Vector Group Annual Report 2016

FY2016 Annual Report · Vector Group
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March 10, 2017

Dear Fellow Stockholder,

2016 was a successful year for Vector Group Ltd. We delivered strong operational and ﬁnancial results in
our core tobacco and real estate businesses, and we are conﬁdent that our 2016 initiatives will increase
stockholder value in the years to come.

Liggett Group, the fourth-largest United States tobacco manufacturer, recorded another year of record
earnings in 2016. In our New Valley real estate business, we continued to make strategic, value-creating
investments in new development projects and Douglas Elliman, the nation’s fourth-largest residential real
estate brokerage ﬁrm, had another year of signiﬁcant revenue growth.

Overall Financial Results

Our revenues were $1.691 billion in 2016, compared to $1.657 billion in 2015. Additionally, we
maintained a strong balance sheet with substantial liquidity, with cash, marketable securities and long-term
investments of $651 million as of December 31, 2016. Reﬂecting our ongoing commitment to rewarding
stockholders for
the
22nd consecutive year and a 5% stock dividend for the 18th consecutive year.

their continued investment, we paid a cash dividend to our stockholders for

Additionally,

in January 2017, we reﬁnanced our existing 7.75% senior secured notes due 2021 of
$835 million by completing the sale of $850 million aggregate principal amount of 6.125% senior secured
notes due 2025. We expect to save approximately $12.6 million per year in cash interest expenses because of
the reﬁnancing.

Tobacco Business

We had continued strength and record earnings performance for our tobacco business in 2016. Tobacco
Adjusted Operating Income1 increased 10.5% versus the prior year to $258.6 million, and our year-end retail
market share grew from 3.40% to 3.65%. The double-digit growth in Tobacco Adjusted Operating Income was
primarily due to achieving higher margins from price increases and cost savings realized from the 2015
restructuring of our tobacco business. Our conviction that there would be market opportunities resulting from
the Reynolds-Lorillard-Imperial Tobacco transaction, as well as opportunities relating to developments in the
‘‘deep discount’’ category, has proven true and is evident in our tobacco business results. The organizational
changes we implemented to prepare for shifting market dynamics well positioned us to maximize the
opportunities that developed in 2016.

We remain focused on preserving brand strength in the market while driving long-term proﬁt growth.
Accordingly, we continue to pursue opportunities that we believe will generate incremental volume growth,
including an expansion of tactical business-building programs in geographies of focus for us.

With respect to litigation, in December 2016, we reached a settlement that resolved 124 Engle progeny
cases. The Engle cases have been the biggest litigation overhang on the United States tobacco industry in the
last decade, and we are very pleased with our positioning after having substantially reduced our litigation
exposure. We will continue to work to resolve the 125 remaining Engle cases in which Liggett is a defendant.

1

Adjusted EBITDA and Tobacco Adjusted Operating Income are non-GAAP ﬁnancial measures and should
be considered in addition to, but not as a substitute for, other measures of ﬁnancial performance prepared
in accordance with GAAP. Reconciliations to Adjusted EBITDA and Tobacco Adjusted Operating Income
are contained in the Company’s earnings release issued on March 1, 2017.

We are pleased with the record performance of our tobacco business in 2016, and will continue to focus

on proﬁtably growing our operations by both increasing market share and margins.

Real Estate Business

In 2016, our New Valley real estate subsidiary invested approximately $44 million in new or continuing
real estate developments, and received distributions of approximately $33 million from some of our earlier
development projects. Our investment portfolio at December 31, 2016 consisted of 23 projects and includes
the investment we made in 2016 in a joint venture that will own and operate the premier luxury retail space at
the Wynn Las Vegas resort. We continue to search for compelling opportunities to opportunistically deploy
capital from our strong balance sheet to grow the New Valley business.

Douglas Elliman, New Valley’s 70.59% owned subsidiary, continued to post strong revenue increases in
2016. Douglas Elliman reported revenues of $675.3 million and Adjusted EBITDA1 of $36.7 million in 2016.
In 2016, we beneﬁted from our recent strategic marketing initiatives, partly offset by a slowdown in sales in
the luxury residential real estate market. Douglas Elliman’s focus remains building out its strong platform in
New York, South Florida, Aspen and Los Angeles and enhancing its footprint by expanding into other
attractive, high-growth markets where our clients enjoy living and traveling.

Outlook

As we progress through 2017, we are both excited about our strategy and conﬁdent about our ability to
execute. We will continue to assess new opportunities in our businesses and selectively pursue those with the
best long-term value-creation potential.

On behalf of the Board of Directors and the management team, we would like to thank our stockholders,
employees and customers for their continued support and dedication, and for their continued conﬁdence in
Vector Group.

Sincerely,

Howard M. Lorber
President and Chief Executive Officer

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2016

VECTOR GROUP LTD.

(Exact name of registrant as speciﬁed in its charter)

Delaware
(State or other jurisdiction of incorporation
incorporation or organization)

1-5759
Commission File Number

4400 Biscayne Boulevard, Miami, Florida
(Address of principal executive offıces)

65-0949535
(I.R.S. Employer
Identiﬁcation No.)

33137
(Zip Code)

(305) 579-8000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, par value $.10 per share

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as deﬁned in Rule 405 of the Securities

Act. (cid:2) Yes □ No

Indicate by check mark if the Registrant is not required to ﬁle reports pursuant to Section 13 or Section 15(d) of the

Exchange Act. □ Yes (cid:2) No

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
ﬁles). (cid:2) Yes □ No

Indicate by check mark if disclosure of delinquent ﬁlers pursuant to Item 405 Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant’s knowledge, in deﬁnitive proxy or information statement incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)

Indicate by check mark whether the Registrant is a large accelerated ﬁler, an accelerated ﬁler, or a non-accelerated ﬁler.

See deﬁnition of ‘‘accelerated ﬁler and large accelerated ﬁler’’ in Rule 12b-2 of the Exchange Act.

Large accelerated ﬁler (cid:2) Accelerated ﬁler □

Indicate by check mark whether

Act. □ Yes (cid:2) No

the Registrant

Non-accelerated ﬁler □
(Do not check if a
smaller reporting company)
is a shell company as deﬁned in Rule 12b-2 of

Smaller reporting company □

the Exchange

The aggregate market value of the common stock held by non-affiliates of Vector Group Ltd. as of June 30, 2016 was

approximately $2.025 billion.

At March 1, 2017, Vector Group Ltd. had 129,739,481 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III (Items 10, 11, 12, 13 and 14) from the deﬁnitive Proxy Statement for the 2017 Annual Meeting of Stockholders to
be ﬁled with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s ﬁscal year
covered by this report.

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VECTOR GROUP LTD.
FORM 10-K

TABLE OF CONTENTS

PART I

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business
Item 1.
Item 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties
Item 2.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.

PART II

Item 5.

Item 6.
Item 7.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities; Executive Officers of the Registrant
. . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes In and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 10.
Item 11.
Item 12.

Item 13.
Item 14.

PART III
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneﬁcial Owners and Management and Related
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15.
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exhibits and Financial Statement Schedules

PART IV

i

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ITEM 1. BUSINESS

Overview

PART I

Vector Group Ltd., a Delaware corporation, is a holding company and is engaged principally in:

•

•

the manufacture and sale of cigarettes in the United States through our Liggett Group LLC
(‘‘Liggett’’) and Vector Tobacco Inc. (‘‘Vector Tobacco’’) subsidiaries and

the real estate business through our New Valley LLC subsidiary, which is seeking to acquire or
invest in additional real estate properties or projects. New Valley owns 70.59% of Douglas Elliman
Realty, LLC (‘‘Douglas Elliman Realty’’), which operates the largest residential brokerage company
in the New York metropolitan area.

Financial information relating to our business segments can be found in Note 19 to our consolidated
ﬁnancial statements. Our business segments for
the year ended December 31, 2016 were Tobacco,
E-Cigarettes, and Real Estate. The Tobacco segment consists of the manufacture and sale of cigarettes. The
E-Cigarettes segment includes the operations of the Company’s e-cigarette business. The Real Estate segment
includes the Company’s investment
in New Valley LLC, which includes Douglas Elliman, Escena,
Sagaponack and investments in real estate ventures.

Strategy

Our strategy is to maximize stockholder value by increasing the proﬁtability of our subsidiaries in the

following ways:

Liggett and Vector Tobacco

•

•

•

•

•

•

Capitalize on our tobacco subsidiaries’ cost advantage in the United States cigarette market due to
the favorable treatment that they receive under the Master Settlement Agreement (‘‘MSA’’);

Focus marketing and selling efforts on the discount segment, continue to build volume and margin in
core discount brands (EAGLE 20’s, PYRAMID, GRAND PRIX, LIGGETT SELECT and EVE) and
utilize core brand equity to selectively build distribution;

Continue to provide the best quality products relative to other discount products in the marketplace;

Increase efficiency by developing and adopting an organizational structure to maximize proﬁt
potential;

Selectively expand the portfolio of private and control
strategy that offers long-term list price stability for customers; and

label partner brands utilizing a pricing

Identify, develop and launch relevant new tobacco products to the market in the future.

New Valley

•

•

•

•

Continue to grow Douglas Elliman Realty’s operations by utilizing its strong brand name recognition
and pursuing strategic and ﬁnancial opportunities, including entry into new markets;

Continue to leverage our expertise as direct investors by actively pursuing real estate investments in
the United States and abroad which we believe will generate above-market returns;

Acquire operating companies through mergers, asset purchases, stock acquisitions or other means;
and

Invest our excess funds opportunistically in situations that we believe can maximize stockholder
value.

Tobacco Operations

General. Liggett is the operating successor to Liggett & Myers Tobacco Company, which was founded
in 1873. Vector Tobacco is a discount cigarette manufacturer selling product in the deep discount category. In
this report, certain references to ‘‘Liggett’’ refer to our tobacco operations, including the business of Liggett
and Vector Tobacco, unless otherwise speciﬁed.

1

For the year ended December 31, 2016, Liggett was the fourth-largest manufacturer of cigarettes in the
United States in terms of unit sales. Liggett’s manufacturing facilities are located in Mebane, North Carolina
where it manufactures most of Vector Tobacco’s cigarettes pursuant to a contract manufacturing agreement. At
the present time, Liggett and Vector Tobacco have no foreign operations.

According to data from Management Science Associates,

Inc., Liggett’s domestic shipments of
approximately 8.5 billion cigarettes during 2016 accounted for 3.3% of the total cigarettes shipped in the
United States during such year. Liggett’s market share was 3.3% and 3.4% in 2015 and 2014, respectively.
Historically, Liggett produced premium cigarettes as well as discount cigarettes (which include among others,
control
label, private label, branded discount and generic cigarettes). Premium cigarettes are generally
marketed under well-recognized brand names at higher retail prices to adult smokers with a strong preference
for branded products, whereas discount cigarettes are marketed at lower retail prices to adult smokers who are
more cost conscious. In recent years, the discounting of premium cigarettes has become far more signiﬁcant in
the marketplace. This has led to some brands that were traditionally considered premium brands becoming
more appropriately categorized as branded discount, following list price reductions. Liggett’s EVE brand falls
into that category. All of Liggett’s units sold in 2016, 2015 and 2014 were in the discount segment, which
Liggett’s management believes has been the primary growth segment in the industry for more than a decade.

Liggett produces cigarettes in 116 combinations of length, style and packaging. Liggett’s current brand

portfolio includes:

•

•

•

•

•

•

EAGLE 20’s — a brand positioned in the deep discount segment for long-term growth re-launched
as a national brand in 2013,

PYRAMID — the industry’s ﬁrst deep discount product with a brand identity relaunched in the
second quarter of 2009,

GRAND PRIX — re-launched as a national brand in 2005,

LIGGETT SELECT — a discount category brand originally launched in 1999,

EVE — a 120 millimeter cigarette in the branded discount category, and

USA and various Partner Brands and private label brands.

In April 2009, Liggett repositioned PYRAMID as a box-only brand with a low price to speciﬁcally
compete with brands which are priced at the lowest level of the deep discount segment. PYRAMID is now
the largest seller in Liggett’s family of brands with 50.7% of Liggett’s unit volume in 2016, 54.4% in 2015
and 61.1% in 2014.

In January 2013, Liggett repackaged and relaunched EAGLE 20’s to distributors and retailers on a
national basis. EAGLE 20’s is marketed to compete with brands positioned in the deep discount segment.
EAGLE 20’s represented 29.1% in 2016, 23.4% in 2015 and 13.4% in 2014 of Liggett’s unit volume.
According to Management Science Associates, Liggett held a share of approximately 12.0% of the overall
discount market segment for 2016 and 11.8% for 2015 and 2014.

Under the MSA reached in November 1998 with 46 states and various territories, cigarette manufacturers
selling product in the U.S. must make settlement payments to the states and territories based on how many
cigarettes they sell annually. Liggett, however, is not required to make any payments unless its market share
exceeds approximately 1.65% of the U.S. cigarette market. Additionally, Vector Tobacco has no payment
obligation unless its market share exceeds approximately 0.28% of the U.S. cigarette market. We believe our
tobacco subsidiaries have a sustainable cost advantage over their competitors as a result of the settlement.

Liggett’s and Vector Tobacco’s payments under the MSA are based on each respective company’s
incremental market share above the minimum threshold applicable to each respective company. Thus,
if
Liggett’s total market share is 3%, its MSA payment is based on 1.35%, which is the difference between
Liggett’s total market share of 3% and its approximate applicable grandfathered share of 1.65%. We anticipate
that both Liggett’s and Vector Tobacco’s payment exemptions will be fully utilized in the foreseeable future.

2

The source of industry data in this report

is Management Science Associates, Inc., an independent
third-party database management organization that collects wholesale and retail shipment data from various
cigarette manufacturers and distributors and provides analysis of market share, unit sales volume and premium
versus discount mix for individual companies and the industry as a whole. Management Science Associates’
information relating to unit sales volume and market share of certain of the smaller, primarily deep discount,
cigarette manufacturers is based on estimates developed by Management Science Associates.

Business Strategy. Liggett’s business strategy is to capitalize on its cost advantage in the United States
cigarette market resulting from the favorable treatment our tobacco subsidiaries receive under settlement
agreements with the states and the MSA. Liggett’s long-term business strategy is to continue to focus its
marketing and selling efforts on the discount segment of the market, to continue to build volume and margin
in its core discount brands (EAGLE 20’s, PYRAMID, GRAND PRIX, LIGGETT SELECT and EVE) and to
utilize its core brand equity to selectively build distribution. Liggett
intends to continue its product
management efforts to provide the best quality products relative to other discount products in the market
place. Liggett will continue to seek increases in efficiency by developing and adapting its organizational
structure to maximize proﬁt potential.

Sales, Marketing and Distribution. Liggett’s products are distributed from a central distribution center in
Mebane, North Carolina to 17 public warehouses located throughout the United States. These warehouses
serve as local distribution centers for Liggett’s customers. Liggett’s products are transported from the central
distribution center to the public warehouses by third-party trucking companies to meet pre-existing contractual
obligations to its customers.

Liggett’s customers are primarily distributors of tobacco and convenience products as well as large
grocery, drug and convenience store chains. Two customers accounted for 16% and 14% of Liggett’s revenues
in 2016 and 19% and 10% in 2015. One customer accounted for 19% of Liggett’s revenues in 2014.
Concentrations of credit risk with respect to trade receivables are generally limited due to the large number of
customers, located primarily throughout the United States, comprising Liggett’s customer base. Liggett’s two
respectively, of net accounts receivable at
largest customers,
December 31, 2016 and 4% and 1%, respectively, at December 31, 2015. Liggett’s largest customer
represented approximately 11% of net accounts receivable at December 31, 2014. Ongoing credit evaluations
of customers’ ﬁnancial condition are performed and, generally, no security is required. Liggett maintains
in the aggregate, have not exceeded management’s
reserves for potential credit
expectations.

represented approximately 9% and 3%,

losses and such losses,

Trademarks. All of the major trademarks used by Liggett are federally registered or are in the process
of being registered in the United States and other markets. Trademark registrations typically have a duration
of ten years and can be renewed at Liggett’s option prior to their expiration date.

In view of the signiﬁcance of cigarette brand awareness among consumers, management believes that the
protection afforded by these trademarks is material to the conduct of its business. These trademarks are
pledged as collateral for certain of our senior secured debt.

tobacco inventory to support

Manufacturing. Liggett purchases and maintains leaf

its cigarette
manufacturing requirements. Liggett believes that there is a sufficient supply of tobacco within the worldwide
tobacco market to satisfy its current production requirements. Liggett stores its leaf tobacco inventory in
warehouses in North Carolina and Virginia. There are several different types of tobacco, including ﬂue-cured
leaf, burley leaf, Maryland leaf, oriental
leaf, cut stems and reconstituted sheet. Leaf components of
American-style cigarettes are generally the ﬂue-cured and burley tobaccos. While premium and discount
brands use many of the same tobacco products, input ratios of tobacco products may vary between premium
and discount products. Liggett purchases its tobacco requirements from both domestic and foreign leaf tobacco
dealers, much of it under long-term purchase commitments. As of December 31, 2016,
the majority of
Liggett’s commitments were for the purchase of foreign tobacco.

Liggett’s cigarette manufacturing facility was designed for the execution of short production runs in a
cost-effective manner, which enables Liggett to manufacture and market 116 different cigarette brand styles
including private labels for other companies. Liggett’s facility produced approximately 8.6 billion cigarettes in

3

2016, but maintains the capacity to produce approximately 17.7 billion cigarettes per year. Vector Tobacco has
contracted with Liggett to produce most of its cigarettes at Liggett’s manufacturing facility in Mebane.

Competition. Liggett’s competition is divided into two segments. The ﬁrst segment consists of the three
largest manufacturers of cigarettes in the United States: Philip Morris USA Inc., which is owned by Altria
Group, Inc., RJ Reynolds Tobacco Company (which is now part of Reynolds American) (‘‘RJ Reynolds’’) and
ITG Brands LLC, which is owned by Imperial Brands Plc. These three manufacturers, while primarily
premium cigarette-based companies, also produce and sell discount cigarettes. The second segment of
competition is comprised of a group of smaller manufacturers and importers, most of which sell deep discount
cigarettes.

The merger between RJ Reynolds and Lorillard in June 2015 consolidated approximately 80% of the
U.S. cigarette market within the control of two manufacturers, Philip Morris and RJ Reynolds. Consolidation
in the industry could have a material adverse effect on our ability to compete in the U.S. cigarette market.

Historically, there have been substantial barriers to entry into the cigarette business, including extensive
distribution organizations, large capital outlays for sophisticated production equipment, substantial inventory
investment, costly promotional spending, regulated advertising and, for premium brands, strong brand loyalty.
However, after the MSA was signed, some smaller manufacturers and importers that are not parties to the
MSA were able to overcome these competitive barriers due to their cost advantage resulting from the MSA.
These smaller manufacturers and importers that are not parties to the MSA have been impacted in recent years
by the state statutes enacted pursuant to the MSA and have seen a decline in volume after years of growth.
However, these companies still have signiﬁcant market share through competitive discounting in this segment.

In the cigarette business, Liggett competes on a dual front. The two major manufacturers compete among
themselves for premium brand market share based on advertising and promotional activities and trade rebates
and incentives and compete with Liggett and others for discount market share, on the basis of cost and brand
loyalty. These two competitors have substantially greater ﬁnancial resources than Liggett, and most of their
brands have greater sales and consumer recognition than Liggett’s products. Liggett’s discount brands must
also compete in the marketplace with the smaller manufacturers’ and importers’ deep discount brands.

According to Management Science Associates’ data, the unit sales of Philip Morris and RJ Reynolds
accounted in the aggregate for approximately 78.4% of the domestic cigarette market in 2016. Liggett’s
domestic shipments of approximately 8.5 billion cigarettes during 2016 accounted for 3.3% of
the
approximately 258 billion cigarettes shipped in the United States, compared to 8.7 billion cigarettes in 2015
(3.3%) and 8.9 billion cigarettes in 2014 (3.4%).

Industry-wide shipments of cigarettes in the United States have been declining for a number of years,
with Management Science Associates’ data indicating that domestic industry-wide shipments declined by
approximately 2.4% (approximately 6.3 billion units) and 0.1% (approximately 0.3 billion units) in 2016 and
2015, respectively. Liggett’s management believes that industry-wide shipments of cigarettes in the United
States will continue to decline as a result of numerous factors. These factors include health considerations,
diminishing social acceptance of smoking, and a wide variety of federal, state and local laws limiting smoking
in restaurants, bars and other public places, as well as increases in federal and state excise taxes and
settlement-related expenses which have contributed to higher cigarette prices in recent years.

Historically, because of their dominant market share, Philip Morris and RJ Reynolds, the two largest
cigarette manufacturers, have been able to determine cigarette prices for the various pricing tiers within the
industry. Market pressures have historically caused the other cigarette manufacturers to bring their prices in
line with the levels established by these two major manufacturers. Off-list price discounting and similar
promotional activity by manufacturers, however, has substantially affected the average price differential at
retail, which can be signiﬁcantly less than the manufacturers’ list price gap. Recent discounting by
manufacturers has been far greater than historical levels, and the actual price gap between premium and
deep-discount cigarettes has changed accordingly. This has led to shifts in price segment performance
depending upon the actual price gaps of products at retail.

4

Philip Morris and RJ Reynolds dominate the domestic cigarette market with a combined market share of
78.4% at December 31, 2016. This concentration of United States market share makes it more difficult for
Liggett to compete for shelf space in retail outlets and could impact price competition in the market, either of
which could have a material adverse effect on its sales volume, operating income and cash ﬂows.

E-Cigarettes

Our subsidiary, Zoom E-Cigs LLC (‘‘Zoom’’), entered the emerging United States e-cigarette market in
limited retail distribution outlets in January 2014 with a cautious plan to minimize expense. Uncertainties
regarding e-cigarettes are signiﬁcantly greater today than they were when Zoom was ﬁrst launched. In fact, we
two years with disposable and
have seen signiﬁcant changes in the e-cigarette market over the past
rechargeable e-cigarettes in decline and open system vapor products, which feature reﬁllable tanks and use
low-cost ﬂavored liquids, demonstrating mixed results. Additionally, we believe uncertainties related to the
impact of recent regulation of e-cigarettes, the emergence of new technologies and ongoing consumer category
acceptance exist. Given this backdrop, our primary focus on the e-cigarette product is to limit risk while
staying prepared to pursue opportunities if they occur. Zoom incurred operating losses of $1.4 million,
$13.0 million and $13.1 million in 2016, 2015, and 2014, respectively.

Legislation, Regulation and Litigation

In the United States, tobacco products are subject to substantial and increasing legislation, regulation and
taxation, which have a negative effect on revenue and proﬁtability. In June 2009, legislation was passed
providing for regulation of the tobacco industry by the United States Food and Drug Administration. See
of
Item 7.
Operations — Legislation and Regulation.’’

‘‘Management Discussion

Financial Condition

and Analysis

and Results

of

The cigarette industry continues to be challenged on numerous fronts. The industry is facing increased
pressure from anti-smoking groups and continued smoking and health litigation, the effects of which, at this
time, we are unable to quantify. Product liability litigation, particularly in Florida in the Engle progeny cases,
continues to adversely affect the cigarette industry. See Item 1A. ‘‘Risk Factors,’’ Item 3. ‘‘Legal Proceedings’’
and Note 15 to our consolidated ﬁnancial statements, which contain a description of litigation.

It

is possible that our consolidated ﬁnancial position, results of operations or cash ﬂows could be
materially adversely affected by an unfavorable outcome in any tobacco-related litigation or as a result of
additional federal or state regulation relating to the manufacture, sale, distribution, advertising or labeling of
tobacco products.

Liggett’s management believes that it is in compliance in all material respects with the laws regulating

cigarette manufacturers in all jurisdictions in which we operate.

The MSA and Other State Settlement Agreements

In March 1996, March 1997, and March 1998, Liggett entered into settlements of tobacco-related
litigation with 45 states and territories. The settlements released Liggett from all tobacco-related claims within
those states and territories, including claims for health care cost reimbursement and claims concerning sales of
cigarettes to minors.

In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the ‘‘Original
Participating Manufacturers’’ or ‘‘OPMs’’) and Liggett (together with any other tobacco product manufacturer
that becomes a signatory, the ‘‘Subsequent Participating Manufacturers’’ or ‘‘SPMs’’), (the OPMs and SPMs
are hereinafter referred to jointly as the ‘‘Participating Manufacturers’’) entered into the MSA with 46 states,
the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the
Northern Mariana Islands (collectively, the ‘‘Settling States’’) to settle the asserted and unasserted healthcare
cost recovery and certain other claims of those Settling States. The MSA received ﬁnal judicial approval in
each Settling State.

5

In the Settling States, the MSA released Liggett and other participating tobacco product manufacturers

from:

•

•

all claims of the Settling States and their respective political subdivisions and other recipients of
state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution,
manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of,
the exposure to, or research, statements or warnings about, tobacco products; and

all monetary claims of the Settling States and their respective subdivisions and other recipients of
state health care funds, relating to future conduct arising out of the use of or exposure to, tobacco
products that have been manufactured in the ordinary course of business.

The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise
restricts the activities of Participating Manufacturers. Among other things, the MSA prohibits the targeting of
youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all
tobacco advertising and promotion;
limits each Participating Manufacturer to one tobacco brand name
sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions;
prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of
tobacco products without sufficient proof that
is an adult; prohibits Participating
Manufacturers from licensing third parties to advertise tobacco brand names in any manner prohibited under
the MSA; and prohibits Participating Manufacturers from using as a tobacco product brand name any
nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or
individual celebrities.

the intended recipient

The MSA also requires Participating Manufacturers to affirm corporate principles to comply with the
MSA and to reduce underage usage of tobacco products and imposes restrictions on lobbying activities
conducted on behalf of Participating Manufacturers. In addition, the MSA provides for the appointment of an
independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.

Under the payment provisions of the MSA, the Participating Manufacturers are required to make annual
payments of $9.0 billion (subject to applicable adjustments, offsets and reductions). These annual payments
are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA
are the several, and not joint, obligations of each Participating Manufacturer and are not the responsibility of
any parent or affiliate of a Participating Manufacturer.

Liggett has no payment obligations under the MSA except to the extent its market share exceeds a
market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector Tobacco
has no payment obligations under the MSA except to the extent its market share exceeds a market share
exemption of approximately 0.28% of total cigarettes sold in the United States. Liggett and Vector Tobacco’s
domestic shipments accounted for 3.3% of the total cigarettes sold in the United States in 2016. If Liggett’s or
Vector Tobacco’s market share exceeds their respective market share exemption in a given year, then on
April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, must pay on each excess
unit an amount equal (on a per-unit basis) to that due from the OPMs for that year.

Liggett may have additional payment obligations under the MSA and its other settlement agreements with

the states. See Item 1A. ‘‘Risk Factors’’ and Note 15 to our consolidated ﬁnancial statements.

New Valley LLC

New Valley LLC, a Delaware limited liability company, is engaged in the real estate business and is
seeking to acquire or invest in additional real estate properties and projects. New Valley owns a 70.59%
interest in Douglas Elliman Realty which operates the largest residential brokerage company in the New York
metropolitan area, which is known as Douglas Elliman Real Estate or Douglas Elliman. New Valley also holds
investment interests in various real estate projects domestically and internationally.

Business Strategy

New Valley’s business strategy is to continue to operate its real estate business, to acquire additional real
estate properties and to acquire operating companies through merger, purchase of assets, stock acquisition or
other means, or to acquire control of operating companies through one of such means. New Valley may also

6

seek from time to time to dispose of such businesses and properties when favorable market conditions exist.
New Valley’s cash and investments are available for general corporate purposes, including for acquisition
purposes.

Douglas Elliman Realty, LLC

In addition to owning the largest residential brokerage company in the New York metropolitan area,
Douglas Elliman Realty owns Residential Management Group LLC, which conducts business as Douglas
Elliman Property Management and is the New York metropolitan area’s largest manager of rental, co-op and
condominium housing and Title Services business.

Real Estate Brokerage Business. Douglas Elliman Real Estate is engaged in the real estate brokerage
business through its seven subsidiaries. The seven brokerage companies have 93 offices with approximately
6,400 real estate agents in the New York metropolitan area as well as South Florida, Beverly Hills, California,
Connecticut and Aspen. The companies achieved combined sales of approximately $24.6 billion of real estate
in 2016, approximately $22.4 billion of real estate in 2015 and approximately $18.2 billion of real estate in
2014. Douglas Elliman Real Estate was ranked as the fourth-largest residential brokerage company in the
United States in 2016 based on closed sales volume by the Real Trends broker survey. Douglas Elliman had
revenues of $675.3 million in 2016, $637.0 million in 2015, and $543.2 million in 2014.

The New York City brokerage operation was founded in 1911 and has grown to be one of Manhattan’s
leading residential brokers by specializing in the highest end of the sales and rental marketplaces. It has
24 New York City offices, with approximately 2,806 real estate agents, 6,812 transactions, representing sales
volume of approximately $14.0 billion of real estate in 2016. This is compared to approximately 7,119
transactions, representing approximately $12.7 billion of real estate in 2015, and approximately 6,950
transactions closed in 2014, representing approximately $11.5 billion of real estate.

The Long Island brokerage operation is headquartered in Huntington, New York and is the largest
residential brokerage company on Long Island with 37 offices and approximately 2,237 real estate agents.
Douglas Elliman of Long Island serves approximately 250 communities in Long Island and Queens,
New York. The Westchester brokerage operation operates in a suburban area north of New York City with ﬁve
offices and approximately 193 real estate agents. The Connecticut brokerage operation operates in Greenwich,
Connecticut with one office and approximately 74 real estate agents. During 2016,
the three brokerage
operations closed approximately 11,041 transactions, representing sales volume of approximately $7.1 billion
representing sales volume of
of
approximately $6.3 billion of real estate in 2015, and approximately 8,548 transactions closed in 2014,
representing approximately $5.4 billion of real estate.

real estate. This is compared to approximately 9,764 transactions,

In December 2013, Douglas Elliman Realty acquired from an affiliate of New Valley the membership
interest in the Florida brokerage operation. Douglas Elliman Florida, LLC operates in South Florida with 19
offices located in downtown Miami, Miami Beach, Coconut Grove, North Miami, Ft. Lauderdale, Boca Raton
and Palm Beach. The offices have approximately 938 real estate agents and closed approximately 2,256
transactions, representing sales volume of $2.6 billion of real estate in 2016. This compared to approximately
2,088 transactions, representing sales volume of approximately $2.4 billion of real estate in 2015, and
approximately 1,136 transactions closed in 2014, representing approximately $1.2 billion of real estate.

Douglas Elliman Real Estate operates as a broker in residential real estate transactions. In performing
the company has historically represented the seller, either as the listing broker, or as a
these services,
co-broker in the sale. In acting as a broker for the seller, their services include assisting the seller in pricing
the property and preparing it for sale, advertising the property, showing the property to prospective buyers,
and assisting the seller in negotiating the terms of the sale and in closing the transaction. In exchange for
these services, the seller pays to the company a commission, which is generally a ﬁxed percentage of the sales
price. In a co-brokered arrangement, the listing broker typically splits its commission with the other co-broker
involved in the transaction. The company also offers buyer brokerage services. When acting as a broker for
the buyer, its services include assisting the buyer in locating properties that meet the buyer’s personal and
ﬁnancial speciﬁcations, showing the buyer properties, and assisting the buyer in negotiating the terms of the
purchase and closing the transaction. In exchange for these services, a commission is paid to the company
which also is generally a ﬁxed percentage of the purchase price and is usually, based upon a co-brokerage

7

agreement with the listing broker, deducted from, and payable out of, the commission payable to the listing
broker. With the consent of a buyer and seller, subject to certain conditions, the company may, in certain
circumstances, act as a selling broker and as a buying broker in the same transaction. The company’s sales
and marketing services are provided by licensed real estate sales persons or associate brokers who have
entered into independent contractor agreements with the company. The company recognizes revenue and
commission expenses upon the consummation of the real estate sale.

DE Title Services. DE Title Services provides full-service title and settlement (i.e., closing and escrow)
services to real estate companies and ﬁnancial institutions. DE Title Services acts in the capacity of a title
agent and sells title insurance to property buyers and mortgage lenders. DE Title Services is licensed as a title
agent in New York.

elliman.com and AskElliman.com. Douglas Elliman Real Estate’s website, elliman.com, serves as a
destination where consumers can search properties throughout the entire New York and South Florida markets
and access current market information as well as comprehensive building and neighborhood guides and other
interactive content. Douglas Elliman also owns AskElliman.com, its web site that facilitates communication
with consumers, providing them with access to information from real estate to mortgage ﬁnancing, to speciﬁc
neighborhoods.

Marketing. Douglas Elliman Real Estate offers real estate sales and marketing and relocation services,
which are marketed by a multimedia program. This program includes direct mail, newspaper, internet, catalog,
radio and television advertising and is conducted throughout Manhattan and Long Island. In addition, the
integrated nature of the real estate brokerage companies services is designed to produce a ﬂow of customers
between their real estate sales and marketing business and their mortgage business.

Competition. The real estate brokerage business is highly competitive. However, Douglas Elliman Real
Estate believes that
its ability to offer their customers a range of inter-related services and its level of
residential real estate sales and marketing help position them to meet the competition and improve their
market share.

In the brokerage company’s traditional business of residential real estate sales and marketing, it competes
with multi-office independent real estate organizations and,
to some extent, with franchise real estate
organizations, such as Century-21, ERA, RE/MAX International, Sotheby’s International Realty, Better Homes
and Gardens Real Estate, Berkshire Hathaway HomeServices, and Coldwell Banker. Douglas Elliman believes
that its major competitors in 2017 will also increasingly include multi-office real estate organizations, such as
GMAC Home Services, NRT LLC (whose affiliates include the New York City-based Corcoran Group) and
other privately-owned companies. Speciﬁc to the New York metropolitan area, Douglas Elliman’s major
competitors include Brown Harris Stevens, Halstead Properties, and Stribling & Associates. Residential
brokerage ﬁrms compete for sales and marketing business primarily on the basis of services offered,
reputation, personal contacts, and, recently to a greater degree, price.

Government Regulation. Several facets of real estate brokerage businesses are subject to government
regulation. For example, their real estate sales and marketing divisions are licensed as real estate brokers in
the states in which they conduct their real estate brokerage businesses. In addition, their real estate sales
associates must be licensed as real estate brokers or salespersons in the states in which they do business.
Future expansion of the real estate brokerage operations of Douglas Elliman Real Estate into new geographic
markets may subject it to similar licensing requirements in other states.

A number of states and localities have adopted laws and regulations imposing environmental controls,
disclosure rules, zoning and other land use restrictions, which can materially impact the marketability of
certain real estate. However, Douglas Elliman Real Estate does not believe that compliance with
environmental, zoning and land use laws and regulations has had, or will have, a materially adverse effect on
its ﬁnancial condition or operations.

RESPA and state real estate brokerage laws restrict payments that real estate brokers, title agencies,
mortgage bankers, mortgage brokers and other settlement service providers may receive or pay in connection
with the sales of residences and referral of settlement services (e.g., mortgages, homeowners insurance and
title insurance). Such laws may, to some extent, restrict preferred alliance and other arrangements involving

8

our real estate franchise, real estate brokerage, settlement services and relocation businesses. In addition, our
relocation and title and settlement services businesses, RESPA and similar state laws require timely disclosure
of certain relationships or ﬁnancial interests with providers of real estate settlement services.

The United States Department of Housing and Urban Development (‘‘HUD’’) adopted rules that seek to
simplify and improve disclosures regarding mortgage settlement services and encourage consumers to compare
prices for such services by consumers. The material provisions of the rule include: new Good Faith Estimate
(‘‘GFE’’) and HUD-1 forms, permissibility of average cost pricing by settlement service providers,
implementation of tolerance limits on various fees from the issuance of the GFE and the HUD-1 provided at
closing, and disclosure of the title agent and title underwriter premium splits. To date, there has not been any
material impact (ﬁnancial or otherwise) to us arising out of compliance with these new rules.

Pursuant

to the Dodd-Frank Act, administration of RESPA was transferred from HUD to the new
Consumer Financial Protection Bureau (‘‘CFPB’’) and it is possible that the practices of HUD, taking very
expansive broad readings of RESPA, will continue or accelerate at the CFPB creating increased regulatory
risk. RESPA also has been invoked by plaintiffs in private litigation for various purposes.

Title Services Regulation. Many states license and regulate title agencies/settlement service providers or
certain employees and underwriters through their Departments of Insurance or other regulatory body. In many
states, title insurance rates are either promulgated by the state or are required to be ﬁled with each state by the
agent or underwriter, and some states promulgate the split of title insurance premiums between the agent and
underwriter. States sometimes unilaterally lower the insurance rates relative to loss experience and other
relevant factors. States also require title agencies and title underwriters to meet certain minimum ﬁnancial
requirements for net worth and working capital.

Trade Names. The ‘‘Douglas Elliman’’ trade name is a registered trademark in the United States. The
name has been synonymous with the most exacting standards of excellence in the real estate industry since
Douglas Elliman’s formation in 1911. Other trademarks used extensively in Douglas Elliman’s business, which
are owned by Douglas Elliman and registered in the United States, include ‘‘We are New York,’’ ‘‘Bringing
People and Places Together,’’ ‘‘If You Clicked Here You’d Be Home Now’’ and ‘‘Picture Yourself in the
Perfect Home.’’

The taglines ‘‘From Manhattan to Montauk’’ and ‘‘askelliman.com’’ are used extensively in the Douglas
Elliman’s brokerage operations. In addition, Douglas Elliman’s brokerage operation continues to use the trade
names of certain companies that it has acquired.

as Douglas Elliman Property Management

Residential Property Management Business. Douglas Elliman Realty is also engaged in the management
of cooperatives, condominiums and apartments though its subsidiary, Residential Management Group, LLC,
leading
which conducts business
New-York-City-based managers of apartments, cooperatives and condominiums in the New York metropolitan
area according to a survey in the September 2013 issue of The Real Deal. Residential Management Group
provides full service third-party fee management for approximately 385 properties, representing approximately
43,500 units in New York City, Nassau County, Northern New Jersey and Westchester County. Among the
notable properties currently managed are the Dakota, Museum Tower, Olympic Tower Condominium,
Manhattan House, CitySpire Condominium, RiverHouse and The Sovereign buildings in New York City.
Residential Management Group employs approximately 272 people, of whom approximately 196 work at
Residential Management Group’s headquarters and the remainder at
remote offices in the New York
metropolitan area.

and is one of

the

Real Estate Investments

We own, and seek to acquire investment

interests in various domestic and international real estate
projects through debt and equity investments. Our current real estate investments include the following
projects:

Land Development

Escena. We are developing a 450-acre approved master planned community in Palm Springs, CA. The
development consisted of 667 residential lots, which include both single and multi-family lots, an 18-hole golf
course, clubhouse restaurant, golf shop and seven-acre site approved for a 450-room hotel.

9

Sagaponack. We are developing an oceanfront plot of land in Sagaponack, NY. We are the sole owner
of the land. We plan on partially developing the land by obtaining the appropriate permits and architectural
plans and then subsequently selling it. The property is currently listed for sale.

Condominium and Mixed-Use Development

As of December 31, 2016, we had 15 investments in condominium and mixed-use development real
estate ventures. We had ownership interests ranging from 3.1% to 49.5% in 12 condominium and mixed-use
development real estate ventures in the New York City Standard Metropolitan Statistical Area (‘‘SMSA’’). Of
the 12 condominium and mixed-use development real estate ventures in the New York City SMSA, three were
closing on units as of December 31, 2016 and the remainder had projected construction completion dates
between April 2017 and February 2020. We had ownership interests ranging from 15.0% to 48.5% in three
condominium and mixed-use development real estate ventures in other U.S. areas as of December 31, 2016.
The three condominium and mixed-use development real estate ventures in other U.S. areas had projected
construction completion dates between July 2018 and February 2019.

Apartment Buildings

As of December 31, 2016, we had two investments in apartment building real estate ventures located in
the Houston, Texas and Baltimore, Maryland metropolitan areas with ownership interests of 16.3% and 7.6%,
respectively. The apartment building real estate ventures were operating as of December 31, 2016.

Hotels

As of December 31, 2016, we had two investments in hotel real estate ventures located in the New York
City SMSA and Bermuda with ownership interests of 5.2% and 49.0%, respectively. The hotel real estate
ventures were operating as of December 31, 2016.

Commercial

As of December 31, 2016, we had two investments in commercial real estate ventures located in the
New York City SMSA and Las Vegas, Nevada, respectively, with ownership interests of 49.0% and 2.1%,
respectively. The commercial real estate ventures were operating as of December 31, 2016.

In our

to generate,

real estate investment business, we seek to acquire investment

interests in domestic and
international real estate projects through debt and equity investments. We focus on new condominium
development in Douglas Elliman markets and investing in well-located real estate assets that generate, or have
the potential
long-term, predictable and sustainable cash ﬂows with attractive growth and
development potential. We believe our ownership of Douglas Elliman provides us with a strategic advantage
through its relationships with developers in New York City as well as its knowledge of the New York City
residential real estate market. We and our partners seek to enhance the cash ﬂows and returns from our
investments by using varying levels of leverage. In addition, we and our partners may earn incentives on
certain investments if the investments achieve rates of return that exceed targeted thresholds. Our real estate
investments are located in the United States and Bermuda and we may pursue growth in other markets where
we identify attractive opportunities to invest in or acquire assets and to achieve strong risk-adjusted returns.
We strive to invest at attractive valuations, capitalize on distressed situations where possible, create
opportunities for superior valuation gains and cash ﬂow returns and monetize assets at appropriate times to
realize value. Our portfolio as of December 31, 2016 included interests in the 23 properties discussed above.
As of December 31, 2016, our real estate investment business held interests in joint ventures recorded on our
ﬁnancial statements at approximately $221.3 million and approximately $23.6 million in consolidated real
estate investments.

For additional

information concerning these investments, see Note 7 to our consolidated ﬁnancial

statements.

Long-Term Investments

At December 31, 2016, we had long-term investments of $53.2 million, of which $35.5 million were
accounted for at cost and $17.7 million were accounted for under the equity method. Our investments
accounted for at cost consisted primarily of investment partnerships investing in investment securities and real

10

estate. The investments in these investment partnerships are illiquid and the ultimate realization of these
investments is subject to the performance of the underlying partnership and its management by the general
partners. The estimated fair value of the investment partnerships is provided by the partnerships based on the
indicated market values of the underlying assets or investment portfolio. Our investments accounted for under
the equity method included interests in a partnership and various companies in which we have the ability to
exercise signiﬁcant
including Ladenburg Thalmann
Financial Services Inc. (NYSE MKT: LTS) (‘‘LTS’’)and Castle Brands Inc. (NYSE MKT: ROX) (‘‘Castle’’).

inﬂuence over their operating and ﬁnancial policies,

investment banking, equity research,

Ladenburg Thalmann. We own 15,191,205 common shares of LTS, which represents beneﬁcial
ownership of approximately 8.28% of LTS, a publicly-traded entity engaged in independent brokerage and
institutional sales and trading, asset management
advisory services,
services, life insurance brokerage and trust services through its subsidiaries. We also own 240,000 shares of
LTS’s 8% Series A Cumulative Redeemable Preferred Stock (Liquidation Preference $25.00 Per Share) (‘‘LTS
Preferred’’). Three of our directors, Howard M. Lorber, Henry C. Beinstein and Jeffrey S. Podell, also serve as
directors of LTS. Mr. Lorber also serves as Vice Chairman of LTS. Richard J. Lampen, who along with
Mr. Lorber is an executive officer of ours, also serves as a director of LTS and has served as the President and
Chief Executive Officer of LTS since September 2006. See Note 17 to our consolidated ﬁnancial statements.

Castle Brands. We own 12,671,159 shares of Castle, a publicly-traded developer and importer of
premium branded spirits, which represents beneﬁcial ownership of approximately 7.88% of Castle’s
outstanding shares. Mr. Lampen serves as the President, Chief Executive Officer and a director of Castle.
Mr. Beinstein, a director of Vector, is also a director of Castle. See Note 17 to our consolidated ﬁnancial
statements. In 2013, we purchased in a private placement $200,000 of Castle’s convertible debt, which bears
interest at 5% per annum,
is convertible into 222,222 shares of Castle common stock and is due on
December 15, 2018.

For additional

information concerning these investments, see Note 6 to our consolidated ﬁnancial

statements.

Employees

At December 31, 2016, we had 1,425 employees, of which approximately 922 were employed by
Douglas Elliman primarily in the New York area, 259 were employed at Liggett’s Mebane facility and
approximately 218 were employed in sales and administrative functions at Liggett Vector Brands LLC
(‘‘LVB’’), which coordinates our tobacco and e-cigarettes subsidiaries’ sales and marketing efforts, along with
certain support functions. Approximately 13% of our employees are hourly employees, who are represented by
unions. We have not experienced any signiﬁcant work stoppages since 1977, and we believe that relations
with our employees and their unions are satisfactory.

Available Information

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

11

ITEM 1A. RISK FACTORS

Our business faces many risks. We have described below the known material risks that we and our
subsidiaries face. There may be additional risks that we do not yet know of or that we do not currently
perceive to be signiﬁcant that may also impact our business or the business of our subsidiaries. Each of the
risks and uncertainties described below could lead to events or circumstances that have a material adverse
effect on the business, results of operations, cash ﬂows, ﬁnancial condition or equity of us or one or more of
our subsidiaries, which in turn could negatively affect the value of our common stock. You should carefully
consider and evaluate all of the information included in this report and any subsequent reports that we may
ﬁle with the Securities and Exchange Commission or make available to the public before investing in any
securities issued by us.

We have signiﬁcant liquidity commitments.

During 2017, we have certain liquidity commitments that could require the use of our existing cash
resources. As of December 31, 2016, our corporate expenditures (exclusive of Liggett, Vector Tobacco and
New Valley) and other potential liquidity requirements over the next 12 months include the following (after
giving effect to our January 2017 reﬁnancing):

•

•

•

•

cash interest expense of approximately $113.1 million,

cash for redemption of Senior Secured Notes of approximately $32.4 million,

dividends on our outstanding common shares of approximately $209.6 million, and

other corporate expenses and taxes.

In order to meet the above liquidity requirements as well as other liquidity needs in the normal course of
business, we will be required to use cash ﬂows from operations and existing cash and cash equivalents.
Should these resources be insufficient to meet the upcoming liquidity needs, we may also be required to
liquidate investment securities available for sale and other long-term investments, or, if available, draw on
Liggett’s credit facility. While there are actions we can take to reduce our liquidity needs, there can be no
assurance that such measures will be successful.

We are a holding company and depend on cash payments from our subsidiaries, which are subject to
contractual and other restrictions, in order to service our debt and to pay dividends on our common
stock.

We are a holding company and have no operations of our own. We hold our interests in our various
businesses through our wholly-owned subsidiaries, VGR Holding LLC and New Valley. In addition to our
own cash resources, our ability to pay interest on our debt and to pay dividends on our common stock
depends on the ability of VGR Holding and New Valley to make cash available to us. VGR Holding’s ability
to pay dividends to us depends primarily on the ability of Liggett and Vector Tobacco, its wholly-owned
subsidiaries, to generate cash and make it available to VGR Holding. Liggett’s revolving credit agreement
with Wells Fargo Bank, N.A. contains a restricted payments test that limits the ability of Liggett to pay cash
dividends to VGR Holding. The ability of Liggett to meet the restricted payments test may be affected by
factors beyond its control, including Wells Fargo’s unilateral discretion, if acting in good faith, to modify
elements of such test.

Our receipt of cash payments, as dividends or otherwise, from our subsidiaries is an important source of
our liquidity and capital resources. If we do not have sufficient cash resources of our own and do not receive
payments from our subsidiaries in an amount sufficient to repay our debts and to pay dividends on our
common stock, we must obtain additional funds from other sources. There is a risk that we will not be able to
obtain additional funds at all or on terms acceptable to us. Our inability to service these obligations and to
continue to pay dividends on our common stock would signiﬁcantly harm us and the value of our common
stock.

We and our subsidiaries have a substantial amount of indebtedness.

We and our subsidiaries have signiﬁcant indebtedness and debt service obligations. As of December 31,
2016, we and our subsidiaries had total outstanding indebtedness of $1.4 billion (on both a historical basis and

12

adjusted to give effect to our January 2017 reﬁnancing). In addition, subject to the terms of any future
agreements, we and our subsidiaries will be able to incur additional indebtedness in the future. There is a risk
that we will not be able to generate sufficient funds to repay our debt. If we cannot service our ﬁxed charges,
it would have a material adverse effect on our business and results of operations.

Our high level of debt may adversely affect our ability to satisfy our obligations.

There can be no assurance that we will be able to meet our debt service obligations. A default in our debt
obligations, including a breach of any restrictive covenant imposed by the terms of our indebtedness, could
result in the acceleration of the affected debt as well as other of our indebtedness. In such a situation, it is
unlikely that we would be able to fulﬁll our obligations under the debt or such other indebtedness or that we
would otherwise be able to repay the accelerated indebtedness or make other required payments. Even in the
absence of an acceleration of our indebtedness, a default under the terms of our indebtedness could have an
adverse impact on our ability to satisfy our debt service obligations and on the trading price of our debt and
our common stock.

Our high level of indebtedness could have important consequences. For example, it could:

•

•

•

•

•

•

•

•

make it more difficult for us to satisfy our other obligations with respect to our debt, including
repurchase obligations upon the occurrence of speciﬁed change of control events;

increase our vulnerability to general adverse economic and industry conditions;

limit our ability to obtain additional ﬁnancing;

require us to dedicate a substantial portion of our cash ﬂow from operations to payments on our
indebtedness, reducing the amount of our cash ﬂow available for dividends on our common stock
and other general corporate purposes;

require us to sell other securities or to sell some or all of our assets, possibly on unfavorable terms,
to meet payment obligations;

restrict us from making strategic acquisitions, investing in new capital assets or taking advantage of
business opportunities;

limit our ﬂexibility in planning for, or reacting to, changes in our business and industry; and

place us at a competitive disadvantage compared to competitors that have less debt.

Our 6.125% senior secured notes due 2025 contain restrictive covenants that limit our operating
ﬂexibility.

The indenture governing our 6.125% senior secured notes due 2025 contains covenants that, among other
things, restrict our ability to take speciﬁc actions, even if we believe them to be in our best interest, including
restrictions on our ability to:

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incur or guarantee additional indebtedness or issue preferred stock;

pay dividends or distributions on, or redeem or repurchase, capital stock;

create liens with respect to our assets;

make investments, loans or advances;

prepay subordinated indebtedness;

enter into transactions with affiliates; and

merge, consolidate, reorganize or sell our assets.

In addition, Liggett’s revolving credit agreement requires us to meet speciﬁed ﬁnancial ratios. These
covenants may restrict our ability to expand or fully pursue our business strategies. Our ability to comply with
these and other provisions of the indenture governing the senior secured notes and the Liggett revolving credit
agreement may be affected by changes in our operating and ﬁnancial performance, changes in general

13

business and economic conditions, adverse regulatory developments or other events beyond our control. The
breach of any of these covenants, including those contained in the indenture governing the senior secured
notes and Liggett’s credit agreement, could result in a default under our indebtedness, which could cause those
and other obligations to become due and payable. If any of our indebtedness is accelerated, we may not be
able to repay it.

The indenture governing the senior secured notes contain restrictive covenants, which, among other
things, restrict our ability to pay certain dividends or make other restricted payments or enter into transactions
with affiliates if our Consolidated EBITDA, as deﬁned in the indenture, is less than $75 million for the four
quarters prior to such transaction. Our Consolidated EBITDA for the four quarters ended December 31, 2016
exceeded $75 million.

Changes in respect of the debt ratings of our notes may materially and adversely affect the availability,
the cost and the terms and conditions of our debt.

Both we and several issues of our notes have been publicly rated by Moody’s Investors Service, Inc., or
Moody’s, and Standard & Poor’s Rating Services, or S&P, independent rating agencies. In addition, future
debt instruments may be publicly rated. These debt ratings may affect our ability to raise debt. Any future
downgrading of the notes or our other debt by Moody’s or S&P may affect the cost and terms and conditions
of our ﬁnancings and could adversely affect the value and trading of the notes.

Failure to maintain effective internal control over ﬁnancial reporting could adversely affect us.

The accuracy of our ﬁnancial reporting depends on the effectiveness of our internal control over ﬁnancial
reporting,
the implementation of which requires signiﬁcant management attention. Internal control over
ﬁnancial reporting can provide only reasonable assurance with respect to the preparation and fair presentation
of ﬁnancial statements and may not prevent or detect misstatements because of its inherent limitations. These
limitations include, among others, the possibility of human error, inadequacy or circumvention of controls and
fraud. If we do not maintain effective internal control over ﬁnancial reporting or design and implement
controls sufficient to provide reasonable assurance with respect to the preparation and fair presentation of our
ﬁnancial statements, including in connection with controls executed for us by third parties, we might fail to
timely detect any misappropriation of corporate assets or inappropriate allocation or use of funds and could be
unable to ﬁle accurate ﬁnancial reports on a timely basis. As a result, our reputation, results of operations and
stock price could be materially adversely affected.

internal control over ﬁnancial

In connection with management’s assessment of

reporting under
Section 404 of the Sarbanes-Oxley Act of 2002 for the ﬁscal year ended December 31, 2014, we determined
that we did not maintain effective controls over ﬁve internal controls at our Douglas Elliman Realty, LLC
subsidiary and material weaknesses over two of these controls continued at December 31, 2015. Thus, we
determined that material weaknesses existed at Douglas Elliman. As of December 31, 2016, we remediated
these material weaknesses. See Item 9A, Controls and Procedures, for a discussion of the material weaknesses
and the remediation. If the new controls we implemented to strengthen our overall internal controls at Douglas
Elliman were not designed or do not continue to operate effectively or if we are unsuccessful in continuing to
follow these new processes, we may not timely or accurately report our ﬁnancial condition or results of
operations. This could adversely affect our stock price and the conﬁdence of investors, business partners and
others in our ﬁnancial reports.

Liggett faces intense competition in the domestic tobacco industry.

Liggett is considerably smaller and has fewer resources than its major competitors, and, as a result, has a
more limited ability to respond to market developments. Management Science Associates’ data indicate that
in 2016 Philip Morris and RJ Reynolds, the two largest cigarette manufacturers, controlled 78.4% of the
United States cigarette market. Philip Morris is the largest manufacturer in the market, and its proﬁts are
derived principally from its sale of premium cigarettes. Philip Morris had 59.6% of the premium segment and
47.6% of the total domestic market during 2016. During 2016, all of Liggett’s sales were in the discount
segment, and its share of the total domestic cigarette market was 3.3%. Philip Morris and RJ Reynolds, the
two largest cigarette manufacturers, historically, because of their dominant market share, have been able to
determine cigarette prices for the various pricing tiers within the industry.

14

Consolidation in the industry could adversely affect our ability to compete in the U.S. cigarette market.
For example, RJ Reynolds’ merger with Lorillard Tobacco Company in June 2015 could make it more difficult
for Liggett and Vector Tobacco to compete for shelf space in retail outlets and could impact price competition
in the market, either of which could have a material adverse effect on our sales volume, operating income and
cash ﬂows. Further, as part of the merger, RJ Reynolds and Lorillard Tobacco Company divested four of their
brands to ITG Brands LLC, owned by Imperial Brands Plc.

Liggett’s business is highly dependent on the discount cigarette segment.

All of Liggett’s unit volume is generated in the discount segment. The discount segment

is highly
competitive, with consumers having less brand loyalty and placing greater emphasis on price. While Philip
Morris, RJ Reynolds, and Imperial compete with Liggett in the discount segment of the market, the strongest
competition for market share has come from a group of smaller manufacturers and importers, most of which
sell low quality, deep discount cigarettes. While Liggett’s share of the discount market was 12.0% in 2016 and
11.8% in both 2015 and 2014, Management Science Associates’ data indicate that the discount market share of
these other smaller manufacturers and importers was approximately 25.6% in 2016, 24.8% in 2015, and
34.1% in 2014. If pricing in the discount market continues to be impacted by these smaller manufacturers and
importers, margins in Liggett’s only current market segment could be negatively affected, which in turn could
negatively affect the value of our common stock.

Liggett’s market share is susceptible to decline.

According to Management Science Associates’ data, Liggett’s overall domestic market share during 2016
and 2015 was 3.3% and 3.4% during 2014. Liggett’s share of the discount segment was 12.0% in 2016 and
11.8% in both 2015 and 2014. Liggett’s overall market share remained constant in 2016 after declining by
0.1% in 2015. If it were to decline substantially in the future, Liggett’s sales volume, operating income and
cash ﬂows would be materially adversely affected, which in turn could negatively affect the value of our
common stock.

The domestic cigarette industry has experienced declining unit sales in recent periods.

Industry-wide shipments of cigarettes in the United States have been declining for a number of years,
with Management Science Associates’ data indicating that domestic industry-wide shipments decreased by
approximately 2.4% in 2016 as compared to 2015, and by approximately 0.1% in 2015 as compared to 2014.
We believe that industry-wide shipments of cigarettes in the United States will continue to decline as a result
of numerous factors. These factors include health considerations, diminishing social acceptance of smoking,
and a wide variety of federal, state and local laws limiting smoking in restaurants, bars and other public
places, as well as increases in federal and state excise taxes and settlement-related expenses which have
contributed to high cigarette price levels in recent years. If this decline in industry-wide shipments continues
and Liggett is unable to capture market share from its competitors, or if the industry as a whole is unable to
offset the decline in unit sales with price increases, Liggett’s sales volume, operating income and cash ﬂows
could be materially adversely affected, which in turn could negatively affect the value of our common stock.

Our tobacco operations are subject to substantial and increasing legislation, regulation and taxation,
which has a negative effect on revenue and proﬁtability.

Tobacco products are subject to substantial federal and state excise taxes in the United States. These
taxes may continue to increase. On April 1, 2009, the federal excise tax increased from $0.39 to $1.01 per
pack of cigarettes to fund expansion of the State Children’s Health Insurance Program, referred to as SCHIP.
In addition, the April 2009 federal excise tax increase created certain tax differentials between certain types of
tobacco products. This has caused a dramatic increase in the sale of mis-labeled pipe tobacco as a substitute
for roll-your-own, which has directly impacted sales of cigarettes.

In addition to federal and state excise taxes, certain city and county governments also impose substantial
excise taxes on tobacco products. Increased excise taxes are likely to result in declines in overall sales volume
and shifts by consumers to less expensive brands.

A wide variety of federal, state and local laws limiting the advertising, sale and use of cigarettes have
proliferated in recent years. For example, many local laws prohibit smoking in restaurants and other public

15

places. Private businesses also have adopted regulations that prohibit or restrict, or are intended to discourage,
smoking. Such laws and regulations also are likely to result in a decline in the overall sales volume of
cigarettes.

Over the years, various state and local governments have continued to increase regulation of tobacco
products. These regulations include, among other things, disclosure of ingredient information, the imposition
of signiﬁcantly higher taxes, increases in the minimum age to purchase tobacco products, sampling and
advertising bans or restrictions, ingredient and constituent disclosure requirements and signiﬁcant tobacco
control media campaigns. Additional state and local legislative and regulatory actions will likely be considered
in the future, including, among other things, restrictions on the use of ﬂavorings.

In addition to the foregoing, there have been a number of other restrictive regulatory actions from various
federal administrative bodies, including the United States Environmental Protection Agency and the Food and
Drug Administration (‘‘FDA’’). There have also been adverse legislative and political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry. In 2009, legislation was
passed by Congress providing for regulation of cigarettes by the FDA. These developments generally receive
widespread media attention. Additionally, a majority of states have passed legislation providing for reduced
ignition propensity standards for cigarettes. These developments may negatively affect
the perception of
potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending
litigation, and may prompt the commencement of additional similar litigation or legislation. We are not able to
evaluate the effect of these developing matters on pending litigation or the possible commencement of
additional litigation, but our consolidated ﬁnancial position, results of operations or cash ﬂows could be
materially adversely affected.

Additional federal or state regulation relating to the manufacture, sale, distribution, advertising, labeling,
or information disclosure of tobacco products could further reduce sales, increase costs and have a material
adverse effect on our business.

The Family Smoking Prevention and Tobacco Control Act may adversely affect our sales and operating
proﬁt.

On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the ‘‘Tobacco Control
Act’’) became law. The law grants FDA broad authority over the manufacture, sale, marketing and packaging
of tobacco products, although FDA is prohibited from banning all cigarettes or all smokeless tobacco products.
Among other measures, the law (under various deadlines):

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increases the number of health warnings required on cigarette and smokeless tobacco products,
increases the size of warnings on packaging and in advertising, requires FDA to develop graphic
warnings for cigarette packages, and grants FDA authority to require new warnings;

imposes new restrictions on the sale and distribution of tobacco products, including signiﬁcant new
restrictions on tobacco product advertising and promotion, as well as the use of brand and trade
names;

bans the use of ‘‘light,’’ ‘‘mild,’’ ‘‘low’’ or similar descriptors on tobacco products;

bans the use of ‘‘characterizing ﬂavors’’ in cigarettes other than tobacco or menthol;

gives FDA the authority to impose tobacco product standards that are appropriate for the protection
of the public health (by, for example, requiring reduction or elimination of the use of particular
constituents or components, requiring product testing, or addressing other aspects of tobacco product
construction, constituents, properties or labeling);

requires manufacturers to obtain FDA review and authorization for the marketing of certain new or
modiﬁed tobacco products, which could ultimately result in the FDA prohibiting Liggett from selling
certain of its products;

requires pre-market approval by FDA for tobacco products represented (through labels, labeling,
advertising, or other means) as presenting a lower risk of harm or tobacco-related disease;

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requires manufacturers to report ingredients and harmful constituents and requires FDA to disclose
certain constituent information to the public;

mandates that manufacturers test and report on ingredients and constituents identiﬁed by FDA as
requiring such testing to protect the public health, and allows FDA to require the disclosure of
testing results to the public;

requires manufacturers to submit to FDA certain information regarding the health, toxicological,
behavioral or physiological effects of tobacco products;

prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under
federal law;

requires FDA to establish ‘‘good manufacturing practices’’ to be followed at tobacco manufacturing
facilities;

requires tobacco product manufacturers (and certain other entities) to register with FDA;

authorizes FDA to require the reduction of nicotine (although it may not require the reduction of
nicotine yields of a tobacco product to zero) and the potential reduction or elimination of other
constituents, including menthol;

imposes (and allows FDA to impose) various recordkeeping and reporting requirements on tobacco
product manufacturers; and

grants FDA the regulatory authority to impose broad additional restrictions.

It is likely that the tobacco law could result in a decrease in cigarette sales in the United States, including
sales of Liggett’s and Vector Tobacco’s brands. Compliance and related costs are not possible to predict and
depend substantially on the future requirements imposed by FDA under the law. Costs, however, could be
substantial and could have a material adverse affect on the companies’ ﬁnancial condition, results of
operations, and cash ﬂows. In addition, FDA has a number of investigatory and enforcement tools available to
it. Failure to comply with the law and with FDA regulatory requirements could result in signiﬁcant ﬁnancial
penalties and could have a material adverse effect on the business, ﬁnancial condition and results of operation
of both Liggett and Vector Tobacco. At present, we are not able to predict whether the law will impact Liggett
and Vector Tobacco to a greater degree than other companies in the industry, thus affecting our competitive
position.

Liggett and Vector Tobacco have received requests from FDA regarding certain of their substantial
equivalence applications, including ‘‘Preliminary Finding’’ letters and other FDA correspondence requesting
additional information that would support FDA’s determinations of substantial equivalence. Liggett and Vector
Tobacco have timely responded to FDA’s requests.

In August and October 2016, FDA issued ‘‘not substantially equivalent’’ (‘‘NSE’’) orders for two of
Liggett’s substantial equivalence applications. FDA ordered Liggett to stop all distribution, importation, sale,
marketing, and promotion of CLASS A Menthol Silver 100’s Box on August 12 and CLASS A Menthol Silver
100’s Soft Pack on October 18. Sales of both cigarette styles were limited to the military. Liggett has
complied with these NSE orders.

We cannot predict whether FDA will deem Liggett’s and Vector Tobacco’s remaining responses to
‘‘Preliminary Finding’’ letters for pending substantial equivalence applications to be sufficient
to support
determinations of substantial equivalence for the products covered by these substantial equivalence reports. It
is possible that FDA could determine some, or all, of these products are ‘‘not substantially equivalent’’ to a
preexisting tobacco product, as the agency has already done for two of Liggett’s applications and for multiple
reports from other
‘‘Not substantially
equivalent’’ orders for other cigarettes styles would require us to stop the sale of the applicable cigarettes and
could have a material adverse effect on us.

including other applications for cigarettes.

tobacco companies,

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Litigation will continue to harm the tobacco industry.

Liggett could be subjected to substantial liabilities and bonding requirements from litigation relating to
cigarette products. Adverse judgments could have a negative impact on our ability to operate due to their
impact on cash ﬂows. We and our Liggett subsidiary, as well as the entire cigarette industry, continue to be
challenged on numerous fronts, particularly with respect to the Engle progeny cases in Florida (described
below). New cases continue to be commenced against Liggett and other cigarette manufacturers. As of
December 31, 2016, in addition to approximately 125 Engle progeny cases, there were 35 individual product
liability lawsuits,
three purported class actions and one health care cost recovery action pending in the
United States in which Liggett and/or us were named defendants. It is likely that similar legal actions,
proceedings and claims will continue to be ﬁled against Liggett. Punitive damages, often in amounts ranging
into the billions of dollars, are speciﬁcally pled in certain cases, in addition to compensatory and other
damages. It is possible that there could be adverse developments in pending cases including the certiﬁcation
of additional class actions. An unfavorable outcome or settlement of pending tobacco-related litigation could
encourage the commencement of additional
In addition, an unfavorable outcome in any
litigation.
tobacco-related litigation could have a material adverse effect on our consolidated ﬁnancial position, results of
operations or cash ﬂows. Liggett could face difficulties in obtaining a bond to stay execution of a judgment
pending appeal.

Liggett Only Cases. There are currently three cases pending where Liggett

is the only remaining
tobacco company defendant. Cases where Liggett is the only defendant could increase substantially as a result
of the Engle progeny cases.

As new product liability cases are commenced against Liggett, the costs associated with defending these

cases and the risks relating to the inherent unpredictability of litigation continue to increase.

Individual tobacco-related cases have increased as a result of the Florida Supreme Court’s ruling in
Engle.

In May 2003, a Florida intermediate appellate court overturned a $790.0 million punitive damages award
against Liggett and decertiﬁed the Engle v. R. J. Reynolds Tobacco Co. smoking and health class action. In
July 2006, the Florida Supreme Court affirmed in part and reversed in part the May 2003 intermediate
appellate court decision. Among other things, the Florida Supreme Court affirmed the decision decertifying the
class on a prospective basis and the order vacating the punitive damages award, but preserved several of the
trial court’s Phase I ﬁndings (including that:
(i) smoking causes lung cancer, among other diseases;
(ii) nicotine in cigarettes is addictive; (iii) defendants placed cigarettes on the market that were defective and
information; (v) all defendants sold or
unreasonably dangerous; (iv) the defendants concealed material
supplied cigarettes that were defective; and (vi) all defendants were negligent) and allowed plaintiffs to
proceed to trial on individual
liability issues (using the above ﬁndings) and compensatory and punitive
damage issues, provided they commence their individual lawsuits within one year of the date the court’s
decision became ﬁnal on January 11, 2007, the date of the court’s mandate. In December 2006, the Florida
Supreme Court added the ﬁnding that defendants sold or supplied cigarettes that, at the time of sale or supply,
did not conform to the representations made by defendants.

Pursuant to the Florida Supreme Court’s July 2006 ruling in Engle, former class members had until
January 2008 to ﬁle individual lawsuits. Cases were commenced on behalf of approximately 8,000 plaintiffs.
Lawsuits by individuals requesting the beneﬁt of the Engle ruling are referred to as the ‘‘Engle progeny
cases.’’ Notwithstanding Liggett’s October 2013 and December 2016 multi-plaintiff settlements, Liggett and
Vector remain defendants in approximately 125 state court Engle progeny cases. As of December 31, 2016,
there were six Engle progeny cases currently scheduled for trial in 2017. Through December 31, 2016, 15
adverse verdicts had been entered against Liggett in Engle progeny cases. Several of these were affirmed on
appeal and were satisﬁed by Liggett. To date, Liggett has paid approximately $40 million to satisfy judgments
in Engle progeny cases.

We cannot predict the cash requirements related to any future settlements and judgments, including cash

required to bond any appeals, and there is a risk that those requirements will not be able to be met.

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Excise tax increases adversely affect cigarette sales.

Cigarettes are subject to substantial and increasing federal, state and local excise taxes. In February 2009,
Federal legislation to reauthorize SCHIP, which includes funding provisions that increase the federal cigarette
excise tax from $0.39 to $1.01 per pack, was enacted, effective April 1, 2009. Additional increases in the
federal cigarette excise tax have been proposed by Congress. Various states and other jurisdictions are
considering, or have pending,
in
April 2017 California will be signiﬁcantly increasing its cigarette excise tax from $0.87 to $2.87 per pack.
Management believes increases in excise and similar taxes have had, and will continue to have, an adverse
effect on sales of cigarettes.

legislation proposing further state excise tax increases. For example,

Liggett may have additional payment obligations under the MSA.

NPM Adjustment.

In March 2006, an economic consulting ﬁrm selected pursuant

to the MSA
determined that the MSA was a ‘‘signiﬁcant factor contributing to’’ the loss of market share of Participating
Manufacturers for 2003. This same determination has been made for additional years. This is known as the
the Participating Manufacturers may be entitled to potential NPM
‘‘NPM Adjustment.’’ As a result,
Adjustments to their MSA payments.

The Participating Manufacturers entered into a ‘‘term sheet’’ with 24 Settling States setting out terms for
settlement of the NPM Adjustment for 2003 − 2012 and addressing the NPM Adjustment with respect to those
states for future years. New York also settled the dispute.

For 2003 − 2015, Liggett and Vector Tobacco, as applicable, disputed that they owed the Settling States
the NPM Adjustments as calculated by the independent auditor. As permitted by the MSA, Liggett and Vector
Tobacco paid subject to dispute, withheld payment or paid into a disputed payment account the amounts
associated with these NPM Adjustments. For those states that did not enter into the ‘‘term sheet,’’ or otherwise
settle, the arbitration for 2004 has commenced. It is possible that Liggett could owe additional monies to the
non-settling states in connection with the NPM Adjustment dispute.

Liggett may have additional payment obligations under its individual state settlements.

In 2004, the Attorneys General of Mississippi and Texas advised Liggett that they believed that Liggett
had failed to make all required payments under the respective settlement agreements with these states. Liggett
believes these allegations are without merit, based, among other things, on the language of the most favored
nation provisions of the settlement agreements. No amounts have been accrued in our consolidated ﬁnancial
statements for any additional amounts that may be payable by Liggett under the settlement agreements with
Mississippi and Texas. In January 2016, Mississippi ﬁled a motion to enforce the March 1996 settlement
agreement alleging that Liggett owes at least $27 million in compensatory damages (including interest), and
$20 million in punitive damages plus attorneys’ fees. There can be no assurance that Liggett will prevail in
these matters and that Liggett will not be required to make additional payments, which could materially
adversely affect our consolidated ﬁnancial position, results of operations or cash ﬂows and the value of our
common stock.

New Valley is subject to risks relating to the industries in which it operates.

Risks relating to the real estate industry.

The real estate industry is signiﬁcantly affected by changes in economic and political conditions as well
as real estate markets, which could adversely impact returns on our investments, trigger defaults in project
ﬁnancing, cause cancellations of property sales, reduce the value of our properties or investments and could
affect our results of operations and liquidity. The real estate industry is cyclical and is signiﬁcantly affected by
changes in general and local economic conditions which are beyond our control.

These conditions include short-term and long-term interest rates, inﬂation, ﬂuctuations in debt and equity
capital markets, levels of unemployment, consumer conﬁdence and the general economic condition of the
United States and the global economy. The real estate market also depends upon the strength of ﬁnancial
institutions, which are sensitive to changes in the general macroeconomic environment. Lack of available
credit or lack of conﬁdence in the ﬁnancial sector could impact the real estate market, which in turn could
adversely affect our business, ﬁnancial condition and results of operations.

19

Any of the following could be associated with cyclicality in the real estate market by halting or limiting
a recovery in the residential real estate market, and have an adverse effect on our business by causing periods
of lower growth or a decline in the number of home sales and/or property prices which, in turn, could
adversely affect our revenue and proﬁtability:

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periods of economic slowdown or recession;

rising interest rates;

the general availability of mortgage ﬁnancing;

a negative perception of the market for residential real estate;

commission pressure from brokers who discount their commissions;

an increase in the cost of homeowners’ insurance;

weak credit markets;

a low level of consumer conﬁdence in the economy and/or the real estate market;

instability of ﬁnancial institutions;

legislative, tax or regulatory changes that would adversely impact the real estate market, including
but not limited to potential reform relating to Fannie Mae, Freddie Mac and other government
sponsored entities that provide liquidity to the U.S. housing and mortgage markets, and potential
limits on, or elimination of, the deductibility of certain mortgage interest expense and property taxes;

adverse changes in economic and general business conditions in the New York metropolitan area;

a decline in the affordability of homes;

declining demand for real estate;

decreasing home ownership rates, declining demand for real estate and changing social attitudes
toward home ownership; and/or

acts of God, such as hurricanes, earthquakes and other natural disasters, or acts or threats of war or
terrorism.

the real estate market

New Valley is heavily dependent on the performance of

in the New York
metropolitan area. New Valley’s business primarily depends on the performance of the real estate market in
the New York metropolitan area. Our real estate brokerage businesses and our investments in real estate
developments are largely located in the New York metropolitan area and to a lesser extent in South Florida
and other markets. Further, as of December 31, 2016, we had investments in or were developing 14 projects
in the New York metropolitan area. Douglas Elliman Real Estate’s residential brokerage business primarily
depends on volumes of sales transactions and sales prices for
residential property in the New York
metropolitan area. If volumes of residential property sales transactions in the New York metropolitan area
decrease, the aggregate sales commission earned by Douglas Elliman Real Estate on sales transactions is also
likely to decline, as the residential real estate market experienced to some degree in 2016. Our business is and
may continue to be heavily dependent on the continued growth of the property market in the New York
metropolitan area, and any adverse developments in the supply and demand or in property prices in these
areas would have an adverse effect on our ﬁnancial condition and results of operations.

We cannot assure that property development and investment activities will continue at past levels or that
we will be able to beneﬁt from future growth in the property market in the New York metropolitan area,
South Florida or the United States. Any adverse developments in national and local economic conditions as
measured by such factors as GDP growth, employment levels, job growth, consumer conﬁdence, interest rates
and population growth in the New York metropolitan area and the United States, particularly in the regions
where our investments and brokerages are located, may reduce demand and depress prices for our properties
and services and would have an adverse effect on our business, ﬁnancial condition and results of operations.

20

New Valley is dependent on the attractiveness of New York City as a place to live and invest in and its
status as an international center for business and commerce. Through its investments in Douglas Elliman
Real Estate and 14 developments in the New York metropolitan area, New Valley is dependent on the
attractiveness of New York City as a place to live and invest in. If New York City’s economy stagnates or
contracts or if there are signiﬁcant concerns or uncertainty regarding the strength of New York City’s
economy, due to domestic,
in
particular, any matters which adversely affect New York City’s status as an international center for business
and commerce or the economic beneﬁts of New York City’s ﬁnancial services industry),
the New York
metropolitan area may become a less attractive place to live, work, study or to own residential property for
investment purposes. The attractiveness of New York City may also be negatively affected by other factors,
including high residential property sales prices or rents (or a risk or perceived risk of a fall in sales prices in
the future), high costs of living, and negative perceptions surrounding quality of life, safety and security
(including the risk or perceived risk of acts of terrorism or protests).

international or global macroeconomic trends or other factors (including,

Any reduction in the attractiveness of New York City as a place to live or a place to invest in residential
real estate and any matters which adversely affect New York City’s status as an international center for
business and commerce could result in a reduction, by volume and/or by value, in our investment in real
estate developments and/or residential property sales transactions in the New York metropolitan area, which
would adversely affect our business, ﬁnancial condition and results of operations.

Risks associated with our real estate development business.

Real estate development is a competitive industry, and competitive conditions may adversely affect our
results of operations. The real estate development industry is highly competitive. Real estate developers
compete not only for buyers, but also for desirable properties, building materials, labor and capital. We
compete with other local, regional, national and international real estate asset managers, investors and property
developers, who have signiﬁcant ﬁnancial resources and experience. Competitive conditions in the real estate
development industry could result in: difficulty in acquiring suitable investments in properties at acceptable
prices; increased selling incentives; lower sales volumes and prices; lower proﬁt margins; impairments in the
value of our investments in real estate developments and other assets; and increased construction costs, delays
in construction and increased carry costs. Development projects are subject to special risks including potential
increase in costs, changes in market demand,
inability to meet deadlines which may delay the timely
completion of projects, reliance on contractors who may be unable to perform and the need to obtain various
governmental and third party consents.

If the market value of our properties or investments decline, our results of operations could be adversely
affected by impairments and write-downs. We acquire land and invest in real estate projects in the ordinary
course of our business. There is an inherent risk that the value of our land and investments may decline after
purchase, which also may affect the value of existing properties under construction. The valuation of property
is inherently subjective and based on the individual characteristics of each property. The market value of our
land and investments in real estate projects depends on general and local real estate market conditions. These
conditions can change and thereby subject valuations to uncertainty. Moreover, all valuations are made on the
basis of assumptions that may not prove to reﬂect economic or demographic reality. We may have acquired
options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot
build and sell the property proﬁtably. In addition, our deposits or investments in deposits for building lots
controlled under option or similar contracts may be put at risk. If market conditions deteriorate, some of our
assets may be subject to impairments and write-down charges which would adversely affect our operations
and ﬁnancial results.

If demand for residential or commercial real estate decreases below what was anticipated when we
purchased interests in or developed such inventory, proﬁtability may be adversely affected and we may not be
able to recover the related costs when selling and building our properties and/or investments. We regularly
review the value of our investments and will continue to do so on a periodic basis. Write-downs and
impairments in the value of our properties and/or investments may be required, and we may in the future sell
properties and/or investments at a loss, which could adversely affect our results of operations and ﬁnancial
condition.

21

We face risks associated with property acquisitions. We may be unable to ﬁnance acquisitions or
investments on favorable terms or properties may fail to perform as expected. We may underestimate the costs
necessary to bring an investment up to standards established for its intended market position. We may also
acquire or invest in properties subject to liabilities and with recourse, with respect to unknown liabilities. The
Company’s acquisition of real estate investments are subject
to several risks including: underestimated
operating expenses for a property, possibly making it uneconomical or unproﬁtable; a property may fail to
perform in accordance with expectations, in which case the Company may sustain lower-than-expected income
or need to incur additional expenses for the property; and the Company may not be able to sell, dispose or
reﬁnance the property at a favorable price or terms, or at all, as the case may be; in addition to any potential
loss on a sale, the Company may have no choice but to hold on to the property and continue to incur net
operating losses if underperforming for an indeﬁnite period of time, as well as incur continuing tax,
environmental and other liabilities. Acquisition agreements will
typically contain conditions to closing,
including completion of due diligence to our satisfaction or other conditions that are not within our control,
which may not be satisﬁed. Each of these factors could have an adverse effect on our results of operations and
ﬁnancial condition.

Our success depends on the availability of suitable real estate investments at acceptable prices and
having suffıcient liquidity to acquire such investments. Our success in investing in real estate depends in part
upon the continued availability of suitable real estate assets at acceptable prices. The availability of properties
for investment at favorable prices depends on a number of factors outside of our control, including the risk of
competitive over-bidding on real estate assets. Should suitable opportunities become less available, the number
of properties we develop and invest
in would be reduced, which would reduce revenue and proﬁts. In
addition, our ability to make investments will depend upon whether we have sufficient liquidity to fund such
purchases and investments.

If we, or the entities we invest in, are not able to develop and market our real estate developments
successfully or within expected timeframes or at projected pricing, our business and results of operations will
be adversely affected. Before a property development generates any revenues, material expenditures are
incurred to acquire land, obtain development approvals and construct signiﬁcant portions of project
infrastructure, amenities, model offices, showrooms, apartments or homes and sales facilities. It generally takes
several years for a real estate development to achieve cumulative positive cash ﬂow. If we, or the entities we
invest in, are unable to develop and market our real estate developments successfully or to generate positive
cash ﬂows from these operations within expected timeframes, it could have a material adverse effect on our
business and results of operations.

Because certain of our assets are illiquid, we may not be able to sell these assets when appropriate or
when desired. Large real estate development like the ones that we retain investments in can be hard to sell,
especially if local market conditions are poor. Such illiquidity could limit our ability to diversify our assets
promptly in response to changing economic or investment conditions. Additionally, ﬁnancial difficulties of
other property owners resulting in distressed sales could depress real estate values in the markets in which we
operate in times of illiquidity. These restrictions reduce our ability to respond to changes in the performance
of our assets and could adversely affect our ﬁnancial condition and results of operations.

Guaranty risks; risks of joint ventures. New Valley has a number of real estate-related investments in
which other partners hold signiﬁcant interests. New Valley must seek approval from these other parties for
important actions regarding these joint ventures. Since the other parties’ interests may differ from those of
New Valley, a deadlock could arise that might impair the ability of the ventures to function. Such a deadlock
could signiﬁcantly harm the ventures. If our partners face adverse ﬁnancial conditions, it may impair their
ability to fund capital calls or satisfy their share of any guarantees on project ﬁnancing. In addition, we are
typically obligated to execute guarantees or indemnify our partners for guarantees they may execute in
connection with the acquisition or construction ﬁnancing for our projects. The guarantees that we might be
obligated to sign include guarantees for environmental liability at a project, ‘‘bad boy’’ acts committed by
New Valley, as well as a ‘‘carry’’ guarantee and completion guarantee for a project. In the event of a default,
if a lender were to exercise its rights under these guarantees, it could have a material adverse effect on our
business and results of operations.

22

Our real estate investments and the real estate market

in general could be adversely impacted by
changes in the law. Many different laws govern the development of real estate. Changes to laws such as
affordable housing, zoning, air rights and others, could adversely impact our real estate projects. The Financial
Crimes Enforcement Network of the Treasury Department has recently issued Geographic Targeting Orders
that will temporarily require certain United States title insurance companies to identify the natural persons
who directly or indirectly beneﬁcially own companies that pay all cash for high-end residential real estate in
the Borough of Manhattan in New York City and in Miami-Dade County in Florida. No assurances can be
given as to the impact such requirements may have on the continued purchasing of high-end residential
properties in Manhattan and Miami-Dade County by such individuals for so long as such requirements are in
effect, and no assurances can be given as to the impact such requirements may have in the event they are
extended to other markets throughout the country in which New Valley is engaged in high-end residential
properties.

The real estate developments we invest

to losses as a result of construction
defects. Real estate developers, are subject to construction defect and warranty claims arising in the ordinary
course of their business. These claims are common in the real estate development industry and can be costly.

in may be subject

Claims may be asserted against

the real estate developments we invest

in for construction defects,
personal injury or property damage caused by the developer, general contractor or subcontractors, and if
successful these claims may give rise to liability. Subcontractors are independent of the homebuilders that
contract with them under normal management practices and the terms of trade contracts and subcontracts
within the industry; however,
if U.S. or other regulatory agencies or courts reclassify the employees of
sub-contractors as employees of real estate developers, real estate developers using subcontractors could be
responsible for wage, hour and other employment-related liabilities of their subcontractors.

In addition, where the real estate developments in which we invest hire general contractors, unforeseen
events such as the bankruptcy of, or an uninsured or under-insured loss claimed against,
the general
contractor, may sometimes result in the real estate developer becoming responsible for the losses or other
obligations of the general contractor. The costs of insuring against construction defect and product liability
claims are high, and the amount of coverage offered by insurance companies may be limited. There can be no
assurance that
this coverage will not be further restricted and become more costly. If the real estate
developments in our real estate portfolio are not able to obtain adequate insurance against these claims in the
future, our business and results of operations may be adversely affected.

Increasingly in recent years, individual and class action lawsuits have been ﬁled against real estate
developers asserting claims of personal injury and property damage caused by a variety of issues, including
faulty materials and the presence of mold in residential dwellings. Furthermore, decreases in home values as a
result of general economic conditions may result in an increase in both non-meritorious and meritorious
construction defect claims, as well as claims based on marketing and sales practices. Insurance may not cover
all of the claims arising from such issues, or such coverage may become prohibitively expensive. If real estate
developments in our real estate portfolio are not able to obtain adequate insurance against these claims, they
may experience litigation costs and losses that could reduce our revenues from these investments. Even if they
are successful in defending such claims, we may incur signiﬁcant losses.

Our real estate investments may face substantial damages as a result of existing or future litigation,
arbitration or other claims. The real estate developments we invest in are exposed to potentially signiﬁcant
litigation, arbitration proceedings and other claims, including breach of contract, contractual disputes and
disputes relating to defective title, property misdescription or construction defects. Class action lawsuits can be
costly to defend, and if our assets were to lose any certiﬁed class action suit, it could result in substantial
liability. With respect to certain general liability exposures, including construction defect and product liability
claims, interpretation of underlying current and future trends, assessment of claims and the related liability and
reserve estimation process requires us to exercise signiﬁcant judgment due to the complex nature of these
exposures, with each exposure exhibiting unique circumstances. Furthermore, once claims are asserted for
construction defects, it is difficult to determine the extent to which the assertion of these claims will expand
geographically. As a result, we may suffer losses on our investments which could adversely affect our
business, ﬁnancial condition and results of operations.

23

Our investments in real estate are susceptible to adverse weather conditions and natural and man-made
disasters. Adverse weather conditions and natural and man-made disasters such as hurricanes, tornadoes,
storms, earthquakes, ﬂoods, droughts, ﬁres, snow, blizzards, as well as terrorist attacks, riots and electrical
outages, can have a signiﬁcant effect on the assets in our real estate portfolio. These adverse conditions can
cause physical damage to work in progress and new developments, delays and increased costs in the
construction of new developments and disruptions and suspensions of operations, whether caused directly or
by disrupting or suspending operations of those upon whom our real estate developments rely in their
operations. Such adverse conditions can mutually cause or aggravate each other, and their incidence and
severity are unpredictable. If insurance is unavailable to the real estate developments we invest in or is
unavailable on acceptable terms, or if insurance is not adequate to cover business interruptions or losses
resulting from adverse weather or natural or man-made disasters, the real estate developments we invest in
and our results of operations will be adversely affected. In addition, damage to properties in our real estate
portfolio caused by adverse weather or a natural or man-made disaster may cause insurance costs for these
properties to increase.

A major health and safety incident relating to our real estate investments could be costly in terms of
potential liabilities and reputational damage. Building sites are inherently dangerous, and operating in the
real estate development industry poses certain inherent health and safety risks. Due to regulatory requirements,
health and safety performance is critical to the success of the real estate investments we invest in. Any failure
in penalties for non-compliance with relevant regulatory
in health and safety performance may result
requirements, and a failure that results in a major or signiﬁcant health and safety incident is likely to be costly
in terms of potential liabilities incurred as a result. Such a failure could generate signiﬁcant negative publicity
and have a corresponding impact on the reputation and relationships of the developer with relevant regulatory
agencies or governmental authorities, which in turn could have an adverse effect on our investment and
operating results.

Insurance may not cover some potential losses or may not be obtainable at commercially reasonable
rates, which could adversely affect our ﬁnancial condition and results of operations. Real estate properties in
our real estate portfolio maintain insurance on their properties in amounts and with deductibles that we believe
are comparable with what owners of similar properties carry; however, such insurance may not cover some
potential losses or may not be obtainable at commercially reasonable rates in the future. There also are certain
types of risks (such as war, environmental contamination such as toxic mold, and lease and other contract
claims) which are either uninsurable or not economically insurable. Should any uninsured or underinsured loss
occur, we could lose our investment in, and anticipated proﬁts and cash ﬂows from, one or more properties.

The volatility in the capital and credit markets has increased in recent years. Because the volatility in
capital and credit markets may create additional risks in the upcoming months and possibly years, we will
continue to perform additional assessments to determine the impact, if any, on our consolidated ﬁnancial
statements. Thus, future impairment charges may occur.

Risks associated with Douglas Elliman Realty.

Douglas Elliman Real Estate depends on a strong brand, and any failure to maintain, protect and
enhance the Douglas Elliman brand would have an adverse effect on its ability to grow its real estate
brokerage business. Douglas Elliman Real Estate has developed a strong brand that we believe has
contributed signiﬁcantly to the success of its business. Maintaining, protecting and enhancing Douglas Elliman
Real Estate as a premium real estate brokerage brand is critical to growing its business. If Douglas Elliman
Real Estate does not successfully build and maintain a strong brand, its real estate brokerage business could
be negatively impacted. Maintaining and enhancing the quality of the Douglas Elliman Real Estate brand may
require us to make substantial investments in areas such as marketing, community relations, outreach and
employee training. Douglas Elliman Real Estate actively engages in print and online advertisements, targeted
promotional mailings and email communications, and engages on a regular basis in public relations and
sponsorship activities. There is no assurance that those activities will enhance the brand awareness.

Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive
considerable negative publicity or result in litigation. Some of these incidents may relate to the way Douglas
Elliman Real Estate manages its relationship with its agents, our growth strategies or the ordinary course of its

24

business or its brokerage business. Other incidents may arise from events that are or may be beyond its ability
to control and may damage its brand, such as actions taken (or not taken) by one or more agents relating to
health, safety, welfare or other matters; litigation and claims; failure to maintain high ethical and social
standards for all of its operations and activities; failure to comply with local laws and regulations; and illegal
activity targeted at Douglas Elliman Real Estate or others. Douglas Elliman Real Estate’s brand value could
diminish signiﬁcantly if any such incidents or other matters erode consumer conﬁdence in it, which may result
in a decrease in its total agent count and, ultimately could adversely affect its business and operating results.

The real estate brokerage business in the New York metropolitan area, South Florida, Aspen, Colorado
and Beverly Hills, California is extremely competitive. Douglas Elliman Real Estate competes with other
multi-office independent real estate organizations and with franchise real estate organizations competing in
local areas. Competition is particularly intense in the densely populated metropolitan areas of New York and
South Florida in which it operates. In addition, in the real estate brokerage industry, new participants face
minimal barriers to entry into the market. Douglas Elliman Real Estate also competes for the services of
qualiﬁed licensed agents. The ability of its brokerage offices to retain agents is generally subject to numerous
factors, including the sales commissions they receive, advertising support and its perception of brand value.

The ﬁnancial results of Douglas Elliman Real Estate’s real estate brokerage business is affected directly
by the success of its agents. Douglas Elliman Real Estate’s real estate brokerage offices generate revenue in
the form of commissions and service fees. Accordingly, its ﬁnancial results depend upon the operational and
ﬁnancial success of its brokerage offices and its agents.

Infringement, misappropriation or dilution of Douglas Elliman Real Estate’s intellectual property could
harm its business. We regard the Douglas Elliman Real Estate trademark portfolio as having signiﬁcant
value and as being an important factor in the marketing of its brand. Douglas Elliman Real Estate believes
that this and other intellectual property are valuable assets that are critical to its success. Douglas Elliman
Real Estate relies on a combination of protections provided by contracts, as well as copyright, trademark, and
other laws,
to protect our intellectual property from infringement, misappropriation or dilution. It has
registered certain trademarks and service marks and has other trademark and service mark registration
applications pending in the U.S. and foreign jurisdictions. Although Douglas Elliman Real Estate monitors its
trademark portfolio both internally and through external search agents and imposes an obligation on agents to
notify it upon learning of potential infringement, there can be no assurance that it will be able to adequately
maintain, enforce and protect its trademarks or other intellectual property rights.

Douglas Elliman Real Estate is not aware of any challenges to its right to use any of its brand names or
trademarks. It is commonly involved in numerous proceedings, generally on a small scale, to enforce its
intellectual property and protect
its brand. Unauthorized uses or other infringement of its trademarks or
service marks, including ones that are currently unknown to us, could diminish the value of its brand and may
adversely affect its business. Failure to adequately protect its intellectual property rights could damage its
brand and impair its ability to compete effectively. Even where it has effectively secured statutory protection
for its trademarks and other intellectual property, its competitors may misappropriate its intellectual property.
Defending or enforcing our trademark rights, branding practices and other intellectual property, and seeking an
injunction and/or compensation for misappropriation of conﬁdential
in the
expenditure of signiﬁcant resources and divert the attention of management, which in turn may adversely
affect our business and operating results.

information, could result

Moreover, unauthorized third parties may use Douglas Elliman Real Estate’s intellectual property to trade
on the goodwill of its brand, resulting in consumer confusion or dilution. Any reduction of its brand’s
goodwill, consumer confusion, or dilution is likely to impact sales, and could adversely affect its business and
operating results.

Douglas Elliman Real Estate relies on traffıc to its websites, including its ﬂagship website, elliman.com,
directed from search engines. If these websites fail to rank prominently in unpaid search results, traffıc to
these websites could decline and its business would be adversely affected. Douglas Elliman Real Estate’s
success depends in part on its ability to attract users through unpaid Internet search results on search engines.
The number of users it attract to its websites, including its ﬂagship website elliman.com, from search engines
is due in large part to how and where its websites rank in unpaid search results. These rankings can be

25

affected by a number of factors, many of which are not under our direct control, and they may change
frequently. For example, a search engine may change its ranking algorithms, methodologies or design layouts.
As a result, links to Douglas Elliman Real Estate’s websites may not be prominent enough to drive traffic to
its websites, and we may not know how or otherwise be in a position to inﬂuence the results. In some
instances, search engine companies may change these rankings in order to promote their own competing
services or the services of one or more of its competitors. Its websites have experienced ﬂuctuations in search
result rankings in the past, and it anticipates ﬂuctuations in the future. Any reduction in the number of users
directed to its websites could adversely affect its real estate brokerage business and results of operations.
Further, a failure of Douglas Elliman Real Estate’s websites or website-based technology, which are subject to
factors beyond our control, could signiﬁcantly disrupt
its business and lead to reduced revenue and
reputational damage as Douglas Elliman Real Estate may not be able to effectively scale and adapt its existing
technology and network infrastructure to ensure its platforms is accessible.

Potential new investments we may make are unidentiﬁed and may not succeed.

We currently hold a signiﬁcant amount of marketable securities and cash not committed to any speciﬁc
investments. This subjects a security holder to increased risk and uncertainty because a security holder will
not be able to evaluate how this cash will be invested and the economic merits of particular investments.
There may be substantial delay in locating suitable investment opportunities. In addition, we may lack relevant
management experience in the areas in which we may invest. There is a risk that we will fail in targeting,
consummating or effectively integrating or managing any of these investments.

Cybersecurity incidents could disrupt business operations, result in the loss of critical and conﬁdential
information, and adversely impact our reputation and results of operations.

Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain
unauthorized access to information technology systems to sophisticated and targeted measures known as
advanced persistent threats, directed at the Company. In the ordinary course of our business, we collect and
store sensitive data, including our proprietary business information and intellectual property, and that of our
clients and personally identiﬁable information of our customers. Additionally, we increasingly rely on
third-party data storage providers,
including cloud storage solution providers. The secure processing,
maintenance and transmission of this information are critical to our operations and with respect to information
collected and stored by our third-party service providers, we are reliant upon their security procedures. While
we and our third-party service providers have experienced, and expect to continue to experience, these types
of threats and incidents, none of them to date have been material to the Company. Cybersecurity incidents,
depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption
or unavailability of critical data and conﬁdential or proprietary information (our own or that of third parties,
including personally identiﬁable information) and the disruption of business operations. Our business
interruption insurance may be insufficient
losses that may occur. The potential
consequences of a material cybersecurity incident include reputational damage, litigation with third parties,
diminution in the value of the services we provide to our customers, and increased cybersecurity protection
and remediation costs, which in turn could adversely affect our competitiveness and results of operations.

to compensate us for

We depend on our key personnel.

We depend on the efforts of our executive officers and other key personnel. While we believe that we
could ﬁnd replacements for these key personnel, the loss of their services could have a signiﬁcant adverse
effect on our operations.

The price of our common stock may ﬂuctuate signiﬁcantly.

The trading price of our common stock has ranged between $19.33 and $23.24 per share over the past
52 weeks. We expect that the market price of our common stock will continue to ﬂuctuate including as a
result of the issuance of 2,000,000 common shares in January 2017.

26

The market price of our common stock may ﬂuctuate in response to numerous factors, many of which

are beyond our control. These factors include the following:

•

•

•

•

•

•

•

•

•

•

actual or anticipated ﬂuctuations in our operating results;

changes in expectations as to our future ﬁnancial performance, including ﬁnancial estimates by
securities analysts and investors;

the operating and stock performance of our competitors;

announcements by us or our competitors of new products or services or signiﬁcant contracts,
acquisitions, strategic partnerships, joint ventures or capital commitments;

the initiation or outcome of litigation;

the failure or signiﬁcant disruption of our operations from various causes related to our critical
information technologies and systems including cybersecurity threats to our data and customer data
as well as reputational or ﬁnancial risks associated with a loss of any such data;

changes in interest rates;

general economic, market and political conditions;

additions or departures of key personnel; and

future sales of our equity or convertible securities.

We cannot predict the extent, if any, to which future sales of shares of common stock or the availability

of shares of common stock for future sale, may depress the trading price of our common stock.

In addition,

the stock market

in recent years has experienced extreme price and trading volume
ﬂuctuations that often have been unrelated or disproportionate to the operating performance of individual
companies. These broad market ﬂuctuations may adversely affect the price of our common stock, regardless of
our operating performance. Furthermore, stockholders may initiate securities class action lawsuits if the market
price of our stock drops signiﬁcantly, which may cause us to incur substantial costs and could divert the time
and attention of our management. These factors, among others, could signiﬁcantly depress the price of our
common stock.

We have many potentially dilutive securities outstanding.

As of December 31, 2016, we had outstanding restricted shares and options granted to employees to
purchase approximately 6,297,489 shares of our common stock, with a weighted-average exercise price of
$9.59 per share, of which options 2,111,985 shares were exercisable as of December 31, 2016. We also have
outstanding convertible notes and debentures maturing in January 2019 and April 2020, which are currently
convertible into 26,139,248 shares of our common stock. The issuance of these shares will cause dilution
which may adversely affect the market price of our common stock. The availability for sale of signiﬁcant
quantities of our common stock could adversely affect the prevailing market price of the stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our principal executive offices are located in Miami, Florida. We lease 12,390 square feet of office space
in an office building in Miami, which we share with various of our subsidiaries. The lease is with an affiliate
of the Company and expires in March 2018, subject to two ﬁve-year renewal options.

We lease approximately 9,000 square feet of office space in New York, New York under a lease that
expires in 2020. New Valley’s operating properties are discussed above under the description of New Valley’s
business and in Note 7 to our consolidated ﬁnancial statements.

27

Douglas Elliman leases 93 offices throughout New York, Connecticut, Florida, California and Colorado.
Leases expire at various times between 2016 and 2032. As of December 31, 2016, the properties leased by
Douglas Elliman are as follows:

Type
Offices
Offices
Offices
Offices
Offices
Offices

Number of
Offices
24
37
19
5
1
7

Location

New York City, NY
Long Island, NY
South Florida
Westchester County, NY
California
Other

Owned or
Leased
Leased
Leased
Leased
Leased
Leased
Leased

Approximate
Total Square
Footage
221,000
123,000
35,000
14,000
12,000
8,000

Liggett’s tobacco manufacturing facilities, and several of the distribution and storage facilities, are
currently located in or near Mebane, North Carolina. Various of such facilities are owned and others are
leased. Liggett’s office, manufacturing complex and warehouse are pledged as collateral under its Revolving
Credit Facility. As of December 31, 2016, the principal properties owned or leased by Liggett are as follows:

Type
Storage Facilities
Office and Manufacturing Complex
Warehouse
Warehouse
Warehouse

Location
Danville, VA
Mebane, NC
Mebane, NC
Mebane, NC
Mebane, NC

Owned or
Leased
Owned
Owned
Owned
Leased
Leased

Approximate
Total Square
Footage
578,000
240,000
60,000
125,000
22,000

LVB leases approximately 22,000 square feet of office space in Morrisville, North Carolina. The lease

expires in January 2019.

Liggett’s management believes that its property, plant and equipment are well maintained and in good

condition and that its existing facilities are sufficient to accommodate a substantial increase in production.

ITEM 3.

LEGAL PROCEEDINGS

Liggett and other United States cigarette manufacturers have been named as defendants in various types
of cases predicated on the theory, among other things, that they should be liable for damages from adverse
health effects alleged to have been caused by cigarette smoking or by exposure to secondary smoke from
cigarettes.

Reference is made to Note 15 to our consolidated ﬁnancial statements, which contains a description of
certain legal proceedings to which the Company, and its subsidiaries, including Liggett, are a party and other
related matters. Reference is also made to Exhibit 99.1, Material Legal Proceedings, incorporated herein, for
additional information regarding the pending tobacco-related legal proceedings to which we or Liggett are
parties.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

28

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed and traded on the New York Stock Exchange under the symbol ‘‘VGR.’’ The
following table sets forth, for the periods indicated, high and low sale prices for a share of our common stock
on the NYSE, as reported by the NYSE, and quarterly cash dividends declared on shares of common stock:

Year
2016:
Fourth Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2015:
Fourth Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

Low

Cash
Dividends

$22.95
22.41
21.89
22.66

$24.38
23.46
21.47
21.13

$20.02
20.46
19.33
20.23

$21.08
20.14
19.60
18.70

$0.40
0.38
0.38
0.38

$0.38
0.36
0.36
0.36

At February 21, 2017, there were approximately 1,599 holders of record of our common stock.

The declaration of future cash dividends is within the discretion of our Board of Directors and is subject
to a variety of contingencies such as market conditions, earnings and our ﬁnancial condition as well as the
availability of cash.

Liggett’s revolving credit agreement currently permits Liggett to pay dividends to VGR Holding only if
Liggett’s borrowing availability exceeds $5 million for the 30 days prior to payment of the dividend and after
giving effect to the dividend, and so long as no event of default has occurred under the agreement, as deﬁned
under the Credit Facility, including Liggett’s compliance with the covenants in the credit facility, including
maintaining minimum levels of EBITDA (as deﬁned) if its borrowing availability is less than $20 million and
not exceeding maximum levels of capital expenditures (as deﬁned).

Our 6.125% Senior Secured Notes due 2025 prohibit our payment of cash dividends or distributions on
our common stock if, at the time of such payment, our Consolidated EBITDA (as deﬁned) for the most
recently completed four full ﬁscal quarters is less than $75 million. Our Consolidated EBITDA for the four
quarters ended December 31, 2016 exceeded $75 million.

We paid 5% stock dividends on September 29, 2016 and September 29, 2015 to the holders of our

common stock. All information presented in this report is adjusted for the stock dividends.

29

Performance Graph

The following graph compares the total annual return of our Common Stock, the S&P 500 Index, the
S&P MidCap 400 Index and the NYSE Arca Tobacco Index, formerly known as the AMEX Tobacco Index,
for the ﬁve years ended December 31, 2016. The graph assumes that $100 was invested on December 31,
2011 in the Common Stock and each of the indices, and that all cash dividends and distributions were
reinvested.

S
R
A
L
L
O
D

400

300

200

100

0

12/31/11

12/31/12

12/31/13

12/31/14

12/31/15

12/31/16

Vector Group Ltd.

S&P 500

S&P MidCap

NYSE Arca Tobacco

Vector Group Ltd.
. . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . .
S&P MidCap . . . . . . . . . . . . . . . . . . . . .
NYSE Arca Tobacco . . . . . . . . . . . . . . . .

12/11
100
100
100
100

12/12
97
116
118
119

12/13
123
154
157
131

12/14
181
175
173
130

12/15
226
177
169
157

12/16
246
198
204
199

Unregistered Sales of Equity Securities and Use of Proceeds

No securities of ours which were not registered under the Securities Act of 1933 were issued or sold by

us during the three months ended December 31, 2016.

Issuer Purchases of Equity Securities

Our purchases of our common stock during the three months ended December 31, 2016 were as follows:

Period
October 1 to October 31, 2016 . . . . .
November 1 to November 30, 2016 . .
December 1 to December 31, 2016 . . .
. . . . . . . . . . . . . . . . . . . . .

Total

Total Number
of Shares
Purchased
—

100,016(1)

—
100,016

Average Price
Paid per Share
$ —
20.84(1)
—
$20.84

Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
—
—
—
—

Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
—
—
—
—

(1) Delivery of shares to us in payment of tax withholding in connection with an employee’s vesting in

restricted stock. The shares were immediately canceled.

30

EXECUTIVE OFFICERS OF THE REGISTRANT

The table below, together with the accompanying text, presents certain information regarding all our
current executive officers as of March 1, 2017. Each of the executive officers serves until the election and
qualiﬁcation of such individual’s successor or until such individual’s death, resignation or removal by the
Board of Directors.

Name

Howard M. Lorber
Richard J. Lampen
J. Bryant Kirkland III
Marc N. Bell
Ronald J. Bernstein

Age

68
63
51
56
63

Position

Year Individual
Became an
Executive Officer

President and Chief Executive Officer
Executive Vice President
Senior Vice President, Chief Financial Officer and Treasurer
Senior Vice President, General Counsel and Secretary
President and Chief Executive Officer of Liggett

2001
1996
2006
1998
2000

Howard M. Lorber has been our President and Chief Executive Officer since January 2006. He served
as our President and Chief Operating Officer from January 2001 to December 2005 and has served as a
director of ours since January 2001. From November 1994 to December 2005, Mr. Lorber served as President
and Chief Operating Officer of New Valley, where he also served as a director. Mr. Lorber was Chairman of
the Board of Hallman & Lorber Assoc., Inc., consultants and actuaries of qualiﬁed pension and proﬁt sharing
plans, and various of its affiliates from 1975 to December 2004 and has been a consultant to these entities
since January 2005; Chairman of the Board of Directors since 1987 and Chief Executive Officer from
November 1993 to December 2006 of Nathan’s Famous, Inc., a chain of fast food restaurants; Chairman of
the Board of Ladenburg Thalmann Financial Services from May 2001 to July 2006 and Vice Chairman since
July 2006; a Director of Clipper Realty, Inc., a real estate investment trust, since July 2015. Mr. Lorber was a
member of the Board of Directors of Morgans Hotel Group Co. from March 2015 until November 2016, and
Chairman from May 2015 to November 2016. He is also a trustee of Long Island University.

Richard J. Lampen has served as our Executive Vice President since July 1996. From October 1995 to
December 2005, Mr. Lampen served as the Executive Vice President and General Counsel of New Valley,
where he also served as a director. Since September 2006, he has served as President and Chief Executive
Officer of Ladenburg Thalmann Financial Services. From November 1998 to November 2011, he served as
President and Chief Executive Officer of CDSI Holdings Inc., an affiliate of New Valley, which is now known
as SG Blocks Inc. Since October 2008, Mr. Lampen has served as President and Chief Executive Officer of
Castle Brands Inc. Mr. Lampen is a director of Castle and Ladenburg Thalmann Financial Services and served
as a director of SG Blocks Inc. until January 2014.

J. Bryant Kirkland III has been our Chief Financial Officer and Treasurer since April 2006 and our
Senior Vice President since May 2016. Mr. Kirkland served as a Vice President of ours from January 2001 to
April 2016 and served as New Valley’s Vice President and Chief Financial Officer from January 1998 to
December 2005. He has served since July 1992 in various ﬁnancial capacities with us, Liggett and
New Valley. Mr. Kirkland served as Vice President, Treasurer and Chief Financial Officer of CDSI Holdings
Inc. (now known as SG Blocks Inc.) from January 1998 to November 2011 and as a director of SG Blocks
Inc. (formerly known as CDSI Holdings Inc.) from November 1998 to September 2015. Mr. Kirkland has
served as Chairman of the Board of Directors, President and Chief Executive Officer of Multi Soft II, Inc. and
Multi Solutions II, Inc. since July 2012.

Marc N. Bell has been our General Counsel and Secretary since May 1994 and our Senior Vice
President since May 2016 and the Senior Vice President and General Counsel of Vector Tobacco since
April 2002. Mr. Bell served as a Vice President of ours from January 1998 to April 2016. From
November 1994 to December 2005, Mr. Bell served as Associate General Counsel and Secretary of
New Valley and from February 1998 to December 2005, as a Vice President of New Valley. Mr. Bell
previously served as Liggett’s General Counsel and currently serves as an officer, director or manager for
many of Vector’s or New Valley’s subsidiaries. Mr. Bell served as a member of the Board of Directors of SG
Blocks Inc. from March 2014 to September 2015.

31

Ronald J. Bernstein has served as President and Chief Executive Officer of Liggett since September 1,
2000 and of Liggett Vector Brands since March 2002 and has been a director of ours since March 2004. From
July 1996 to December 1999, Mr. Bernstein served as General Director and, from December 1999 to
September 2000, as Chairman of Liggett-Ducat, our former Russian tobacco business sold in 2000. Prior to
that time, Mr. Bernstein served in various positions with Liggett commencing in 1991, including Executive
Vice President and Chief Financial Officer.

32

ITEM 6.

SELECTED FINANCIAL DATA

2016

Statement of Operations Data:
Revenues(1) . . . . . . . . . . . . . . . . . . . . . $1,690,949
Operating income(3)
. . . . . . . . . . . . . . . $ 232,997
Net income attributed to Vector Group

Year Ended December 31,
2014
(dollars in thousands, except per share amounts)

2015

2013

2012

$1,657,197
$ 199,920

$1,591,315
$ 212,438

$1,079,921
$ 111,186

$1,095,533
$ 154,083

Ltd.

. . . . . . . . . . . . . . . . . . . . . . . . $

71,127

$

59,198

$

36,856

$

37,300(4) $

30,675

Per basic common share(2):

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

. . . . . . . . . . . . . . . . . . . . . . $

0.56

$

0.46

$

0.32

$

0.34

$

0.29

Per diluted common share(2):

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

. . . . . . . . . . . . . . . . . . . . . . $

0.55

Cash distributions declared per common

share(2)

. . . . . . . . . . . . . . . . . . . . . . $

1.54

Balance Sheet Data:
Current assets . . . . . . . . . . . . . . . . . . . $ 705,463
Total assets . . . . . . . . . . . . . . . . . . . . . $1,404,035
Current liabilities . . . . . . . . . . . . . . . . . $ 196,148
Notes payable, embedded derivatives,

long-term debt and other obligations,
less current portion . . . . . . . . . . . . . . $1,245,275

$

$

0.46

1.47

$

$

0.32

1.40

$

$

0.34

1.33

$

$

0.29

1.27

$ 583,739
$1,280,615
$ 216,292

$ 751,397
$1,389,042
$ 212,424

$ 484,388
$1,089,965
$ 359,376

$ 579,336
$ 967,443
$ 167,860

$1,000,150

$ 995,001

$ 607,872

$ 739,589

Non-current employee beneﬁts, deferred
income taxes and other long-term
liabilities . . . . . . . . . . . . . . . . . . . . . $ 215,884

$ 149,064
Stockholders’ deﬁciency . . . . . . . . . . . . $ (253,272) $ (122,161) $ (20,680) $ (50,605) $ (89,070)

$ 186,334

$ 202,297

$ 173,322

(1) Revenues include federal excise taxes of $425,980, $439,647, $446,086, $456,703 and $508,027,

respectively.

(2) Per share computations include the impact of 5% stock dividends on September 29, 2016, September 29,

2015, September 26, 2014, September 27, 2013, and September 28, 2012.

(3) Operating income includes $247 of expense from MSA Settlements for the year ended December 31,
the years ended
2016, and $4,364, $1,419 and $11,823 of
December 31, 2015, 2014, and 2013, respectively; and $20,000, $20,072, $2,475 and $88,106 of
litigation judgment and settlement expense for the years ended December 31, 2016, 2015, 2014, and
2013, respectively; and $41 and $7,257 of restructuring charges for the years ended December 31, 2016
and 2015, respectively; and $1,607 of pension settlement expense for the year ended December 31, 2015.
(4) Net income attributed to Vector Group Ltd. includes a gain of $36,140, net of taxes, to account for the
difference between the carrying value and the fair value of the previously held 50% interest in Douglas
Elliman.

income from MSA Settlements for

33

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Amounts)

Overview

We are a holding company and are engaged principally in:

•

•

the manufacture and sale of cigarettes in the United States through our Liggett Group LLC and
Vector Tobacco Inc. subsidiaries and

the real estate business through our New Valley LLC subsidiary, which is seeking to acquire or
invest in additional real estate properties or projects. New Valley owns 70.59% of Douglas Elliman,
which operates the largest residential brokerage company in the New York metropolitan area.

All of our tobacco operations’ unit sales in 2016, 2015 and 2014 were in the discount segment, which
management believes has been the primary growth segment in the industry for more than a decade. The
signiﬁcant discounting of premium cigarettes in recent years has led to brands, such as EVE, that were
traditionally considered premium brands to become more appropriately categorized as discount, following list
price reductions.

Our tobacco subsidiaries’ cigarettes are produced in 116 combinations of length, style and packaging.

Liggett’s current brand portfolio includes:

•

•

•

•

•

•

EAGLE 20’s — a brand positioned in the deep discount segment for long-term growth re-launched
as a national brand in 2013,

PYRAMID — the industry’s ﬁrst deep discount product with a brand identity re-launched in the
second quarter of 2009,

GRAND PRIX — re-launched as a national brand in 2005,

LIGGETT SELECT — a discount category brand originally launched in 1999,

EVE — a 120-millimeter cigarette in the branded discount category, and

USA and various Partner Brands and private label brands.

In April 2009, Liggett repositioned PYRAMID as a box-only brand with a new low price to speciﬁcally
compete with brands which are priced at the lowest level of the deep discount segment. PYRAMID is now
the largest seller in Liggett’s family of brands with 50.7% of Liggett’s unit volume in 2016, 54.4% in 2015
and 61.1% in 2014. In January 2013, Liggett repackaged and relaunched EAGLE 20’s to distributors and
retailers on a national basis. EAGLE 20’s is marketed to compete with brands positioned in the deep discount
segment. EAGLE 20’s represented 29.1% in 2016, 23.4% in 2015 and 13.4% in 2014 of Liggett’s unit
volume. According to Management Science Associates, Liggett held a share of approximately 12.0% of the
overall discount market segment for 2016 compared to 11.8% for each of 2015 and 2014.

Under the Master Settlement Agreement (‘‘MSA’’) reached in November 1998 with 46 states and various
territories, cigarette manufacturers selling product in the U.S. must make settlement payments to the states and
territories based on how many cigarettes they sell annually. Liggett, however, is not required to make any
payments unless its market share exceeds 1.65% of the U.S. cigarette market. Additionally, Vector Tobacco
has no payment obligation unless its market share exceeds approximately 0.28% of the U.S. market. Liggett’s
and Vector Tobacco’s payments under the MSA are based on each company’s incremental market share above
the minimum threshold applicable to such company. We believe that our tobacco subsidiaries have gained a
sustainable cost advantage over their competitors as a result of the settlement.

The discount segment is a challenging marketplace, with consumers having less brand loyalty and placing
greater emphasis on price. Liggett’s competition is now divided into two segments. The ﬁrst segment consists
of the three largest manufacturers of cigarettes in the United States: Philip Morris USA Inc., which is owned
Inc., RJ Reynolds Tobacco Company (which is now part of Reynolds American)
by Altria Group,
(‘‘RJ Reynolds’’) and ITG Brands LLC, which is owned by Imperial Brands Plc. These three manufacturers,

34

while primarily premium cigarette-based companies, also produce and sell discount cigarettes. The second
segment of competition is comprised of a group of smaller manufacturers and importers, most of which sell
deep discount cigarettes.

Our subsidiary, Zoom, entered the United States e-cigarette market in limited retail distribution outlets in
January 2014. Zoom’s operations are included in our ‘‘E-Cigarettes’’ reporting segment. We have seen
signiﬁcant changes in the e-cigarette market over the past two years with apparent declines in the sales of
disposable and rechargeable e-cigarettes while open-system vapor products that feature reﬁllable tanks and use
low-cost ﬂavored liquids have demonstrated mixed results. Additionally, we believe uncertainties exist related
to the impact of recent regulation of e-cigarettes, the emergence of new technologies and ongoing consumer
category acceptance. Given this backdrop, our primary focus on e-cigarettes is to stay prepared to pursue
opportunities if they occur.

Recent Developments

Issuance of Senior Secured Notes due 2025.

In January 2017, we issued $850,000 of our 6.125% senior
secured notes due 2025 in a private offering to qualiﬁed institutional investors in accordance with Rule 144A
of the Securities Act of 1933 (the ‘‘Securities Act’’).

The 6.125% Senior Secured Notes pay interest on a semi-annual basis at a rate of 6.125% per year and
mature on February 1, 2025. We may redeem some or all of the 6.125% Senior Secured Notes at any time at
a make-whole redemption price. On or after February 1, 2020, we may redeem some or all of the 6.125%
Senior Secured Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any, to
the redemption date.

The aggregate net proceeds from the issuance of the 6.125% senior secured notes were approximately
$831,100 after deducting offering expenses. We used the net proceeds of the issuance, together with the
proceeds from the sale of 2,000,000 common shares, to redeem all of our outstanding 7.75% senior secured
notes due 2021 and to satisfy and discharge the indenture governing the existing notes.

Issuance of 2,000,000 common shares. On January 27, 2017, we sold 2,000,000 shares of our common

stock for approximately $43.2 million.

Redemption of Senior Secured Notes due 2021. On February 26, 2017, we retired $835,000 of our
7.75% senior secured notes at a premium of 103.875%, plus accrued and unpaid interest. We will incur a loss
on the extinguishment of the debt of $34,110 for the three months ended March 31, 2017, which is comprised
of $32,356 of redemption premium and tender offer costs as well as net non-cash interest expense of $1,754.

New Valley Real Estate Ventures:

Wynn Las Vegas Retail.

In December 2016, New Valley invested $10,000 for an approximate 2.1% in
Wynn/CA JV, LLC. The purpose of the joint venture is to own and operate retail space in the Wynn Resort in
Las Vegas, Nevada. The investment is a variable interest entity; however, New Valley is not the primary
beneﬁciary. New Valley accounts for this investment under the equity method of accounting. New Valley’s
maximum exposure to loss as a result of its investment
in Wynn Las Vegas Retail was $10,000 at
December 31, 2016.

Recent Developments in Smoking-Related Litigation

The cigarette industry continues to be challenged on numerous fronts. New cases continue to be
commenced against Liggett and other cigarette manufacturers. Liggett could be subjected to substantial
liabilities and bonding requirements from litigation relating to cigarette products. Adverse litigation outcomes
could have a negative impact on our ability to operate due to their impact on cash ﬂows. It is possible that
there could be adverse developments in pending cases including the certiﬁcation of additional class actions.
An unfavorable outcome or
the
commencement of additional litigation. In addition, an unfavorable outcome in any tobacco-related litigation
could have a material adverse effect on our consolidated ﬁnancial position, results of operations or cash ﬂows.
Liggett could face difficulties in obtaining a bond to stay execution of a judgment pending appeal.

settlement of pending tobacco-related litigation could encourage

35

Critical Accounting Policies

General. The preparation of ﬁnancial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. Signiﬁcant estimates subject to material changes in the near term include
impairment charges, inventory valuation, deferred tax assets, allowance for doubtful accounts, promotional
accruals, sales returns and allowances, actuarial assumptions of pension plans, the estimated fair value of
embedded derivative liabilities, settlement accruals, long-term investments and impairments, accounting for
investments in equity securities, and litigation and defense costs. Actual results could differ from those
estimates.

Revenue Recognition. Revenues from sales of cigarettes and e-cigarettes are recognized upon the
shipment of ﬁnished goods when title and risk of loss have passed to the customer, there is persuasive
evidence of an arrangement, the sale price is ﬁxed or determinable and collectibility is reasonably assured. We
provide an allowance for expected sales returns, net of any related inventory cost recoveries. In accordance
with authoritative guidance on how taxes collected from customers and remitted to governmental authorities
should be presented in the income statement (that is, gross versus net presentation), we include federal excise
taxes on cigarettes in revenues and cost of goods sold. Such revenues and cost of sales totaled $425,980,
$439,647, and $446,086 for the years ended December 31, 2016, 2015 and 2014, respectively. Since our
primary line of business is tobacco, our ﬁnancial position and our results of operations and cash ﬂows have
been and could continue to be materially adversely affected by signiﬁcant unit sales volume declines,
regulation, litigation and defense costs, increased tobacco costs or reductions in the selling price of cigarettes
in the near term.

Revenue is recognized only when persuasive evidence of an arrangement exists, the price is ﬁxed or
determinable, the transaction has been completed and collectibility of the resulting receivable is reasonably
assured. Real estate commissions earned by the Company’s real estate brokerage businesses are recorded as
revenue on a gross basis upon the closing of a real estate transaction as evidenced when the escrow or similar
account is closed, the transaction documents have been recorded and funds are distributed to all appropriate
parties. Commissions expenses are recognized concurrently with related revenues. Property management fees
and rental commissions earned are recorded as revenue when the related services are performed.

Contingencies. We record Liggett’s product

litigation costs as
operating, selling, administrative and general expenses as those costs are incurred. As discussed in Note 15 to
our consolidated ﬁnancial statements, legal proceedings regarding Liggett’s tobacco products are pending or
threatened in various jurisdictions against Liggett and us.

liability legal expenses and other

We record provisions in our consolidated ﬁnancial statements for pending litigation when we determine
that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present
time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as disclosed in
Note 15 to our consolidated ﬁnancial statements and discussed below related to the 15 cases where an adverse
verdict was entered against Liggett: (i) management has concluded that it is not probable that a loss has been
incurred in any of the pending tobacco-related cases; or (ii) management is unable to estimate the possible
loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related
cases and, therefore, management has not provided any amounts in the consolidated ﬁnancial statements for
unfavorable outcomes, if any. Legal defense costs are expensed as incurred.

Although Liggett has generally been successful in managing litigation in the past, litigation is subject to

uncertainty and signiﬁcant challenges remain, particularly with respect to the Engle progeny cases.

Adverse verdicts have been entered against Liggett in 15 state court Engle progeny cases (see Note 15 to
our consolidated ﬁnancial statements), and several of these verdicts have been affirmed on appeal and satisﬁed
by Liggett.

Except as discussed in Note 15 regarding the cases where an adverse verdict was entered against Liggett
and that remain on appeal, management is unable to estimate the possible loss or range of loss from the
remaining Engle progeny cases as there are currently multiple defendants in each case and, in most cases,

36

discovery has not occurred or is limited. As a result, the Company lacks information about whether plaintiffs
are in fact Engle class members (non-class members’ claims are generally time-barred), the relevant smoking
history, the nature of the alleged injury and the availability of various defenses, among other things. Further,
plaintiffs typically do not specify their demand for damages.

There is other tobacco-related litigation pending against Liggett, which is discussed in Note 15 to our
the outcome of any of the other

is not able to predict

consolidated ﬁnancial statements. Management
tobacco-related litigation pending or threatened against Liggett.

A reader should not infer from the absence of any reserve in our consolidated ﬁnancial statements that
we will not be subject to signiﬁcant tobacco-related liabilities in the future. Litigation is subject to many
uncertainties, and it is possible that our consolidated ﬁnancial position, results of operations or cash ﬂows
could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation.

There may be several other proceedings, lawsuits and claims pending against us and certain of our
consolidated subsidiaries unrelated to tobacco or tobacco product liability. We are of the opinion that the
liabilities, if any, ultimately resulting from such other proceedings, lawsuits and claims should not materially
affect our ﬁnancial position, results of operations or cash ﬂows.

Settlement Agreements. As discussed in Note 15 to our consolidated ﬁnancial statements, Liggett and
Vector Tobacco are participants in the MSA. Liggett and Vector Tobacco have no payment obligations under
the MSA except to the extent their market shares exceed approximately 1.65% and 0.28%, respectively, of
total cigarettes sold in the United States. Their obligations, and the related expense charges under the MSA,
are subject to adjustments based upon, among other things, the volume of cigarettes sold by Liggett and
Vector Tobacco, their relative market shares and inﬂation. Since relative market shares are based on cigarette
shipments, the best estimate of the allocation of charges under the MSA is recorded in cost of goods sold as
the products are shipped. Settlement expenses under the MSA recorded in the accompanying consolidated
statements of operations were $110,486 for 2016, $113,919 for 2015 and $116,650 for 2014. Adjustments to
these estimates are recorded in the period that the change becomes probable and the amount can be reasonably
estimated.

Embedded Derivatives and Beneﬁcial Conversion Feature. We measure all derivatives, including certain
derivatives embedded in other contracts, at fair value and recognize them in the consolidated balance sheet as
an asset or a liability, depending on our rights and obligations under the applicable derivative contract. We
have issued variable interest senior convertible debt in a series of private placements where a portion of the
total interest payable on the debt is computed by reference to the cash dividends paid on our common stock.
This portion of the interest payment is considered an embedded derivative within the convertible debt, which
we are required to separately value. As a result, we have bifurcated this embedded derivative and estimated
the fair value of the embedded derivative liability. The resulting discount created by allocating a portion of the
issuance proceeds to the embedded derivative is then amortized to interest expense over the term of the debt
using the effective interest method.

As of December 31, 2016 and 2015, the fair value of derivative liabilities was estimated at $112,332 and
$144,042, respectively. The decrease is due to the gains on the changes in fair value of convertible debt and
the conversion of the Vector 6.75% Variable Interest Senior Convertible Note due 2015 (as amended).

Changes to the fair value of these embedded derivatives are reﬂected on our consolidated statements of
operations as ‘‘Changes in fair value of derivatives embedded within convertible debt.’’ The value of the
embedded derivative is contingent on changes in interest rates of debt instruments maturing over the duration
of the convertible debt as well as projections of future cash and stock dividends over the term of the debt. We
recognized gains of $31,710, $24,455 and $19,409 in 2016, 2015 and 2014, respectively, due to changes in
the fair value of the embedded derivatives.

After giving effect to the recording of embedded derivative liabilities as a discount to the convertible
debt, our common stock had a fair value at the issuance date of the notes in excess of the conversion price,
resulting in a beneﬁcial conversion feature. The intrinsic value of the beneﬁcial conversion feature was
recorded as additional paid-in capital and as a further discount on the debt. The discount is then amortized to
interest expense over the term of the debt using the effective interest rate method.

37

We recognized non-cash interest expense of $25,732, $18,529 and $32,071 in 2016, 2015 and 2014,
respectively, due to the amortization of the debt discount attributable to the embedded derivatives and
$12,796, $8,681 and $19,401 in 2016, 2015 and 2014, respectively, due to the amortization of the debt
discount attributable to the beneﬁcial conversion feature.

Stock-Based Compensation. Our stock-based compensation uses a fair-value-based method to recognize
non-cash compensation expense for share-based transactions. Under the fair value recognition provisions, we
recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost
for those shares expected to vest on a straight-line basis over the requisite service period of the award. We
recognized stock-based compensation expense of $2,203, $1,675 and $1,573 in 2016, 2015 and 2014,
respectively, related to the amortization of stock option awards and $7,832, $3,945 and $1,678, respectively,
related to the amortization of restricted stock grants. As of December 31, 2016 and 2015, there was $3,680
and $3,775, respectively, of total unrecognized cost related to employee stock options and $37,853 and
$44,632, respectively, of total unrecognized cost related to restricted stock grants. See Note 14 to our
consolidated ﬁnancial statements.

Employee Beneﬁt Plans. The determination of our net pension and other postretirement beneﬁt income
or expense is dependent on our selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions include, among others, the discount rate, expected long-term rate of return on plan assets
and rates of increase in compensation and healthcare costs. We determine discount rates by using a
quantitative analysis that considers the prevailing prices of investment grade bonds and the anticipated cash
ﬂow from our two qualiﬁed deﬁned beneﬁt plans and our postretirement medical and life insurance plans.
These analyses construct a hypothetical bond portfolio whose cash ﬂow from coupons and maturities match
the annual projected cash ﬂows from our pension and retiree health plans. As of December 31, 2016, our
beneﬁt obligations were computed assuming a discount rate between 3.60% − 4.40%. As of December 31,
2016, our service cost was computed assuming a discount rate of 3.75% − 4.75%. In determining our expected
rate of return on plan assets, we consider input from our external advisors and historical returns based on the
expected long-term rate of return which is the weighted average of the target asset allocation of each
individual asset class. Our actual 10-year annual rate of return on our pension plan assets was 5.2%, 6.0% and
6.6% for the years ended December 31, 2016, 2015 and 2014, respectively, and our actual ﬁve-year annual
rate of return on our pension plan assets was 7.6%, 6.3% and 9.8% for the years ended December 31, 2016,
2015 and 2014, respectively. In computing expense for the year ended December 31, 2017, we will use an
assumption of a 6.0% annual rate of return on our pension plan assets. In accordance with accounting
principles generally accepted in the United States of America, actual results that differ from our assumptions
are accumulated and amortized over future periods and therefore, generally affect our recognized income or
expense in such future periods. While we believe that our assumptions are appropriate, signiﬁcant differences
in our actual experience or signiﬁcant changes in our assumptions may materially affect our future net pension
and other postretirement beneﬁt income or expense.

Net pension expense for deﬁned beneﬁt pension plans and other postretirement expense was $2,060 and
$6,556 for 2016 and 2015, respectively, while net pension beneﬁt for deﬁned beneﬁt pension plans and other
postretirement expense was $345 a for 2014 and we currently anticipate beneﬁt expense will be approximately
$3,307 for 2017. In contrast, our funding obligations under the pension plans are governed by the Employee
Retirement Income Security Act (‘‘ERISA’’). To comply with ERISA’s minimum funding requirements, we do
not currently anticipate that we will be required to make any funding to the tax qualiﬁed pension plans for the
pension plan year beginning on January 1, 2017 and ending on December 31, 2017.

Long-Term Investments and Impairments. At December 31, 2016, we had long-term investments of
$53,197, of which $35,476 were accounted for at cost and $17,721 were accounted for under the equity
method. Our investments accounted for at cost consisted primarily of investment partnerships investing in
investment securities and real estate. The investments in these investment partnerships are illiquid and the
ultimate realization of these investments is subject to the performance of the underlying partnership and its
management by the general partners. The estimated fair value of the investment partnerships is provided by
the partnerships based on the indicated market values of the underlying assets or investment portfolio. Our
investments accounted for under the equity method included interests in a partnership and various companies
in which we have the ability to exercise signiﬁcant inﬂuence over their operating and ﬁnancial policies. The

38

estimated fair value of the investments is either provided by the partnership based on the indicated market
values of the underlying assets or is calculated internally based on the number of shares owned and the equity
in earnings and interest income we recognize on the investment. Gains are recognized when realized in our
consolidated statement of operations. Losses are recognized as realized or upon the determination of the
occurrence of an other-than-temporary decline in fair value. On a quarterly basis, we evaluate our investments
to determine if there are indicators of impairment. If so, we also make a determination of whether there is an
impairment and if it is considered temporary or other than temporary. We believe that the assessment of
temporary or other-than-temporary impairment is facts-and-circumstances driven. However, among the matters
that are considered in making such a determination are the period of time the investment has remained below
its cost or carrying value, the severity of the decline, the likelihood of recovery given the reason for the
decrease in market value and our original expected holding period of the investment.

Goodwill and Indeﬁnite Life Assets. Goodwill and intangible assets with indeﬁnite lives are not
instead are tested for impairment on an annual basis, or whenever events or changes in

amortized, but
business circumstances indicate the carrying value of the assets may not be recoverable.

The Company’s goodwill and trademarks are related to Douglas Elliman. The Company’s intangible asset

associated with the beneﬁt under MSA is related to Vector Tobacco.

The Company follows ASC 350, Intangibles — Goodwill and Other, included in ASU 2011-08, Testing
to
Goodwill for Impairment. The amendments permit entities to ﬁrst perform a qualitative assessment
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. Based on the results of the qualitative assessment, if the entity determines that it is more likely than
not that the fair value of a reporting unit is less than its carrying amount, it would then perform the ﬁrst step
of the goodwill impairment test; otherwise, no further impairment test would be required. The Company
performed the qualitative assessment for the year ended December 31, 2016 and determined that performing
the ﬁrst step of the two-step impairment test was unnecessary.

The fair value of the intangible asset associated with the Douglas Elliman trademark is calculated using a
‘‘relief from royalty payments’’ method. This approach involves two steps: (i) estimating reasonable royalty
rates for its trademark associated with the Douglas Elliman trademark and (ii) applying these royalty rates to a
net sales stream and discounting the resulting cash ﬂows to determine fair value. This fair value is then
compared with the carrying value of the trademark. The Company performed the qualitative assessment for
the year ended December 31, 2016 and no impairment was noted.

The fair value of the intangible asset associated with the beneﬁt under the MSA is calculated using
discounted cash ﬂows. This approach involves two steps: (i) estimating future cash savings due to the
payment exemption under the MSA and (ii) discounting the resulting cash ﬂow savings to determine fair
value. This fair value is then compared with the carrying value of the intangible asset associated with the
beneﬁt under the MSA. To the extent that the carrying amount exceeds the implied fair value of the intangible
asset, an impairment loss is recognized. The Company performed its impairment test as of December 31, 2016
and no impairment was noted.

Income Taxes. The application of income tax law is inherently complex. Laws and regulations in this
area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions
and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax
laws and regulations change over time and, as a result, changes in our subjective assumptions and judgments
may materially affect amounts recognized in our consolidated ﬁnancial statements. See Note 13 to our
consolidated ﬁnancial statements for additional information regarding our accounting for income taxes and
uncertain tax positions.

Results of Operations

The following discussion provides an assessment of our results of operations and should be read in
conjunction with our consolidated ﬁnancial statements and related notes included elsewhere in this report. The
consolidated ﬁnancial statements include the accounts of VGR Holding, Liggett, Vector Tobacco, Liggett
Vector Brands, New Valley, which owns a 70.59% interest in Douglas Elliman Realty, LLC, and other less
signiﬁcant subsidiaries.

39

Our business segments were Tobacco, E-Cigarettes and Real Estate for

the three years ended
December 31, 2016, 2015 and 2014. The Tobacco segment consists of the manufacture and sale of cigarettes.
The E-Cigarettes segment includes the operations of Zoom. The Real Estate segment includes our investment
in New Valley LLC, which includes Douglas Elliman, Escena, our previous investment in Indian Creek,
Sagaponack and investments in real estate ventures.

The accounting policies of the segments are the same as those described in the summary of signiﬁcant

accounting policies and can be found in Note 1 to our consolidated ﬁnancial statements.

2016

Year Ended December 31,
2015
(Dollars in thousands)

2014

Revenues:

Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E-Cigarettes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total revenues

$1,011,620
(776)
680,105
$1,690,949

$1,017,761
(1,970)
641,406
$1,657,197

$1,021,259
8,589
561,467
$1,591,315

Operating income (loss):

Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E-Cigarettes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .

Total operating income

$ 238,293(1) $ 209,393(2) $ 199,119(3)
(13,124)
(13,037)
24,087
42,354
(15,911)
(20,523)
$ 212,438
$ 199,920

(1,403)
23,001
(26,894)
$ 232,997

(1) Operating income includes $247 of expense from MSA Settlement, $20,000 of litigation settlement and

judgment expense, and $41 of restructuring expense.

(2) Operating income includes $4,364 of income from MSA Settlement, $20,072 of litigation judgment

expense, $7,257 of restructuring expense, and $1,607 of pension settlement expense.

(3) Operating income includes $1,419 of income from NPM Settlement and $2,475 of litigation settlement

charges and judgment expense.

2016 Compared to 2015

Revenues. Total revenues were $1,690,949 for the year ended December 31, 2016 compared to
$1,657,197 for the year ended December 31, 2015. The $33,752 (2.0%) increase in revenues was due to a
$38,699 increase in Real Estate revenues, primarily related to increases in Douglas Elliman’s commissions,
and a $1,194 decline in E-Cigarettes negative revenues, associated with an adjustment to the allowance for
customer sales returns, offset by a $6,141 decline in Tobacco revenues.

Cost of sales. Total cost of sales were $1,097,344 for the year ended December 31, 2016 compared to
$1,109,727 for the year ended December 31, 2015. The $12,383 (1.1%) decline in cost of sales was due to a
$25,469 decline in Tobacco cost of sales due to lower sales volume and lower per unit manufacturing and
MSA expense and a $1,456 decline in E-Cigarettes cost of sales due to lower sales volume offset by a
$14,542 increase in Real Estate cost of sales, primarily related to an increase in Douglas Elliman’s
commissions expense.

Expenses. Operating, selling, general and administrative expenses were $340,567 for the year ended
December 31, 2016 compared to $320,221 for the year ended December 31, 2015. The $20,346 (6.4%)
increase in operating, selling and administrative expenses is due to a $25,243 increase in Real Estate
operating, selling and administrative expenses primarily related to the Douglas Elliman brokerage expenses
and a $6,371 increase in Corporate and Other expenses primarily due to an increase in stock-based
compensation expense, senior executive pension expense, and increased professional fees. This was offset by a
$2,284 decline in Tobacco expenses and a $8,984 decline in E-Cigarette expenses.

40

Operating income. Operating income was $232,997 for the year ended December 31, 2016 compared to
$199,920 for the same period last year, an increase of $33,077 (16.5%). Tobacco operating income increased
by $28,900, Real Estate operating income declined by $1,086, primarily related to Douglas Elliman, and
E-cigarettes operating loss declined by $11,634. This was offset by an increase of $6,371 in Corporate and
Other expenses.

Other expenses. Other expenses were $106,568 and $92,215 for the years ended December 31, 2016
and 2015, respectively. For the year ended December 31, 2016, other expenses primarily consisted of interest
expense of $142,982, impairment of investment securities available for sale of $5,381 and equity in losses
from investments of $2,754. This was offset by income of $31,710 from changes in fair value of derivatives
embedded within convertible debt, equity in earnings from real estate ventures of $5,200, other income of
$4,732 and gain on sale of
the year ended
December 31, 2015, other expenses primarily consisted of equity in losses from long-term investments of
$2,681, impairment of investment securities available for sale of $12,846 and interest expense of $120,691.
This was offset by income of $24,455 from changes in fair value of derivatives embedded within convertible
debt, gain on sale of investment securities available for sale of $11,138, equity in earnings from real estate
ventures of $2,001 and interest and other income of $6,409.

investment securities available for sale of $2,907. For

The value of the embedded derivatives is contingent on changes in implied interest rates of the
convertible debt, our stock price, stock volatility as well as projections of future cash and stock dividends over
the term of the debt. The interest rate component of the value of the embedded derivative is computed by
calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. This rate is determined
by calculating the implied rate on our 2020 Convertible Notes when removing the embedded option value
within the convertible security. This rate is based upon market observable inputs and inﬂuenced by our stock
price, convertible bond trading price, risk free interest rates and stock volatility. We recognized beneﬁts from
reductions in the value of embedded derivatives of $31,710 and $24,455 for the years ended December 31,
2016 and 2015, respectively.

Income before provision for income taxes.

Income before income taxes was $126,429 and $107,705 for
the years ended December 31, 2016, and 2015, respectively. The increase is attributable to the items discussed
above.

Income tax expense.

Income tax expense was $49,163 for the year ended December 31, 2016 compared
to $41,233 for the year ended December 31, 2015. Our income tax rates for the years ended December 31,
2016 and 2015 do not bear a customary relationship to statutory income tax rates as a result of the impact of
nondeductible expenses as well as state income taxes, interest and penalties accrued on unrecognized tax
beneﬁts offset by the impact of the domestic production activities deduction.

Tobacco.

All of our Tobacco sales were in the discount category in 2016 and 2015. For the year ended
December 31, 2016, Tobacco revenues were $1,011,620 compared to $1,017,761 for
the year ended
December 31, 2015. Revenues for 2016 declined by $6,141 (0.6%) due to a 2.6% decline in sales volume of
$38,973 (227.1 million units), offset by a favorable price variance of $32,832.

Tobacco revenues. Liggett

increased the list price of PYRAMID, LIGGETT SELECT, EVE and
GRAND PRIX by $0.70 per carton in May 2015, November 2015 and May 2016, and by $0.80 per carton in
November 2016. Liggett increased the list price of EAGLE 20’s by $1.00 per carton in December 2015 and
December 2016.

41

Tobacco cost of sales. The major components of our Tobacco cost of sales are as follows:

. . . . . . . . . . . . . .
Manufacturing overhead, raw materials and labor
Federal Excise Taxes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tobacco quota buyout expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDA expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSA expense, net of market share exemption . . . . . . . . . . . . . . . . .
Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2016
$116,713
425,980
—
19,252
110,486(2)
$672,431

2015
$124,814
439,647

664(1)

18,856
113,919(3)
$697,900

(1) The quarterly assessments due under the Fair and Equitable Tobacco Reform Act (shown as ‘‘Tobacco
quota buyout expense’’ above) expired at the end of 2014. The $664 for the year ended December 31,
2015 represents a ﬁnal assessment for the fourth quarter of 2014 that was received in 2015.
Includes $247 increase in expense from MSA Settlement.
Includes $4,364 reduction in expense from MSA Settlement.

(2)
(3)

Tobacco gross proﬁt was $339,189 for the year ended December 31, 2016 compared to $319,861 for the
year ended December 31, 2015. The $19,328 (6.0%) increase was due to higher margins generated from price
increases in 2016, primarily on the PYRAMID brand, and lower manufacturing and MSA unit costs. As
a percentage of revenues (excluding Federal Excise Taxes), Tobacco gross proﬁt was 57.9% in the 2016
period and 55.3% in the 2015 period.

Tobacco expenses. Tobacco operating, selling, general and administrative expenses were $80,855 for the
year ended December 31, 2016 compared to $83,139 for the year ended December 31, 2015. The $2,284
decline in expenses primarily related to savings from the October 2015 restructuring. In addition, tobacco
operating expenses decreased in 2016 due to the absence of $7,216 of restructuring expense. Tobacco product
liability legal expenses, including settlements and judgments, were $26,611 and $26,987 for the years ended
December 31, 2016 and 2015.

Tobacco operating income. Tobacco operating income was $238,293 for the year ended December 31,
2016 compared to $209,393 for the year ended December 31, 2015. The Tobacco operating income increase
of $28,900 was primarily due to the higher margins and lower operating expenses discussed above.

E-Cigarettes.

E-Cigarettes revenues. E-Cigarettes revenues were negative $776 for the year ended December 31, 2016
compared to negative revenues of $1,970 for the year ended December 31, 2015. These negative revenues
were associated with an adjustment to the allowance for customer sales returns.

E-Cigarettes cost of sales. Cost of sales associated with our E-Cigarettes segment were $84 for the year
ended December 31, 2016 compared to $1,540 for the year ended December 31, 2015. Cost of sales declined
by $1,456 due to lower sales volumes.

E-Cigarettes expenses. E-Cigarettes operating, selling, general and administrative expenses were $543
and $9,527 for the years ended December 31, 2016 and 2015, respectively. The decline was due to lower
advertising and marketing expenses. Operating losses from E-Cigarettes were $1,403 and $13,037 for
the years ended December 31, 2016 and 2015, respectively.

Real Estate.

Real Estate revenues. Real Estate revenues were $680,105 and $641,406 for

the years ended
December 31, 2016 and 2015, respectively. Real Estate revenues increased by $38,699 (6.0%), primarily
related to an increase of $39,114 in Douglas Elliman’s Commission and other brokerage income which was
primarily due to increased closings in its development marketing division.

42

Real Estate revenues and cost of sales were as follows:

Year Ended December 31,

2016

2015

Real Estate Revenues:

Commission and other brokerage income . . . . . . . . . . . . . . . . . .
Property management income . . . . . . . . . . . . . . . . . . . . . . . . . .
Title fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales on facilities primarily from Escena . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
. . . . . . . . . . . . . . . . . . . . . . . . . .

Total Real Estate revenues

$641,051
29,883
4,324
—
4,844
3
$680,105

Real Estate Cost of Sales:

Commission and other brokerage expense . . . . . . . . . . . . . . . . . .
Cost of sales on facilities primarily from Escena . . . . . . . . . . . . .
Title fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Real Estate cost of sales . . . . . . . . . . . . . . . . . . . . . . . .

$420,317
3,833
679
$424,829

$601,937
28,522
4,616
1,166
5,165
—
$641,406

$405,678
3,866
743
$410,287

Brokerage cost of sales. Douglas Elliman commission cost of sales increased by $14,639 due to

increased sales volume.

Real Estate expenses. Real Estate operating, selling, general and administrative expenses were $232,275
and $207,032 were for the years ended December 31, 2016 and 2015, respectively. The increase of $25,243
was primarily due to increased expenses at Douglas Elliman from Douglas Elliman’s development marketing
division and continued expansion into new markets as well as incremental professional fees in 2016 associated
with the costs of being a subsidiary of a public company.

Real Estate operating income. The Real Estate segment had operating income of $23,001 and $24,087
for the years ended December 31, 2016 and 2015, respectively. The decline in operating income of $1,086
was primarily related to an increase in Douglas Elliman operating, selling, general and administrative expenses
offset by higher gross proﬁt at Douglas Elliman.

Corporate and other.

Corporate and other loss. The operating loss at the corporate segment was $26,894 for the year ended
December 31, 2016 compared to $20,523 for the same period in 2015. The increase of $6,371 was primarily
due to increased stock-based compensation expense, executive pension expense and increased professional
fees for the year ended December 31, 2016.

2015 Compared to 2014

Revenues. Total revenues were $1,657,197 for the year ended December 31, 2015 compared to
$1,591,315 for the year ended December 31, 2014. The $65,882 (4.1%) increase in revenues was due to an
increase in Real Estate revenues of $79,939, primarily related to increases in Douglas Elliman’s commissions,
offset by a decline of $10,559 in E-Cigarettes revenues and a decline of $3,498 in Tobacco revenues.

Cost of sales. Total cost of sales was $1,109,727 for the year ended December 31, 2015 compared to
$1,097,060 for the year ended December 31, 2014. The $12,667 (1.2%) increase in cost of sales was due to
an increase in Real Estate cost of sales of $56,259, primarily related to an increase in Douglas Elliman’s
commissions expense, offset by a decline of $37,825 in Tobacco cost of sales due to lower sales volume and
the elimination of the Tobacco Quota Buyout and a decline of $5,767 of E-Cigarettes cost of sales due to
lower sales volume.

Expenses. Operating, selling, general and administrative expenses were $320,221 for the year ended
December 31, 2015 compared to $279,342 for the year ended December 31, 2014. This was an increase of
$40,879 (14.6%) of which $41,947 was related to the operating, selling and administrative expenses of Real

43

Estate, primarily related to the Douglas Elliman brokerage expenses and $4,612 of Corporate and Other
expenses. This was offset by a decline of $4,880 in E-Cigarettes expenses and $801 in Tobacco expenses.

Operating income. Operating income was $199,920 for the year ended December 31, 2015 compared to
$212,438 for the same period last year, a decline of $12,518 (5.9%). Real Estate operating income declined by
$18,267 and Corporate and Other expenses increased by $4,612. This was offset by an increase in Tobacco
operating income of $10,274 and a decline in operating losses related to E-Cigarettes $87.

Other expenses. Other expenses were $92,215 and $130,159 for the years ended December 31, 2015
and 2014, respectively. For the year ended December 31, 2015, other expenses primarily consisted of equity in
losses from long-term investments of $2,681, impairment of investment securities available for sale of $12,846
and interest expense of $120,691. The decline in interest expense in 2015 was primarily attributable to lower
average debt balances and the capitalization of interest expense allocated to our equity method investments in
entities developing real estate projects. This was offset by income of $24,455 from changes in fair value of
derivatives embedded within convertible debt, gain on sale of investment securities available for sale of
$11,138, equity in earnings from real estate ventures of $2,001 and interest and other income of $6,409. For
the year ended December 31, 2014, other expenses consisted primarily of interest expense of $160,991,
accelerated interest expense of $5,205 related to the debt conversions of the 6.75% Variable Interest Senior
Convertible Note and loss on sale of investment securities available for sale of $11. The increase in interest
expense in 2014 was primarily attributable to higher average debt balances. This was offset by a beneﬁt of
$19,409 from changes in fair value of derivatives embedded within convertible debt, equity earnings in
income from real estate ventures of $4,103, equity income on long-term investments of $3,140 and interest
and other income of $9,396.

The value of the embedded derivatives is contingent on changes in implied interest rates of the
convertible debt, our stock price, stock volatility as well as projections of future cash and stock dividends over
the term of the debt. The interest rate component of the value of the embedded derivative is computed by
calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. This rate is determined
by calculating the implied rate on our 2020 Convertible Notes when removing the embedded option value
within the convertible security. This rate is based upon market observable inputs and inﬂuenced by our stock
price, convertible bond trading price, risk free interest rates and stock volatility. We recognized beneﬁts from
reductions in the value of embedded derivatives of $24,455 and $19,409 for the years ended December 31,
2015 and 2014, respectively.

Income before income taxes.

Income before income taxes was $107,705 and $82,279 for the years

ended December 31, 2015 and 2014, respectively. The increase is attributable to the items discussed above.

Income tax expense. The income tax expense was $41,233 for the year ended December 31, 2015
compared to $33,165 for the year ended December 31, 2014. Our income tax rates for the years ended
December 31, 2015 and 2014 do not bear a customary relationship to statutory income tax rates as a result of
the impact of nondeductible expenses, state income taxes and interest and penalties accrued on unrecognized
tax beneﬁts offset by the impact of the domestic production activities deduction.

Tobacco.

All of our Tobacco sales were in the discount category in 2015 and 2014. For the year ended
December 31, 2015, Tobacco revenues were $1,017,761 compared to $1,021,259 for
the year ended
December 31, 2014. Revenues for 2015 declined by 0.3% ($3,498) due to a decline in sales volume of
$36,981 (approximately 172.3 million units) offset by a favorable price variance of $33,483 related to the
price increases in 2015.

Tobacco revenues. Liggett

increased the list price of PYRAMID, LIGGETT SELECT, EVE and
GRAND PRIX by $0.70 per carton in November 2015, May 2015 and November 2014 and $0.60 per carton
in May 2014. Liggett increased the list price of EAGLE 20’s by $1.00 per carton in December 2015.

44

Tobacco cost of sales. Our Tobacco cost of sales declined from $735,725 for

the year ended
December 31, 2014 to $697,900 for the year ended December 31, 2015. The major components of our
Tobacco cost of sales are as follows:

. . . . . . . . . . . . . .
Manufacturing overhead, raw materials and labor
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Excise Taxes, net
Tobacco quota buyout expense(1)
. . . . . . . . . . . . . . . . . . . . . . . . .
FDA expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSA expense, net of market share exemption(2)
. . . . . . . . . . . . . . .
Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2015
$124,814
439,647
664
18,856
113,919
$697,900

2014
$128,157
446,086
27,122
17,710
116,650
$735,725

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

(2)

Tobacco gross proﬁt was $319,861 for the year ended December 31, 2015 compared to $285,534 for the
year ended December 31, 2014. The $34,327 (12.0%) increase was due to higher margins that were generated
from the absence of the tobacco quota buyout in 2015, price increases in 2015, primarily on the PYRAMID
brand, and lower MSA expense due to increased income in 2015 from the MSA Settlement. This was offset
by increased FDA expense of $1,146. As a percentage of revenues (excluding Federal Excise Taxes), Tobacco
gross proﬁt was 55.3% in the 2015 period and 49.6% in the 2014 period.

Tobacco expenses. Tobacco operating, selling, general and administrative expenses were $83,139 for the
year ended December 31, 2015 compared to $83,940 for the year ended December 31, 2014. The $801
decline in expenses primarily related to reduced legal expenses and savings related to the October 2015
restructuring. In addition, tobacco operating, selling, general and administrative expenses increased during
2015 due to litigation, settlement and judgments expense of $20,072 and $7,257 for restructuring expenses.
Tobacco product liability legal expenses, including settlements and judgments, were $26,987 for the year
ended December 31, 2015 compared to $9,944 for the year ended December 31, 2014.

Tobacco operating income. Tobacco operating income was $209,393 for the year ended December 31,
2015 compared to $199,119 for the year ended December 31, 2014. The Tobacco operating income increase of
$10,274 was primarily due to the higher gross margins of $34,327 discussed above. This was partially offset
by an increase in litigation, settlement and judgments of $17,597 and $7,257 of restructuring expenses for the
year ended December 31, 2015.

E-Cigarettes.

E-Cigarettes revenues. E-Cigarettes revenues were negative $1,970 for the year ended December 31,
2015 compared to revenues of $8,589 for the year ended December 31, 2014. Revenues declined because of
lower sales volume and an increase in the estimate for the customer returns allowance of $2,849.

E-Cigarettes cost of sales. Cost of sales associated with our E-Cigarettes segment were $1,540 for the
year ended December 31, 2015 compared to $7,307 for the year ended December 31, 2014. Cost of sales
decreased by $5,767 due to lower sales volumes.

E-Cigarettes expenses. E-Cigarettes operating, selling, general and administrative expenses were $9,527
and $14,406 for the years ended December 31, 2015 and 2014, respectively. The decline was due to lower
advertising and marketing expenses. Operating losses from E-Cigarettes were $13,037 and $13,124 for
the years ended December 31, 2015 and 2014, respectively.

45

Real Estate.

Real Estate revenues. Real Estate revenues were $641,406 and $561,467 for the years ended ended
December 31, 2015 and 2014, respectively. Real Estate revenues increased by $79,939 (14.2%), primarily
related to an increase of $92,601 in Douglas Elliman’s Commission and other brokerage income, offset
primarily by the absence of the $13,234 revenue from the sale of Indian Creek in 2014.

Real Estate revenues and cost of sales were as follows:

Year Ended December 31,

2015

2014

Real Estate Revenues:

Commission and other brokerage income . . . . . . . . . . . . . . . . . . . . . . . . .
Property management income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Title fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales on facilities primarily from Escena . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Total Real Estate revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Real Estate Cost of Sales:

Commission and other brokerage expense . . . . . . . . . . . . . . . . . . . . . . . .
Real estate held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales on facilities primarily from Escena . . . . . . . . . . . . . . . . . . . .
Title fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Real Estate cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$601,937
28,522
4,616
1,166
5,165
—
$641,406

$405,678
—
3,866
743
$410,287

$509,336
28,974
3,152
14,400
5,166
439
$561,467

$339,543
9,987
4,050
448
$354,028

Real estate held for sale revenues and cost of sales for the years ended December 31, 2015 and 2014

related to the sale of our residential real estate project located on Indian Creek, Florida.

Real Estate expenses. Real Estate operating, selling, general and administrative expenses were $207,032
and $165,085 for the years ended December 31, 2015 and 2014, respectively. The increase of $41,947 was
primarily due to an increase of expenses at Douglas Elliman related to its strategic investments fueled by its
expansion into new markets, its development marketing division and increased advertising and marketing
expenses to strengthen the long-term value of the Douglas Elliman brand name.

Real Estate operating income (loss). The Real Estate segment had operating income of $24,087 and
$42,354 for the years ended December 31, 2015 and 2014, respectively. The decrease in operating income of
$18,267 was primarily related to an increase in in Douglas Elliman operating, selling, general and
administrative expenses, offset by higher proﬁts and the absence of the operating income related to the 2014
sale of Indian Creek.

Corporate and other.

Corporate and other loss. The operating loss at the corporate segment was $20,523 for the year ended
December 31, 2015 compared to $15,911 for the same period in 2014. The increase was primarily due
to increased non-cash compensation expense and increased professional
the year ended
December 31, 2015.

fees

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Liquidity and Capital Resources

Net cash and cash equivalents increased by $153,162 and $91,899 in 2016 and 2014, respectively, and

decreased by $85,997 in 2015.

Net cash provided from operations was $97,636, $144,479 and $107,376 in 2016, 2015 and 2014,
respectively. The change in the 2016 period, when compared to the 2015 period, was primarily related to
higher payments of tobacco litigation settlements and judgments and interest in 2016, as well as increases in
the payments of prior year promotional and excise tax liabilities in the tobacco segment in 2016. These were
offset by an increase of operating income. The change in the 2015 period, when compared to the 2014 period,
was primarily due to the absence of a one-time payment in 2014 related to the Engle progeny settlement as
well as lower cash interest payments in 2015. The increase in cash provided from operations for the year
ended December 31, 2015 was offset by higher income tax payments in 2015. In October 2013, we entered
into a settlement with approximately 4,900 Engle progeny plaintiffs and their counsel. Liggett agreed to pay a
total of approximately $110,000 under this settlement, which consisted of a $61,600 lump sum payment in
2014 and agreed to pay the balance in installments over 14 years, beginning in February 2015.

Cash used in investing activities was $542, $22,363 and $221,434 in 2016, 2015 and 2014, respectively.
Our investment philosophy is to maximize return on investments using a reasonable expectation for return.
For example, we expect our investment returns to exceed the comparable return on cash or short-term
U.S. Treasury Bills when investing in equity and debt securities and more than our weighted-average cost of
capital when investing in non-consolidated real estate businesses and capital expenditures. Our investing
activities decreased in 2016 compared to 2015. In 2016, cash used in investing activities was for the purchase
of investment securities of $117,211, investments in real estate ventures of $44,107, capital expenditures of
$26,691, purchase of long-term investments of $50, the purchase of subsidiaries of $250, investments in real
estate held for sale of $245 and an increase in cash surrender value of corporate-owned life insurance policies
of $484. This was offset by the proceeds from the sale of investment securities of $116,070, the repayment of
notes receivable of $4,410, distributions from investments in real estate ventures of $33,204, proceeds from
the sale or liquidation of long-term investments of $4,552, the pay down of investment securities of $9,212,
the maturities of investment securities of $10,822, a decrease in non-current restricted assets of $10,181 and
the proceeds from the sale of ﬁxed assets of $45. In 2015, cash used in investing activities was for the
investments in real estate ventures of $70,272, capital
purchase of investment securities of $214,146,
issuance of notes receivable of
expenditures of $10,977, purchase of long-term investments of $10,000,
$4,410, an increase in non-current restricted assets of $6,889, investments in real estate held for sale of
$12,603 and an increase in cash surrender value of corporate-owned life insurance policies of $1,742. This
was offset by the proceeds from the sale of investment securities of $270,576,
the repayment of notes
receivable of $4,000, distributions from investments in real estate ventures of $17,563, proceeds from the sale
or liquidation of long-term investments of $1,303, the pay down of investment securities of $8,739, the
maturities of investment securities of $5,491, proceeds from sale of preferred securities of $1,000 and the
proceeds from the sale of ﬁxed assets of $4. In 2014, cash used in investing activities was for the purchase of
investment securities of $305,731,
in real estate ventures of $40,916, capital expenditures
of $23,404, purchase of long-term investments of $12,000, issuance of notes receivable of $8,250, purchase of
preferred securities of $1,000, an increase in non-current restricted assets of $872, the purchase of subsidiaries
of $750 and increase in cash surrender value of corporate-owned life insurance policies of $484. This was
offset by the sale of investment securities of $154,615, the maturities of investment securities of $930, the
repayment of notes receivable of $4,850, distributions from investments in real estate ventures of $7,309,
proceeds from the sale or liquidation of long-term investments of $2,416,
the pay down of investment
securities of $1,849 and the proceeds from the sale of ﬁxed assets of $4.

investment

Cash provided by ﬁnancing activities was $56,068 and $205,957 in 2016 and 2014, respectively. Cash
used in ﬁnancing activities was $208,113 in 2015. In 2016, cash provided by ﬁnancing activities was from
proceeds of debt issuance of $243,620, net borrowings of debt under the revolver of $33,680, contributions
from non-controlling interest of $248, proceeds from the exercise of Vector options of $398 and tax beneﬁt of
options exercised of $579. This was offset by cash used for dividends and distributions on common stock of
$198,947, repayments of debt of $5,365, payment of deferred ﬁnancing costs of $6,600 and distributions to
non-controlling interest of $11,545. In 2015, cash used for ﬁnancing activities was for the dividends and

49

distributions on common stock of $188,151, repayment of debt of $6,684, net repayments of debt under the
revolver of $14,554, payment of deferred ﬁnancing costs of $624 and distributions to non-controlling interest
of $3,280. This was offset by proceeds of debt issuance of $2,105, contributions from non-controlling interest
of $813, proceeds from the exercise of Vector options of $1,441 and tax beneﬁt of options exercised of $821.
In 2014, we took advantage of historically low interest rates and lowered our weighted average cost of capital
by issuing debt at
lower interest rates than our historical borrowing levels. In 2014, cash provided by
ﬁnancing activities was from proceeds of debt issuance of $413,914, proceeds from the exercise of Vector
options of $5,151 and tax beneﬁt of options exercised of $1,178. This was offset by cash used for dividends
and distributions on common stock of $167,328, repayments of debt of $12,601, net repayments of debt under
the revolver of $12,658, payment of deferred ﬁnancing costs of $12,360 and distributions to non-controlling
interest of $9,339.

Tobacco Litigation. To date, 15 verdicts have been entered in Engle progeny cases against Liggett in
the amount of $47,173, plus attorneys’ fees and interest. Several of these verdicts have been affirmed on
appeal and have been satisﬁed by Liggett. It is possible that additional cases could be decided unfavorably.

On October 23, 2013, we entered into a settlement with approximately 4,900 Engle progeny plaintiffs and
their counsel. Pursuant to the terms of the settlement, Liggett agreed to pay a total of approximately $110,000,
with approximately $61,600 paid in a lump sum and the balance to be paid in installments over 14 years. In
2013, we recorded a charge of $86,213 in connection with the settlement. Our future payments will be
approximately $3,400 per annum through 2028, with a cost of living increase beginning in 2021.

On December 7, 2016, we entered into an agreement with 124 Engle progeny plaintiffs and their counsel.
Pursuant to the terms of the settlement, Liggett agreed to pay $17,650, $14,000 of which was paid on
December 7, 2016 with the balance of $3,650 to be paid in equal quarterly payments starting in January 2018,
with 5% interest. Due to the settlement, in the fourth quarter of 2016, we recorded a charge of $17,650.

Notwithstanding the comprehensive nature of

the Engle Progeny Settlements, approximately 125
plaintiffs’ claims remain outstanding. Therefore, we and Liggett may still be subject to periodic adverse
judgments which could have a material adverse affect on our consolidated ﬁnancial position, results of
operations and cash ﬂows.

Management cannot predict

the cash requirements related to any future 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. Management is unable to make a reasonable estimate of the amount or range of loss that could result
from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases. It is
possible that our consolidated ﬁnancial position, results of operations or cash ﬂows could be materially
adversely affected by an unfavorable outcome in any such tobacco-related litigation.

Vector.

6.75% Variable Interest Senior Convertible Note due 2014. On March 14, 2014, the holder of the
6.75% Variable Interest Senior Convertible Note due 2014 converted $25,000 principal balance of the $50,000
Note into 2,455,877 of our common shares. On November 14, 2014, the terms of the Note were amended to
extend the maturity date to February 15, 2015. No other terms were modiﬁed. In February 2015, the holder of
the 6.75% Variable Interest Senior Convertible Note due 2014 converted the remaining $25,000 principal
balance of the $50,000 Note into 2,455,876 of our common stock.

6.75% Variable Interest Senior Convertible Exchange Notes due 2014.

In May 2014, August 2014 and
November 2014, holders of the 6.75% Variable Interest Senior Convertible Exchange Notes due 2014
converted $107,530 principal balance of the $107,530 Notes into 9,310,815 of our common shares.

5.5% Variable Interest Senior Convertible Notes due 2020. On March 24, 2014, we completed the sale
of $258,750 of our 5.5% Variable Interest Convertible Senior Notes due 2020 and received net proceeds from
the sale of the Notes of approximately $250,300.

7.75% Senior Secured Notes due 2021.

In February 2013, we issued $450,000 of our 7.75% senior
secured notes due 2021. In April 2014, we completed the sale of $150,000 principal amount of our 7.75%
Senior Secured Notes due 2021 for a price of 106.75%. We received net proceeds of approximately $158,700

50

after deducting underwriting discounts, commissions, fees and offering expenses. On May 9, 2016, we
completed the sale of an additional $235,000 principal amount of our 7.75% Senior Secured Notes due 2021
for a price of 103.5%. We received net proceeds of approximately $236,900 after deducting underwriting
discounts, commissions, fees and offering expenses.

6.125% Senior Secured Notes due 2025.

In January 2017, we issued $850,000 of our 6.125% senior
secured notes due 2025 in a private offering to qualiﬁed institutional investors in accordance with Rule 144A
of the Securities Act of 1933 (the ‘‘Securities Act’’). The aggregate net proceeds from the issuance of the
6.125% senior secured notes were approximately $831,100 after deducting offering expenses. We used the net
proceeds of the issuance, together with the proceeds from the sale of 2,000,000 common shares, to redeem all
of our outstanding 7.75% senior secured notes due 2021 and to satisfy and discharge the indenture governing
the existing notes. We retired the 7.75% senior secured notes at 103.875%, plus accrued and unpaid interest,
on January 27, 2017. We will incur a loss on the extinguishment of the debt of $34,110 for the three months
ended March 31, 2017, which included $32,356 of premium and tender offer costs and non-cash interest
expense of $1,754 related to the write-off of net unamortized debt premium and deferred ﬁnance costs.

The 6.125% Senior Secured Notes pay interest on a semi-annual basis at a rate of 6.125% per year and
mature on February 1, 2025. We may redeem some or all of the 6.125% senior secured notes at any time at a
make-whole redemption price. On or after February 1, 2020, we may redeem some or all of the 6.125% senior
secured notes at a premium that will decline over time, plus accrued and unpaid interest, if any, to the date of
purchase.

The 6.125% Senior Secured Notes are guaranteed subject

to certain customary automatic release
provisions on a joint and several basis by all of our 100% owned domestic subsidiaries that are engaged in the
conduct of our cigarette businesses. In addition, some of the guarantees are collateralized by ﬁrst priority or
second priority security interests in certain assets of some of the subsidiary guarantors,
including their
common stock, pursuant to security and pledge agreements.

The indenture contains covenants that restrict the payment of dividends if our consolidated earnings
before interest, taxes, depreciation and amortization (‘‘Consolidated EBITDA’’), as deﬁned in the indenture,
for the most recently ended four full quarters is less than $75,000. The indenture also restricts the incurrence
of debt if our Leverage Ratio and our Secured Leverage Ratio, as deﬁned in the indenture, exceed 3.0 and
1.5, respectively. Our Leverage Ratio is deﬁned in the indenture as the ratio of our guaranteeing subsidiaries’
total debt
investments in marketable securities and long-term
investments to Consolidated EBITDA, as deﬁned in the indenture. Our Secured Leverage Ratio is deﬁned in
the indenture in the same manner as the Leverage Ratio, except that secured indebtedness is substituted for
indebtedness. As of December 31, 2016, we are in compliance with all debt covenants. The following table
summarizes the requirements of these ﬁnancial covenants and the results of the calculation, as deﬁned by the
indenture.

less the fair market value of our cash,

Covenant
Consolidated EBITDA, as deﬁned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leverage ratio, as deﬁned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured leverage ratio, as deﬁned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Indenture
Requirement
$75,000
<3.0 to 1
<1.5 to 1

December 31,
2016
$319,817
1.94 to 1
1.0 to 1

As of December 31, 2015, we were in compliance with all debt covenants in place at that time.

Liggett Financing. Liggett did not enter into any equipment ﬁnancing arrangements in 2016. In 2015,
Liggett entered into two ﬁnancing agreements for a total of $1,765 related to the purchase of equipment. The
weighted average interest rate of the outstanding debt is 4.79% per annum and the interest rates on the
two notes range from 4.49% to 4.85%. Total monthly installments are approximately $33.

In 2014, Liggett entered into three ﬁnancing agreements for a total of $5,115 related to the purchase of
equipment. The weighted average interest rate of the outstanding debt is 5.02% per annum and the interest
rates on the three notes are from 4.98% to 5.04%. Total monthly installments are approximately $95. Liggett

51

also reﬁnanced $2,843 of debt related to equipment purchased in 2011. The reﬁnanced debt had an interest
rate of 5.63% and a remaining term of 21 months. The reﬁnanced debt carries an interest rate of 4.99% and a
term of 36 months.

Liggett Credit Facility. On January 14, 2015, Liggett and 100 Maple LLC (‘‘Maple’’), a subsidiary of
Liggett, entered into a Third Amended and Restated Credit Agreement (the ‘‘Credit Agreement’’), with Wells
Fargo Bank, National Association (‘‘Wells Fargo’’), as agent and lender. The Credit Agreement governs a
$60,000 credit facility (the ‘‘Credit Facility’’) that consists of a revolving credit facility of up to $60,000
borrowing capacity (the ‘‘Revolver’’) and a $3,600 term loan (the ‘‘Term Loan’’) that is within the $60,000
commitment under the Credit Facility and reduces the amount available under the Revolver. All borrowings
under the Credit Facility (other than the Term Loan) are limited to a borrowing base equal to roughly (1) the
lesser of (a) 85% of the net amount of eligible accounts receivable and (b) $10,000 plus (2) the lesser of
(a) the sum of (I) 80% of the value of eligible inventory consisting of packaged cigarettes plus (II) the lesser
of (x) 60% multiplied by Liggett’s eligible cost of eligible inventory consisting of leaf tobacco and (y) 85% of
the net orderly liquidation value of eligible inventory consisting of leaf tobacco and (b) $60,000,
less
(3) certain reserves against accounts receivable, inventory, bank products or other items which Wells Fargo, as
agent, may establish from time to time in its permitted discretion. The obligations under the Credit Facility are
collateralized on a ﬁrst priority basis by all inventories, receivables and certain other personal property of
Liggett and Maple, a mortgage on Liggett’s manufacturing facility and certain real property of Maple, subject
to certain permitted liens. The Credit Facility amended and restated Liggett’s previous $50,000 credit facility
with Wells Fargo and Maple’s existing $3,600 term loan with Wells Fargo. In connection with the issuance of
the 6.125% Senior Secured Notes due 2025, in January 2017, Liggett and Maple entered into Amendment
No. 1 to the Credit Agreement to update certain deﬁned terms of the Credit Agreement relating to our 6.125%
Senior Secured Notes due 2025.

The term of the Credit Facility expires on March 31, 2020. Prime rate loans under the Credit Facility
bear interest at a rate equal to the greatest of (i) the Federal Funds rate plus 0.50%, (ii) LIBOR plus 1.0% and
(ii) the prime rate of Wells Fargo. LIBOR rate loans under the Credit Facility bear interest at a rate equal to
LIBOR plus 2.25%. The interest rate applicable to this Credit Facility at December 31, 2016 was 3.02%.

The Credit Facility, as amended, permits the guaranty of the 6.125% Senior Secured Notes due 2025 by
each of Liggett and Maple and the pledging of certain assets of Liggett and Maple on a subordinated basis to
secure their guarantees. The credit facility also grants to Wells Fargo a blanket lien on all the assets of Liggett
and Maple, excluding any equipment pledged to current or future purchase money or other ﬁnanciers of such
equipment and excluding any real property, other than the Mebane Property and other real property to the
extent its value is in excess of $5,000. Wells Fargo, Liggett, Maple and the collateral agent for the holders of
our 6.125% Senior Secured Notes have entered into an intercreditor agreement, pursuant to which the liens of
the collateral agent on the Liggett and Maple assets will be subordinated to the liens of Wells Fargo on the
Liggett and Maple assets.

The Credit Facility contains customary affirmative and negative covenants, including covenants that limit
Liggett’s, Maple’s and their subsidiaries’ ability to incur, create or assume certain indebtedness, to incur or
assume certain liens, to purchase, hold or acquire certain investments, to declare or make certain dividends
and distributions and to engage in certain mergers, consolidations and asset sales. The Credit Facility also
requires the Company to comply with speciﬁed ﬁnancial covenants, including that Liggett’s earnings before
interest, taxes, depreciation and amortization, as deﬁned under the Credit Facility, on a trailing twelve month
basis, shall not be less than $100,000 if Liggett’s excess availability, as deﬁned under the Credit Facility, is
less than $20,000. The covenants also require that annual capital expenditures, as deﬁned under the Credit
Facility (before a maximum carryover amount of $10,000), shall not exceed $20,000 during any ﬁscal year.
The Credit Facility also contains customary events of default. The Credit Facility requires Liggett’s
compliance with certain ﬁnancial and other covenants including a restriction on Liggett’s ability to pay cash
dividends unless Liggett’s borrowing availability, as deﬁned, under the credit facility for the 30-day period
prior to the payment of the dividend, and after giving effect to the dividend, was at least $5,000 and no event
of default had occurred under the agreement, including Liggett’s compliance with the covenants in the credit
facility. Liggett was in compliance with these covenants as of December 31, 2016.

52

We and our subsidiaries have signiﬁcant indebtedness and debt service obligations. As of December 31,
2016, we and our subsidiaries had total outstanding indebtedness of $1,369,000. Approximately, $230,000 of
our 7.5% convertible notes mature in 2019, $258,750 of our 5.5% variable interest senior convertible notes
mature in 2020, and $850,000 of our 6.125% senior secured mature in 2025. There is a risk that we will not
be able to generate sufficient funds to repay our debt. If we cannot service our ﬁxed charges, it would have a
material adverse effect on our business and results of operations.

We believe that our cigarette operations are positive cash-ﬂow-generating units and will continue to be
able to sustain our operations without any signiﬁcant liquidity concerns. In addition, subject to the terms of
any future agreements, we and our subsidiaries will be able to incur additional indebtedness in the future.

In order to meet the above liquidity requirements as well as other anticipated liquidity needs in the
normal course of business, we had cash and cash equivalents of approximately $393,500, investment securities
available for sale of approximately $156,900, long-term investments with an estimated value of approximately
$58,800 and availability under Liggett’s credit facility of approximately $16,700 as of December 31, 2016.
Management currently anticipates that these amounts, as well as expected cash ﬂows from our operations,
proceeds from public and/or private debt and equity ﬁnancing, management fees and other payments from
subsidiaries, should be sufficient to meet our liquidity needs over the next 12 months. We may acquire or seek
to acquire additional operating businesses through merger, purchase of assets, stock acquisition or other
means, or to make other investments, which may limit our liquidity otherwise available.

On a quarterly basis, we evaluate our investments to determine whether an impairment has occurred. If
so, we also make a determination if such impairment is considered temporary or other-than-temporary. We
believe that
is facts-and-circumstances
driven. However, among the matters that are considered in making such a determination are the period of time
the investment has remained below its cost or carrying value, the likelihood of recovery given the reason for
the decrease in market value and our original expected holding period of the investment.

the assessment of temporary or other-than-temporary impairment

The total amount of unrecognized tax beneﬁts was $1,523 as of January 1, 2016 and decreased $1,008
during the year ended December 31, 2016, primarily from the expiration of various state statutes of limitations
and the reversal of a LIFO inventory difference. The total amount of unrecognized tax beneﬁts was $1,744 as
of January 1, 2015 and decreased $221 during the year ended December 31, 2015, primarily from the
expiration of various state statutes of limitations.

Contractual Obligations

Our signiﬁcant contractual obligations as of December 31, 2016 were as follows:

2017

2018

2019

2020

2021

Thereafter

Total

Contractual Obligations
Notes payable, long-term debt and

other obligations(1)(7)

Operating leases(2)
. . . . . . . . . . . .
Inventory purchase commitments(3) . .
Capital expenditure purchase

. . . . . . . . . $ 39,509
24,952
10,874

commitments(4)
Interest payments(5)(7)
Engle progeny settlements
Total(6)

805
117,064
3,426
. . . . . . . . . . . . . . . . . . . $196,630

. . . . . . . . . . . .
. . . . . . . . . .
. . . . . . .

$ 2,099
22,068
—

$231,261
21,786
—

$261,151
18,656
—

$835,001
15,213
—

$
101,138
—

— $1,369,021
203,813
10,874

—
119,068
7,076
$150,311

—
96,884
3,426
$353,357

—
77,213
3,426
$360,446

—
32,356
3,426
$885,996

—
—
23,983
$125,121

805
442,585
44,763
$2,071,861

(1) Notes payable, long-term debt and other obligations are shown before discount. For more information
concerning our long-term debt, see ‘‘Liquidity and Capital Resources’’ above and Note 9 to our
consolidated ﬁnancial statements.

(2) Operating lease obligations represent estimated lease payments for facilities and equipment.
(3)

Inventory purchase commitments represent primarily purchase commitments under our leaf inventory
management program. See Note 4 to our consolidated ﬁnancial statements.

(4) Capital expenditure purchase commitments

represent purchase commitments

for machinery and

equipment at Liggett. See Note 5 to our consolidated ﬁnancial statements.

53

(5)

Interest payments are based on current interest rates at December 31, 2016 and the assumption our
current policy of a cash dividend of $0.40 per quarter and an annual 5% stock dividend will continue.
For more information concerning our long-term debt, see ‘‘Liquidity and Capital Resources’’ above and
Note 9 to our consolidated ﬁnancial statements.

(6) Because their future cash outﬂows are uncertain, the above table excludes our pension and post beneﬁt

plans unfunded obligations of $59,895 at December 31, 2016.

(7) Notes payable,

long-term debt and other obligations and interest payments are shown without
consideration for the tender offer for our 7.75% senior secured notes due 2021 or the issuance of our
6.125% senior secured notes due 2025 in January 2017.

Payments under the MSA, discussed in Note 15 to our consolidated ﬁnancial statements, and the Food and
Drug Administration (‘‘FDA’’) user fees, discussed in ‘‘Legislation and Regulation’’ below, are excluded from
the table above, as the payments are subject to adjustment for several factors, including inﬂation, overall
industry volume, our market share and the market share of non-participating manufacturers.

Off-Balance Sheet Arrangements

We have various agreements in which we may be obligated to indemnify the other party with respect to
certain matters. Generally, these indemniﬁcation clauses are included in contracts arising in the normal course
of business under which we customarily agree to hold the other party harmless against losses arising from a
breach of representations related to such matters as title to assets sold and licensed or certain intellectual
property rights. Payment by us under such indemniﬁcation clauses is generally conditioned on the other party
making a claim that is subject to challenge by us and dispute resolution procedures speciﬁed in the particular
contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount,
and in some instances, we may have recourse against third parties for certain payments made by us. It is not
possible to predict the maximum potential amount of future payments under these indemniﬁcation agreements
due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically,
payments made by us under these agreements have not been material. As of December 31, 2016, we were not
aware of any indemniﬁcation agreements that would or are reasonably expected to have a current or future
material adverse impact on our ﬁnancial position, results of operations or cash ﬂows.

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. We believe the fair value of Liggett Vector Brands’ obligation under
the agreement was immaterial at December 31, 2016.

As of December 31, 2016, we had outstanding approximately $1,686 of letters of credit, collateralized by
certiﬁcates of deposit. The letters of credit have been issued as security deposits for leases of office space, to
secure the performance of our subsidiaries under various insurance programs and to provide collateral for
various subsidiary borrowing and capital lease arrangements.

We have a leaf inventory management program whereby, among other things, we are committed to
purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of
anticipated requirements and are at prices, including carrying costs, established at the commitment date. At
December 31, 2016, Liggett had tobacco purchase commitments of approximately $10,874. We have a single
source supply agreement for reduced ignition propensity cigarette paper through 2019.

Future machinery and equipment purchase commitments at Liggett were $805 at December 31, 2016.

Market Risk

We are exposed to market risks principally from ﬂuctuations in interest rates, foreign currency exchange
rates and equity prices. We seek to minimize these risks through our regular operating and ﬁnancing activities
and our long-term investment strategy. Our market risk management procedures cover all market risk sensitive
ﬁnancial instruments.

54

As of December 31, 2016, approximately $40,200 of our outstanding debt at face value had variable
interest rates determined by various interest rate indices, which increases the risk of ﬂuctuating interest rates.
Our exposure to market risk includes interest rate ﬂuctuations in connection with our variable rate borrowings,
which could adversely affect our cash ﬂows. As of December 31, 2016, we had no interest rate caps or swaps.
Based on a hypothetical 100 basis point increase or decrease in interest rates (1%), our annual interest
expense could increase or decrease by approximately $402.

In addition, as of December 31, 2016, $309,023 ($488,750 principal amount) of outstanding debt had a
variable interest rate determined by the amount of the dividends on our common stock. The difference
between the stated value of the debt and carrying value is due principally to certain embedded derivatives,
which were separately valued and recorded upon issuance. Changes to the estimated fair value of these
embedded derivatives are reﬂected within our statements of operations as ‘‘Changes in fair value of
derivatives embedded within convertible debt.’’ The value of the embedded derivative is contingent on
changes in interest rates of debt instruments maturing over the duration of the convertible debt as well as
projections of future cash and stock dividends over the term of the debt and changes in the closing stock price
at the end of each quarterly period. Based on a hypothetical 100 basis point increase or decrease in interest
rates (1%), our annual ‘‘Changes in fair value of derivatives embedded within convertible debt’’ could
increase or decrease by approximately $1,457, with approximately $936 resulting from the embedded
derivative associated with our 5.5% variable interest senior convertible debentures due 2020 and the remaining
$521 resulting from the embedded derivative associated with the 7.5% variable interest senior convertible
notes. An increase in our quarterly dividend rate by $0.10 per share would increase interest expense by
approximately $10,570 per year.

We have estimated the fair market value of the embedded derivatives based principally on the results of a
valuation model. The value of the embedded derivatives is contingent on changes in interest rates of debt
instruments maturing over the duration of the convertible debt, our stock price as well as projections of future
cash and stock dividends over the term of the debt. The interest rate component of the value of the embedded
derivative is computed by calculating an equivalent non-convertible, unsecured and subordinated borrowing
cost. This rate is determined by calculating the implied rate on our 7.5% Convertible Notes when removing
the embedded option value within the convertible security. This rate is based upon market observable inputs
and inﬂuenced by our stock price, convertible bond trading price, risk free interest rates and stock volatility.
The range of estimated fair market values of our embedded derivatives was between $113,090 and $111,653.
We recorded the fair market value of our embedded derivatives at the approximate midpoint of the range at
$112,332 as of December 31, 2016. The estimated fair market value of our embedded derivatives could
change signiﬁcantly based on future market conditions.

We held investment securities available for sale totaling $156,903 as of December 31, 2016. See Note 3
to our consolidated ﬁnancial statements. Adverse market conditions could have a signiﬁcant effect on the
value of these investments.

We and New Valley also hold long-term investments in various investment partnerships. These

investments are illiquid, and their ultimate realization is subject to the performance of the underlying entities.

New Accounting Pronouncements

Refer to Note 1, Summary of Signiﬁcant Accounting Policies, to our consolidated ﬁnancial statements for

further information on New Accounting Pronouncements.

Legislation and Regulation

Reports with respect to the alleged harmful physical effects of cigarette smoking have been publicized for
many years and, in the opinion of Liggett’s management, have had and will continue to have an adverse effect
on cigarette sales. Since 1964, the Surgeon General of the United States and the Secretary of Health and
Human Services have released a number of reports stating that cigarette smoking is a causative factor with
respect to a variety of health hazards, including cancer, heart disease and lung disease, and have recommended
various government actions to reduce the incidence of smoking. In 1997, Liggett publicly acknowledged that,
as the Surgeon General and respected medical researchers have found, smoking causes health problems,
including lung cancer, heart and vascular disease, and emphysema.

55

On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the ‘‘Tobacco Control
Act’’) became law. The law grants the FDA broad authority over the manufacture, sale, marketing and
packaging of tobacco products, although FDA is prohibited from banning all cigarettes or all smokeless
tobacco products. Among other measures, the law (under various deadlines):

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

increases the number of health warnings required on cigarette and smokeless tobacco products,
increases the size of warnings on packaging and in advertising, requires FDA to develop graphic
warnings for cigarette packages, and grants FDA authority to require new warnings;

imposes new restrictions on the sale and distribution of tobacco products, including signiﬁcant new
restrictions on tobacco product advertising and promotion, as well as the use of brand and trade
names;

bans the use of ‘‘light,’’ ‘‘mild,’’ ‘‘low’’ or similar descriptors on tobacco products;

bans the use of ‘‘characterizing ﬂavors’’ in cigarettes other than tobacco or menthol;

gives FDA the authority to impose tobacco product standards that are appropriate for the protection
of the public health (by, for example, requiring reduction or elimination of the use of particular
constituents or components, requiring product testing, or addressing other aspects of tobacco product
construction, constituents, properties or labeling);

requires manufacturers to obtain FDA review and authorization for the marketing of certain new or
modiﬁed tobacco products which could ultimately result in the FDA prohibiting Liggett from selling
certain of its products;

requires pre-market approval by FDA for tobacco products represented (through labels, labeling,
advertising, or other means) as presenting a lower risk of harm or tobacco-related disease;

requires manufacturers to report ingredients and harmful constituents and requires FDA to disclose
certain constituent information to the public;

mandates that manufacturers test and report on ingredients and constituents identiﬁed by FDA as
requiring such testing to protect the public health, and allows FDA to require the disclosure of
testing results to the public;

requires manufacturers to submit to FDA certain information regarding the health, toxicological,
behavioral or physiological effects of tobacco products;

prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under
federal law;

requires FDA to establish ‘‘good manufacturing practices’’ to be followed at tobacco manufacturing
facilities;

requires tobacco product manufacturers (and certain other entities) to register with FDA;

authorizes FDA to require the reduction of nicotine (although it may not require the reduction of
nicotine yields of a tobacco product to zero) and the potential reduction or elimination of other
constituents, including menthol;

imposes (and allows FDA to impose) various recordkeeping and reporting requirements on tobacco
product manufacturers; and

grants FDA broad regulatory authority to impose additional restrictions.

56

The law also required establishment of a Tobacco Products Scientiﬁc Advisory Committee (‘‘TPSAC’’) to
provide advice, information and recommendations with respect to the safety, dependence or health issues
related to tobacco products, including:

•

•

•

•

a recommendation on modiﬁed risk applications;

a recommendation on the effects of tobacco product nicotine yield alteration and whether there is a
threshold level below which nicotine yields do not produce dependence;

a report on the public health impact of the use of menthol in cigarettes; and

a report on the public health impact of dissolvable tobacco products.

review of

TPSAC completed its

in cigarettes and issued a report with
the use of menthol
recommendations to FDA in March 2011. The report stated that ‘‘removal of menthol cigarettes from the
marketplace would beneﬁt public health in the United States,’’ but did not expressly recommend that FDA ban
menthol cigarettes. In July 2013, FDA made available its preliminary scientiﬁc evaluation (‘‘PSE’’) of public
health issues related to the use of menthol in cigarettes, in which it concluded that menthol cigarettes likely
pose a public health risk above that seen with non-menthol cigarettes. FDA also issued and accepted public
comment on an Advance Notice of Proposed Rulemaking (‘‘ANPR’’) seeking input related to potential
regulatory options it might consider in determining what future regulatory action,
it believes is
warranted. A decision by FDA to ban menthol in tobacco products could have a material adverse effect on us.
In July 2014, the federal district court for the District of Columbia ruled on cross-motions for summary
judgment in a lawsuit brought by several cigarette manufacturers against FDA challenging the composition of
the TPSAC. The district court granted, in part, the plaintiffs’ motion for summary judgment, ordering FDA to
reconstitute the TPSAC and barring the agency from relying in any manner on the March 2011 TPSAC report
on menthol. FDA appealed the decision to the U.S. Court of Appeals for the District of Columbia Circuit. The
D.C. Circuit issued an opinion in January 2016, that vacated the district court’s decision due to the plaintiffs’
lack of standing and lifted the prohibition on FDA relying on the March 2011 TPSAC report. The D.C.
Circuit’s decision does not preclude future challenges if FDA ultimately relies on the March 2011 TPSAC
report to restrict or ban menthol in cigarettes.

if any,

The Tobacco Control Act imposes user fees on certain tobacco product manufacturers in order to fund
tobacco-related FDA activities. User fees will be allocated among tobacco product classes according to a
formula set out in the legislation, and then among manufacturers and importers within each class based on
market share. FDA user fees for Liggett and Vector Tobacco for 2016 were $19,252 and could increase in the
future.

The Tobacco Control Act also imposes signiﬁcant new restrictions on the advertising and promotion of
tobacco products. For example, as required under the law, FDA reissued certain regulations previously issued
in 1996 (which were struck down by the Supreme Court in 2000 as beyond FDA’s authority). Subject to
limitations imposed by a federal injunction (discussed below), these regulations took effect on June 22, 2010.
As written,
the ability of manufacturers, distributors and retailers to
advertise and promote tobacco products, by, for example, restricting the use of color and graphics in
advertising, limiting the use of outdoor advertising, restricting the sale and distribution of non-tobacco items
and services, gifts, and sponsorship of events, and imposing restrictions on the use for cigarette or smokeless
tobacco products of trade or brand names that are used for nontobacco products.

these regulations signiﬁcantly limit

In August 2009, several cigarette manufacturers ﬁled a federal lawsuit against FDA challenging the
constitutionality of a number of the restrictions imposed by the Tobacco Control Act, including the ban on
color and graphics in advertising, the color graphic and non-graphic warning label requirement, limits on the
right to make truthful statements regarding modiﬁed risk tobacco products, restrictions on the placement of
outdoor advertising, and a ban on the distribution of product samples. In January 2010, a federal district court
in Kentucky ruled that the regulations’ ban on the use of color and graphics in certain tobacco product
advertising was unconstitutional and prohibited FDA from enforcing that ban. The court, however, let stand
numerous other advertising and promotion restrictions. In March 2010, both parties appealed this decision. In
May 2010, FDA issued a guidance document indicating that it intends to exercise its enforcement discretion
and not commence enforcement actions based upon these provisions during the pendency of the litigation. In

57

March 2012, a federal appellate court reviewing the district court’s decision also let stand numerous
advertising and promotion restrictions, but held that the ban on the use of color and graphics in advertising
was unconstitutional. In May 2012, the federal appellate court denied the cigarette manufactures’ petition for
rehearing en banc. In October 2012, the cigarette manufacturers ﬁled a petition for writ of certiorari in the
United States Supreme Court which was denied in April 2013.

In April 2010, a number of cigarette manufacturers ﬁled a federal lawsuit against FDA challenging the
restrictions on trade or brand names based upon First Amendment and other grounds. In May 2010, FDA
issued a guidance document indicating that FDA was aware of concerns regarding the trade and brand name
restrictions and while the agency was considering the matter, it intended to exercise its enforcement discretion
and not commence trade or brand name enforcement actions for the duration of its consideration where:
(1) the trade or brand name of the cigarettes or smokeless tobacco product was registered, or the product was
marketed, in the United States on or before June 22, 2009; or (2) the ﬁrst marketing or registration in the
United States of the tobacco product occurs before the ﬁrst marketing or registration in the United States of
the non-tobacco product bearing the same name; provided, however, that the tobacco and non-tobacco product
are not owned, manufactured, or distributed by the same, related, or affiliated entities (including as a licensee).
The lawsuit was stayed by agreement of the parties. In November 2011, FDA issued a proposal to amend its
trade name restrictions and the lawsuit was dismissed in November 2013. FDA’s proposal remains under
consideration. We cannot predict the future impact of the proposed amendment.

In June 2011, FDA issued a ﬁnal rule that would have modiﬁed the required warnings that appear on
cigarette packages and in cigarette advertisements. The rule would have required each cigarette package and
advertisement to bear one of nine new textual warning statements accompanied by graphic images. The
warnings would have had to appear on at least the top 50% of the front and rear panels of cigarette packages
and occupy at least 20% of cigarette advertisements. In August 2011, a number of cigarette manufacturers,
including Liggett, ﬁled a federal lawsuit against FDA challenging the constitutionality of these new graphic
images on First Amendment and other grounds and seeking an injunction staying implementation of the
graphic images, and other related labeling requirements. In February 2012, on First Amendment grounds, the
court granted the industry’s motion for summary judgment permanently enjoining implementation of FDA’s
graphic warnings regulation. This decision was affirmed on appeal and FDA did not seek United States
Supreme Court review. Should FDA ultimately issue new graphic warnings that are deemed constitutionally
valid, the decision provides that such warnings would go into effect 15 months after they are issued. We
cannot predict how the inclusion of new warnings, if ultimately required by FDA in new rulemaking, would
impact product sales or whether it would have a material adverse effect on us.

The Tobacco Control Act requires premarket review of ‘‘new tobacco products.’’ A ‘‘new tobacco
product’’ is one that was not commercially marketed in the United States as of February 15, 2007 or that was
modiﬁed after that date. In general, before a company may commercially market a ‘‘new tobacco product,’’ it
must either (a) submit an application and obtain an order from FDA permitting the product to be marketed; or
(b) submit an application and receive an FDA order ﬁnding the product to be ‘‘substantially equivalent’’ to a
‘‘predicate’’ tobacco product that was commercially marketed in the U.S. prior to February 15, 2007. A
‘‘substantially equivalent’’ tobacco product is one that has the ‘‘same characteristics’’ as the predicate or one
that has ‘‘different characteristics’’ but does not raise ‘‘different questions of public health.’’

Manufacturers of products ﬁrst introduced after February 15, 2007 and before March 22, 2011 who
submitted a substantial equivalence application to FDA prior to March 23, 2011 may continue to market the
tobacco product unless FDA issues an order that the product is not substantially equivalent. Failure to timely
submit the application, or FDA’s conclusion that such a ‘‘new tobacco product’’ is not substantially equivalent,
will cause the product to be deemed misbranded and/or adulterated. After March 22, 2011, a ‘‘new tobacco
product’’ may not be marketed without an FDA substantial equivalence determination. Prior to the deadline,
Liggett and Vector Tobacco submitted substantial equivalence applications to FDA for numerous products.

Liggett and Vector Tobacco have received requests from FDA regarding certain of their substantial
equivalence applications, including ‘‘Preliminary Finding’’ letters and other FDA correspondence requesting
additional information that would support FDA’s determinations of substantial equivalence. Liggett and Vector
Tobacco have timely responded to FDA’s requests.

58

In August and October 2016, FDA issued ‘‘not substantially equivalent’’ (‘‘NSE’’) orders for two of
Liggett’s substantial equivalence applications. FDA ordered Liggett to stop all distribution, importation, sale,
marketing, and promotion of CLASS A Menthol Silver 100’s Box on August 12 and CLASS A Menthol Silver
100’s Soft Pack on October 18. Sales of both cigarette styles were limited to the military. Liggett has
complied with these NSE orders.

We cannot predict whether FDA will deem Liggett’s and Vector Tobacco’s remaining responses to
‘‘Preliminary Finding’’ letters for pending substantial equivalence applications to be sufficient
to support
determinations of substantial equivalence for the products covered by these substantial equivalence reports. It
is possible that FDA could determine some, or all, of these products are ‘‘not substantially equivalent’’ to a
preexisting tobacco product, as the agency has already done for two of Liggett’s applications and for multiple
‘‘Not substantially
reports from other
equivalent’’ orders for other cigarettes styles would require us to stop the sale of the applicable cigarettes and
could have a material adverse effect on us.

including other applications for cigarettes.

tobacco companies,

In April 2015, a number of cigarette manufacturers ﬁled a federal lawsuit challenging FDA’s March 4,
2015 ‘‘guidance’’ document, ‘‘Guidance for Industry: Demonstrating the Substantial Equivalence of a New
Tobacco Product: Responses to Frequently Asked Questions.’’ The guidance document would have required
FDA’s prior approval for all changes to the label of a tobacco product
that would render the product
‘‘distinct’’ and a ‘‘new tobacco product,’’ even though there was no change to the product itself. Similarly, the
guidance document would have required prior approval for changes in the quantity of products sold within a
package. The complaint alleged that FDA’s guidance was contrary to and exceeded FDA’s authority under the
Federal Food, Drug, and Cosmetic Act (‘‘FDCA’’); violated First Amendment rights because it restricted and
to avoid the
chilled protected commercial speech; and was issued under
notice-and-comment
the Administrative Procedure Act and the FDCA and
subsequent judicial review. The plaintiffs requested that the court prevent FDA from enforcing the guidance.
In May 2015, FDA adopted an ‘‘Interim Enforcement Policy,’’ which stated that FDA was considering
regulatory comments and that it did not ‘‘intend to issue any warning letters or take steps to initiate any
judicial or administrative adversarial proceedings’’ pursuant to its March 4, 2015 guidance document, during
that period of review and consideration. Plaintiffs, therefore, dismissed the case without prejudice.

rulemaking requirements of

the guise of

‘‘guidance’’

In September 2015, FDA issued a revised version of the same document entitled, ‘‘Guidance for Industry:
Demonstrating the Substantial Equivalence of a New Tobacco Product: Responses to Frequently Asked
Questions (Edition 2).’’ The revised version did not materially change the requirements set forth in the prior
version regarding changes to product labels and changes to the quantity of products sold within a package.
Accordingly, in September 2015, the cigarette manufacturers ﬁled a lawsuit in the federal district court for the
District of Colombia challenging FDA’s September 2015 ‘‘guidance’’ document. The September 2015
complaint contained arguments and allegations that were substantially similar to those contained in the
April 2015 complaint. The plaintiffs requested that the court prevent FDA from enforcing the revised version
of its guidance. In October 2015, the plaintiffs ﬁled for summary judgment against FDA. In December 2015,
FDA opposed that motion and ﬁled a motion to dismiss or, in the alternative, a motion for summary judgment.
In August 2016, the court held that a modiﬁcation to an existing product’s label does not result in a ‘‘new
tobacco product’’ and therefore such a label change does not give rise to the substantial equivalence review
process. Accordingly, the court vacated the revised guidance insofar as it pertains to label changes, but upheld
the guidance in all other respects, including its treatment of product quantity changes as modiﬁcations that
give rise to a ‘‘new tobacco product’’ requiring substantial equivalence review. The parties did not appeal this
decision, concluding the litigation.

In May 2016, FDA issued a ﬁnal ‘‘deeming’’ regulation that extends the agency’s authority under the
Tobacco Control Act to other tobacco products not currently regulated by the agency, such as e-cigarettes,
cigars, pipe tobacco and hookah.

Under the ‘‘deeming’’ rule, manufacturers of the newly-regulated products, including e-cigarettes, will be
subject to the same Tobacco Control Act provisions and relevant regulatory requirements that already apply to
cigarettes. As of August 8, 2016, domestic manufacturers must register and list the tobacco products with
FDA and obtain premarket market authorization for any product introduced after this date. For products

59

introduced between February 15, 2007 and August 8, 2016, the premarket authorization requirements are
subject to certain staggered compliance periods. Requests for exemption from the substantial equivalence
requirement must be submitted by August 8, 2017. Substantial equivalence applications must be submitted by
February 8, 2018. Premarket tobacco product applications must be submitted by August 8, 2018. Unless FDA
issues an order denying or refusing to accept an application, FDA will not take enforcement action against the
product for one year after the application deadline. However, at the end of that period, even if FDA has not
to enforcement action unless FDA determines that
completed its review,
‘‘substantial progress’’ is being made towards completion and decides to defer enforcement for a reasonable
time period. FDA has not set deadlines for its own review.

the product will be subject

It is likely that the Tobacco Control Act will result in a decrease in cigarette sales in the United States,
including sales of Liggett’s and Vector Tobacco’s brands. Total compliance and related costs are not possible
to predict and depend on the future requirements imposed by FDA under the new law. Costs, however, could
be substantial and could have a material adverse effect on the companies’ ﬁnancial condition, results of
operations, and cash ﬂows. Failure to comply with the Tobacco Control Act and with FDA regulatory
requirements could result in signiﬁcant ﬁnancial penalties and could have a material adverse effect on the
business, ﬁnancial condition and results of operation of both Liggett and Vector Tobacco. We are not able to
predict whether the Tobacco Control Act will impact Liggett and Vector Tobacco to a greater degree than
other companies in the industry, thus affecting its competitive position.

Cigarettes are subject to substantial and increasing federal, state and local excise taxes. In April 2009, the
federal cigarette excise tax increased from $0.39 to $1.01 per pack, while state excise taxes vary considerably.
Both the federal government and many states are considering, or have pending, legislation proposing further
excise tax increases. Management believes increases in excise and similar taxes have had, and will continue to
have, an adverse effect on sales of cigarettes.

All states have enacted virtually identical

legislation requiring cigarettes to meet a laboratory test
standard for reduced ignition propensity. Cigarettes that meet this standard are referred to as ‘‘ﬁre standard
compliant’’ or ‘‘FSC,’’ and are sometimes commonly called ‘‘self-extinguishing.’’ All of the cigarettes that
Liggett and Vector Tobacco manufacture are ﬁre standard compliant.

A wide variety of federal, state and local laws limiting the advertising, sale and use of cigarettes have
proliferated in recent years. For example, many local laws prohibit smoking in restaurants and other public
places, and many employers have initiated programs restricting or eliminating smoking in the workplace.
There are various other legislative efforts pending at the federal, state or local level which seek to, among
other things, eliminate smoking in public places, curtail affirmative defenses of tobacco companies in product
liability litigation, and further restrict the sale, marketing and advertising of cigarettes and other tobacco
products. This trend has had, and is likely to continue to have, an adverse effect on us. It is not possible to
predict what,
legislation, regulation or other governmental action will be enacted or
implemented.

if any, additional

In addition to the foregoing, there have been a number of other 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 similar litigation or legislation.

60

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical

this report contains ‘‘forward-looking statements’’ within the
meaning of the federal securities law. Forward-looking statements include information relating to our intent,
belief or current expectations, primarily with respect to, but not limited to:

information,

•

•

•

•

•

•

•

•

•

economic outlook,

capital expenditures,

cost reduction,

legislation and regulations,

cash ﬂows,

operating performance,

litigation,

impairment charges and cost saving associated with restructurings of our tobacco operations, and

related industry developments (including trends affecting our business, ﬁnancial condition and results
of operations).

We identify forward-looking statements in this report by using words or phrases such as ‘‘anticipate,’’
‘‘believe,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘may be,’’ ‘‘objective,’’ ‘‘plan,’’ ‘‘seek,’’ ‘‘predict,’’ ‘‘project’’ and
‘‘will be’’ and similar words or phrases or their negatives.

The forward-looking information involves important risks and uncertainties that could cause our actual
results, performance or achievements to differ materially from our anticipated results, performance or
achievements expressed or implied by the forward-looking statements. Factors that could cause actual results
to differ materially from those suggested by the forward-looking statements include, without limitation, the
following:

•

•

•

•

•

•

•

•

general economic and market conditions and any changes therein, due to acts of war and terrorism
or otherwise,

governmental regulations and policies,

effects of industry competition,

impact of business combinations, including acquisitions and divestitures, both internally for us and
externally in the tobacco industry,

impact of legislation providing for regulation of tobacco products by the FDA,

impact of substantial increases in federal, state and local excise taxes,

uncertainty related to product
Florida; and,

liability litigation including the Engle progeny cases pending in

potential additional payment obligations for us under the MSA and other settlement agreements with
the states.

Further information on the risks and uncertainties that we face include the risks discussed above under
Item 1A. ‘‘Risk Factors’’ and in ‘‘Management’s Discussion and Analysis of Financial Condition and Results
of Operations.’’

Although we believe the expectations reﬂected in these forward-looking statements are based on
reasonable assumptions, there is a risk that these expectations will not be attained and that any deviations will
be material. The forward-looking statements speak only as of the date they are made.

61

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information under the caption ‘‘Management’s Discussion and Analysis of Financial Condition and

Results of Operations — Market Risk’’ is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements and Notes thereto, together with the report thereon of Deloitte &

Touche LLP dated March 1, 2017, are set forth beginning on page F-1 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed, in the reports the Company ﬁles or submits under the Securities Exchange Act of
1934, as amended (the ‘‘Exchange Act’’), is recorded, processed, summarized and reported within the time
periods speciﬁed in the SEC’s rules and forms and that such information is accumulated and communicated to
the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.

In connection with the preparation of this Form 10-K, the Company carried out an evaluation under the
supervision of and with the participation of the Company’s management, including the Chief Executive Officer
and Chief Financial Officer, as of December 31, 2016, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures, as such term is deﬁned in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that as of December 31, 2016, the Company’s disclosure controls and procedures were effective as
of December 31, 2016.

Remediation of Material Weaknesses

Management has assessed and concluded that its previously reported material weaknesses over ﬁnancial
reporting related to Douglas Elliman’s controls over segregation of duties and general computer controls over
Douglas Elliman’s information technology system for ﬁnance and accounting had been remediated as of
December 31, 2016.

After identifying ﬁve material weaknesses related to its Douglas Elliman subsidiary as of December 31,
2014 (reduced to two material weaknesses related to its Douglas Elliman subsidiary as of December 31,
2015), the Company began an intense remediation process. Beginning in 2015 and continuing in 2016, at the
direction of the Audit Committee of the Company’s Board of Directors, as well as the Company’s CEO and
CFO, the Company took the following efforts to remediate these material weakness including:

•

•

In June 2015, Douglas Elliman employed a new Chief Financial Officer, who is a licensed Certiﬁed
Public Accountant (‘‘CPA’’) with more than 30 years of experience in the ﬁnancial departments of
publicly-traded companies.
in 2015, Douglas Elliman also added a Director of
Sarbanes-Oxley Section 404 Compliance, a corporate controller, who is licensed as a CPA and
previously served as a senior manager at a Big Four accounting ﬁrm, two regional controllers who
are both licensed as CPAs, and two accounting managers who are both licensed as CPAs.

In addition,

In August 2015, Douglas Elliman employed a new Chief Technology Officer (‘‘CTO’’) who was
previously a technology executive with a large U.S. ﬁnancial institution. Douglas Elliman’s new
CTO oversees, among other things, security of the accuracy and completeness of the Company’s
ﬁnancial reporting and was instrumental in the remediation of the material weakness related to
IT Systems.

62

•

•

During 2015 and continuing into 2016, Douglas Elliman engaged a new consulting ﬁrm and
improved its documentation of internal controls into a more robust format that has been designed to
detect errors that could lead to material misstatements in the Company’s consolidated ﬁnancial
statements.

During 2015 and continuing into 2016,
the Company redesigned and implemented a series of
newly-created internal controls related to previously improper internal controls related to segregation
of duties by accounting and ﬁnance personnel at Douglas Elliman.

The Company’s management, Audit Committee and Board of Directors remained committed and involved
during this process to maintaining a strong and sustainable internal control environment and believe that the
remediation represented signiﬁcant improvements in the Company’s overall control environment as well as its
internal controls over the ﬁnancial reporting of Douglas Elliman.

The result of these efforts led to the remediation of all material weaknesses at Douglas Elliman as of

December 31, 2016.

Management’s Annual Report on Internal Control Over Financial Reporting

Management

is responsible for establishing and maintaining adequate internal control over ﬁnancial
reporting for the Company, as such term is deﬁned in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Internal control over ﬁnancial reporting is a process designed to provide reasonable assurance regarding the
reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly reﬂect the transactions and dispositions
of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of ﬁnancial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a
material effect on the ﬁnancial statements.

Because of inherent

internal control over ﬁnancial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

limitations,

Management,

including the Chief Executive Officer and Chief Financial Officer, has conducted an
assessment of the effectiveness of the Company’s internal control over ﬁnancial reporting as of December 31,
2016, based on the criteria in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (‘‘COSO’’).

Based on this assessment, management concluded that the Company’s internal control over ﬁnancial
reporting was effective as of December 31, 2016 based on the criteria in Internal Control — Integrated
Framework (2013) issued by COSO.

The effectiveness of the Company’s internal control over ﬁnancial reporting as of December 31, 2016 has
been audited by Deloitte & Touche LLP, an independent registered public accounting ﬁrm, as stated in its
report which appears herein.

Changes in Internal Control Over Financial Reporting

Management, together with our CEO and CFO, evaluated the changes in the Company’s internal control
over ﬁnancial reporting during the quarter ended December 31, 2016. As discussed above, Douglas Elliman
remediated the previously reported material weaknesses related to Douglas Elliman’s controls over segregation
of duties and general computer controls over Douglas Elliman’s information technology system for ﬁnance
and accounting.

63

Management concluded its testing of these controls in the fourth quarter, supporting its remediation

documentation.

There were no other changes in the Company’s internal control over ﬁnancial reporting during the quarter
ended December 31, 2016 that have materially affected or are reasonably likely to materially affect, the
Company’s internal control over ﬁnancial reporting.

64

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Vector Group Ltd.
Miami, Florida

We have audited the internal control over ﬁnancial reporting of Vector Group Ltd. and subsidiaries (the
‘‘Company’’) as of December 31, 2016, based on criteria established in Internal Control — Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over ﬁnancial reporting and
for
included in the
accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over ﬁnancial reporting based on our audit.

internal control over ﬁnancial

the effectiveness of

its assessment of

reporting,

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over ﬁnancial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over ﬁnancial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over ﬁnancial reporting is a process designed by, or under the supervision
of, the company’s principal executive and principal ﬁnancial officers, or persons performing similar functions,
and effected by the company’s board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
ﬁnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reﬂect
the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
ﬁnancial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
ﬁnancial statements.

Because of the inherent limitations of internal control over ﬁnancial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over ﬁnancial reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over ﬁnancial
reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated ﬁnancial statements and ﬁnancial statement schedule as of and for the
year ended December 31, 2016 of the Company and our report dated March 1, 2017 expressed an unqualiﬁed
opinion on those ﬁnancial statements and ﬁnancial statement schedule.

Certiﬁed Public Accountants
Miami, Florida
March 1, 2017

ITEM 9B. OTHER INFORMATION

None.

65

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information contained under the following headings in our deﬁnitive Proxy Statement for our 2017
Annual Meeting of Stockholders (the ‘‘2017 Proxy Statement’’), to be ﬁled with the SEC not later than
120 days after the end of our ﬁscal year covered by this report pursuant to Regulation 14A under the
Securities Exchange Act of 1934, is incorporated herein by reference: ‘‘Board Proposal 1 — Nomination and
Election of Directors’’ and ‘‘Section 16(a) Beneﬁcial Ownership Compliance.’’ See Item 5 of this report for
information regarding our executive officers. We have adopted a policy statement entitled Code of Business
Conduct and Ethics that applies to all of our directors, officers and employees. In the event that an amendment
to, or a waiver from, a provision of the Code of Business Conduct and Ethics is made or granted, we intend
to post such information on our web site, which is www.vectorgroupltd.com.

ITEM 11. EXECUTIVE COMPENSATION

The information contained under

the headings

Committee Interlocks and Insider Participation’’ in our 2017 Proxy Statement
reference.

‘‘Executive Compensation’’ and ‘‘Compensation
is incorporated herein by

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The information contained under the headings ‘‘Equity Compensation Plan Information’’ and ‘‘Security
Ownership of Certain Beneﬁcial Owners and Management’’ in our 2017 Proxy Statement is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

The information contained under the headings ‘‘Certain Relationships and Related Party Transactions’’

and ‘‘Board of Directors and Committees’’ in our 2017 Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information contained under the headings ‘‘Audit and Non-Audit Fees’’ and ‘‘Pre-Approval Policies

and Procedures’’ in our 2017 Proxy Statement is incorporated herein by reference.

66

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) INDEX TO 2016 CONSOLIDATED FINANCIAL STATEMENTS:

PART IV

Our consolidated ﬁnancial statements and the notes thereto, together with the report thereon of Deloitte &
Touche LLP for the two years ended December 31, 2016, dated March 1, 2017 and the reports thereon of
PricewaterhouseCoopers LLP for the year ended December 31, 2014, dated March 4, 2015 appear beginning
on page F-1 of this report.

(a)(2) FINANCIAL STATEMENT SCHEDULES:

Schedule II — Valuation and Qualifying Accounts Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-84

(a)(3) EXHIBITS:

(a) The following is a list of exhibits ﬁled herewith as part of this Annual Report on Form 10-K:

EXHIBIT NO.

DESCRIPTION

INDEX OF EXHIBITS

*3.1

*3.2

*3.3

*3.4

*3.5

*4.1

*4.2

*4.3

*4.4

*4.5

(‘‘Vector’’)

Amended and Restated Certiﬁcate of Incorporation of Vector Group Ltd. (formerly known as
Brooke Group Ltd.)
(incorporated by reference to Exhibit 3.1 in Vector’s
Form 10-Q for the quarter ended September 30, 1999).
Certiﬁcate of Amendment to the Amended and Restated Certiﬁcate of Incorporation of Vector
(incorporated by reference to Exhibit 3.1 in Vector’s Form 8-K dated May 24, 2000).
Certiﬁcate of Amendment to the Amended and Restated Certiﬁcate of Incorporation of Vector
Group Ltd. (incorporated by reference to Exhibit 3.1 in Vector’s Form 10-Q for the quarter
ended June 30, 2007).
Certiﬁcate of Amendment to the Amended and Restated Certiﬁcate of Incorporation of Vector
Group Ltd. (incorporated by reference to Exhibit 3.1 in Vector’s Form 10-Q for the quarter
ended June 30, 2014).
Amended and Restated By-Laws of Vector Group Ltd.
Exhibit 3.4 in Vector’s Form 8-K dated October 19, 2007).
Third Amended and Restated Loan and Security Agreement by and between Wells Fargo
Bank, National Association, successor to Wachovia Bank, National Association as Lender,
Liggett Group LLC as Borrower, and 100 Maple LLC, dated as of January 14, 2015
(incorporated by reference to Exhibit 4.4 of Vector’s Form 10-K for
the year ended
December 31, 2014).
Amendment No. 1 to Third Amended and Restated Credit Agreement, dated as of
January 27, 2017, among Liggett Group LLC, 100 Maple LLC and Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 10.1 to Vector’s Form 8-K dated
January 27, 2017).

(incorporated by reference to

Share Lending Agreement, dated as of November 15, 2012, between Vector Group Ltd. and
Jefferies & Company, Inc. (incorporated by reference to Exhibit 10.1 of Vector’s Form 8-K
dated November 15, 2012).

Indenture, dated as of November 20, 2012, by and between Vector Group Ltd. and Wells
Fargo Bank, N. A., as trustee, relating to the 7.5% Variable Interest Senior Convertible
Notes due 2019 (incorporated by reference to Exhibit 4.1 of Vector’s Form 8-K dated
November 20, 2012).

Indenture, dated as of November 20, 2012,

First Supplemental
to the Indenture dated
November 20, 2012, by and between Vector Group Ltd. and Wells Fargo Bank, N. A., as
trustee, relating to the 7.5% Variable Interest Senior Convertible Notes due 2019 (incorporated
by reference to Exhibit 4.2 of Vector’s Form 8-K dated November 20, 2012).

67

EXHIBIT NO.

DESCRIPTION

*4.6

*4.7

*4.8

*4.9

*4.10

*4.11

*4.12

*4.13

*10.1

*10.2

*10.3

*10.4

*10.5

*10.6

*10.7

*10.8

Second Supplemental Indenture, dated as of March 24, 2014, to the Base Indenture, by and
between Vector Group Ltd. and Wells Fargo Bank, National Association, as
trustee
(incorporated by reference to Exhibit 4.2 of Vector’s Form 8-K dated March 24, 2014).

Form of Global Note, relating to the 7.5% Variable Interest Senior Convertible Notes due
of Vector’s Form 8-K dated
(incorporated
2019
November 20, 2012).

to Exhibit

reference

4.3

by

Form of Global Note, relating to the 5.5% Variable Interest Senior Convertible Notes due
2020 (incorporated by reference to Exhibit 4.3 of Vector’s Form 8-K dated March 24, 2014).

Indenture, dated as of January 27, 2017, among Vector Group Ltd., the guarantors named
therein and U.S. Bank National Association, as trustee (incorporated by reference to
Exhibit 4.1 of Vector’s Form 8-K dated January 27, 2017).

Pledge Agreement, dated as of January 27, 2017, between VGR Holding LLC and U.S. Bank
National Association, as collateral agent (incorporated by reference to Exhibit 4.2 of Vector’s
Form 8-K dated January 27, 2017).

Security Agreement, dated as of January 27, 2017, by and between Vector Tobacco Inc. and
U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 4.3
of Vector’s Form 8-K dated January 27, 2017).
Security Agreement, dated as of January 27, 2017, among Liggett Group LLC, 100 Maple
LLC and U.S. Bank National Association, as collateral agent (incorporated by reference to
Exhibit 4.4 of Vector’s Form 8-K dated January 27, 2017).
Amended and Restated Intercreditor and Lien Subordination Agreement, dated as of
January 27, 2017, among Liggett Group LLC, 100 Maple LLC, U.S. Bank National
Association and Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 4.5 of Vector’s Form 8-K dated January 27, 2017).
Corporate Services Agreement, dated as of June 29, 1990, between Vector and Liggett
(incorporated by reference to Exhibit 10.10 in Liggett’s Registration Statement on Form S-1,
No. 33-47482).
Services Agreement, dated as of February 26, 1991, between Brooke Management Inc.
(‘‘BMI’’) and Liggett (the ‘‘Liggett Services Agreement’’) (incorporated by reference to
Exhibit 10.5 in VGR Holding’s Registration Statement on Form S-1, No. 33-93576).
First Amendment to Liggett Services Agreement, dated as of November 30, 1993, between
Liggett and BMI (incorporated by reference to Exhibit 10.6 in VGR Holding’s Registration
Statement on Form S-1, No. 33-93576).
Second Amendment to Liggett Services Agreement, dated as of October 1, 1995, between
BMI, Vector and Liggett (incorporated by reference to Exhibit 10(c) in Vector’s Form 10-Q
for the quarter ended September 30, 1995).
Third Amendment
to Liggett Services Agreement, dated as of March 31, 2001, by and
between Vector and Liggett (incorporated by reference to Exhibit 10.5 in Vector’s Form 10-K
for the year ended December 31, 2003).

Fourth Amendment to Service Agreement dated as of October 4, 2006, between Vector Group
Ltd. and Liggett Group LLC (incorporated by reference to Exhibit 10.1 in Vector’s Form 10-Q
dated June 30, 2012).

Fifth Amendment to Service Agreement dated as of November 30, 2011, between Vector
Group Ltd. and Liggett Group LLC (incorporated by reference to Exhibit 10.2 in Vector’s
Form 10-Q dated June 30, 2012).

Corporate Services Agreement, dated January 1, 1992, between VGR Holding and Liggett
(incorporated by reference to Exhibit 10.13 in Liggett’s Registration Statement on Form S-1,
No. 33-47482).

68

EXHIBIT NO.

*10.9

*10.10

*10.11

*10.12

*10.13

*10.14

*10.15

*10.16

*10.17

*10.18

*10.19

*10.20

*10.21

*10.22

DESCRIPTION

Service Agreement dated as of October 1, 2006 between Vector Group Ltd. and Vector
Tobacco Ltd. (incorporated by reference to Exhibit 10.3 in Vector’s Form 10-Q dated
June 30, 2012).

Tax sharing agreement dated May 24, 1999 between Brooke Group Ltd., BGLS Inc., Liggett
Group Inc., Epic Holdings Inc., and Carolina Tobacco Express Company Inc. (incorporated by
reference to Exhibit 10.4 in Vector’s Form 10-Q dated June 30, 2012).

Settlement Agreement, dated March 15, 1996, by and among the State of West Virginia, State
of Florida, State of Mississippi, Commonwealth of Massachusetts, and State of Louisiana,
(incorporated by reference to Exhibit 15 in the
Brooke Group Holding and Liggett
Schedule 13D ﬁled by Vector on March 11, 1996, as amended, with respect to the common
stock of RJR Nabisco Holdings Corp.).

Addendum to Initial States Settlement Agreement (incorporated by reference to Exhibit 10.43
in Vector’s Form 10-Q for the quarter ended March 31, 1997).

Settlement Agreement, dated March 12, 1998, by and among the States listed in Appendix A
thereto, Brooke Group Holding and Liggett (incorporated by reference to Exhibit 10.35 in
Vector’s Form 10-K for the year ended December 31, 1997).

Master Settlement Agreement made by the Settling States and Participating Manufacturers
signatories thereto (incorporated by reference to Exhibit 10.1 in Philip Morris Companies
Inc.’s Form 8-K dated November 25, 1998, Commission File No. 1-8940).
General Liggett Replacement Agreement, dated as of November 23, 1998, entered into by
each of the Settling States under the Master Settlement Agreement, and Brooke Group
Holding and Liggett (incorporated by reference to Exhibit 10.34 in Vector’s Form 10-K for
the year ended December 31, 1998).
Stipulation and Agreed Order regarding Stay of Execution Pending Review and Related
Matters, dated May 7, 2001, entered into by Philip Morris Incorporated, Lorillard Tobacco
Co., Liggett and Brooke Group Holding Inc. and the class counsel in Engel, et. al., v. R.J.
Reynolds Tobacco Co., et. al. (incorporated by reference to Exhibit 99.2 in Philip Morris
Companies Inc.’s Form 8-K dated May 7, 2001).
Term Sheet agreed to by Liggett, certain other Participating Manufacturers, 18 states, the
District of Columbia and Puerto Rico (incorporated by reference to Exhibit 10.1 to Reynolds
American Inc.’s (Commission File Number 1-32258) Form 8-K, dated March 12, 2013).
Settlement Agreement as of October 22, 2013, by, between and among: (a) Liggett and Vector
and (b) Plaintiffs’ Coordinating Counsel, Participating Plaintiffs’ Counsel, and their respective
clients who are plaintiffs in certain Engle Progeny Actions (incorporated by reference to
Exhibit 10.18 to Vector’s Form 10-K for the year ended December 31, 2013).
Settlement Agreement as of October 22, 2013, by, between and among: (a) Liggett Group
LLC and Vector, and (b) Plaintiffs’ Coordinating Counsel, The Wilner Firm, and The Wilner
Firm’s clients who are plaintiffs in certain federal and state Engle Progeny Actions
(incorporated by reference to Exhibit 10.19 to Vector’s Form 10-K for the year ended
December 31, 2013).

Amended and Restated Employment Agreement dated as of January 27, 2006, between Vector
and Howard M. Lorber (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated
January 27, 2006).

Employment Agreement, dated as of January 27, 2006, between Vector and Richard J.
Lampen (incorporated by reference
to Exhibit 10.3 in Vector’s Form 8-K dated
January 27, 2006).

Amendment to the Employment Agreement dated as of February 22, 2012 between Vector
Group Ltd. and Richard J. Lampen (incorporated by reference to Exhibit 10.3 in Vector’s
Form 8-K/A dated February 21, 2012).

69

EXHIBIT NO.

*10.23

*10.24

*10.25

*10.26

*10.27

*10.28

*10.29

*10.30

*10.31

*10.32

*10.33

*10.34

*10.35

*10.36

*10.37

*10.38

*10.39

*10.40

*10.41

DESCRIPTION

Amended and Restated Employment Agreement, dated as of January 27, 2006, between Vector
and Marc N. Bell (incorporated by reference to Exhibit 10.4 in Vector’s Form 8-K dated
January 27, 2006).

Employment Agreement, dated as of November 11, 2005, between Liggett Group Inc. and
Ronald J. Bernstein (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated
November 11, 2005).

Amendment to Employment Agreement, dated as of January 14, 2011, between Liggett and
Ronald J. Bernstein (incorporated by reference to Exhibit 10.17 in Vector’s Form 10-K for the
year ended December 31, 2011).

Amendment to Employment Agreement, dated as of October 29, 2013, between Liggett and
Ronald J. Bernstein (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated
October 28, 2013).

Employment Agreement, dated as of January 27, 2006, between Vector and J. Bryant Kirkland
III (incorporated by reference to Exhibit 10.5 in Vector’s Form 8-K dated January 27, 2006).

Amendment
to Employment Agreement, dated as of February 29, 2016, by and between
Vector Group Ltd. and J. Bryant Kirkland III (incorporated by reference to Exhibit 10.1 in
Vector’s Form 8-K/A dated February 29, 2016).
Vector Group Ltd. Amended and Restated 1999 Long-Term Incentive Plan (incorporated by
reference to Appendix A in Vector’s Proxy Statement dated April 21, 2004).
Vector Group Ltd. Management Incentive Plan (incorporated by reference to Exhibit 10.3 of
Vector’s Form 8-K dated March 10, 2014).
Stock Option Agreement, dated December 3, 2009, between Vector and Richard J. Lampen
(incorporated by reference to Exhibit 10.19 in Vector’s Form 10-K dated December 31, 2009).
Stock Option Agreement, dated December 3, 2009, between Vector and Marc N. Bell
(incorporated by reference to Exhibit 10.20 in Vector’s Form 10-K dated December 31, 2009).
Stock Option Agreement, dated December 3, 2009, between Vector and Howard M. Lorber
(incorporated by reference to Exhibit 10.22 in Vector’s Form 10-K dated December 31, 2009).
Stock Option Agreement, dated December 3, 2009, between Vector and J. Bryant Kirkland III
(incorporated by reference to Exhibit 10.23 in Vector’s Form 10-K dated December 31, 2009).
Stock Option Agreement, dated January 14, 2011, between Vector and Howard M. Lorber
(incorporated by reference to Exhibit S to Schedule 13D, as amended, dated January 21, 2011
ﬁled by Howard M. Lorber).
Stock Option Agreement, dated February 26, 2013, between Vector and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 to Vector’s Form 10-Q dated March 31, 2013).
Stock Option Agreement, dated February 26, 2013, between Vector and Richard J. Lampen
(incorporated by reference to Exhibit 10.2 to Vector’s Form 10-Q dated March 31, 2013).

Stock Option Agreement, dated February 26, 2013, between Vector and J. Bryant Kirkland III
(incorporated by reference to Exhibit 10.3 to Vector’s Form 10-Q dated March 31, 2013).

Stock Option Agreement, dated February 26, 2013, between Vector and Marc N. Bell
(incorporated by reference to Exhibit 10.4 to Vector’s Form 10-Q dated March 31, 2013).

Stock Option Agreement, dated February 26, 2014, as amended on May 16, 2014, between
Vector and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 to Vector’s
Form 10-Q dated June 30, 2014).

Stock Option Agreement, dated February 26, 2014, as amended on May 16, 2014, between
Vector and Richard J. Lampen (incorporated by reference to Exhibit 10.2 to Vector’s
Form 10-Q dated June 30, 2014).

70

EXHIBIT NO.

*10.42

*10.43

*10.44

*10.45

*10.46

*10.47

*10.48

*10.49

*10.50

*10.51

*10.52

*10.53

*10.54

*10.55

*10.56

*10.57

*10.58

*10.59

DESCRIPTION

Stock Option Agreement, dated February 26, 2014, as amended on May 16, 2014, between
Vector and J. Bryant Kirkland III (incorporated by reference to Exhibit 10.3 to Vector’s
Form 10-Q dated June 30, 2014).

Stock Option Agreement, dated February 26, 2014, as amended on May 16, 2014, between
Vector and Marc N. Bell (incorporated by reference to Exhibit 10.44 to Vector’s Form 10-K
dated December 31, 2015).

Stock Option Agreement, dated February 24, 2015 between Vector and Howard M. Lorber
(incorporated by reference to Exhibit 10.3 to Vector’s Form 10-Q dated March 31, 2015).

Stock Option Agreement, dated February 24, 2015 between Vector and Richard J. Lampen
(incorporated by reference to Exhibit 10.4 to Vector’s Form 10-Q dated March 31, 2015).

Stock Option Agreement, dated February 24, 2015 between Vector and J. Bryant Kirkland III
(incorporated by reference to Exhibit 10.5 to Vector’s Form 10-Q dated March 31, 2015).

Stock Option Agreement, dated February 24, 2015 between Vector and Marc N. Bell
(incorporated by reference to Exhibit 10.6 to Vector’s Form 10-Q dated March 31, 2015).

Stock Option Agreement, dated February 29, 2016 between Vector and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 to Vector’s Form 10-Q dated March 31, 2016).

Stock Option Agreement, dated February 29, 2016 between Vector and Richard J. Lampen
(incorporated by reference to Exhibit 10.2 to Vector’s Form 10-Q dated March 31, 2016).
Stock Option Agreement, dated February 29, 2016 between Vector and J. Bryant Kirkland III
(incorporated by reference to Exhibit 10.3 to Vector’s Form 10-Q dated March 31, 2016).
Stock Option Agreement, dated February 29, 2016 between Vector and Marc N. Bell
(incorporated by reference to Exhibit 10.4 to Vector’s Form 10-Q dated March 31, 2016).
Restricted Share Award Agreement, dated as of October 28, 2013, between Vector Group Ltd.
and Ronald J. Bernstein (incorporated by reference to Exhibit 10.42 to Vector’s Form 10-K
for the year ended December 31, 2013).
Performance-Based Restricted Share Award Agreement, pursuant
to Vector Group Ltd.
Management Incentive Plan, dated as of July 23, 2014 by and between Vector Group Ltd. and
Howard M. Lorber (incorporated by reference to Exhibit 10.6 of Schedule 13D as ﬁled by
Howard M. Lorber on July 25, 2014).
Performance-Based Restricted Share Award Agreement, pursuant
to Vector Group Ltd.
Management Incentive Plan, dated as of November 10, 2015 by and between Vector Group
Ltd. and Howard M. Lorber (incorporated by reference to Exhibit 10.1 of Vector’s Form 8-K
dated November 10, 2015).
Vector Senior Executive Incentive Compensation Plan (incorporated by reference to
Exhibit 10.1 in Vector’s Form 8-K dated January 14, 2011).

Vector Supplemental Retirement Plan (as amended and restated April 24, 2008) (incorporated
by reference to Exhibit 10.1 in Vector’s Form 10-Q for the quarter ended June 30, 2008).

Operating Agreement of Douglas Elliman Realty, LLC (formerly known as Montauk Battery
Realty LLC) dated December 17, 2002 (incorporated by reference to Exhibit 10.1 in New
Valley’s Form 8-K dated December 13, 2002).

First Amendment to Operating Agreement of Douglas Elliman Realty, LLC (formerly known
as Montauk Battery Realty LLC), dated as of March 14, 2003 (incorporated by reference to
Exhibit 10.1 in New Valley’s Form 10-Q for the quarter ended March 31, 2003).

Second Amendment to Operating Agreement of Douglas Elliman Realty, LLC, dated as of
May 19, 2003 (incorporated by reference to Exhibit 10.1 in New Valley’s Form 10-Q for the
quarter ended June 30, 2003).

71

EXHIBIT NO.

*10.60

*10.61

*10.62

*10.63

*10.64

*10.65

*10.66

12.1

*16.1

21
23.1
23.2
31.1

31.2

32.1

32.2

99.1

DESCRIPTION

Settlement Agreement and Mutual Release by and among (i) Prudential Real Estate Financial
Services of America Inc. and (ii) Douglas Elliman Realty LLC; Dorothy Herman; DTHY
Realty, Inc.; New Valley Real Estate LLC; New Valley Mortgage LLC; Howard M. Lorber
and Richard J. Lampen dated December 13, 2013 (incorporated by reference to Exhibit 10.48
to Vector’s Form 10-K for the year ended December 31, 2013).

Agreement Relating to Sale and Assignment of Membership Interest between New Valley Real
Estate LLC and Prudential Real Estate Financial Services of America, Inc. (incorporated by
reference to Exhibit 10.49 to Vector’s Form 10-K for the year ended December 31, 2013).

Office Lease, dated as of September 10, 2012, between Vector Group Ltd. and Frost Real
Estate Holdings, LLC. (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated
September 10, 2012).

First Amendment, dated as of November 12, 2012, to Office Lease, dated as of September 10,
2012, between Vector Group Ltd. and Frost Real Estate Holdings, LLC. (incorporated by
reference to Exhibit 10.40 of Vector’s Form 10-K dated December 31, 2012).

Vector Group Ltd. Equity Retention and Hedging Policy (incorporated by reference to
Exhibit 10.1 of Vector’s Form 8-K dated January 15, 2013).

Vector Group Ltd. Stock Ownership Guidelines (incorporated by reference to Exhibit 10.1 of
Vector’s Form 8-K dated March 10, 2014).
Vector Group Ltd. Stock Executive Compensation Clawback Policy (incorporated by reference
to Exhibit 10.2 of Vector’s Form 8-K dated March 10, 2014).
Computation of Ratio of Earnings to Fixed Charges for each of the ﬁve years within the
period ended December 31, 2016.
Letter of PwC to the Securities and Exchange Commission, dated June 11, 2015 (incorporated
by reference to Exhibit 16.1 of Vector’s Form 8-K dated June 8, 2015).
Subsidiaries of Vector.
Consent of PricewaterhouseCoopers LLP.
Consent of Deloitte & Touche LLP.
Certiﬁcation of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certiﬁcation of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certiﬁcation of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certiﬁcation of Chief Financial Officer, Pursuant
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Material Legal Proceedings.

to 18 U.S.C. Section 1350, as Adopted

*

Incorporated by reference

Each management contract or compensatory plan or arrangement required to be ﬁled as an exhibit to this

report pursuant to Item 14(c) is listed in exhibit nos. 10.20 through 10.48.

72

SIGNATURES

Pursuant

to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,

the
to be signed on its behalf by the undersigned thereunto duly

Registrant has duly caused this Report
authorized.

VECTOR GROUP LTD.
(Registrant)

By: /s/ J. Bryant Kirkland III
J. Bryant Kirkland III
Senior Vice President,
Chief Financial Officer and Treasurer

Date: March 1, 2017

POWER OF ATTORNEY

The undersigned directors and officers of Vector Group Ltd. hereby constitute and appoint Richard J.
Lampen, J. Bryant Kirkland III and Marc N. Bell, and each of them, with full power to act without the other
and with full power of substitution and resubstitutions, our true and lawful attorneys-in-fact with full power to
execute in our name and behalf in the capacities indicated below, this Annual Report on Form 10-K and any
and all amendments thereto and to ﬁle the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, and hereby ratify and conﬁrm all
that such
attorneys-in-fact, or any of them, or their substitutes shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities indicated on March 1, 2017.

SIGNATURE

TITLE

/s/ Howard M. Lorber
Howard M. Lorber

/s/ J. Bryant Kirkland III
J. Bryant Kirkland III

/s/ Bennett S. LeBow
Bennett S. LeBow

/s/ Stanley S. Arkin
Stanley S. Arkin

/s/ Henry C. Beinstein
Henry C. Beinstein

/s/ Ronald J. Bernstein
Ronald J. Bernstein

/s/ Jeffery S. Podell
Jeffery S. Podell

/s/ Jean E. Sharpe
Jean E. Sharpe

President and Chief Executive Officer
(Principal Executive Officer)

Senior Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

Director

Director

Director

Director

Director

Director

73

[This page intentionally left blank.] 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
VECTOR GROUP LTD.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2016
ITEMS 8, 15(a)(1) AND (2), 15(c)

INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

Financial Statements and Schedules of the Registrant and its subsidiaries required to be included in

Items 8, 15(a) (1) and (2), 15(c) are listed below:

FINANCIAL STATEMENTS:

Vector Group Ltd. Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . .

Reports of Independent Registered Certiﬁed Public Accounting Firm . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets as of December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations for the years ended December 31, 2016, 2015

and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016,

2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Stockholders’ Deﬁciency for the years ended December 31, 2016,

2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015

and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

F-2

F-3

F-4

F-5

F-6

F-7

F-9

F-11

FINANCIAL STATEMENT SCHEDULE:

Schedule II — Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-96

Financial Statement Schedules not listed above have been omitted because they are not applicable or the

required information is contained in our consolidated ﬁnancial statements or accompanying notes.

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Vector Group Ltd.:
Miami, Florida

We have audited the accompanying consolidated balance sheets of Vector Group Ltd. and subsidiaries
(the ‘‘Company’’) as of December 31, 2016 and 2015, and the related consolidated statements of operations,
comprehensive income, stockholders’ deﬁciency, and cash ﬂows for the years then ended. Our audit also
included the ﬁnancial statement schedule listed in the Index at Item 15. These ﬁnancial statements and
ﬁnancial statement schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these ﬁnancial statements and ﬁnancial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the ﬁnancial statements are free of material misstatement. An audit
includes
examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An
audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as
well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, such consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial
position of Vector Group Ltd. and subsidiaries as of December 31, 2016 and 2015, and the results of their
operations and their cash ﬂows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such ﬁnancial statement schedule, when
considered in relation to the basic consolidated ﬁnancial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over ﬁnancial reporting as of December 31, 2016, based
on Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 1, 2017 expressed an unqualiﬁed opinion on the
Company’s internal control over ﬁnancial reporting.

Certiﬁed Public Accountants
Miami, Florida
March 1, 2017

F-2

Report of Independent Registered Certiﬁed Public Accounting Firm

To the Board of Directors and Stockholders
of Vector Group Ltd

In our opinion, the consolidated statement of operations, comprehensive income, stockholders’ deﬁciency
and cash ﬂows for the year ended December 31, 2014 present fairly, in all material respects, the results of
operations and cash ﬂows of Vector Group Ltd. and its subsidiaries for the year ended December 31, 2014, in
conformity with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the ﬁnancial statement schedule for the year ended December 31, 2014, presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated ﬁnancial
statements. These ﬁnancial statements and ﬁnancial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these ﬁnancial statements and ﬁnancial statement
schedule based on our audit. We conducted our audit of these ﬁnancial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the ﬁnancial statements, assessing the accounting principles used and signiﬁcant estimates made
by management, and evaluating the overall ﬁnancial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Miami, Florida
March 4, 2015, except for Note 6(c), Note 7(a) and Note 7(b), as to which date is March 8, 2016 and Note 2,
as to which date is March 1, 2017

F-3

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS:

Current assets:

Total current assets

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable − trade, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in real estate, net
Long-term investments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in real estate ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted assets
Goodwill and other intangible assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total assets

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY:
Current liabilities:

Total current liabilities

Current portion of notes payable and long-term debt . . . . . . . . . . . . . . . . . . . .
Current payments due under the Master Settlement Agreement
. . . . . . . . . . . . .
Current portion of employee beneﬁts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable, net
Litigation accruals
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, long-term debt and other obligations, less current portion . . . . . . . . .
Fair value of derivatives embedded within convertible debt
. . . . . . . . . . . . . . . . .
Non-current employee beneﬁts
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Payments due under the Master Settlement Agreement
Litigation accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies (Notes 10 and 15)
Stockholders’ deﬁciency:

December 31,
2016

December 31,
2015
(Dollars in thousands,
except per share amounts)

$ 393,530
156,903
18,801
89,834
16,110
7,330
22,955
705,463
80,448
23,640
53,197
221,258
3,986
261,918
22,273
31,852
$1,404,035

$

39,508
16,192
937
—
3,659
135,852
196,148
1,132,943
112,332
58,958
93,085
22,257
27,513
14,071
1,657,307

$ 240,368
181,976
23,889
86,516
2,841
9,195
38,954
583,739
75,632
23,318
62,726
217,168
12,303
263,959
20,650
21,120
$1,280,615

$

8,919
29,241
915
96
22,904
154,217
216,292
856,108
144,042
55,055
79,429
20,094
24,718
7,038
1,402,776

Preferred stock, par value $1.00 per share, 10,000,000 shares authorized . . . . . . .
Common stock, par value $0.10 per share, 250,000,000 shares authorized,

127,739,481 and 123,792,329 shares issued and outstanding . . . . . . . . . . . . .
Accumulated deﬁcit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Vector Group Ltd. stockholders’ deﬁciency . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ deﬁciency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ deﬁciency . . . . . . . . . . . . . . . . . . . . . . .

Non-controlling interest

—

—

12,774
(333,529)
(11,245)
(332,000)
78,728
(253,272)
$1,404,035

12,379
(210,113)
(8,313)
(206,047)
83,886
(122,161)
$1,280,615

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

F-4

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,
2015
(Dollars in thousands, except per share amounts)

2014

2016

Revenues

Tobacco* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E-cigarettes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,011,620
680,105
(776)
1,690,949

$1,017,761
641,406
(1,970)
1,657,197

$1,021,259
561,467
8,589
1,591,315

Expenses:

Cost of sales:

Tobacco* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate
E-cigarettes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating, selling, administrative and general expenses . . . .
Litigation settlement and judgment expense . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

672,431
424,829
84
1,097,344
340,567
20,000
41
232,997

697,900
410,287
1,540
1,109,727
320,221
20,072
7,257
199,920

735,725
354,028
7,307
1,097,060
279,342
2,475
—
212,438

Other income (expenses):

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of derivatives embedded within

convertible debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acceleration of interest expense related to debt conversion . .
Equity in (losses) earnings from investments . . . . . . . . . . .
Gain (loss) on sale of investment securities available

for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings from real estate ventures . . . . . . . . . . . .
Impairment of investment securities available for sale . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before provision for income taxes . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributed to non-controlling interest
. . . . . . . . . .
Net income attributed to Vector Group Ltd. . . . . . . . . . . . . . .

Per basic common share:

Net income applicable to common share attributed to Vector
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Group Ltd.

Per diluted common share:

Net income applicable to common share attributed to Vector
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash distributions declared per share . . . . . . . . . . . . . . . . . .

Group Ltd.

(142,982)

(120,691)

(160,991)

31,710
—
(2,754)

2,907
5,200
(5,381)
4,732
126,429
49,163
77,266
(6,139)
71,127

0.56

0.55
1.54

$

$

$
$

24,455
—
(2,681)

11,138
2,001
(12,846)
6,409
107,705
41,233
66,472
(7,274)
59,198

0.46

0.46
1.47

$

$

$
$

19,409
(5,205)
3,140

(11)
4,103
—
9,396
82,279
33,165
49,114
(12,258)
36,856

0.32

0.32
1.40

$

$

$
$

*

Revenues and cost of sales include federal excise taxes of $425,980, $439,647 and $446,086 for the years
ended December 31, 2016, 2015 and 2014, respectively.

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

F-5

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net unrealized (losses) gains on investment securities available for

sale:

Year Ended December 31,
2015
(Dollars in thousands)
$ 66,472

2014

$ 49,114

2016

$77,266

Change in net unrealized (losses) gains . . . . . . . . . . . . . . . . . . . . .
Net unrealized losses reclassiﬁed into net income . . . . . . . . . . . . . .
Net unrealized (losses) gains on investment securities available for

(6,139)
2,474

(12,710)
1,708

2,095
11

sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,665)

(11,002)

2,106

Net unrealized gains (losses) on long-term investments accounted for

under the equity method:

Change in net unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . .
Net unrealized losses reclassiﬁed into net income . . . . . . . . . . . . . .
Net unrealized gains (losses) on long-term investments accounted

for under the equity method . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in pension-related amounts

Net gain arising during the year . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Net change in pension-related amounts
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income tax effect on:

—
—

—
28

1,190
1,624

2,814
61

(3,064)
1,780
(1,284)
(4,921)

(8,620)
4,200
(4,420)
(12,547)

(1,784)
—

(1,784)
64

(4,698)
1,015
(3,683)
(3,297)

Change in net unrealized (losses) gains on investment securities . .
Net unrealized losses reclassiﬁed into net income on investment

2,490

5,650

(866)

securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,004)

Change in unrealized gains (losses) on long-term investments

accounted for under the equity method . . . . . . . . . . . . . . . . . .

—

Net unrealized losses reclassiﬁed into net income on long-term

investments accounted for under the equity method . . . . . . . . .
Forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension-related amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax beneﬁt on other comprehensive income . . . . . . . .
Other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
Comprehensive income attributed to non-controlling interest
. . . . . . . . . .
Comprehensive income attributed to Vector Group Ltd.

—
(11)
514
1,989
(2,932)
74,334
(6,139)
$68,195

(702)

(484)

(672)
(25)
1,810
5,577
(6,970)
59,502
(7,274)
$ 52,228

(5)

738

—
(27)
1,523
1,363
(1,934)
47,180
(12,258)
$ 34,922

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

F-6

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

Common Stock
Shares

Amount

Additional
Paid-In
Capital

. 97,482,998 $ 9,748
—
—
.

$

Accumulated
Other
Comprehensive
Income (Loss)

Accumulated
Deﬁcit
(Dollars in thousands)
591
—

— $(121,514)
36,856
—

$

.

.

.

.

.

.
.

.
.

.
.

.
.

.
.

Balance, January 1, 2014 .
.
.
Net income .

.
.
.
Change in net loss and prior service
.
Forward contract adjustments, net of
.
.
.

cost, net of income taxes .

.
Unrealized loss on long-term

income taxes

.

.

.

.

.

.

.

.

.

.

.
.

.

.

investment securities accounted for
under the equity method, net of
.
.
.
income taxes
Change in net unrealized gain on

.

.

.

.

.

.

.

.

.

.

.

.

.

.

investment securities, net of income
.
.
.
taxes
Net unrealized loss reclassiﬁed into net
.

income, net of income taxes .
Unrealized gain on investment

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.
.

.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

$300 .

stock .

securities, net of income taxes

Total other comprehensive loss
.

.
.
Total comprehensive income
.
Distributions and dividends on common
.
.
.
.
.
.
.
Restricted stock grant
Effect of stock dividend .
.
Note conversion, net of income taxes of
.
.

.
.
Beneﬁcial conversion feature of notes
payable, net of income taxes of
.
.
$10,327 .
.

.
.
.
.
Exercise of stock options
.
.
Tax beneﬁt of options exercised
Stock-based compensation .
.
.
Contributions from non-controlling
.
.
.
.
.
Distributions to non-controlling
.
.
.
Balance, December 31, 2014 .
.
.
.
Net income .

.
.
.
.
Change in net loss and prior service
.
Forward contract adjustments, net of
.
.
.

cost, net of income taxes .

.
Unrealized gain on long-term

income taxes

.
.
.
.

.

.
.
.

.

.

interest .

interest .

.
.
.
.

.

.
.
.
.

.
.
.

.
.
.

.
.
.

.
.

.
.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

investment securities accounted for
under the equity method, net of
.
.
income taxes

.
Change in net unrealized loss on

.

.

.

.

.

.

.

.

.

.

.

.

.

.

investment securities, net of income
.
.
.
taxes
Net unrealized loss reclassiﬁed into net
.

income, net of income taxes .
Unrealized loss on investment

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

securities, net of income taxes

Total other comprehensive loss
.

Total comprehensive income

.

.

.
.

.

. .
.
.
.
.

.

.

.

.

.

.
.
.

.
.
.

—

—

—

—

—

—
—
—

—

—

—

—

—

—
—
—

—

—

—

—

—

—
—
—

—

—

—

—

—

—
—
—

—
1,000,000
5,195,856

— (155,067)
—
—

100
520

(11,831)
—
(520)

. 10,417,384

1,041

130,980

.
.
.
.

.

—
404,776
—
—

—

—
41
—
—

—

.
—
. 114,501,014
—
.

—
11,450
—

—

—

—

—

—

—
—
—

—

—

—

—

—

—
—
—

14,648
5,010
1,178
3,251

—

—
—
—

—

—

—

—

—

—
—
—

—

—
—
—
—

—

—
(97,009)
59,198

—

—

—

—

—

—
—
—

Treasury
Stock

Non-
controlling
Interest

Total

$(12,857)
—

$73,427
12,258

$ (50,605)
49,114

—

—

—

—

—

—
—

—
—
—

—

—
—
—
—

—

—

—

—

—

—

—
—

(2,160)

37

(1,046)

1,229

6

1,235
(1,934)
47,180

— (166,898)
100
—
—
—

—

—
—
—
—

132,021

14,648
5,051
1,178
3,251

2,733

2,733

—
(12,857)
—

(9,339)
79,079
7,274

—

—

—

—

—

—
—
—

—

—

—

—

—

—
—
—

(9,339)
(20,680)
66,472

(2,610)

36

1,658

(7,060)

1,006

(6,054)
(6,970)
59,502

(2,160)

37

(1,046)

1,229

6

—
—
—

—
—
—

—

—
—
—
—

—

—
(1,343)
—

(2,610)

36

1,658

(7,060)

1,006

—

—

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

F-7

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY − (continued)

Common Stock
Shares

Amount

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Accumulated
Deﬁcit
(Dollars in thousands)

Treasury
Stock

Non-
controlling
Interest

Total

.

.

.

.

.

.

.

.

.

.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

$367 .

stock .

restricted stock vesting .
.

Distributions and dividends on common
.
.
.

.
.
.
Restricted stock grant
.
Surrender of shares in connection with
.
.

.
.
Effect of stock dividend .
Note conversion, net of income taxes of
. .
.
.
.
.
.
.
.
.
.

.
.
.
.
.
Exercise of stock options
.
.
Cancellation of treasury shares .
.
Tax beneﬁt of options exercised
Stock-based compensation .
.
.
Contributions from non-controlling
.
.
.

.
.
Distributions to non-controlling interest .
.
Balance, December 31, 2015 .
.
.
.
.
Net income .

.
.
.
Change in net loss and prior service
.
Forward contract adjustments, net of
.
.
.

cost, net of income taxes .

.
Change in net unrealized loss on

income taxes

interest .

.
.
.
.
.

.

.

.
.

.
.

.
.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

investment securities, net of income
.
.
.
taxes
Net unrealized loss reclassiﬁed into net
.

income, net of income taxes .
Unrealized loss on investment

.

.

.

.

.

.

.

.

.

.

.
.

.
.

.
.
.
.
.

.

.

.

.

.

.

.
.

securities, net of income taxes

Total other comprehensive loss
.

. .
.
.
Total comprehensive income
.
.
Distributions and dividends on common
.
.
.

.
.
.
Restricted stock grant
.
Surrender of shares in connection with
.
.

stock .

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.

.

.

.

.

.

.
.

.
.

.
.

.
.

restricted stock vesting .
.

.
Effect of stock dividend .
.
Cancellation of shares under share
.
.

.
.
.
lending agreement .
.
Exercise of stock options
.
.
Tax beneﬁt of options exercised
Stock-based compensation .
.
.
Contributions from non-controlling
.
.
.
.
.
Distributions to non-controlling
.
.
.
Balance, December 31, 2016 .

interest .

interest .

.
.

.
.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.
.
.
.

.

.
.

.
.
.
.

.

.
.

.
.

.
.
.
.

.

.
.

.
.

.
.
.
.

.

—
1,200,000

— (18,120)
—

120

(171,718)
—

(83,411)
5,837,144

(8)
584

(2,075)
—

—
(584)

2,227,552
110,030
—
—
—

25,299
223
10
1,311
— (12,857)
821
—
5,621
—

—
.
.
—
. 123,792,329
—
.

—
—
12,379
—

—

—

—

—

—
—
—

—
50,000

(187,577)
6,087,035

(2,034,212)
31,906
—
—

—

—

—

—

—
—
—

—
5

(18)
609

(204)
3
—
—

—
—
—
—

—

—

—

—

—
—
—

(7,173)
(5)

(4,034)
—

204
395
579
10,034

—

—

—

—
—

—
—

—
—
—
—
—

—
—
(8,313)
—

(770)

17

(3,629)

1,450

—

—

—
—

—
—

—
—
—
—

—

—
—

—
—

—
—
12,857
—
—

—
—
—
—

—

—

—

—

—
—
—

—
—

—
—

—
—
—
—

—

— (189,838)
120
—

—
—

—
—
—
—
—

(2,083)
—

25,522
1,321
—
821
5,621

813
(3,280)
83,886
6,139

813
(3,280)
(122,161)
77,266

—

—

—

—

—
—
—

(770)

17

(3,629)

1,450

(2,179)
(2,932)
74,334

— (201,107)
—
—

—
—

—
—
—
—

(4,052)
—

—
398
579
10,034

248

248

—
—
—
—
—

—
—
(210,113)
71,127

—

—

—

—

—
—
—

(193,934)
—

—
(609)

—
—
—
—

—

.
—
—
. 127,739,481 $12,774

$

—
—
— $(333,529)

—
$(11,245)

—

(11,545)
$ — $ 78,728

(11,545)
$(253,272)

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

F-8

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash ﬂows from operating activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 77,266

$ 66,472

$ 49,114

2016

Year Ended December 31,
2015
(Dollars in thousands)

2014

Adjustments to reconcile net income to net cash provided by

operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
Non-cash stock-based expense
. . . . . . . . . . . . . . . . . . . .
Acceleration of interest expense related to debt conversion . .
(Gain) loss on sale of assets . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from long-term investments . . . . . . . . . . . . .
Gain on liquidation of long-term investments accounted for

at cost

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in losses (earnings) from long-term investments . . . .
(Gain) loss on sale of investment securities available

for sale

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Equity in earnings from real estate ventures
Distributions from real estate ventures . . . . . . . . . . . . . . .
Non-cash interest expense
. . . . . . . . . . . . . . . . . . . . . . .
Impairment of investment securities . . . . . . . . . . . . . . . . .
Impairment of long-term investments . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Impairment of real estate, net

Changes in assets and liabilities:

Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . .
Payments due under the Master Settlement Agreement
. . . .
. . . . . . . . . . . . . . . . . . . .
Other assets and liabilities, net
Net cash provided by operating activities . . . . . . . . . . . . . . .

22,359
10,034
—
(42)
12,571
1,347

(189)
2,754

(2,907)
(5,200)
23,446
10,549
5,381
1,587
—

(5,809)
(3,317)
(22,922)
(10,968)
(18,304)
97,636

25,654
5,621
—
77
(13,195)
1,258

—
2,681

(11,138)
(2,001)
5,894
6,504
12,846
811
230

(1,414)
3,806
37,936
(2,796)
5,233
144,479

24,499
3,251
5,205
(540)
22,026
1,416

—
(3,140)

11
(4,103)
5,152
35,584
—
—
—

(11,197)
3,173
5,708
(925)
(27,858)
107,376

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

F-9

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS − (continued)

Cash ﬂows from investing activities:

. . . . . . . . . . . . . . . . . . . . . . .
Sale of investment securities
Maturities of investment securities
. . . . . . . . . . . . . . . . . . .
Purchase of investment securities . . . . . . . . . . . . . . . . . . . .
Proceeds from sale or liquidation of long-term investments . . .
Purchase of long-term investments
. . . . . . . . . . . . . . . . . . .
Decrease (increase) in restricted assets . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Investments in real estate ventures
Distributions from real estate ventures . . . . . . . . . . . . . . . . .
Issuance of notes receivable . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of ﬁxed assets . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value of life insurance policies . . . .
Purchase of subsidiaries
. . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of notes receivable . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Purchase of preferred securities
. . . . . . . . . . . . . . . . . . .
Pay down of investment securities
. . . . . . . . . . . . . .
Proceeds from sale of preferred securities
. . . . . . . . . . . . . . . .
Investments in real estate held for sale
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . .

Cash ﬂows from ﬁnancing activities:
. . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of debt
Deferred ﬁnancing costs
. . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under revolver . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments on revolver
. . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and distributions on common stock . . . . . . . . . . .
Distributions to non-controlling interest
. . . . . . . . . . . . . . . .
Contributions from non-controlling interest . . . . . . . . . . . . . .
Proceeds from exercise of Vector options . . . . . . . . . . . . . . .
Tax beneﬁt of options exercised . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) ﬁnancing activities . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . .

2016

Year Ended December 31,
2015
(Dollars in thousands)

2014

$ 116,070
10,822
(117,211)
4,552
(50)
10,181
(44,107)
33,204
—
45
(26,691)
(484)
(250)
4,410
—
9,212
—
(245)
(542)

243,620
(5,365)
(6,600)
144,294
(110,614)
(198,947)
(11,545)
248
398
579
56,068
153,162
240,368
$ 393,530

$ 270,576
5,491
(214,146)
1,303
(10,000)
(6,889)
(70,272)
17,563
(4,410)
4
(10,977)
(1,742)
—
4,000
—
8,739
1,000
(12,603)
(22,363)

2,105
(6,684)
(624)
153,361
(167,915)
(188,151)
(3,280)
813
1,441
821
(208,113)
(85,997)
326,365
$ 240,368

$ 154,615
930
(305,731)
2,416
(12,000)
(872)
(40,916)
7,309
(8,250)
4
(23,404)
(484)
(750)
4,850
(1,000)
1,849
—
—
(221,434)

413,914
(12,601)
(12,360)
886,130
(898,788)
(167,328)
(9,339)
—
5,151
1,178
205,957
91,899
234,466
$ 326,365

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

F-10

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation:

The consolidated ﬁnancial statements of Vector Group Ltd. (the ‘‘Company’’ or ‘‘Vector’’) include the
accounts of VGR Holding LLC (‘‘VGR Holding’’), Liggett Group LLC (‘‘Liggett’’), Vector Tobacco Inc.
(‘‘Vector Tobacco’’), Liggett Vector Brands LLC (‘‘Liggett Vector Brands’’), Zoom E-Cigs LLC (‘‘Zoom’’),
New Valley LLC (‘‘New Valley’’) and other less signiﬁcant subsidiaries. New Valley includes the accounts of
Douglas Elliman Realty, LLC (‘‘Douglas Elliman’’) and other less signiﬁcant subsidiaries. All signiﬁcant
intercompany balances and transactions have been eliminated.

Liggett and Vector Tobacco are engaged in the manufacture and sale of cigarettes in the United States.
Zoom is engaged in the sale of electronic cigarettes in the United States. New Valley is engaged in the real
estate business.

Revisions to December 31, 2015 Consolidated Balance Sheet.

In April 2015, the Financial Accounting
Standards Board (‘‘FASB’’) issued Accounting Standard Update (‘‘ASU’’) No. 2015-03, ‘‘Interest-Imputation
of Interest’’, which requires debt issuance costs to be reported in the balance sheet as a direct deduction from
the face amount of the note. The guidance is effective for ﬁnancial statements issued for ﬁscal years beginning
after December 15, 2015. This amendment must be applied retrospectively to all periods presented. The
Company adopted the provisions of this ASU retrospectively in the ﬁrst quarter of 2016, and adjusted all prior
periods accordingly. The adoption of this ASU will simplify the presentation of debt issuance costs and reduce
complexity without decreasing the usefulness of information provided to users of ﬁnancial statements.

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

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .

Total assets

Notes payable, long-term debt and other

December 31, 2015

As Previously
Reported

$
51,261
$1,310,756

ASU Adoption
$(30,141)
$(30,141)

As Revised
$
21,120
$1,280,615

obligations, less current portion . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ deﬁciency . . . . . . . . . . . . .
Total liabilities and stockholders’ deﬁciency . . .

$ 886,249
1,432,917
(122,161)
$1,310,756

$(30,141)
(30,141)
—
$(30,141)

$ 856,108
1,402,776
(122,161)
$1,280,615

(b) Estimates and Assumptions:

The preparation of ﬁnancial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Signiﬁcant estimates subject to material changes in the near term include valuation of
returns and allowances, actuarial
intangible assets,
assumptions of pension plans, the estimated fair value of embedded derivative liabilities, settlement accruals,
valuation of investments, including other-than-temporary impairments to such investments, and litigation and
defense costs. Actual results could differ from those estimates.

inventory valuation, promotional accruals,

sales

F-11

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

(c) Cash and Cash Equivalents:

Cash includes cash on hand, cash on deposit in banks, and money market accounts. Cash equivalents is
comprised of short-term investments which have an original maturity of 90 days or less. Interest on short-term
investments is recognized when earned. The Company places its cash and cash equivalents with large
commercial banks. The Federal Deposit Insurance Corporation (‘‘FDIC’’) and Securities Investor Protection
Corporation (‘‘SIPC’’) insure these balances, up to $250 and $500, respectively. Substantially all of the
Company’s cash balances at December 31, 2016 are uninsured.

(d) Financial Instruments:

The carrying value of cash and cash equivalents, restricted assets, accounts receivable and short-term

loans approximate their fair value.

The fair value of the senior secured notes and the variable interest senior convertible debentures for

the years ended December 31, 2016 and 2015 was estimated based on current market quotations.

As required by authoritative guidance, derivatives embedded within the Company’s convertible debt are
recognized on the Company’s balance sheet and are stated at estimated fair value at each reporting period.
Changes in the fair value of the embedded derivatives are reﬂected quarterly as ‘‘Changes in fair value of
derivatives embedded within convertible debt.’’

The estimated fair values for ﬁnancial instruments presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair values.

(e) Investment Securities:

The Company classiﬁes investments in debt and marketable equity securities as available for sale.
Investments classiﬁed as available for sale are carried at fair value, with net unrealized gains and losses
included as a separate component of stockholders’ deﬁciency. The cost of securities sold is determined based
on average cost. Investments in marketable equity securities represent less than a 20 percent interest in the
investees and the Company does not exercise signiﬁcant inﬂuence over such entities.

Gains are recognized when realized in the Company’s consolidated statements of operations. Losses are
recognized as realized or upon the determination of the occurrence of an other-than-temporary decline in fair
value. The Company’s policy is to review its securities on a periodic basis to evaluate whether any security
has experienced an other-than-temporary decline in fair value. If it is determined that an other-than-temporary
is the Company’s policy to record an
decline exists in one of the Company’s marketable securities,
impairment charge with respect to such investment in the Company’s consolidated statements of operations.

it

(f) Signiﬁcant Concentrations of Credit Risk:

Financial instruments which potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents and trade receivables. The Company places its temporary cash in
money market securities (investment grade or better) with what management believes are high credit quality
ﬁnancial institutions.

Liggett’s customers are primarily candy and tobacco distributors and large grocery, drug and convenience
store chains. Two customers, accounted for 16% and 14% of Liggett’s revenues in 2016 and 19% and 10% in
2015. One customer accounted for 19% of Liggett’s revenues in 2014. Concentrations of credit risk with
respect to trade receivables are generally limited due to the large number of customers, located primarily
throughout the United States, comprising Liggett’s customer base. Liggett’s two largest customers represented
approximately 9% and 3%, respectively, of net accounts receivable at December 31, 2016 and 4% and 1%,

F-12

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

respectively, at December 31, 2015. Liggett’s largest customer represented approximately 11% of net accounts
receivable at December 31, 2014. Ongoing credit evaluations of customers’ ﬁnancial condition are performed
and, generally, no collateral is required. Liggett maintains reserves for potential credit losses and such losses,
in the aggregate, have not exceeded management’s expectations.

(g) Accounts Receivable:

Accounts receivable-trade are recorded at their net realizable value. The allowance for doubtful accounts
and cash discounts was $361 and $479 at December 31, 2016 and 2015, respectively. Uncollectible accounts
are written off when the likelihood of collection is remote and when collection efforts have been abandoned.

(h) Inventories:

Tobacco inventories are stated at

the lower of cost and net realizable value with cost determined
primarily by the last-in, ﬁrst-out (LIFO) method at Liggett and Vector Tobacco. Although portions of leaf
tobacco inventories may not be used or sold within one year because of the time required for aging, they are
included in current assets, which is common practice in the industry. It is not practicable to determine the
amount that will not be used or sold within one year.

(i) Restricted Assets:

Current restricted assets of $7,330 and $9,195 at December 31, 2016 and 2015, respectively, consist
primarily of certiﬁcates of deposits and supersedeas bonds. Long-term restricted assets of $3,986 and $12,303
at December 31, 2016 and 2015, respectively, consist primarily of certiﬁcates of deposit which collateralize
letters of credit, supersedeas bonds and deposits on long-term debt. The certiﬁcates of deposit mature at
various dates from February 2017 to August 2020. The carrying value of restricted assets approximate their
fair value.

(j) Property, Plant and Equipment:

Property, plant and equipment are stated at cost. Property, plant and equipment are depreciated using the
straight-line method over the estimated useful lives of the respective assets, which are 20 to 30 years for
buildings and 3 to 10 years for machinery and equipment.

Repairs and maintenance costs are charged to expense as incurred. The costs of major renewals and
betterments are capitalized. The cost and related accumulated depreciation of property, plant and equipment
are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reﬂected
in operations.

The cost of leasehold improvements is amortized over the lesser of the related leases or the estimated
useful lives of the improvements. Costs of major additions and betterments are capitalized, while expenditures
for routine maintenance and repairs are charged to expense as incurred.

(k) 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.

F-13

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

The Company’s interest in VIEs is primarily in the form of equity ownership. The Company examines
speciﬁc criteria and uses judgment when determining if the Company is the primary beneﬁciary of a VIE.
Factors considered include risk and reward sharing, experience and ﬁnancial condition of other partner(s),
voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive
committee, existence of unilateral kick-out rights exclusive of protective rights or voting rights and level of
economic disproportionality between the Company and its other partner(s).

Accounting guidance requires the consolidation of VIEs in which the Company is the primary
beneﬁciary. The guidance requires consolidation of VIEs that an enterprise has a controlling ﬁnancial interest.
A controlling ﬁnancial interest will have both of the following characteristics: (a) the power to direct the
activities of a VIE that most signiﬁcantly impact the VIE’s economic performance and (b) the obligation to
absorb losses of the VIE that could potentially be signiﬁcant to the VIE or the right to receive beneﬁts from
the VIE that could potentially be signiﬁcant to the VIE.

The Company’s maximum exposure to loss in its investments in unconsolidated VIEs is limited to its
investment in the unconsolidated VIEs which is the carrying value. The Company’s maximum exposure to
loss in its investment in its consolidated VIEs is limited to its investment which is the carrying value of the
investment net of the non-controlling interest. Creditors of the consolidated VIEs have no recourse to the
general credit of the primary beneﬁciary.

(l) Goodwill and Other Intangible Assets:

Goodwill from acquisitions represents the excess of the purchase price over the fair value of the
underlying acquired net tangible and intangible assets. Factors that contribute to the recognition of goodwill in
the Company’s acquisitions include (i) expected growth rates and proﬁtability of the acquired companies,
(ii) securing buyer-speciﬁc synergies that increase revenue and proﬁts and are not otherwise available to
market participants, (iii) signiﬁcant cost savings opportunities, (iv) experienced workforce and (v) the
Company’s strategies for growth in sales, income and cash ﬂows.

Goodwill is tested for impairment at least annually as of October 1 and monitored for interim triggering
events on an on-going basis. Other intangible assets with indeﬁnite useful lives are not amortized, but rather,
are tested for impairment at least annually. In evaluating goodwill for impairment, the Company has the
option to ﬁrst assess qualitative factors to determine whether further impairment testing is necessary. Among
other relevant events and circumstances that affect the fair value of reporting units, the Company considers
individual factors such as macroeconomic conditions, changes in the industry and the markets in which the
Company operates as well as the historical and expected future ﬁnancial performance. If the Company
concludes that it is more likely than not that fair value is less than its carrying value, recoverability of
goodwill is evaluated using a two-step process. The ﬁrst step involves a comparison of the fair value of the
reporting unit to the Company’s carrying amount. Fair value is determined based on an income approach and
a market approach that are equally weighted. If the carrying amount of the reporting unit, including the
goodwill, exceeds the fair value of the reporting unit, the second step is performed. The second step involves
a comparison of the implied fair value and carrying value of the goodwill of the reporting unit. To the extent
that the carrying amount exceeds the implied fair value of the goodwill, an impairment loss is recognized.

To determine the implied fair value of the Company’s indeﬁnite-lived intangible asset, trademark, it
utilizes the relief from royalty method, pursuant to which the asset is valued by reference to the amount of
royalty income it would generate if licensed in an arm’s length transaction. Under the relief from royalty
method, similar to the discounted cash ﬂow method, estimated net revenues expected to be generated by the
asset during its life are multiplied by a benchmark royalty rate and then discounted by the estimated weighted
average cost of capital associated with the asset. The resulting capitalized royalty stream is an indication of
the value of owning the asset. To the extent that the carrying amount exceeds the implied fair value of the
intangible asset, an impairment loss is recognized.

F-14

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

The fair value of the intangible asset associated with the beneﬁt under the Master Settlement Agreement
(‘‘MSA’’) is calculated using discounted cash ﬂows. This approach involves two steps: (i) estimating future
cash savings due to the payment exemption under the MSA and (ii) discounting the resulting cash ﬂow
savings to determine fair value. This fair value is then compared with the carrying value of the intangible
asset associated with the beneﬁt under the MSA. To the extent that the carrying amount exceeds the implied
fair value of the intangible asset, an impairment loss is recognized.

Intangible assets with ﬁnite lives are amortized over their respective estimated useful lives. Identiﬁable
intangible assets that are subject to amortization are evaluated for impairment using a process similar to that
used to evaluate long-lived assets described below.

(m) Impairment of Long-Lived Assets:

The Company reviews long-lived assets for

impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company
performs a test for recoverability, comparing projected undiscounted cash ﬂows to the carrying value of the
asset group to determine if impairment exists. If impairment is determined to exist, any related impairment
loss is calculated based on fair value of the asset on the basis of discounted cash ﬂow. Impairment losses on
assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

(n) Pension, Postretirement and Postemployment Beneﬁts Plans:

The cost of providing retiree pension beneﬁts, health care and life insurance beneﬁts is actuarially
determined and accrued over the service period of the active employee group. The Company recognizes the
funded status of each deﬁned beneﬁt pension plan, retiree health care and other postretirement beneﬁt plans
and postemployment beneﬁt plans on the balance sheet.

(o) Stock Options:

The Company accounts for employee stock compensation plans by measuring compensation cost for
share-based payments at fair value at grant date. The fair value is recognized as compensation expense over
the vesting period on a straight-line basis. The terms of certain stock options awarded under the 2014
Management Incentive Plan in February 2014 and under the 1999 Plan in November 2013, February 2013,
December 2009 and January 2001 provide for common stock dividend equivalents (paid in cash at the same
rate as paid on the common stock) with respect to the shares underlying the unvested portion of the options.
The Company recognizes payments of the dividend equivalent rights on these options on the Company’s
consolidated balance sheet as reductions in additional paid-in capital until fully utilized and then accumulated
deﬁcit ($6,258, $5,566 and $4,612, net of income taxes, for the years ended December 31, 2016, 2015 and
2014, respectively), which are included as ‘‘Distributions and dividends on common stock’’ in the Company’s
consolidated statement of stockholders’ deﬁciency.

(p) Income Taxes:

The Company accounts for income taxes under the liability method and records deferred taxes for the
impact of temporary differences between the amounts of assets and liabilities recognized for ﬁnancial
reporting purposes and the amounts recognized for tax purposes as well as tax credit carryforwards and loss
carryforwards. These deferred taxes are measured by applying currently enacted tax rates. A valuation
allowance reduces deferred tax assets when it is deemed more likely than not that some portion or all of the
deferred tax assets will not be realized. A current tax provision is recorded for income taxes currently payable.

The Company accounts for uncertainty in income taxes by recognizing the ﬁnancial statement impact of a
tax position when it is more likely than not that the position will be sustained upon examination. If the tax
position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount

F-15

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

of the beneﬁt that is greater than 50% likely of being realized upon ultimate settlement. The guidance requires
that a liability created for unrecognized deferred tax beneﬁts shall be presented as a liability and not combined
with deferred tax liabilities or assets. The Company classiﬁes all tax-related interest and penalties as income
tax expense.

(q) Distributions and Dividends on Common Stock:

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

(r) Revenue Recognition:

Tobacco and E-Cigarettes sales:

Revenues from sales are recognized upon the shipment of ﬁnished
goods when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement,
the sale price is ﬁxed or determinable and collectibility is reasonably assured. The Company provides an
allowance for expected sales returns, net of any related inventory cost recoveries (e.g. federal excise taxes).
Certain sales incentives, including promotional price discounts, are classiﬁed as reductions of net sales. The
Company includes federal excise taxes on tobacco sales in revenues and cost of goods sold. Since the
Company’s primary line of business is tobacco, the Company’s ﬁnancial position and its results of operations
and cash ﬂows have been and could continue to be materially adversely affected by signiﬁcant unit sales
volume declines at
increased
tobacco costs or reductions in the selling price of cigarettes in the near term.

the Company and industry levels, regulation,

litigation and defense costs,

Tobacco Shipping and Handling Fees and Costs:

Shipping and handling fees related to sales
transactions are neither billed to customers nor recorded as revenue. Shipping and handling costs, which were
$5,268 in 2016, $5,488 in 2015 and $5,585 in 2014 are recorded as operating, selling, administrative and
general expenses.

Real estate sales:

Revenue is recognized only when persuasive evidence of an arrangement exists, the
price is ﬁxed or determinable, the transaction has been completed and collectibility of the resulting receivable
is reasonably assured. Real estate commissions earned by the Company’s real estate brokerage businesses are
recorded as revenue on a gross basis upon the closing of a real estate transaction as evidenced when the
escrow or similar account is closed, the transaction documents have been recorded and funds are distributed to
all appropriate parties. Commissions expenses are recognized concurrently with related revenues. Property
management fees and rental commissions earned are recorded as revenue when the related services are
performed and the earnings process is complete.

(s) Advertising:

Tobacco and E-Cigarettes advertising costs, which are expensed as incurred and included within
operating, selling, administration and general expenses, were $3,397, $5,097 and $9,493 for the years ended
December 31, 2016, 2015 and 2014, respectively.

Real estate advertising costs, which are expensed as incurred and included within operating, selling,
administration and general expenses, were $22,835, $25,657 and $14,952 for the years ended December 31,
2016 and 2015 and 2014, respectively.

(t) Comprehensive Income:

The Company presents net income and other comprehensive income in two separate, but consecutive,
statements. The items are presented before related tax effects with detailed amounts shown for the income tax
expense or beneﬁt related to each component of other comprehensive income.

F-16

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

The components of accumulated other comprehensive loss, net of income taxes, were as follows:

Net unrealized gains on investment securities available
for sale, net of income taxes of $6,272, $7,758, and
$12,706, respectively . . . . . . . . . . . . . . . . . . . . .

Net unrealized losses on long-term investment

accounted for under the equity method, net of
income tax beneﬁts of $0, $0, and $1,156,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . .

Forward contracts adjustment, net of income taxes of

$0, $11, and $36, respectively . . . . . . . . . . . . . . .

Pension-related amounts, net of income taxes of

December 31,
2016

December 31,
2015

December 31,
2014

$ 9,869

$ 12,048

$ 18,102

—

(2)

—

(19)

(1,658)

(55)

$14,491, $13,977, and $12,167, respectively . . . . .
Accumulated other comprehensive loss . . . . . . . . . . .

(21,112)
$(11,245)

(20,342)
$ (8,313)

(17,732)
$ (1,343)

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

The Company has estimated the fair market value of the embedded derivatives based principally on the
results of a valuation model. 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 December 31, 2016, the
range of estimated fair market values of the Company’s embedded derivatives was between $111,653 and
$113,090. The Company recorded the fair market value of its embedded derivatives at
the approximate
midpoint of the range at $112,332 as of December 31, 2016. At December 31, 2015, the range of estimated
fair market values of the Company’s embedded derivatives was between $143,422 and $144,660. The
Company recorded the fair market value of its embedded derivatives at the midpoint of the range at $144,042
as of December 31, 2015. The estimated fair market value of the Company’s embedded derivatives could
change signiﬁcantly based on future market conditions. (See Note 9.)

(v) Capital and Credit Markets:

The Company has performed additional assessments to determine the impact,

if any, of market
developments, on the Company’s consolidated ﬁnancial statements. The Company’s additional assessments
have included a review of access to liquidity in the capital and credit markets, counterparty creditworthiness,
value of the Company’s investments (including long-term investments, mortgage receivable and employee
beneﬁt plans) and macroeconomic conditions. The volatility in capital and credit markets may create
additional risks in the upcoming months and possibly years and the Company will continue to perform
additional assessments to determine the impact, if any, on the Company’s consolidated ﬁnancial statements.
Thus, future impairment charges may occur.

On a quarterly basis, the Company evaluates its investments to determine whether an impairment has
occurred. If so, the Company also makes a determination of whether such impairment is considered temporary
or other than temporary. The Company believes that the assessment of temporary or other-than-temporary

F-17

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

impairment is facts-and-circumstances driven. However, among the matters that are considered in making such
a determination are the period of time the investment has remained below its cost or carrying value, the
likelihood of recovery given the reason for the decrease in market value and the Company’s original expected
holding period of the investment.

(w) Contingencies:

The Company records Liggett’s product liability legal expenses as operating, selling, administrative and
general expenses as those costs are incurred. As discussed in Note 15, legal proceedings covering a wide
range of matters are pending or threatened in various jurisdictions against Liggett and the Company.

The Company and its subsidiaries record provisions in their consolidated ﬁnancial statements for pending
litigation when they determine that an unfavorable outcome is probable and the amount of loss can be
reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a
case may occur, except as disclosed in Note 15: (i) management has concluded that it is not probable that a
loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to estimate
the possible loss or range of loss that could result from an unfavorable outcome of any of the pending
tobacco-related cases and, therefore, management has not provided any amounts in the consolidated ﬁnancial
statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.

Except as discussed in Note 15, management is unable to estimate the possible loss or range of loss from
remaining Engle progeny cases as there are currently multiple defendants in each case and discovery has not
occurred or is limited. As a result, the Company lacks information about whether plaintiffs are, in fact, Engle
class members (non-class members’ claims are generally time-barred), the relevant smoking history, the nature
of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs typically
do not specify their demand for damages. Litigation is subject to many uncertainties, and it is possible that the
Company’s consolidated ﬁnancial position, results of operations or cash ﬂows could be materially adversely
affected by an unfavorable outcome in any such tobacco-related litigation.

(x) Other, Net:

Other, net consists of:

Interest and dividend income . . . . . . . . . . . . . . . . . .
Out-of-period adjustment . . . . . . . . . . . . . . . . . . . . .
Acceleration of closing fee related to termination of

Douglas Elliman joint venture . . . . . . . . . . . . . . . .
Impairment of real estate, net . . . . . . . . . . . . . . . . . .
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Gain on long-term investment
Impairment of long-term investments
. . . . . . . . . . . .
Other (expense) income . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net

Year Ended December 31,
2015
$7,038
—

2014
$5,803
1,231

2016
$ 6,018
—

—
—
—
190
(1,203)
(273)
$ 4,732

—
(230)
(78)
390
(811)
100
$6,409

2,335
—
—
—
—
27
$9,396

The out-of-period adjustment related to a non-accrual of a receivable from Douglas Elliman in the fourth
quarter of 2013 and would have increased the Company’s gain on acquisition of Douglas Elliman in 2013.
The Company assessed the materiality of this error on all previously issued consolidated ﬁnancial statements
and concluded that the error was immaterial to all previously issued consolidated ﬁnancial statements. The
to the Company’s 2014 consolidated ﬁnancial
impact of correcting this error in 2014 was not material
statements.

F-18

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

(y) Other Current Liabilities:

Other current liabilities consists of:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued promotional expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued excise and payroll taxes payable, net . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued salaries and beneﬁts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other current liabilities

December 31,
2016
$ 10,573
23,763
10,044
35,449
6,164
26,958
22,901
$135,852

December 31,
2015
$ 19,639
24,816
26,556
28,147
11,008
22,774
21,277
$154,217

(z) New Accounting Pronouncements:

In November 2016, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards
Update (‘‘ASU’’) 2016-18, Statement of Cash Flows (Topic 230) (‘‘ASU 2016-18’’). ASU 2016-18 provides
guidance on the classiﬁcation of restricted cash to be included with cash and cash equivalents when
reconciling the beginning of period and end of period total amounts on the statement of cash ﬂows. This
pronouncement is effective for reporting periods beginning after December 15, 2017 using a retrospective
adoption method and early adoption is permitted. The Company is currently assessing the impact the adoption
of ASU 2016-18 will have on the Company’s consolidated ﬁnancial statements.

In October 2016, the FASB issued ASU 2016-17, Interests Held through Related Parties That Are under
Common Control (‘‘ASU 2016-17’’). ASU 2016-17 modiﬁes existing guidance with respect to how a decision
maker that holds an indirect interest in a VIE through a common control party determines whether it is the
primary beneﬁciary of the VIE as part of the analysis of whether the VIE would need to be consolidated.
Under ASU 2016-17, a decision maker would need to consider only its proportionate indirect interest in the
VIE held through a common control party. As a result of ASU 2016-17,
in certain cases, previous
consolidation conclusions may change. ASU 2016-17 is effective for the Company’s ﬁscal year beginning
January 1, 2017 with retrospective application to January 1, 2016. The Company is currently assessing the
impact the adoption of ASU 2016-17 will have on the Company’s consolidated ﬁnancial statements.

In August 2016,

the FASB issued ASU 2016-15, Classiﬁcation of Certain Cash Receipts and Cash
Payments (‘‘ASU 2016-15’’). ASU 2016-15 is intended to reduce diversity in practice on how certain cash
receipts and payments are presented and classiﬁed in the statement of cash ﬂows. The standard provides
guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent
consideration payments made after a business combination, proceeds from the settlement of insurance claims,
and distributions received from equity method investees. ASU 2016-15 also provides guidance for classifying
cash receipts and payments that have aspects of more than one class of cash ﬂows. ASU 2016-15 is effective
for the Company’s ﬁscal year beginning January 1, 2018. Early adoption is permitted. The standard requires
application using a retrospective transition method. The Company is currently assessing the impact
the
adoption of ASU 2016-15 will have on the Company’s consolidated ﬁnancial statements.

In March 2016,

the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting (‘‘ASU 2016-09’’). ASU 2016-09 modiﬁes
U.S. GAAP by requiring the following, among others: (1) all excess tax beneﬁts and tax deﬁciencies are to be
recognized as income tax expense or beneﬁt on the income statement (excess tax beneﬁts are recognized
regardless of whether the beneﬁt reduces taxes payable in the current period); (2) excess tax beneﬁts are to be

F-19

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

classiﬁed along with other income tax cash ﬂows as an operating activity in the statement of cash ﬂows; (3) in
the area of forfeitures, an entity can still follow the current U.S. GAAP practice of making an entity-wide
accounting policy election to estimate the number of awards that are expected to vest or may instead account
for forfeitures when they occur; and (4) classiﬁcation as a ﬁnancing activity in the statement of cash ﬂows of
cash paid by an employer to the taxing authorities when directly withholding shares for tax withholding
purposes. ASU 2016-09 is effective for the Company’s ﬁscal year beginning January 1, 2017, including
interim periods. Early application is permitted. The Company is currently assessing the impact the adoption of
ASU 2016-09 will have on the Company’s consolidated ﬁnancial statements.

(Reporting Revenue Gross versus Net)

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606):
(‘‘ASU 2016-08’’).
Principal versus Agent Considerations
ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09,
the
amendments in this ASU are intended to improve the operability and understandability of the implementation
guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net
basis. ASU 2016-08 will have the same effective date and transition requirements as the new revenue standard
issued in ASU 2014-09. The Company is currently assessing the impact the adoption of ASU 2016-08 and
ASU 2014-09 will have on the Company’s consolidated ﬁnancial statements.

instead,

In March 2016,

the FASB issued ASU 2016-07, Investments — Equity Method and Joint Ventures:
Simplifying the Transition to the Equity Method of Accounting (‘‘ASU 2016-07’’). ASU 2016-07 eliminates
the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains
signiﬁcant inﬂuence over a previously held investment. ASU 2016-07 will be effective for the Company’s
ﬁscal year beginning January 1, 2017 and subsequent interim periods. The Company will apply the guidance
prospectively for all future applications of the equity method of previously held investments subsequent to the
adoption date.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put
and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force) (‘‘ASU 2016-06’’).
ASU 2016-06 clariﬁes the requirement for assessing whether contingent call (put) options that can accelerate
the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity
performing the assessment under ASU 2016-06 is required to assess the embedded call (put) options solely in
accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently
exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put)
option is related to interest rates or credit risks. The amendments in ASU 2016-06 are effective for the
including interim periods. The Company is currently
Company’s ﬁscal year beginning January 1, 2017,
evaluating the method and impact the adoption of ASU 2016-06 will have on the Company’s consolidated
ﬁnancial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (‘‘ASU 2016-02’’), which provides guidance
for accounting for leases. ASU 2016-02 requires lessees to classify leases as either ﬁnance or operating leases
and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months
regardless of the lease classiﬁcation. The lease classiﬁcation will determine whether the lease expense is
recognized based on an effective interest rate method or on a straight line basis over the term of the lease.
Accounting for lessors remains largely unchanged from current U.S. GAAP. ASU 2016-02 will be effective for
the Company’s ﬁscal year beginning January 1, 2019 and subsequent
interim periods. The Company is
currently evaluating the impact the adoption of ASU 2016-02 will have on the Company’s consolidated
ﬁnancial statements.

F-20

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in
U.S. GAAP on the classiﬁcation and measurement of ﬁnancial instruments. Changes to the current guidance
primarily affects the accounting for equity investments, ﬁnancial liabilities under the fair value option, and the
presentation and disclosure requirements for ﬁnancial instruments. In addition, the ASU clariﬁes guidance
related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized
losses on available-for-sale debt securities. The new standard is effective for ﬁscal years and interim periods
beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a
cumulative-effect adjustment to the balance sheet at the beginning of the ﬁrst reporting period in which the
guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for
ﬁnancial
risk in other
comprehensive income. The Company is evaluating the effect that this guidance will have on its consolidated
ﬁnancial statements.

the fair value option resulting from instrument-speciﬁc credit

liabilities under

(‘‘ASU 2015-16’’), which requires adjustments

In September 2015, the FASB issued ASU 2015-16, Business Combination (Topic 805): Simplifying the
Accounting for Measurement Period Adjustments
to
provisional amounts initially recorded in a business combination that are identiﬁed during the measurement
period to be recognized in the reporting period in which the adjustment amounts are determined. This includes
any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the
change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
ASU 2015-15 also requires the disclosure of the nature and amount of measurement-period adjustments
recognized in the current period, including separately the amounts in current-period income statement line
to the provisional
items that would have been recorded in previous reporting periods if the adjustment
amounts had been recognized as of the acquisition date. The guidance is effective for the Company beginning
January 1, 2016. The Company will apply the guidance prospectively for all business combinations that occur
subsequent to the adoption date.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern
(Subtopic 205-40)-Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(‘‘ASU 2014-15’’). ASU 2014-15 provides guidance to U.S. GAAP about management’s responsibility to
evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to
provide related footnote disclosures. Speciﬁcally, ASU 2014-15 (1) deﬁnes the term substantial doubt,
(2) requires an evaluation of every reporting period including interim periods, (3) provides principles for
considering the mitigating effect of management’s plan, (4) requires certain disclosures when substantial doubt
is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other
disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year
after the date that the ﬁnancial statements are issued (or available to be issued). The amendments in this
update are effective for annual periods beginning after December 15, 2016 and interim periods within those
reporting periods. Earlier adoption is permitted. The adoption of ASU 2014-15 is not expected to have a
material effect on the Company’s consolidated ﬁnancial statements.

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606),
(‘‘ASU 2014-09’’). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most current revenue recognition guidance,
including industry-speciﬁc guidance. Under the new model, recognition of revenue occurs when a customer
obtains control of promised goods or services in an amount that reﬂects the consideration to which the entity
expects to be entitled in exchange for those goods or services. In addition, the new standard requires that
reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash ﬂows arising
from contracts with customers. The new standard is effective for annual reporting periods beginning after
December 15, 2018, with early adoption permitted for annual reporting periods beginning subsequent to

F-21

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period
presented or with the cumulative effect of initially applying it recognized at the date of initial application. The
Company is evaluating the effect of the adoption of ASU 2014-09 will have on its consolidated ﬁnancial
statements.

2. EARNINGS PER SHARE

Information concerning the Company’s common stock has been adjusted to give retroactive effect to the
5% stock dividends paid to Company stockholders on September 29, 2016, September 29, 2015 and
September 26, 2014. All per share amounts and references to share amounts have been updated to reﬂect the
retrospective effect of the stock dividends. The dividends were recorded at par value of $609 in 2016, $584 in
2015 and $520 in 2014,
the
the Company did not have
aforementioned years. In connection with the 5% stock dividends, the Company increased the number of
shares subject to outstanding stock options by 5% and reduced the exercise prices accordingly.

retained earnings

in each of

since

For purposes of calculating basic earnings per share (‘‘EPS’’), net

income available to common
stockholders attributed to Vector Group Ltd. for the period are reduced by the contingent interest and the
non-cash interest expense associated with the discounts created by the beneﬁcial conversion features and
embedded derivatives related to the Company’s convertible debt issued. The convertible debt issued by the
Company are participating securities due to the contingent interest feature and had no impact on EPS for
the years ended December 31, 2016, 2015 and 2014 as the dividends on the common stock reduced earnings
available to common stockholders so there were no unallocated earnings.

As discussed in Note 14,

the Company has stock option awards which provide for common stock
dividend equivalents at the same rate as paid on the common stock with respect to the shares underlying the
unexercised portion of
the options. These outstanding options represent participating securities under
authoritative guidance. The Company recognizes payments of the dividend equivalent rights ($6,258, net of
income taxes of $435, $5,566, net of income taxes of $211, and $4,612, net of income taxes of $306, for
the years ended December 31, 2016, 2015 and 2014, respectively) on these options as reductions in additional
paid-in capital on the Company’s consolidated balance sheet. As a result, in its calculation of basic EPS for
the years ended December 31, 2016, 2015 and 2014, respectively, the Company has adjusted its net income
for the effect of these participating securities as follows:

Net income attributed to Vector Group Ltd. . . . . . . . . . . . .
Income attributable to participating securities . . . . . . . . . . .
Net income available to common stockholders attributed to

2016
$71,127
(2,241)

2015
$59,198
(1,752)

2014
$36,856
(1,024)

Vector Group Ltd.

. . . . . . . . . . . . . . . . . . . . . . . . . . .

$68,886

$57,446

$35,832

Basic EPS is computed by dividing net income available to common stockholders attributed to Vector

Group Ltd. by the weighted-average number of shares outstanding, which includes vested restricted stock.

Diluted EPS includes the dilutive effect of non-vested restricted stock grants, stock options and
convertible securities. Diluted EPS is computed by dividing net income available to common stockholders by
the diluted weighted-average number of shares outstanding, which includes dilutive non-vested restricted stock
grants, stock options and convertible securities.

F-22

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

2. EARNINGS PER SHARE − (continued)

Basic and diluted EPS were calculated using the following shares for the years ended December 31,

2016, 2015 and 2014:

Weighted-average shares for basic EPS . . . . . . . . . . . 124,031,786
Plus incremental shares related to stock options and

2016

2015
123,648,565

2014
113,479,170

non-vested restricted stock . . . . . . . . . . . . . . . . . .

227,790
Weighted-average shares for diluted EPS . . . . . . . . . . 124,259,576

33,632
123,682,197

70,069
113,549,239

The following non-vested restricted stock and shares issuable upon the conversion of convertible debt
were outstanding during the years ended December 31, 2016, 2015 and 2014 but were not included in the
computation of diluted EPS because the exercise prices of the options and the per share expense associated
with the restricted stock were greater than the average market price of the common shares during the
respective periods, and the impact of common shares issuable under the convertible debt were anti-dilutive
to EPS.

Year Ended December 31,
2015

2014

2016

Weighted-average number of shares issuable upon conversion of

debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted-average conversion price . . . . . . . . . . . . . . . . . . . . . $

26,140,250
18.70

26,369,018
18.62

$

33,827,057
16.03

$

The Company’s convertible debt was anti-dilutive in 2016, 2015 and 2014.

3. INVESTMENT SECURITIES AVAILABLE FOR SALE

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

Marketable equity securities . . . . . . . . . . . . . . . . . .
Mutual funds invested in ﬁxed income securities . . . .
Marketable debt securities . . . . . . . . . . . . . . . . . . . .
Total investment securities available for sale . . . . .

Cost
$ 34,956
20,507
85,297
$140,760

Gross
Unrealized
Gains
$16,141
81
181
$16,403

Gross
Unrealized
Losses
$(254)
(6)
—
$(260)

Fair
Value
$ 50,843
20,582
85,478
$156,903

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

Marketable equity securities . . . . . . . . . . . . . . . . . .
Mutual funds invested in ﬁxed income securities . . . .
Marketable debt securities . . . . . . . . . . . . . . . . . . . .
Total investment securities available for sale . . . . .

Cost
$ 47,502
20,126
94,540
$162,168

Gross
Unrealized
Gains
$19,833
—
52
$19,885

Gross
Unrealized
Losses
$(62)
(15)
—
$(77)

Fair
Value
$ 67,273
20,111
94,592
$181,976

F-23

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

3. INVESTMENT SECURITIES AVAILABLE FOR SALE − (continued)

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

Investment Type:
U.S. Government securities . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . .
U.S. mortgage-backed securities
. . . . . . . . . . . . . . .
Commercial mortgage-backed securities . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . .
Index-linked U.S. bonds . . . . . . . . . . . . . . . . . . . . .
Foreign ﬁxed-income securities . . . . . . . . . . . . . . . .
Total marketable debt securities by maturity dates . .

Fair
Value
$30,642
36,687
6,500
1,398
8,980
770
501
$85,478

Under
1 Year
$ —
4,364
—
—
8,980
—
$ —
$13,344

1 Year up to
5 Years
$30,642
32,173
36
—
—
770
$
501
$64,122

More than
5 Years
$ —
150
6,464
1,398
—
—
$ —
$8,012

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:

December 31, 2016
Marketable equity securities . . . . . .
Mutual funds invested in ﬁxed

income securities . . . . . . . . . . . .

December 31, 2015
Marketable equity securities . . . . . .
Mutual funds invested in ﬁxed

income securities . . . . . . . . . . . .

In loss position for

Less than 12 months
Fair
Value

Unrealized
Losses

12 months or more
Fair
Value

Unrealized
Losses

Total Fair
Value

Total
Unrealized
Losses

$ 5,746

$(254)

$—

$—

$ 5,746

$(254)

10,253
$15,999

(6)
$(260)

$—

$—

10,253
$15,999

(6)
$(260)

$ 5,938

$ (62)

10,053
$15,991

(15)
$ (77)

$—

—
$—

$—

—
$—

$ 5,938

$ (62)

10,053
$15,991

(15)
$ (77)

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

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

Gross realized gains on sales . . . . . . . . . . . . . . . . . .
Gross realized losses on sales . . . . . . . . . . . . . . . . . .

Gains (losses) on sale of investment securities

available for sale . . . . . . . . . . . . . . . . . . . . . . .

Other-than-temporary impairments

. . . . . . . . . . . . . .

Year Ended December 31,
2015
$ 13,727
(2,589)

2016
$ 3,408
(501)

$ 2,907

$(5,381)

$ 11,138

$(12,846)

2014
$ 275
(286)

$ (11)

$ —

The Company recorded an ‘‘Other-than-temporary-impairment’’ charge of $5,381 and $12,846 for the
year ended December 31, 2016 and 2015, respectively. No impairment was recorded for the year ended
December 31, 2014. The largest components of these total charges were $4,772 and $6,895 for the year ended
December 31, 2016 and 2015, respectively, related to Morgans Hotel Group Co. (‘‘MHGC’’), a company

F-24

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

3. INVESTMENT SECURITIES AVAILABLE FOR SALE − (continued)

where Vector’s President and Chief Executive Officer also served as Chairman of the Board of Directors. On
December 1, 2016, MHGC merged with another company and, as a result, the common shares of MHGC
ceased to be outstanding and were converted into the right to receive $2.25 in cash. The Company received
$5,535 for its investment in MHGC and recorded a gain of $2,140, after recognizing an impairment charge of
$4,772 in the ﬁrst quarter of 2016.

Although management generally does not have the intent to sell any speciﬁc securities at the end of the
period, in the ordinary course of managing the Company’s investment securities portfolio, management may
sell securities prior to their maturities for a variety of reasons, including diversiﬁcation, credit quality, yield
and liquidity requirements and the funding of claims and obligations to policyholders.

Proceeds from investment securities sales totaled $116,070, $270,576 and $154,615 and proceeds from
early redemptions by issuers totaled $20,034, $14,230 and $2,779 for the years ended December 31, 2016,
2015 and 2014, respectively, mainly from sales of Corporate securities and U.S. Government securities.

4. INVENTORIES

Inventories consist of:

Leaf tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other raw materials
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E-Cigarettes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories at current cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIFO adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2016
$ 46,253
3,733
633
65,052
—
115,671
(25,837)
$ 89,834

December 31,
2015
$ 49,856
3,578
789
61,493
80
115,796
(29,280)
$ 86,516

All of the Company’s inventories, excluding amounts related to prepaid MSA cost and federal excise
taxes, at December 31, 2016 and 2015 have been reported under the LIFO method. The $25,837 LIFO
adjustment as of December 31, 2016 decreases the current cost of inventories by $17,632 for Leaf tobacco,
$214 for Other raw materials, $29 for Work-in-process, and $7,962 for Finished goods. The $29,280 LIFO
adjustment as of December 31, 2015 decreased the current cost of inventories by $19,863 for Leaf tobacco,
$643 for Other raw materials, $33 for Work-in-process, $8,736 for Finished goods and $5 for E-Cigarettes.
Cost of goods sold was reduced by $211 and $1,703 for the year ended December 31, 2016 and December 31,
2015, respectively, due to liquidations of LIFO inventories.

The Company has a leaf inventory management program whereby, among other things, it is committed to
purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of
anticipated requirements and are at prices, including carrying costs, established at the commitment date. At
December 31, 2016, Liggett had tobacco purchase commitments of approximately $10,874. The Company has
a single source supply agreement for reduced ignition propensity cigarette paper through 2019.

The Company capitalizes the incremental prepaid cost of the MSA and federal excise taxes in ending
inventory. Each year, the Company capitalizes in inventory that portion of its MSA liability that relates to
cigarettes shipped to the public warehouses but not sold. The amount of capitalized MSA cost in ‘‘Finished
goods’’ inventory was $17,364 and $15,796 at December 31, 2016 and 2015, respectively. Federal excise tax
in inventory was $25,888 at December 31, 2016 and $23,455 at December 31, 2015.

F-25

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land and improvements
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings
Machinery and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less accumulated depreciation and amortization . . . . . . . . . . . . . . .

December 31,
2016

December 31,
2015

$

1,442
16,010
184,623
32,419
234,494
(154,046)
$ 80,448

$

1,442
15,908
178,131
21,142
216,623
(140,991)
$ 75,632

Depreciation and amortization expense related to property, plant and equipment for the years ended

December 31, 2016, 2015 and 2014 was $20,782, $20,423 and $17,843, respectively.

Future machinery and equipment purchase commitments at Liggett were $805 and $832 at December 31,

2016 and 2015, respectively.

6. LONG-TERM INVESTMENTS

Long-term investments consisted of the following:

Investments accounted at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments accounted under the equity method . . . . . . . . . . . . . . .

(a) Cost-Method Investments:

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

December 31,
2016
$35,476
17,721
$53,197

December 31,
2015
$41,231
21,495
$62,726

Investment partnerships
. . . . . . . . . . . . . . . . . .
Real estate partnership . . . . . . . . . . . . . . . . . . .

December 31, 2016

December 31, 2015

Carrying
Value
$34,975
501
$35,476

Fair
Value
$40,569
494
$41,063

Carrying
Value
$40,730
501
$41,231

Fair
Value
$44,217
552
$44,769

The principal business of the investment partnerships is investing in investment securities and real estate.
The estimated fair value of the investment partnerships was provided by the partnerships based on the
indicated market values of the underlying assets or investment portfolio. The investments in these investment
partnerships are illiquid and the ultimate realization of these investments is subject to the performance of the
underlying partnership and its management by the general partners. In the future, the Company may invest in
other investments, including limited partnerships, real estate investments, equity securities, debt securities,
derivatives and certiﬁcates of deposit, depending on risk factors and potential rates of return.

If it is determined that an other-than-temporary decline in fair value exists in long-term investments, the
Company records an impairment charge with respect to such investment in its consolidated statements of
operations. The Company will continue to perform additional assessments to determine the impact, if any, on
the Company’s consolidated ﬁnancial statements. Thus, future impairment charges may occur.

The Company has accounted for these investments using the cost method of accounting because the

investments did not meet the requirements for equity method accounting.

F-26

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

6. LONG-TERM INVESTMENTS − (continued)

The Company invested an aggregate $5,000 in three additional investment partnerships in 2015. The
principal business of these investment partnerships is investing in investment securities. The Company also
invested $5,000 in a reinsurance company in 2015. The Company received cash distributions of $4,741, $587
and $549 from limited partnerships in 2016, 2015 and 2014, respectively.

The long-term investments are carried on the consolidated balance sheet at cost. The fair value
determination disclosed above would be classiﬁed as Level 3 under fair value hierarchy disclosed in Note 18
if such assets were recorded on the consolidated balance sheet at fair value. The fair value determinations
disclosed above were based on company assumptions, and information obtained from the partnerships based
on the indicated market values of the underlying assets of the investment portfolio.

(b) Equity-Method Investments:

Long-term investments accounted for under the equity method consisted of the following:

Indian Creek Investors LP (‘‘Indian Creek’’) . . . . . . . . . . . . . . . . . .
Boyar Value Fund (‘‘Boyar’’) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ladenburg Thalmann Financial Services Inc. (‘‘LTS’’) . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Castle Brands, Inc. (‘‘Castle’’)

December 31,
2016
$ 5,248
7,816
4,657
—
$17,721

December 31,
2015
$ 4,989
7,302
9,204
—
$21,495

At December 31, 2016, the Company’s ownership percentages in Indian Creek, Boyar, LTS and Castle
were 20.22%, 31.99%, 8.28% and 7.88%, respectively. The Company accounted for Indian Creek and Boyar
interests as equity-method investments because the Company’s ownership percentage meets the threshold for
equity-method accounting. The Company accounted for the LTS and Castle interests as equity-method
investments because the Company has the ability to exercise signiﬁcant inﬂuence over their operating and
ﬁnancial policies.

The value of Boyar, based on the quoted market price as of December 31, 2016, was $7,816, equal to its
carrying value. Ladenburg Thalmann Fund Management, LLC, an indirect subsidiary of LTS, is the manager
of Boyar.

At December 31, 2016, the aggregate values of the LTS and Castle investments, based on the quoted
market price, were $37,067 and $9,630, respectively. The difference between the amount at which the LTS
and Castle investments are carried and the amount of underlying equity in net assets was $24,431 and $1,857,
respectively. This basis difference represents other direct ﬁnancial activities and is being accounted for as part
of the equity investment.

The principal business of Indian Creek is investing in investment securities. Fair value approximates
carrying value. The estimated fair value of the investment partnership was provided by the partnership based
on the indicated market values of the underlying assets or investment portfolio. The investment
in the
investment partnership is illiquid and the ultimate realization of the investment is subject to the performance
of the underlying partnership and its management by the general partners.

The Company received cash distributions of $1,158, $2,364 and $3,283 from the Company’s investments
in long-term investments under the equity method in 2016, 2015 and 2014, respectively. The Company
recognized equity in losses in long-term investments under the equity method of $2,754 and $2,681 in 2016
and 2015, respectively. The Company recognized equity in earnings in long-term investments under the equity
method of $3,140 in 2014. The Company has suspended its recognition of equity in losses in Castle to the
extent such losses exceed its basis.

F-27

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

6. LONG-TERM INVESTMENTS − (continued)

If it is determined that an other-than-temporary decline in fair value exists in long-term investments, the
Company records an impairment charge with respect to such investment in its consolidated statements of
operations. The Company will continue to perform additional assessments to determine the impact, if any, on
the Company’s consolidated ﬁnancial statements. Thus, future impairment charges may occur.

The long-term investments are carried on the consolidated balance sheet at cost under the equity method
of accounting. The fair value determination disclosed above would be classiﬁed as Level 3 under fair value
hierarchy disclosed in Note 18 if such assets were recorded on the consolidated balance sheet at fair value.

(c) Combined Financial Statements for Unconsolidated Subsidiaries

Pursuant

to Rule 4-08(g),
includes information for Indian Creek and Boyar.

the following summarized ﬁnancial data for unconsolidated subsidiaries

Investment securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partners’ capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities and partners’ capital

December 31,
2016
$67,546
33
28
$67,607
$17,216
17,216
50,391
$67,607

December 31,
2015
$40,676
101
8,664
$49,441
408
$
408
49,033
$49,441

Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment (loss) income . . . . . . . . . . . . . . . . . . . . . . .

Total net realized gain (loss) and net change in unrealized

depreciation from investments
Net increase (decrease) in partners’ capital resulting from

. . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,
2015

2016
$ 438
(684)
(246)

$

565
(868)
(303)

2014
$ 3,314
(1,298)
2,016

3,341

(14,809)

(168)

operations

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,095

$(15,112)

$ 1,848

F-28

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

6. LONG-TERM INVESTMENTS − (continued)

Pursuant to Rule 4-08(g), the following summarized ﬁnancial data is presented for LTS. The Company

has elected a three-month lag reporting period for LTS.

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables from clearing brokers, note receivable and other receivable, net . .
Goodwill and intangible assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accrued compensation, commissions and fees payable . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, net of $1,001 and $1,655 unamortized discount in 2016 and

Total liabilities

2015, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deﬁcit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total controlling shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .

Non-controlling interest

September 30,
2016
$ 105,989
115,887
251,411
70,469
$ 543,756

$ 76,191
37,189

48,364
30,716
192,460
1
19
509,335
(158,055)
351,300
(4)
351,296
$ 543,756

September 30,
2015
$ 114,548
115,334
269,774
63,634
$ 563,290

$ 72,936
24,615

59,184
21,487
178,222
1
19
517,988
(132,952)
385,056
12
385,068
$ 563,290

(1) The table above presents the nature and amounts of the major components of assets and liabilities,

along with information regarding redeemable stock and non-controlling interest.

Twelve Months Ended
September 30,
2015
$ 1,122,735
(1,132,010)
(9,275)
31
(9,244)
4,396

$

2016
$ 1,104,227
(1,119,366)
(15,139)
(154)
(15,293)
(25,159)

$

2014
$ 867,756
(856,072)
11,684
12
11,696
$ 22,482

Gross (loss) proﬁt

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of contingent consideration . . . . . . . . . .
(Loss) income from continuing operations . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-29

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

6. LONG-TERM INVESTMENTS − (continued)

Pursuant to Rule 4-08(g), the following summarized ﬁnancial data is presented for Castle. The Company

has elected a three-month lag reporting period for Castle.

Current liabilities
Non-current liabilities
Total liabilities

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total controlling shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .

September 30,
2016
$42,285
9,085
$51,370
$12,583
15,215
27,798
19,838
3,734
23,572
$51,370

September 30,
2015
$36,922
9,845
$46,767
$ 9,947
13,696
23,643
19,978
3,146
23,124
$46,767

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7. NEW VALLEY LLC

(a) Investments in real estate ventures.

Twelve Months Ended
September 30,
2015
$ 67,143
(41,317)
25,826
(25,920)
(94)
$ (2,946)

2016
$ 73,549
(44,236)
29,313
(28,338)
975
$ (1,263)

2014
$ 51,426
(32,495)
18,931
(20,399)
(1,468)
$ (4,845)

New Valley also 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 aggregated the disclosure of its investments in real
estate ventures by property type and operating characteristics.

F-30

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

7. NEW VALLEY LLC − (continued)

The components of ‘‘Investments in real estate ventures’’ were as follows:

Range of
Ownership

December 31,
2016

December 31,
2015

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . .

3.1% − 49.5%
15.0% − 48.5%

Apartment Buildings:

All other U.S. areas . . . . . . . . . . . . . . . . . . .

7.6% − 16.3%

Hotels:

New York City SMSA . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . .

5.2%
49.0%

$131,770
40,950
172,720

$138,247
25,776
164,023

8,287
8,287

21,895
3,037
24,932

15,754
15,754

19,697
10,228
29,925

Commercial:

New York City SMSA . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . .

Other
Investments in real estate ventures

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . .

Contributions

49.0%
2.1%

50.0%

3,290
10,000
13,290
2,029
$221,258

5,449
—
5,449
2,017
$217,168

New Valley made contributions to its investments in real estate ventures as follows:

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hotels:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2016

December 31,
2015

$ 5,661
23,874
29,535

4,082
490
4,572

—
10,000
10,000
$44,107

$48,232
12,836
61,068

1,896
1,377
3,273

5,931
—
5,931
$70,272

F-31

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

7. NEW VALLEY LLC − (continued)

During the year-ended December 31, 2016, New Valley did not make certain capital contributions to
Monad Terrace. This resulted in a change in ownership percentage from 31.3% to 24.3%. For other ventures
where New Valley previously held an investment, New Valley contributed its proportionate share of additional
capital along with contributions by the other investment partners during the years ended December 31, 2016
and December 31, 2015. New Valley’s direct investment percentage for these ventures did not change.

Distributions

New Valley received distributions from its investments in real estate ventures as follows:

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apartment Buildings:

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hotels:

International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2016

December 31,
2015

$(27,574)
(10,336)
(37,910)

$(18,787)
—
(18,787)

(9,055)
(9,055)

(8,120)
(8,120)

(3,290)
(3,290)

—
—

(515)
(515)
(1,050)
$(56,650)

(480)
(480)
(900)
$(23,457)

Of the distributions received by New Valley from its investment in real estate ventures, $23,446 and
$5,894 were from distributions of earnings and $33,204 and $17,563 were a return of capital for the years
ended December 31, 2016 and December 31, 2015, respectively.

F-32

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

7. NEW VALLEY LLC − (continued)

Equity in Earnings (Losses) from Real Estate Ventures

New Valley recognized equity in earnings (losses) from real estate ventures as follows:

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . .

Apartment Buildings:

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . .

Hotels:

New York City SMSA . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial:

New York City SMSA . . . . . . . . . . . . . . . . . . . . .

Other
Total equity in earnings from real estate ventures

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .

December 31,
2016

December 31,
2015

December 31,
2014

$ 7,432
(1,793)
5,639

$ 4,533
(869)
3,664

$ 7,806
100
7,906

1,588
1,588

(1,884)
439
(1,445)

(1,644)
(1,644)
1,062
$ 5,200

527
527

(1,540)
(1,594)
(3,134)

(2)
(2)
946
$ 2,001

341
341

(2,643)
(1,612)
(4,255)

—
—
111
4,103

Investment in Real Estate Ventures Entered Into During 2016

In July 2016, New Valley entered into a newly created joint venture related to the 20 Times Square
project. The joint venture is a variable interest entity, however, New Valley is not the primary beneﬁciary.
New Valley accounts for its interest in the joint venture under the equity method of accounting and has
combined this investment with the existing 20 Times Square venture carrying balance.

In August 2016, New Valley entered into a newly created joint venture related to the 87 Park project. The
joint venture is a variable interest entity, however, New Valley is not the primary beneﬁciary. New Valley
accounts for its interest in the joint venture under the equity method of accounting and has combined this
investment with the existing 87 Park venture carrying balance.

In December 2016, New Valley invested $10,000 for an approximate 2.1% interest in Wynn/CA JV, LLC.
The purpose of the joint venture is to own and operate retail space in the Wynn Resort in Las Vegas, Nevada.
The joint venture is a variable interest entity; however, New Valley is not the primary beneﬁciary. New Valley
accounts for this investment under the equity method of accounting. New Valley’s maximum exposure to loss
as a result of its investment in Wynn Las Vegas Retail was $10,000 at December 31, 2016.

VIE Consideration

It was determined that New Valley is the primary beneﬁciary of two joint ventures as New Valley
the entities. Therefore,

controls the activities that most signiﬁcantly impact economic performance of
New Valley consolidates these VIEs.

F-33

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

7. NEW VALLEY LLC − (continued)

The carrying amount of the consolidated VIEs’ assets were $14,385 and $13,702 for the years ended
December 31, 2016 and 2015, respectively. Those assets are owned by the VIEs, not the Company. Neither of
the consolidated VIEs had non-recourse liabilities as of December 31, 2016 and 2015. 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.

Maximum Exposure to Loss

New Valley’s maximum exposure to loss was as follows:

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apartment Buildings:

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hotels:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total maximum exposure to loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2016

$133,335
46,712
180,047

8,287
8,287

21,895
3,037
24,932

3,290
10,000
13,290
2,029
$228,585

New Valley capitalized $11,433 and $9,928 of interest expense into the carrying value of its ventures
whose projects were currently under development during the years ended December 31, 2016 and
December 31, 2015, respectively.

Douglas Elliman has been engaged by the developers as the sole broker or the co-broker for several of
the real estate development projects that New Valley owns an interest in through its joint venture investments.
Douglas Elliman had gross commissions of approximately $15,078 and $3,077 from these projects for
the years ended December 31, 2016 and December 31, 2015, respectively.

(b) Combined Financial Statements for Unconsolidated Subsidiaries:

Pursuant

to Rule 4-08(g),

the following summarized ﬁnancial data for unconsolidated subsidiaries
includes information for the following entities: Condominium and Mixed Use Development (10 Madison
West, The Marquand, 11 Beach Street, 160 Leroy Street, 215 Chrystie Street, Queens Plaza South,
111 Murray Street, 87 Park, 20 Times Square, 25-19 43rd Avenue — The Dutch LIC, 76 Eleventh Avenue,
Monad Terrace, West Hollywood Edition and 125 Greenwich Street) Apartment Buildings (ST Portfolio and
Maryland Portfolio), Hotels (Coral Beach, Park Lane Hotel, and Hotel Taiwana) and Commercial (Harmon

F-34

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

7. NEW VALLEY LLC − (continued)

Meadow and Wynn Las Vegas Retail). New Valley has elected a one-month lag reporting period for
10 Madison West, Hotel Taiwana, 11 Beach Street, Maryland Portfolio, 20 Times Square, 160 Leroy Street,
215 Chrystie Street, 87 Park, 125 Greenwich Street, Harmon Meadow, Monad Terrace, Park Lane Hotel,
ST Portfolio, Coral Beach, West Hollywood Edition and Wynn Las Vegas Retail. New Valley has elected a
three month lag reporting period for The Marquand, Queens Plaza South, 111 Murray Street,
25-19 43rd Avenue — The Dutch LIC and 76 Eleventh Avenue.

Condominium and Mixed Use Development:

Income Statement
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . .
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . .

Year Ended December 31,
2015

2014

2016

$511,844
303,020
42,566
$166,258

$141,884
92,837
10,672
$ 38,375

$182,635
96,993
6,798
$ 78,844

Balance Sheets
Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apartment & Office Buildings:

December 31,
2016

December 31,
2015

$3,413,928
3,786,206
2,478,574
2,687,351
564,194

$2,921,611
3,237,835
2,014,682
2,195,940
535,573

Income Statement
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . .

$87,225
83,117
$ 4,108

$83,871
75,384
$ 8,487

$85,704
86,153
$ (449)

Year Ended December 31,
2015

2014

2016

Balance Sheets
Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2016

December 31,
2015

$488,732
522,459
475,668
484,377
(9,931)

$590,331
626,513
512,479
529,692
(4,463)

F-35

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

7. NEW VALLEY LLC − (continued)

Hotels:

Income Statement
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . .
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations . . . . . . . . . . . . . . . .

Year Ended December 31,
2015

2014

2016

$ 81,517
4,262
114,582
$ (37,327)

$ 83,324
3,837
112,069
$ (32,582)

$ 82,899
3,064
133,258
$ (53,423)

Balance Sheets
Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial:

December 31,
2016

December 31,
2015

$781,461
854,559
491,200
509,385
312,113

$824,753
894,447
511,029
538,426
294,470

Income Statement
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations . . . . . . . . . . . . . . . .

$ 8,410
11,195
$ (2,785)

$5,638
5,642
(4)
$

Year Ended December 31,
2015

2016

2014

$ —
—
$ —

Balance Sheets
Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$61,091
74,512
55,625
57,601

$65,398
67,343
55,624
56,415

December 31,
2016

December 31,
2015

Other:

Income Statement
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . .

Year Ended December 31,
2015

2014

2016

$3,344
1,227
$2,117

$3,030
1,049
$1,981

$2,714
1,019
$1,695

December 31,
2016

December 31,
2015

Balance Sheets
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,382
$1,230

$5,157
$1,022

F-36

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

7. NEW VALLEY LLC − (continued)

(c) Guarantees and Commitments:

in the joint venture, or

The joint venture agreements by which New Valley invests in real estate set forth certain conditions
where New Valley or its affiliate is required to contribute payments towards the satisfaction of liabilities of
the other partners
to otherwise indemnify other partners. Mostly these
contribution/indemnity requirements are triggered in the event New Valley or its affiliate commits an act that
results in liability of another partner under a guarantee that
the other partner has given to a lender in
connection with a mortgage or mezzanine loan. The guarantees given in connection with the loans may
include non-recourse carve-out guarantees, environmental
indemnities, carry guarantees and/or completion
guarantees, depending on the speciﬁc project. In some instances, New Valley or its affiliate would be
proportionately liable in the event of liability under a guarantee that is not the fault of any of the partners in
the joint venture. In very limited circumstances, New Valley has agreed to be a guarantor directly in
connection with a loan, but in almost all of New Valley’s investments, neither New Valley nor any of its
affiliates is a direct guarantor under the loan documents. In some instances, New Valley and its partners have
guaranteed the debt of certain unconsolidated entities. As of December 31, 2016 and 2015, no events are
known to the Company that would trigger any guarantees or contribution requirements by New Valley related
to its unconsolidated entities.

As of December 31, 2016 and 2015,

the aforementioned contribution/indemnity obligations and
guarantees were not material to the Company. The Company believes that as of December 31, 2016, in the
event New Valley becomes legally obligated to contribute funds or otherwise indemnify another partner due to
a triggering event under a guarantee, or becomes legally obligated as a guarantor (in the limited circumstances
where New Valley is a direct guarantor under the loan documents), the real estate underlying the applicable
project is expected to be sufficient to largely repay any guaranteed obligation (although a lender need not
necessarily resort to foreclosing on the real estate before seeking recourse under a loan guarantee). In one of
New Valley’s projects, New Valley and its partner have guaranteed approximately $6,000 of a construction
loan. The guarantee is automatically reduced for all additional capital contributions New Valley and it partner
contribute to the investment, and for any additional equity raised for the project. In another project,
New Valley has executed limited recourse guarantees with a maximum exposure to New Valley of
approximately $5,400.

If New Valley is required to make a payment under any guarantee, the payment would constitute a
capital contribution or loan to the New Valley unconsolidated entity and increase New Valley’s investment in
the unconsolidated entity and its share of any funds the entity distributes.

(d) Investments in Real Estate, net:

The components of ‘‘Investments in Real Estate, net’’ were as follows:

Escena, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sagaponack . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2016
$10,792
12,848
$23,640

December 31,
2015
$10,716
12,602
$23,318

Escena.

In March 2008, a subsidiary of New Valley purchased a loan collateralized by a substantial
portion of a 450-acre approved master planned community in Palm Springs, California known as ‘‘Escena.’’ In
April 2009 New Valley completed the foreclosure process and took title to the collateral which consisted of
867 residential lots with site and public infrastructure, an 18-hole golf course, a substantially completed
clubhouse, and a seven-acre site approved for a 450-room hotel.

F-37

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

7. NEW VALLEY LLC − (continued)

The assets have been classiﬁed as an ‘‘Investments in Real Estate, net’’ on the Company’s consolidated

balance sheet and the components are as follows:

Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and building improvements . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2016
$ 8,907
1,878
2,028
12,813
(2,021)
$10,792

December 31,
2015
$ 8,907
1,875
1,923
12,705
(1,989)
$10,716

The Company recorded an operating loss of $899, $789 and $760 for the years ended December 31,
2016, 2015 and 2014, respectively, from Escena. The operating loss recorded for the year ended December 31,
2015 includes an impairment charge of $230 related to the golf course.

Investment in Sagaponack.

In April 2015, New Valley invested $12,502 in a residential real estate
project located in Sagaponack, NY. The project is wholly owned and the balances of the project are included
in the consolidated ﬁnancial statements of the Company. As of December 31, 2016, the assets of Sagaponack
consist of land and land improvements of $12,848.

Investment in Indian Creek.

In March 2013, New Valley invested $7,616 for an 80% interest in Timbo
LLC (‘‘Indian Creek’’) which owns a residential real estate project located on Indian Creek, Florida. As a
result of the 80% ownership interest, the consolidated ﬁnancial statements of the Company include the results
of Indian Creek.

In May 2014,

the Indian Creek property was sold for $14,400. New Valley recognized income of

approximately $2,400 from the sale for the year ended December 31, 2014. The project has concluded.

Real Estate Market Conditions. Because of the risks and uncertainties of the real estate markets, the
Company will continue to perform additional assessments to determine the impact of the markets, if any, on
the Company’s consolidated ﬁnancial statements. Thus, future impairment charges may occur.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The components of Goodwill and other intangible assets, net were as follows:

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2016
$ 70,815

December 31,
2015
$ 70,791

Indeﬁnite life intangibles:

Intangible asset associated with beneﬁt under the MSA . . . . . . . . .
Trademark − Douglas Elliman . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Total goodwill and other intangible assets, net . . . . . . . . . . . . . . .

Intangibles with a ﬁnite life, net

107,511
80,000
3,592
$261,918

107,511
80,000
5,657
$263,959

Goodwill is evaluated for impairment annually or whenever we identify certain triggering events or
circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other
things, unexpected adverse business conditions, macro and reporting unit speciﬁc economic factors (for
interest rate and foreign exchange rate ﬂuctuations, and loss of key personnel), supply costs,
example,
unanticipated competitive activities, and acts by governments and courts.

F-38

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

8. GOODWILL AND OTHER INTANGIBLE ASSETS − (continued)

The Company follows ASC 350, Intangibles — Goodwill and Other, included in ASU 2011-08, Testing
the year ended
test was

Impairment. The Company performed the qualitative assessment
Goodwill
December 31, 2016 and determined that performing the ﬁrst step of the two-step impairment
unnecessary.

for

for

Other intangible assets and contract liabilities assumed were as follows:

Intangible asset associated with beneﬁt under the MSA . . . .
Trademark − Douglas Elliman . . . . . . . . . . . . . . . . . . . . .
Favorable leases
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: Accumulated amortization on amortizable intangibles . .
. . . . . . . . . . . . . . . . . . . . . . . . .

Other intangibles, net

Contract liabilities assumed:
Unfavorable leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated amortization on amortizable intangibles .
. . . . . . . . . . . . . . . . . . . . . . . .

Unfavorable leases, net

Useful Lives
in Years
Indeﬁnite
Indeﬁnite
1 − 10
1 − 5

December 31,
2016
$107,511
80,000
13,444
5,816
19,260
(15,668)
$ 3,592

December 31,
2015
$107,511
80,000
13,444
5,691
19,135
(13,478)
$ 5,657

1 − 10

$ 4,022
(2,204)
$ 1,818

$ 4,022
(1,591)
$ 2,431

The intangible asset associated with the beneﬁt under the MSA relates to the market share payment
exemption of The Medallion Company Inc. (now known as Vector Tobacco Inc.), acquired in April 2002,
under the MSA, which states payments under the MSA continue in perpetuity. As a result, the Company
believes it will realize the beneﬁt of the exemption for the foreseeable future.

The fair value of the intangible asset associated with the beneﬁt under the MSA is calculated using
discounted cash ﬂows. This approach involves two steps: (i) estimating future cash savings due to the
payment exemption under the MSA and (ii) and discounting the resulting cash ﬂow savings to determine fair
value. This fair value is then compared with the carrying value of the intangible asset associated with the
beneﬁt under the MSA. To the extent that the carrying amount exceeds the implied fair value of the intangible
asset, an impairment loss is recognized. The Company performed its impairment test for the year ended
December 31, 2016 and no impairment was noted.

The trademark intangible is attributed to the acquisition of the Douglas Elliman Realty brand name which
the Company plans to continue using for the foreseeable future. The fair value of the intangible asset
associated with the Douglas Elliman trademark is calculated using a ‘‘relief from royalty payments’’ method.
This approach involves two steps: (i) estimating reasonable royalty rates for its trademark associated with the
Douglas Elliman trademark and (ii) applying these royalty rates to a net sales stream and discounting the
resulting cash ﬂows to determine fair value. This fair value is then compared with the carrying value of the
trademark. The Company performed the qualitative assessment for the year ended December 31, 2016 and no
impairment was noted.

The fair value of the other intangibles with ﬁnite lives includes favorable leases arising from leases with
terms that are less than market value assumed in the business combination. Other intangibles with ﬁnite lives
also includes backlog and listing inventory for Development sales.

The unfavorable leases were from lease terms that exceeded market and gave rise to a liability that were

assumed in the business combination. The unfavorable leases are grouped with long-term Other liabilities.

F-39

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

8. GOODWILL AND OTHER INTANGIBLE ASSETS − (continued)

Amortization of other intangibles was $1,462 and $5,080 for the years ended December 31, 2016 and
2015, respectively. For the year ended December 31, 2015, $1,925 was taken as an offset to revenue, which
relate to amortization of backlog and listing inventory intangible assets and $208 was taken as other
amortization expense. For the years ended December 31, 2016 and December 31, 2015, respectively $2,075
and $3,730 were taken as rent expense for amortization of favorable leases and $613 and $783 were taken as
offsets to rent expense for amortization of unfavorable leases. Amortization expense is estimated to be $932
and $833, amortization income from unfavorable lease contracts of $166 and $22, and amortization expense of
$82 during the ﬁve years ended December 31, 2017 through 2021, respectively, and amortization income of
$7 thereafter.

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

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

Vector:

7.75% Senior Secured Notes due 2021, including premium of

$13,954 and $8,014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.5% Variable Interest Senior Convertible Debentures due 2020, net
of unamortized discount of $71,247 and $86,136* . . . . . . . . . .

7.5% Variable Interest Senior Convertible Notes due 2019, net of

December 31,
2016

December 31,
2015

$ 848,954

$608,014

187,503

172,614

unamortized discount of $108,480 and $132,119* . . . . . . . . . . .

121,520

97,881

Liggett:

Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term loan under credit facility . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total notes payable, long-term debt and other obligations . . . . . . . . .

37,163
2,999
4,519
591
1,203,249

3,213
3,269
9,716
461
895,168

Less:

Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total notes payable, long-term debt and other obligations . . . . . . . . .

(30,798)
1,172,451

(30,141)
865,027

Less:

Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount due after one year

(39,508)
$1,132,943

(8,919)
$856,108

*

The fair value of the derivatives embedded within the 5.5% Variable Interest Senior Convertible
Debentures ($59,433 at December 31, 2016 and $71,959 at December 31, 2015, respectively) and the
7.5% Variable Interest Senior Convertible Debentures ($52,899 at December 31, 2016 and $72,083 at
December 31, 2015, respectively) is separately classiﬁed as a derivative liability in the consolidated
balance sheets.

Senior Secured Notes — Vector:

7.75% Senior Secured Notes due 2021:

In February 2013, the Company issued $450,000 of its 7.75% Senior Secured Notes due 2021. The
aggregate net proceeds from the issuance of the 7.75% Senior Secured Notes were approximately $438,250
after deducting offering expenses. On April 15, 2014, the Company completed the sale of an additional

F-40

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS − (continued)

$150,000 principal amount of its 7.75% Senior Secured Notes due 2021 for a price of 106.75%. The
Company received net proceeds of approximately $158,670 after deducting underwriting discounts,
commissions, fees and offering expenses. On May 9, 2016, the Company completed the sale of an additional
$235,000 principal amount of its 7.75% Senior Secured Notes due 2021 for a price of 103.5%. The Company
received net proceeds of approximately $236,900 after deducting underwriting discounts, commissions, fees
and offering expenses.

On January 27, 2017, the Company completed the sale of $850,000 of its 6.125% senior secured notes
due 2025 (the ‘‘6.125% Notes’’). The Company used the net cash proceeds from the 6.125% Notes offering,
together with the proceeds of the concurrent sale of 2,000,000 of its common shares, to redeem all of the
Company’s outstanding 7.75% Senior Secured Notes due 2021 and to satisfy and discharge the indenture
governing the existing 7.75% Senior Secured Notes due 2021.

The 7.75% Senior Secured Notes paid interest on a semi-annual basis at a rate of 7.75% per year and
matured on February 15, 2021. The 7.75% Senior Secured Notes were guaranteed subject to certain customary
automatic release provisions on a joint and several basis by all of the 100% owned domestic subsidiaries of
the Company that are engaged in the conduct of the Company’s cigarette businesses. (See Note 21.) In
addition, some of the guarantees were collateralized by second priority or ﬁrst priority security interests in
certain collateral of some of the subsidiary guarantors, including their common stock, pursuant to security and
pledge agreements.

6.125% Senior Secured Notes due 2025 — Vector

In January 2017, the Company sold $850,000 of its 6.125% Senior Secured Notes due 2025 in a private
offering to qualiﬁed institutional investors in accordance with Rule 144A of the Securities Act of 1933. The
aggregate net proceeds from the sale of the 6.125% Senior Secured Notes were approximately $831,100 after
deducting underwriting discounts, commissions, fees and offering expenses. As discussed above, the Company
is using the net proceeds of the issuance to redeem all of the Company’s outstanding 7.75% Senior Secured
Notes due 2021. The Company will account for the redeemed $835,000 of the 7.75% senior secured notes as
an extinguishment of the debt.

The 6.125% Senior Secured Notes pay interest on a semi-annual basis at a rate of 6.125% per year and
mature on February 1, 2025. The Company may redeem some or all of the 6.125% Senior Secured Notes at
any time at a make-whole redemption price. On or after February 1, 2020, the Company may redeem some or
all of the 6.125% Senior Secured Notes at a premium that will decrease over time, plus accrued and unpaid
interest, if any, to the redemption date. In the event of a change of control, as deﬁned in the indenture
governing the 6.125% Senior Secured Notes, each holder of the 6.125% Senior Secured Notes may require the
Company to repurchase some or all of its 6.125% Senior Secured Notes at a repurchase price equal to 101%
of their aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase. If the
Company sells certain assets and does not apply the proceeds as required pursuant to the indenture, it must
offer to repurchase the 6.125% Senior Secured Notes at the prices listed in the indenture.

The 6.125% Senior Secured Notes are guaranteed subject

to certain customary automatic release
provisions on a joint and several basis by all of the wholly owned domestic subsidiaries of the Company that
are engaged in the conduct of the Company’s cigarette businesses. (See Note 21.) In addition, some of the
guarantees are collateralized by ﬁrst priority or second priority security interests in certain assets of some of
the subsidiary guarantors, including their common stock, pursuant to security and pledge agreements.

The indenture contains covenants

the payment of dividends by the Company if
the Company’s consolidated earnings before interest, taxes, depreciation and amortization, as deﬁned in the
indenture, for the most recently ended four full quarters is less than $75,000. The indenture also restricts
the incurrence of debt if the Company’s Leverage Ratio and its Secured Leverage Ratio, as deﬁned in the

restrict

that

F-41

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS − (continued)

the Company’s and the guaranteeing subsidiaries’ total debt

indenture, exceed 3.0 and 1.5, respectively. The Company’s Leverage Ratio is deﬁned in the indenture as the
less the fair market value of
ratio of
the Company’s cash,
investments in marketable securities and long-term investments to Consolidated
EBITDA, as deﬁned in the indenture. The Company’s Secured Leverage Ratio is deﬁned in the indenture in
the same manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness.

Variable Interest Senior Convertible Debt — Vector:

Vector has outstanding two series of variable interest senior convertible debt. Both series of debt pay
interest on a quarterly basis at a stated rate plus an additional amount of interest on each payment date. The
additional amount is based on the amount of cash dividends paid during the prior three-month period ending
on the record date for such interest payment multiplied by the total number of shares of its common stock into
which the debt would be convertible on such record date (the ‘‘Additional Interest’’).

6.75% Variable Interest Senior Convertible Note due 2015, as amended:

On March 14, 2014,

the holder of the 6.75% Variable Interest Senior Convertible Note due 2014
converted $25,000 principal balance of the $50,000 Note into 2,455,877 of the Company’s common shares.
The Company recorded non-cash accelerated interest expense related to the converted debt of $3,679 for the
year ended December 31, 2014. The debt conversion resulted in a reduction of debt and an increase to equity
in the amount of $25,000.

On November 14, 2014, the Note was amended whereby the stated maturity date of the Note was
extended from November 15, 2014 to February 15, 2015. On February 3, 2015, the holder of the 6.75%
Variable Interest Senior Convertible Note due 2014 converted the remaining $25,000 principal balance of the
$50,000 Note into 2,455,876 of our common stock.

The holder of the 6.75% Note was an entity affiliated with Dr. Phillip Frost, whose ownership is

approximately 15.3% of the Company’s common stock as of February 21, 2017.

7.5% Variable Interest Senior Convertible Notes due 2019:

In November 2012, the Company sold $230,000 of its 7.5% variable interest senior convertible notes due
2019 (the ‘‘2019 Convertible Notes’’) in a public offering registered under the Securities Act. The 2019
Convertible Notes are the Company’s senior unsecured obligations and are effectively subordinated to any of
its secured indebtedness to the extent of the assets securing such indebtedness. The 2019 Convertible Notes
are also structurally subordinated to all
liabilities and commitments of the Company’s subsidiaries. The
aggregate net proceeds from the sale of the 2019 Convertible Notes were approximately $218,900 after
deducting underwriting discounts, commissions, fees and offering expenses.

The 2019 Convertible Notes pay interest (‘‘Total Interest’’) on a quarterly basis beginning January 15,
2013 at a rate of 2.5% per annum plus additional interest, which is based on the amount of cash dividends
paid during the prior three-month period ending on the record date for such interest payment multiplied by the
total number of shares of its common stock into which the debt will be convertible on such record date.
Notwithstanding the foregoing, however, the interest payable on each interest payment date shall be the higher
of (i) the Total Interest and (ii) 7.5% per annum. The notes are convertible into the Company’s common stock
at the holder’s option. The notes will mature on January 15, 2019. If a fundamental change (as deﬁned in the
indenture) occurs, the Company will be required to offer to repurchase the notes at 100% of their principal
amount, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Share Lending Agreement:

In connection with the offering of its 2019 Convertible Notes in November 2012, the Company lent
the underwriter for the offering, a total of 7,431,606 shares of the
Jefferies & Company (‘‘Jefferies’’),
Company’s common stock under the Share Lending Agreement. Jefferies is entitled to offer and sell such

F-42

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS − (continued)

shares and use the sale to facilitate the establishment of a hedge position by investors in the notes and will
receive all proceeds from the common stock offerings and lending transactions under the Share Lending
Agreement. The Company received a nominal lending fee of $0.10 per share for each share of common stock
that the Company lent pursuant to the Share Lending Agreement.

The Share Lending Agreement requires that the shares borrowed be returned upon the maturity of the
related debt, January 2019, or earlier, including the redemption of the notes or the conversion of the notes to
shares of common stock pursuant to the terms of the indenture governing the notes. Borrowed shares are
issued and outstanding for corporate law purposes and, accordingly, the holders of the borrowed shares will
have all of the rights of a holder of the Company’s outstanding shares. However, because the share borrower
must return to the Company all borrowed shares (or identical shares), the borrowed shares are not considered
outstanding for purposes of computing and reporting the Company’s earnings per share in accordance with
U.S. GAAP. Jefferies agreed to pay to the Company an amount equal to any dividends or other distributions
that the Company pays on the borrowed shares.

The Company received a nominal fee for the loaned shares and determined the fair value of the Share
Lending Agreement was $3,204 at the date of issuance based on the present value of the future cash ﬂows
attributed to an estimated reduction in stated interest due to the presence of the Share Lending Agreement.
The $3,204 fair value was recognized as a debt ﬁnancing charge and is being amortized to interest expense
over the term of the notes. In November 2012 and September 2016, 3,715,804 and 2,135,923 shares were
returned but no cash was exchanged, respectively. As of December 31, 2016, 1,579,879 shares were
outstanding on the Share Lending Agreement and $466 had been amortized to interest expense. The issuance
costs associated with the Share Lending Agreement were presented on the balance sheet as a direct deduction
from the face amount of the related debt. The unamortized amount of these issuance costs was $2,140 and
$2,607 at December 31, 2016 and December 31, 2015, respectively.

5.5% Variable Interest Senior Convertible Notes due 2020 — Vector:

On March 24, 2014,

the Company completed the sale of $258,750 of its 5.5% Variable Interest
Convertible Senior Notes due 2020 (the ‘‘2020 Convertible Notes’’). The 2020 Convertible Notes are the
Company’s senior unsecured obligations and are effectively subordinated to any of its secured indebtedness to
the extent of the assets securing such indebtedness. The 2020 Convertible Notes are also structurally
subordinated to all liabilities and commitments of the Company’s subsidiaries.

The aggregate net proceeds from the sale of the 2020 Convertible Notes were approximately $250,300
after deducting underwriting discounts, commissions, fees and offering expenses. The net proceeds were used
for general corporate purposes, including for additional investments in real estate and in the Company’s
tobacco business.

The 2020 Convertible Notes pay interest (‘‘Total Interest’’) on a quarterly basis beginning April 15, 2014
at a rate of 1.75% per annum plus additional interest, which is based on the amount of cash dividends paid
during the prior three-month period ending on the record date for such interest payment multiplied by the total
number of shares of its common stock into which the debt will be convertible on such record date.
Notwithstanding the foregoing, however, the interest payable on each interest payment date after April 15,
2014 is the higher of (i) the Total Interest and (ii) 5.5% per annum with the interest payment on April 15,
2014 being based on 5.5% per annum. The notes are convertible into the Company’s common stock at the
holder’s option. The notes will mature on April 15, 2020. If a fundamental change (as deﬁned in the
indenture) occurs, the Company will be required to offer to repurchase the notes at 100% of their principal
amount, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

F-43

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS − (continued)

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

The conversion rates for all convertible debt outstanding as of December 31, 2016 and December 31,

2015, are summarized below:

December 31, 2016

December 31, 2015

Conversion
Price

Shares
per $1,000

Conversion
Price

Shares
per $1,000

7.5% Variable Interest Senior Convertible Notes

due 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . .

$15.22

65.7030

$15.22

65.7030

5.5% Variable Interest Senior Convertible

Debentures due 2020 . . . . . . . . . . . . . . . . . .

$23.46

42.6185

$23.46

42.6185

Embedded Derivatives on the Variable Interest Senior Convertible Debt:

The portion of the interest on the Company’s convertible debt which is computed by reference to the
cash dividends paid on the Company’s common stock is considered an embedded derivative within the
convertible debt, which the Company is required to separately value. In accordance with authoritative
guidance on accounting for derivatives and hedging, the Company has bifurcated these embedded derivatives
and estimated the fair value of the embedded derivative liability including using a third party valuation. The
resulting discount created by allocating a portion of the issuance proceeds to the embedded derivative is then
amortized to interest expense over the term of the debt using the effective interest method. Changes to the fair
value of these embedded derivatives are reﬂected quarterly in the Company’s consolidated statements of
operations as ‘‘Change in fair value of derivatives embedded within convertible debt.’’ The value of the
embedded derivative is contingent on changes in interest rates of debt instruments maturing over the duration
of the convertible debt as well as projections of future cash and stock dividends over the term of the debt.

A summary of non-cash interest expense associated with the amortization of the debt discount created by
the embedded derivative liability associated with the Company’s variable interest senior convertible debt is as
follows:

6.75% note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.75% exchange notes . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
7.5% convertible notes
. . . . . . . . . . . . . . . . . . . . . . . .
5.5% convertible notes
Interest expense associated with embedded derivatives . . .

Year Ended December 31,
2015
$ —
—
8,777
9,752
$18,529

2014
$ 6,097
13,570
5,553
6,851
$32,071

2016
$ —
—
14,294
11,438
$25,732

A summary of non-cash changes in fair value of derivatives embedded within convertible debt is as

follows:

6.75% note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.75% exchange notes . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
7.5% convertible notes
5.5% convertible notes
. . . . . . . . . . . . . . . . . . . . . . . .
Gain on changes in fair value of derivatives embedded

Year Ended December 31,
2015

$

(5)
—
15,555
8,905

2014
$ 3,212
8,990
5,296
1,911

2016
$ —
—
19,184
12,526

within convertible debt

. . . . . . . . . . . . . . . . . . . . . .

$31,710

$24,455

$19,409

F-44

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS − (continued)

The following table reconciles the fair value of derivatives embedded within convertible debt:

Balance at January 1, 2014 . . . . . . . . . . . .
Issuance of 5.5% Note . . . . . . . . . . . . . .
Conversion of $25,000 of 6.75% Variable
Interest Senior Convertible Note due
February 15, 2015 . . . . . . . . . . . . . . .
Conversion of $107,530 of 6.75% Variable
Interest Senior Convertible Exchange
Notes due November 15, 2014 . . . . . . .

Gain from changes in fair value of

embedded derivatives . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . .
Conversion of $25,000 of 6.75% Variable
Interest Senior Convertible Note due
February 15, 2015 . . . . . . . . . . . . . . .

Loss (gain) from changes in fair value of

embedded derivatives . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . . . .

Gain from changes in fair value of

6.75%
Note
$ 6,607
—

6.75%
Exchange
Notes
$12,521
—

7.5%
Convertible
Notes
$ 92,934
—

5.5%
Convertible
Notes

Total

$

— $112,062
82,775

82,775

(2,511)

—

—

(3,531)

—

—

—

—

(2,511)

(3,531)

(3,212)
884

(8,990)
—

(5,296)
87,638

(1,911)
80,864

(19,409)
169,386

(889)

5
—

—

—
—

—

—

(889)

(15,555)
72,083

(8,905)
71,959

(24,455)
144,042

embedded derivatives . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . .

—
$ —

—

(19,184)
$ — $ 52,899

(12,526)
$ 59,433

(31,710)
$112,332

Beneﬁcial Conversion Feature on Variable Interest Senior Convertible Debt:

the Company’s common stock had a fair value at

After giving effect to the recording of the embedded derivative liability as a discount to the convertible
debt,
in excess of the
conversion price resulting in a beneﬁcial conversion feature. The accounting guidance on debt with conversion
and other options requires that the intrinsic value of the beneﬁcial conversion feature be recorded to additional
paid-in capital and as a discount on the debt. The discount is then amortized to interest expense over the term
of the debt using the effective interest method. The beneﬁcial conversion feature has been recorded, net of
income taxes, as an increase to stockholders’ deﬁciency.

the issuance date of the debt

A summary of non-cash interest expense associated with the amortization of the debt discount created by

the beneﬁcial conversion feature on the Company’s variable interest senior convertible debt is as follows:

Amortization of beneﬁcial conversion feature:
6.75% note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.75% exchange notes . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
7.5% convertible notes
5.5% convertible notes
. . . . . . . . . . . . . . . . . . . . . .
Interest expense associated with beneﬁcial conversion

Year Ended December 31,
2015

2014

2016

$ —
—
9,345
3,451

$ —
—
5,738
2,943

$ 5,317
8,386
3,631
2,067

feature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,796

$8,681

$19,401

F-45

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS − (continued)

Unamortized Debt Discount on Variable Interest Senior Convertible Debt:

The following table reconciles unamortized debt discount within convertible debt:

Balance at January 1, 2014 . . . . . . . . . . . . . . $19,312
Conversion of $107,530 of 6.75% Variable

6.75%
Note

6.75%
Exchange
Notes
$ 25,945

7.5%
Convertible
Notes
$155,818

5.5%
Convertible
Notes

Total

$

— $201,075

Interest Senior Convertible Exchange Notes
due November 15, 2014 . . . . . . . . . . . . . . .

Conversion of $25,000 of 6.75% Variable
Interest Senior Convertible Note due
February 15, 2015 . . . . . . . . . . . . . . . . . .

Issuance of convertible notes − embedded

—

(3,989)

(7,898)

—

—

—

—

—

derivative . . . . . . . . . . . . . . . . . . . . . . . .

—

Issuance of convertible notes − beneﬁcial

conversion feature . . . . . . . . . . . . . . . . . . .
Amortization of embedded derivatives . . . . . . .
Amortization of beneﬁcial conversion feature . .
Balance at December 31, 2014 . . . . . . . . . . . .
Amortization of embedded derivatives . . . . . . .
Amortization of beneﬁcial conversion feature . .
Balance at December 31, 2015 . . . . . . . . . . . .
Amortization of embedded derivatives . . . . . . .
Amortization of beneﬁcial conversion feature . .
Balance at December 31, 2016 . . . . . . . . . . . . $ — $

—
(6,097)
(5,317)
—
—
—
—
—
—

—
—
(5,553)
(13,570)
(3,631)
(8,386)
146,634
—
(8,777)
—
(5,738)
—
132,119
—
(14,294)
—
—
(9,345)
— $108,480

—

—

(3,989)

(7,898)

82,775

82,775

24,974
(6,851)
(2,067)
98,831
(9,752)
(2,943)
86,136
(11,438)
(3,451)
$ 71,247

24,974
(32,071)
(19,401)
245,465
(18,529)
(8,681)
218,255
(25,732)
(12,796)
$179,727

Revolving Credit Facility — Liggett:

that consists of a revolving credit

On January 14, 2015, Liggett and 100 Maple LLC (‘‘Maple’’), a subsidiary of Liggett, entered into a
Third Amended and Restated Credit Agreement (the ‘‘Credit Agreement’’), with Wells Fargo Bank, National
Association (‘‘Wells Fargo’’), as agent and lender. The Credit Agreement governs a $60,000 credit facility (the
‘‘Credit Facility’’)
facility of up to $60,000 borrowing capacity
(the ‘‘Revolver’’) and a $3,600 term loan (the ‘‘Term Loan’’) that is within the $60,000 commitment under the
Credit Facility and reduces the amount available under the Revolver. All borrowings under the Credit Facility
(other than the Term Loan) are limited to a borrowing base equal to roughly (1) the lesser of (a) 85% of the
net amount of eligible accounts receivable and (b) $10,000 plus (2) the lesser of (a) the sum of (I) 80% of the
value of eligible inventory consisting of packaged cigarettes plus (II) the lesser of (x) 60% multiplied by
Liggett’s eligible cost of eligible inventory consisting of leaf tobacco and (y) 85% of the net orderly
liquidation value of eligible inventory consisting of leaf tobacco and (b) $60,000, less (3) certain reserves
against accounts receivable,
inventory, bank products or other items which Wells Fargo, as agent, may
establish from time to time in its permitted discretion. The obligations under the Credit Facility are
collateralized on a ﬁrst priority basis by all inventories, receivables and certain other personal property of
Liggett and Maple, a mortgage on Liggett’s manufacturing facility and certain real property of Maple, subject
to certain permitted liens. The Credit Facility amended and restated Liggett’s previous $50,000 credit facility
with Wells Fargo and Maple’s existing $3,600 term loan with Wells Fargo.

The term of the Credit Facility expires on March 31, 2020. Prime rate loans under the Credit Facility
bear interest at a rate equal to the greatest of (i) the Federal Funds rate plus 0.50%, (ii) LIBOR plus 1.0% and

F-46

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS − (continued)

(ii) the prime rate of Wells Fargo. LIBOR rate loans under the Credit Facility bear interest at a rate equal to
LIBOR plus 2.25%. The interest rate applicable to this Credit Facility at December 31, 2016 and 2015 was
3.02% and 2.70%, respectively.

The Credit Facility, as amended, permits the guaranty of the 6.125% Senior Secured Notes due 2025 by
each of Liggett and Maple and the pledging of certain assets of Liggett and Maple on a subordinated basis to
secure their guarantees. The credit facility also grants to Wells Fargo a blanket lien on all the assets of Liggett
and Maple, excluding any equipment pledged to current or future purchase money or other ﬁnanciers of such
equipment and excluding any real property, other than the Mebane Property and other real property to the
extent its value is in excess of $5,000. Wells Fargo, Liggett, Maple and the collateral agent for the holders of
our 6.125% senior secured notes have entered into an intercreditor agreement, pursuant to which the liens of
the collateral agent on the Liggett and Maple assets will be subordinated to the liens of Wells Fargo on the
Liggett and Maple assets.

The Credit Facility contains customary affirmative and negative covenants, including covenants that limit
Liggett’s, Maple’s and their subsidiaries’ ability to incur, create or assume certain indebtedness, to incur or
assume certain liens, to purchase, hold or acquire certain investments, to declare or make certain dividends
and distributions and to engage in certain mergers, consolidations and asset sales. The Credit Facility also
requires the Company to comply with speciﬁed ﬁnancial covenants, including that Liggett’s earnings before
interest, taxes, depreciation and amortization, as deﬁned under the Credit Facility, on a trailing twelve month
basis, shall not be less than $100,000 if Liggett’s excess availability, as deﬁned under the Credit Facility, is
less than $20,000. The covenants also require that annual capital expenditures, as deﬁned under the Credit
Facility (before a maximum carryover amount of $10,000), shall not exceed $20,000 during any ﬁscal year.
The Credit Facility also contains customary events of default. The Credit Facility requires Liggett’s
compliance with certain ﬁnancial and other covenants including a restriction on Liggett’s ability to pay cash
dividends unless Liggett’s borrowing availability, as deﬁned, under the credit facility for the 30-day period
prior to the payment of the dividend, and after giving effect to the dividend, was at least $5,000 and no event
of default had occurred under the agreement, including Liggett’s compliance with the covenants in the credit
facility. Liggett was in compliance with these covenants as of December 31, 2016.

In connection with the issuance of the 6.125% Senior Secured Notes due 2025, in January 2017, Liggett
and Maple entered into Amendment No. 1 of the Credit Facility to update certain deﬁned terms of the Credit
Facility relating to the Company’s 6.125% Senior Secured Notes due 2025.

Term Loan under Credit Facility — Liggett:

Within the commitment under

the Credit Facility, Wells Fargo holds a mortgage on Liggett’s
manufacturing facility through a Term Loan with Maple. The outstanding balance under the Term Loan is
$2,999 as of December 31, 2016. The Term Loan bears an interest rate equal to LIBOR + 2.25%. Monthly
principal payments of $25 are due under the Term Loan on the ﬁrst day of each month with the unpaid
principal balance of approximately $2,000 due at maturity on March 1, 2020.

As of December 31, 2016, a total of $40,162 was outstanding under the revolving and term loan portions
of the credit facility. Availability as determined under the facility was approximately $16,714 based on eligible
collateral at December 31, 2016.

Equipment Loans — Liggett:

Liggett did not enter into any equipment ﬁnancing arrangements in 2016.

In 2015, Liggett entered into two ﬁnancing agreements for a total of $1,765 related to the purchase of
equipment. The weighted average interest rate of the outstanding debt is 4.79% per annum and the interest
rates on the two notes are from 4.49% to 4.85%. Total monthly installments are approximately $33.

F-47

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS − (continued)

In 2014, Liggett entered into three ﬁnancing agreements for a total of $5,115 related to the purchase of
equipment. The weighted average interest rate of the outstanding debt is 5.02% per annum and the interest
rates on the three notes are from 4.98% to 5.04%. Total monthly installments are approximately $95. Liggett
also reﬁnanced $2,843 of debt related to equipment purchased in 2011. The reﬁnanced debt had an interest
rate of 5.63% and a remaining term of 21 months. The reﬁnanced debt carries an interest rate of 4.99% and a
term of 36 months.

Each of these equipment loans is collateralized by the purchased equipment.

Fair Value of Notes Payable and Long-Term Debt:

The estimated fair value of the Company’s notes payable and long-term debt are as follows:

Notes payable and long-term debt

. . . . . . . . .

December 31, 2016

December 31, 2015

Carrying
Value
$1,203,249(1)

Fair
Value
$1,570,732

Carrying
Value
$895,168(1)

Fair
Value
$1,297,875

(1) The carrying value does not include the carrying value of the embedded derivative. See Note 18.

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 18 if such liabilities were recorded on the 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 Note 1. The Company used a derived price based upon quoted market
prices and trade activity as of December 31, 2016 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.

Scheduled Maturities:

Scheduled maturities of long-term debt are as follows:

Year Ending December 31:
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Principal

$

39,509
2,099
231,261
261,151
835,001
—
$1,369,021

Unamortized
Discount/
(Premium)

Net

$

—
—
108,479
71,247
(13,954)
—
$165,772

$

39,509
2,099
122,782
189,904
848,955
—
$1,203,249

The scheduled maturities do not give effect to the redemption of the 7.75% Senior Secured Notes due

2021 or the issuance of the 6.125% Senior Secured Notes due 2025 in January 2017.

F-48

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

10. COMMITMENTS

Certain of the Company’s subsidiaries lease facilities and equipment used in operations under both
month-to-month and ﬁxed-term agreements. The aggregate minimum rentals under operating leases with
non-cancelable terms of one year or more as of December 31, 2016 are as follows:

Year Ending December 31:
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lease
Commitments

$ 24,952
22,068
21,786
18,656
15,213
101,138
$203,813

The Company’s rental expense for the years ended December 31, 2016, 2015 and 2014 was $27,237,

$24,446 and $22,516, respectively.

11. EMPLOYEE BENEFIT PLANS

Deﬁned Beneﬁt Plans and Postretirement Plans:

Deﬁned Beneﬁt Plans. The Company sponsors three deﬁned beneﬁt pension plans (two qualiﬁed and
one non-qualiﬁed) covering virtually all individuals who were employed by Liggett on a full-time basis prior
to 1994. Future accruals of beneﬁts under these three deﬁned beneﬁt plans were frozen between 1993 and
1995. These beneﬁt plans provide pension beneﬁts for eligible employees based primarily on their
compensation and length of service. Contributions are made to the two qualiﬁed pension plans in amounts
necessary to meet the minimum funding requirements of the Employee Retirement Income Security Act of
1974. The plans’ assets and beneﬁt obligations were measured at December 31, 2016 and 2015, respectively.

retirement beneﬁts to certain key employees,

The Company also sponsors a Supplemental Retirement Plan (‘‘SERP’’) where the Company will pay
supplemental
the
Company. The plan meets the applicable requirements of Section 409A of the Internal Revenue Code and is
intended to be unfunded for tax purposes. Payments under the SERP will be made out of the general assets of
the Company. The SERP is a deﬁned beneﬁt plan. Under the SERP, the beneﬁt payable to a participant at his
normal retirement date is a lump sum amount which is the actuarial equivalent of a predetermined annual
retirement beneﬁt set by the Company’s board of directors. Normal retirement date is deﬁned as the January 1
following the attainment by the participant of the latter of age 60 or the completion of eight years of
employment following January 1, 2002 with the Company or a subsidiary.

including certain executive officers of

The SERP provides the Company’s President and Chief Executive Officer with an additional beneﬁt
under the SERP equal to a $736 lifetime annuity. In addition, in the event of a termination of his employment
under the circumstances where he is entitled to severance payments under his employment agreement, he will
be credited with an additional 36 months of service towards vesting under the SERP.

At December 31, 2016, the aggregate lump sum equivalents of the annual retirement beneﬁts payable
under the Amended SERP at normal retirement dates occurring during the following years is as follows:
2017 — $0; 2018 — $0; 2019 — $0; 2020 — $7,111; 2021 — $0 and 2022 to 2026 — $51,155. In the case of
a participant who becomes disabled prior to his normal retirement date or whose service is terminated without
cause, the participant’s beneﬁt consists of a pro-rata portion of the full projected retirement beneﬁt to which
he would have been entitled had he remained employed through his normal retirement date, as actuarially
discounted back to the date of payment. A participant who dies while working for the Company or a

F-49

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. EMPLOYEE BENEFIT PLANS − (continued)

subsidiary (and before becoming disabled or attaining his normal retirement date) will be paid an actuarially
discounted equivalent of his projected retirement beneﬁt; conversely, a participant who retires beyond his
normal retirement date will receive an actuarially increased equivalent of his projected retirement beneﬁt.

Postretirement Medical and Life Plans. The Company provides certain postretirement medical and life
insurance beneﬁts to certain employees and retirees. Substantially all of the Company’s manufacturing
employees as of December 31, 2016 are eligible for postretirement medical beneﬁts if they reach retirement
age while working for Liggett or certain affiliates. Retirees are required to fund 100% of participant medical
premiums and, pursuant to union contracts, Liggett reimburses approximately 192 hourly retirees, who retired
prior to 1991, for Medicare Part B premiums. In addition, the Company provides life insurance beneﬁts to
approximately 110 active employees and 437 retirees who reach retirement age and are eligible to receive
beneﬁts under one of the Company’s deﬁned beneﬁt pension plans. The Company’s postretirement liabilities
are comprised of Medicare Part B and life insurance premiums.

The following table provides a reconciliation of beneﬁt obligations, plan assets and the funded status of

the pension plans and other postretirement beneﬁts:

Pension Beneﬁts

Other Postretirement Beneﬁts

2016

2015

2016

2015

Change in beneﬁt obligation:

Beneﬁt obligation at January 1 . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . .
Plan settlement
. . . . . . . . . . . . . . . . . . . . . .
Special termination beneﬁts . . . . . . . . . . . . . .
Beneﬁts paid . . . . . . . . . . . . . . . . . . . . . . . .
Expenses paid . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . .
Beneﬁt obligation at December 31 . . . . . . . . .

Change in plan assets:

Fair value of plan assets at January 1 . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . .
Plan settlement
. . . . . . . . . . . . . . . . . . . . . .
Expenses paid . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . .
Beneﬁts paid . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at December 31 . . . . .

$(133,506)
(547)
(5,419)
—
—
9,596
309
(3,154)
$(132,721)

$ 106,620
6,720
—
(309)
346
(9,596)
$ 103,781

$(150,199)
(532)
(4,992)
17,047
(3,831)
9,879
490
(1,368)
$(133,506)

$ 134,017
(327)
(17,047)
(490)
346
(9,879)
$ 106,620

Unfunded status at December 31 . . . . . . . . . . . .

$ (28,940)

$ (26,886)

$(8,434)
(5)
(385)
—
—
695
—
(553)
$(8,682)

$ —
—
—
—
695
(695)
$ —

$(8,682)

Amounts recognized in the consolidated balance

sheets:

Prepaid pension costs . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . .
Non-current employee beneﬁt liabilities . . . . . . . .
Net amounts recognized . . . . . . . . . . . . . . . . . .

$ 22,273
(316)
(50,897)
$ (28,940)

$ 20,650
(320)
(47,216)
$ (26,886)

$ —
(621)
(8,061)
$(8,682)

$(9,031)
(8)
(371)
—
—
522
—
454
$(8,434)

$ —
—
—
—
522
(522)
$ —

$(8,434)

$ —
(595)
(7,839)
$(8,434)

F-50

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. EMPLOYEE BENEFIT PLANS − (continued)

Pension Beneﬁts
2015

2014

2016

Other Postretirement Beneﬁts
2015

2014

2016

Service cost − beneﬁts earned

during the period . . . . . . . . . .

$

547

$

532

$

523

$

5

$

8

$

9

Interest cost on projected beneﬁt

obligation . . . . . . . . . . . . . . .
Expected return on assets . . . . . .
Settlement loss
. . . . . . . . . . . . .
Special termination beneﬁt

recognized . . . . . . . . . . . . . . .
Amortization of net loss (gain)
. .
Net expense (income) . . . . . . . . .

5,419
(6,076)
—

4,992
(7,378)
3,214

—
1,855
$ 1,745

3,831
1,083
$ 6,274

6,196
(8,518)
—

—
1,075
$ (724)

385
—
—

—
(75)
$315

371
—
—

—
(97)
$282

430
—
—

—
(60)
$379

The following table summarizes amounts in accumulated other comprehensive loss (gain) that are

expected to be recognized as components of net periodic beneﬁt cost for the year ending 2017.

Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deﬁned
Beneﬁt
Pension Plans
$2,009

Post-
Retirement
Plans
$(54)

Total
$1,955

As of December 31, 2016, accumulated other comprehensive (loss) income, before income taxes, consists

of the following:

Accumulated other comprehensive (loss) income as of

January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .

Amortization of gain (loss)
Net loss arising during the year
Accumulated other comprehensive (loss) income as of

Deﬁned
Beneﬁt
Pension Plans

Post-
Retirement
Plans

$(35,258)
1,855
(2,511)

$ 939
(75)
(553)

Total

$(34,319)
1,780
(3,064)

December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . .

$(35,914)

$ 311

$(35,603)

As of December 31, 2015, accumulated other comprehensive (loss) income, before income taxes,

consisted of the following:

Accumulated other comprehensive (loss) income as of

January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of gain (loss)
. . . . . . . . . . . . . . . . . . .
Net (loss) gain arising during the year . . . . . . . . . . . .
Accumulated other comprehensive (loss) income as of

Deﬁned
Beneﬁt
Pension Plans

Post-
Retirement
Plans

$(30,481)
4,297
(9,074)

$582
(97)
454

Total

$(29,899)
4,200
(8,620)

December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . .

$(35,258)

$939

$(34,319)

As of December 31, 2016, two of the Company’s four deﬁned beneﬁt plans experienced accumulated
beneﬁt obligations in excess of plan assets, for which in the aggregate the projected beneﬁt obligation,
accumulated beneﬁt obligation and fair value of plan assets were $51,213, $51,213 and $0, respectively. As of
two of the Company’s four deﬁned beneﬁt plans experienced accumulated beneﬁt
December 31, 2015,

F-51

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. EMPLOYEE BENEFIT PLANS − (continued)

obligations in excess of plan assets, for which in the aggregate the projected beneﬁt obligation, accumulated
beneﬁt obligation and fair value of plan assets were $47,535, $47,535 and $0, respectively.

2016

Pension Beneﬁts
2015

2014

Other
Postretirement Beneﬁts
2014
2015
2016

Weighted average assumptions:

Discount rates − beneﬁt

obligation . . . . . . . . . . . . 3.60% − 4.20% 3.75% − 4.50% 2.75% − 4.00% 4.40% 4.75% 4.25%
Discount rates − service cost . . 3.75% − 4.50% 2.75% − 4.25% 3.00% − 4.75% 4.75% 4.25% 5.00%
Assumed rates of return on

invested assets

Salary increase assumptions

. . . . . . . . .
. .

6.00%
N/A

6.00%
N/A

6.50%
N/A

—% —% —%
3.00% 3.00% 3.00%

Discount rates were determined by a quantitative analysis examining the prevailing prices of high quality
bonds to determine an appropriate discount rate for measuring obligations. The aforementioned analysis
analyzes the cash ﬂow from each of the Company’s four beneﬁt plans as well as a separate analysis of the
cash ﬂows from the postretirement medical and life insurance plans sponsored by Liggett. The aforementioned
analyses then construct a hypothetical bond portfolio whose cash ﬂow from coupons and maturities match the
year-by-year, projected beneﬁt cash ﬂow from the respective pension or retiree health plans. The Company
uses the lower discount rate derived from the two independent analyses in the computation of the beneﬁt
obligation and service cost for each respective retirement
liability. The Company uses the discount rate
derived from the analysis in the computation of the beneﬁt obligation and service cost for all the plans
respective retirement liability.

The Company considers input from its external advisors and historical returns in developing its expected
rate of return on plan assets. The expected long-term rate of return is the weighted average of the target asset
allocation of each individual asset class. The Company’s actual 10-year annual rate of return on its pension
plan assets was 5.2%, 6.0% and 6.6% for the years ended December 31, 2016, 2015 and 2014, respectively,
and the Company’s actual ﬁve-year annual rate of return on its pension plan assets was 7.6%, 6.3% and 9.8%
for the years ended December 31, 2016, 2015 and 2014, respectively.

Gains and losses resulted from changes in actuarial assumptions and from differences between assumed
and actual experience, including, among other items, changes in discount rates and changes in actual returns
on plan assets as compared to assumed returns. These gains and losses are only amortized to the extent that
they exceed 10% of the greater of Projected Beneﬁt Obligation and the fair value of assets. For the year
ended December 31, 2016, Liggett used a 14.18-year period for its Hourly Plan and a 14.31-year period for its
Salaried Plan to amortize pension fund gains and losses on a straight line basis. Such amounts are reﬂected in
the pension expense calculation beginning the year after the gains or losses occur. The amortization of
deferred losses negatively impacts pension expense in the future.

Plan assets are invested employing multiple investment management ﬁrms. Managers within each asset
class cover a range of investment styles and focus primarily on issue selection as a means to add value. Risk
is controlled through a diversiﬁcation among asset classes, managers, styles and securities. Risk is further
controlled both at the manager and asset class level by assigning excess return and tracking error targets.
Investment managers are monitored to evaluate performance against these benchmark indices and targets.

Allowable investment types include equity, investment grade ﬁxed income, high yield ﬁxed income,
hedge funds and short term investments. The equity fund is comprised of common stocks and mutual funds of
large, medium and small companies, which are predominantly U.S. based. The investment grade ﬁxed income
issued or guaranteed by the
investing in ﬁxed income securities
fund includes managed funds
U.S. government, or by its respective agencies, mortgage backed securities, including collateralized mortgage

F-52

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. EMPLOYEE BENEFIT PLANS − (continued)

obligations, and corporate debt obligations. The high yield ﬁxed income fund includes a fund which invests in
non-investment grade corporate debt securities. The hedge funds invest in both equity, including common and
preferred stock, and debt obligations, including convertible debentures, of private and public companies. The
Company generally utilizes its short term investments, including interest-bearing cash, to pay beneﬁts and to
deploy in special situations.

The Liggett Employee Beneﬁts Committee has established the following target assets allocation to equal
55.0% equity investments, 30.0% investment grade ﬁxed income, 10.0% high yield ﬁxed income, and 5.0%
short-term investments, with a rebalancing range of approximately plus or minus 5% around the target asset
allocations.

Vector’s deﬁned beneﬁt retirement plan allocations at December 31, 2016 and 2015, by asset category,

were as follows:

Asset category:

Plan Assets at
December 31,

2016

2015

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment grade ﬁxed income securities
. . . . . . . . . . . . . . . . . . . . . .
High yield ﬁxed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

54%
30%
10%
2%
4%
100%

51%
30%
11%
3%
5%
100%

The deﬁned beneﬁt plans’ recurring ﬁnancial assets subject to fair value measurements and the necessary

disclosures are as follows:

Description
Assets:

Fair Value Measurements as of December 31, 2016

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Signiﬁcant
Other
Observable
Inputs
(Level 2)

Signiﬁcant
Unobservable
Inputs
(Level 3)

Total

Insurance contracts . . . . . . . . . . . . . . . . . . .

$

1,765

$ —

$ 1,765

$ —

Amounts in individually managed investment

accounts:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
U.S. equity securities
Common collective trusts
. . . . . . . . . . . . . .
Investment partnership . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,302
8,298
76,969
12,447
$103,781

4,302
8,298
—
—
$12,600

—
—
76,969
10,457
$89,191

—
—
—
1,990
$1,990

F-53

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. EMPLOYEE BENEFIT PLANS − (continued)

Description
Assets:

Fair Value Measurements as of December 31, 2015

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Signiﬁcant
Other
Observable
Inputs
(Level 2)

Signiﬁcant
Unobservable
Inputs
(Level 3)

Total

Insurance contracts . . . . . . . . . . . . . . . . . . .

$

1,760

$ —

$ 1,760

$ —

Amounts in individually managed investment

accounts:

Cash, mutual funds and common stock . . . . .
. . . . . . . . . . . . . . . . .
U.S. equity securities
Common collective trusts
. . . . . . . . . . . . . .
Investment partnership . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,429
28,434
56,327
14,670
$106,620

5,429
28,434
—
—
$33,863

—
—
56,327
11,256
$69,343

—
—
—
3,414
$3,414

The fair value determination disclosed above of assets as Level 3 under the fair value hierarchy was
determined based on unobservable inputs and were based on company assumptions, and information obtained
from the investments based on the indicated market values of the underlying assets of the investment
portfolio. The fair value of investment included in Level 1 are based on quoted market prices from various
stock exchanges. The Level 2 investments are based on quoted prices for similar assets or liabilities in active
markets and quoted prices for identical or similar assets in markets that are not active.

The changes in the fair value of the Level 3 investments as of December 31, 2016 and 2015 were as

follows:

Balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions
. . . . . . . . . . . . .
Unrealized gain (loss) on long-term investments
Realized gain (loss) on long-term investments . . . . . . . . . . . . . . .
Balance as of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2016
$ 3,414
(1,648)
16
208
$ 1,990

2015
$ 6,824
(2,904)
(470)
(36)
$ 3,414

For 2016 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates
between 0.3% and 18.23% between 2017 and 2024 and 4.5% thereafter. For 2015 measurement purposes,
annual increases in Medicare Part B trends were assumed to equal rates between 1.29% and 17.92% between
2017 and 2024 and 4.5% after 2024.

Assumed health care cost trend rates have a signiﬁcant effect on the amounts reported for the health care

plans. A 1% change in assumed health care cost trend rates would have the following effects:

Effect on total of service and interest cost components . . . . . . . . . . .
Effect on beneﬁt obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1% Increase
$ 4
71

1% Decrease
$ (4)
(67)

To comply with ERISA’s minimum funding requirements, the Company does not currently anticipate that
it will be required to make any contributions to the pension plan year beginning on January 1, 2017 and
the Company may have for
ending on December 31, 2017. Any additional
subsequent years is contingent on several factors and is not reasonably estimable at this time.

funding obligation that

F-54

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. EMPLOYEE BENEFIT PLANS − (continued)

Estimated future pension and postretirement medical beneﬁts payments are as follows:

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 − 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Proﬁt Sharing and 401(k) Plans:

Pension
$ 9,187
8,715
8,210
14,838
7,225
80,902

Postretirement
Medical
$ 621
641
637
622
618
3,015

The Company maintains 401(k) plans for substantially all U.S. employees which allow eligible
employees to invest a percentage of their pre-tax compensation. The Company contributed to the 401(k) plans
and expensed $1,564, $1,467 and $1,219 for
the years ended December 31, 2016, 2015 and 2014,
respectively.

12. RESTRUCTURING

In October 2015, the Company’s Tobacco segment commenced a restructuring by realigning its sales
force and adjusting its business model
to more efficiently serve its chain and independent accounts. In
connection with the restructuring, the segment’s workforce was reduced by 95 employees (or approximately
17% of the Tobacco segment’s workforce).

The following table summarizes amounts expensed for the years ended December 31, 2016 and 2015:

Cash Charges:

Employee severance and beneﬁts . . . . . . . . . . . . . . . . . . . . . . . .
Lease termination costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-Cash:

Employee pension beneﬁts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Point of sale inventory impairment

Total restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amounts expensed
through Year Ended
December 31,

2016

$—
41
—
41

—
—
—
$41

2015

$1,094
203
68
1,365

5,438
454
5,892
$7,257

All amounts expensed through December 31, 2016 and 2015 are included as Restructuring charges in the

Company’s consolidated statements of operations and are all attributable to the Company’s Tobacco segment.

Severance and beneﬁts expensed for the year ended December 31, 2015 relate entirely to a reduction in
sales and administrative positions. Non-cash employee pension beneﬁts costs relate to a reduction in
manufacturing positions at Liggett’s plant in Mebane, NC.

Employee pension beneﬁts consist of the costs associated with enhanced pension beneﬁts due to
employees under the terms of a voluntary termination program initiated in the third quarter of 2015. Pension
plan participants electing to accept voluntary termination of employment were offered enhanced pension
beneﬁts including an increased payment as well as the option to receive a lump sum beneﬁt instead of an

F-55

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

12. RESTRUCTURING − (continued)

annuity. The costs of the special termination beneﬁt associated with the increased payments were $3,831 and
the costs of settlements related to lump sum payments were $1,607 for the year ended December 31, 2015.

The following table presents the activity under the Tobacco segment restructuring plan for the years

ended December 31, 2016 and 2015:

Employee
Severance
and Beneﬁts

Contract
Termination/Exit
Costs

Accrual balance as of

January 1, 2015 . . . . . . . . .
Restructuring charges . . . . . . .
Utilized . . . . . . . . . . . . . . . .
Accrual balance as of

December 31, 2015 . . . . . .
Restructuring charges . . . . . . .
Utilized . . . . . . . . . . . . . . . .
Accrual balance as of

$ —
1,094
(672)

422
—
(422)

$ —
203
(155)

48
41
(89)

Non-Cash
Pension
Expense

Non-Cash
Asset
Impairment

$ —
5,438
(5,438)

$ —
454
(454)

—
—
—

—
—
—

Total

$ —
7,257
(6,767)

490
41
(531)

Other

$ —
68
(48)

20
—
(20)

December 31, 2016 . . . . . .

$ —

$ —

$ —

$ —

$ —

$ —

13. INCOME TAXES

The Company ﬁles a consolidated U.S. income tax return that includes its more than 80%-owned U.S.

subsidiaries. The amounts provided for income taxes are as follows:

Current:

U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred:

U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,
2015

2014

2016

$29,185
7,407
$36,592

$10,076
2,495
12,571
$49,163

$ 40,542
13,886
$ 54,428

$ (9,943)
(3,252)
(13,195)
$ 41,233

$ 8,809
2,416
$11,225

$16,484
5,456
21,940
$33,165

F-56

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

13. INCOME TAXES − (continued)

The tax effect of temporary differences which give rise to a signiﬁcant portion of deferred tax assets and

liabilities are as follows:

Deferred tax assets:

Employee beneﬁt accruals
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Impact of timing of settlement payments
. . . . . . . . . . . . . . . . . .
Various U.S. state tax loss carryforwards
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Less: Valuation allowance
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax liabilities:

. . . .
Excess of tax basis over book-basis non-consolidated entities
. . . . . . . . . . .
Book/tax differences on ﬁxed and Intangible assets
Capitalized interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book/tax differences on inventory . . . . . . . . . . . . . . . . . . . . . . .
Book/tax differences on long-term investments
. . . . . . . . . . . . . .
Impact of accounting for convertible debt . . . . . . . . . . . . . . . . . .
Book/tax differences on available for sale securities . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Net deferred tax liabilities

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2016

December 31,
2015

$ 17,335
1,534
28,266
6,551
2,803
56,489
(4,439)
$ 52,050

$

(7,494)
(54,776)
(8,673)
(16,143)
(23,937)
(27,362)
(6,750)
—
$(145,135)
$ (93,085)

$ 16,201
4,332
39,840
6,713
—
67,086
(3,900)
$ 63,186

$

(7,292)
(52,598)
(4,080)
(16,891)
(29,701)
(30,494)
—
(1,559)
$(142,615)
$ (79,429)

Vector Tobacco had tax effected state and local net operating loss carryforwards of $6,551 and $6,713,
respectively, at December 31, 2016 and 2015, expiring through tax year 2027. The Company provides a
valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. The valuation allowance of $4,439 and
$3,900 at December 31, 2016 and 2015, respectively, consisted primarily of a reserve against Vector Tobacco’s
state and local net operating loss carryforwards. The valuation allowance was decreased in 2016 and 2015,
respectively, as a result of changes in estimates in Vector Tobacco’s ability to utilize state tax net operating
losses in future years because of changes in state tax apportionment and projected taxable income.

The consolidated balance sheets of the Company include deferred income tax assets and liabilities, which
temporary differences in the application of accounting rules established by generally accepted

represent
accounting principles and income tax laws.

Deferred federal income tax expense differs in 2016, 2015 and 2014 due to the nature of the items in
current and deferred tax liabilities. The deferred tax expense in 2016 results primarily from the recognition of
temporary differences (related to litigation accruals) at the Tobacco segment and from the capitalization of
interest expense on the Company’s equity method real estate investments. The deferred tax expense in 2015
results primarily from the capitalization of interest expense on the Company’s equity method real estate
investments. The deferred tax expense in 2014 results primarily from the recognition of temporary differences
(related to litigation accruals) at the Tobacco segment.

F-57

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

13. INCOME TAXES − (continued)

Differences between the amounts provided for income taxes and amounts computed at

the federal

statutory tax rate are summarized as follows:

Income before income taxes . . . . . . . . . . . . . . . . . . .
Federal income tax expense at statutory rate . . . . . . . .

Increases (decreases) resulting from:

State income taxes, net of federal income tax

beneﬁts

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Impact of non-controlling interest
Non-deductible expenses
. . . . . . . . . . . . . . . . . . .
Impact of domestic production deduction . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inclusion of tax liabilities from unincorporated

2016
$126,429
44,250

Year Ended December 31,
2015
$107,705
37,697

2014
$82,279
28,798

6,991
(2,148)
2,569
(2,603)
(359)
(1,202)

6,862
(2,516)
2,941
(3,436)
(265)
152

4,804
(4,290)
2,581
(248)
(275)
—

entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,126

831

1,374

Changes in valuation allowance, net of equity and

tax audit adjustments . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . .

539
$ 49,163

(1,033)
$ 41,233

421
$33,165

The following table summarizes the activity related to the unrecognized tax beneﬁts:

Balance at January 1, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to prior years
. . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to prior years
. . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to prior years
. . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,122
318
(442)
(1,254)
1,744
265
(132)
(354)
1,523
72
(119)
(961)
515

$

In the event

the unrecognized tax beneﬁts of $515 and $1,523 at December 31, 2016 and 2015,
respectively, were recognized, such recognition would impact the annual effective tax rates. During 2016, the
accrual for potential penalties and interest related to these unrecognized tax beneﬁts was decreased by $74,
and in total, as of December 31, 2016, a liability for potential penalties and interest of $145 has been
recorded. During 2015,
the accrual for potential penalties and interest related to these unrecognized tax
beneﬁts was decreased by $28, and in total, as of December 31, 2015, a liability for potential penalties and
interest of $219 has been recorded.

It

is reasonably possible the Company may recognize up to approximately $170 of currently
unrecognized tax beneﬁts over the next 12 months, pertaining primarily to expiration of statutes of limitations
of positions reported on state and local income tax returns. The Company ﬁles U.S. and state and local
income tax returns in jurisdictions with varying statutes of limitations.

F-58

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

14. STOCK COMPENSATION

The Company granted equity compensation under its Amended and Restated 1999 Long-Term Incentive
Plan (the ‘‘1999 Plan’’) until the 1999 Plan expired on December 31, 2013. On May 16, 2014, the Company’s
stockholders approved the 2014 Management Incentive Plan (the ‘‘2014 Plan’’). The 2014 Plan replaced the
1999 Plan. Like the 1999 Plan,
the 2014 Plan provides for the Company to grant stock options, stock
appreciation rights and restricted stock. The 2014 Plan also provides for awards based on a multi-year
performance period and for annual short-term awards based on a twelve-month performance period. Shares
available for issuance under the 2014 Plan are 7,823,451 shares. The Company may satisfy its obligations
under any award granted under the 2014 Plan by issuing new shares. Awards previously granted under the
1999 Plan remain outstanding in accordance with their terms.

Stock Options. The Company recognized compensation expense of $2,203, $1,675 and $1,573 related to

stock options in the years ended December 31, 2016, 2015 and 2014, respectively.

All awards have a contractual term of ten years and awards vest over a period of three to seven years
depending upon each grant. The fair value of option grants is estimated at the date of grant using the
Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions, including expected stock
price characteristics which are signiﬁcantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect
the existing models do not
necessarily provide a reliable single measure of the fair value of stock-based compensation awards.

the fair value estimate,

The assumptions used under the Black-Scholes option pricing model in computing fair value of options
are based on the expected option life considering both the contractual term of the option and expected
employee exercise behavior, the interest rate associated with U.S. Treasury issues with a remaining term equal
to the expected option life and the expected volatility of the Company’s common stock over the expected term
of the option. The assumptions used for grants in the years ended December 31, 2016, 2015 and 2014 were
as follows:

Risk-free interest rate . . . . . . . . .
Expected volatility . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . .
Expected holding period . . . . . . . 7.00 − 10.00 years
Weighted-average grant date fair

2016
1.5% − 1.7%
16.49% − 18.13%
0.0%

value(1)

. . . . . . . . . . . . . . . . .

$5.09 − $6.88

2015
1.8% − 2.0%
22.18% − 22.25%
0.0%
7.00 − 10.00 years

2014
1.1% − 2.6%
18.51% − 22.37%
0.0%
4.00 − 10.00 years

$6.47 − $8.07

$3.28 − $7.32

(1) Per share amounts have not been adjusted to give effect to the stock dividends in 2016, 2015 and 2014.

F-59

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

14. STOCK COMPENSATION − (continued)

A summary of employee stock option transactions follows:

Outstanding on January 1, 2014 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding on December 31, 2014 . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding on December 31, 2015 . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding on December 31, 2016 . . . . . . . . . .

Number of
Shares
3,643,316
448,580
(464,877)
(13)
3,627,006
427,219
(121,308)
(5)
3,932,912
406,875
(33,501)
(6)
4,306,280

Weighted-
Average
Exercise
Price
$11.41
$16.97
$10.87
$ —
$12.16
$20.95
$11.45
$ —
$13.16
$22.13
$11.87
$ —
$14.02

Weighted-
Average
Remaining
Contractual
Term
(Years)
6.5

Aggregate
Intrinsic
Value(1)
$ 9,959

6.4

$25,977

5.9

$36,612

5.3

$37,557

Options exercisable at:

December 31, 2014 . . . . . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . . . . . . .

1,678,829
2,137,112
2,111,985

(1) The aggregate intrinsic value represents the amount by which the fair value of the underlying common
stock ($22.74, $22.47 and $19.33 at December 31, 2016, 2015 and 2014, respectively) exceeds the option
exercise price.

Additional information relating to options outstanding at December 31, 2016 follows:

Options Outstanding
Weighted-
Average
Remaining
Contractual
Life
(Years)
2.9
5.4
—
7.4
—
8.6
5.3

Outstanding
as of
12/31/2016
1,575,948
1,447,663
—
448,577
—
834,092
4,306,280

Weighted-
Average
Exercise
Price
$10.02
$13.13
$ —
$16.98
$ —
$21.53
$14.02

Options Exercisable

Weighted-
Average
Remaining
Contractual
Life
(Years)
2.9
4.0
—
—
—
—
3.2

Exercisable
as of
12/31/2016
1,575,948
536,037
—
—
—
—
2,111,985

Weighted-
Average
Exercise
Price
$10.02
$12.88
$ —
$ —
$ —
$ —
$10.81

Aggregate
Intrinsic
Value
$ —
—
—
—
—
—
$25,331

Range of
Exercise Prices
$8.85 − $11.07 . . . .
$11.07 − $13.28 . . .
$13.28 − $15.49 . . .
$15.49 − $17.70 . . .
$17.70 − $19.92 . . .
$19.92 − $22.13 . . .

As of December 31, 2016, there was $3,680 of total unrecognized compensation cost related to unvested
is expected to be recognized over a weighted-average period of approximately

stock options. The cost
1.31 years at December 31, 2016.

F-60

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

14. STOCK COMPENSATION − (continued)

The Company reﬂects the tax savings resulting from tax deductions in excess of expense reﬂected in its

consolidated ﬁnancial statements as a component of ‘‘Cash Flows from Financing Activities.’’

Non-qualiﬁed options for 406,875 shares of common stock were issued during 2016. The exercise price
of the options granted was $22.13 in 2016. The exercise price of the options granted in 2016 were at the fair
value on the date of the grants.

Non-qualiﬁed options for 427,219 shares of common stock were issued during 2015. The exercise price
of the options granted was $20.95 in 2015. The exercise price of the options granted in 2015 were at the fair
value on the date of the grants.

Non-qualiﬁed options for 448,580 shares of common stock were issued during 2014. The exercise price
of the options granted was $16.97 in 2014. The exercise price of the options granted in 2014 were at the fair
value on the date of the grants.

The Company has elected to use the long-form method under which each award grant is tracked on an
employee-by-employee basis and grant-by-grant basis to determine if there is a tax beneﬁt or tax deﬁciency
for such award. The Company then compares the fair value expense to the tax deduction received for each
grant and aggregates the beneﬁts and deﬁciencies to establish its hypothetical APIC Pool.

The Company recognizes windfall tax beneﬁts associated with the exercise of stock options directly to
stockholders’ deﬁciency only when realized. A windfall tax beneﬁt occurs when the actual tax beneﬁt realized
by the Company upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any,
associated with the award that the Company had recorded.

The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014
was $309, $1,151 and $3,539, respectively. Tax beneﬁts related to option exercises of $116, $821 and $1,178
were recorded as increases to stockholders’ deﬁciency for the years ended December 31, 2016, 2015 and
2014, respectively.

Restricted Stock Awards. On April 2016,

the
Company’s common stock (the ‘‘April 2016 Grant’’) pursuant to the 1999 Plan to each of its ﬁve outside
directors. The shares vest over three years and the Company will recognize $1,054 of expense over the
vesting period of the April 2016 grant. The Company recognized expense of $236 for the year ended
December 31, 2016.

the Company granted 52,500 restricted shares of

On November 10, 2015, the Company granted its President and Chief Executive Officer an award of
1,260,000 shares of its common stock subject to service and performance-based vesting. The award shares
were issued pursuant to the terms of an agreement that provides that both a performance requirement and a
continued employment requirement must be met over a seven-year performance period to earn vested rights
with respect to the award shares. The maximum potential amount of the award shares reﬂects recognition of
the CEO’s contributions as CEO since January 1, 2006 and the value of his management and real estate
expertise to the Company. The fair market value of the restricted shares on the date of grant was $28,374 and
is being amortized over the performance period as a charge to compensation expense. The Company
recognized expense of $4,278 and $597 for the years ended December 31, 2016 and 2015, respectively.

On July 23, 2014,

the Company granted its President and Chief Executive Officer an award of
1,157,625 shares of its common stock subject to service and performance-based vesting. The award shares
were issued pursuant to the terms of an agreement that provides that both a performance requirement and a
continued employment requirement must be met over a seven-year performance period to earn vested rights
with respect to the award shares. The maximum potential amount of the award shares reﬂects recognition of
the CEO’s contributions as CEO since January 1, 2006 and the value of his management and real estate
expertise to the Company. The fair market value of the restricted shares on the date of grant was $20,780 and

F-61

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

14. STOCK COMPENSATION − (continued)

is being amortized over the performance period as a charge to compensation expense. The Company
recognized expense of $3,122, $2,992 and $1,320 for the years ended December 31, 2016, 2015 and 2014,
respectively.

In May 2013,

the Company granted 12,155 restricted shares of the Company’s common stock (the
‘‘May 2013 Grant’’) pursuant to the 1999 Plan to each of its ﬁve outside directors. The shares vested over
three years and the Company recognized $815 of expense over the vesting period of the May 2013 Grant. The
Company recognized expense of $111, $272 and $271 for the years ended December 31, 2016, 2015 and
2014, respectively.

In October 2013, the President and Chief Executive Officer of Liggett and Liggett Vector Brands was
awarded a restricted stock grant of 31,835 shares of Vector’s common stock pursuant to the 1999 Plan. The
shares will vest on the earlier of March 15, 2019, contingent upon performance-based targets being achieved
by the Company’s Tobacco segment, or October 31, 2020, if the performance-based targets are not achieved.
He will receive dividends on the restricted shares as paid. In the event that his employment with the Company
is terminated for any reason other than his death, his disability or a change of control (as deﬁned in this
Restricted Share Agreement) of the Company, any remaining balance of the shares not previously vested will
be forfeited by him. The fair market value of the restricted shares on the date of grant was $458 and is being
amortized over the vesting period as a charge to compensation expense. The Company recognized expense of
$85, $86 and $86 for the years ended December 31, 2016, 2015 and 2014, respectively.

As of December 31, 2016,

there was $37,853 of total unrecognized compensation costs related to
unvested restricted stock awards. The cost is expected to be recognized over a weighted-average period of
approximately 2.74 years.

As of December 31, 2015,
unvested restricted stock awards.

there was $44,632 of total unrecognized compensation costs related to

The Company’s accounting policy is to treat dividends paid on unvested restricted stock as a reduction to

additional paid-in capital on the Company’s consolidated balance sheet.

15. CONTINGENCIES

Tobacco-Related Litigation:

Overview. Since 1954, Liggett and other United States cigarette manufacturers have been named as
defendants in numerous direct, third-party and purported class actions predicated on the theory that cigarette
manufacturers should be liable for damages alleged to have been caused by cigarette smoking or by exposure
to secondary smoke from cigarettes. The cases have generally fallen into the following categories: (i) smoking
and health cases alleging personal injury brought on behalf of individual plaintiffs (‘‘Individual Actions’’);
(ii) lawsuits by individuals requesting the beneﬁt of the Engle ruling (‘‘Engle progeny cases’’); (iii) smoking
and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical
monitoring, as well as cases alleging that use of the terms ‘‘lights’’ and/or ‘‘ultra lights’’ constitutes a
deceptive and unfair trade practice, common law fraud or violation of federal law, purporting to be brought on
behalf of a class of individual plaintiffs (‘‘Class Actions’’); and (iv) health care cost recovery actions brought
seeking
by various
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 years ended December 31, 2016, 2015 and 2014, Liggett incurred
tobacco product liability legal expenses and costs totaling $26,611, $26,987 and $9,944, respectively. The
2016 total includes $17,650 for the December 2016 settlement of 124 Engle progeny cases. The tobacco
product liability legal expenses and costs are included in the operating, selling, administrative and general

foreign and domestic governmental plaintiffs

and non-governmental plaintiffs

F-62

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

expenses and litigation settlement and judgment expense line items in the Condensed Consolidated Statements
of Operations. Legal defense costs are expensed as incurred.

Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending
cases. With the commencement of new cases, the defense costs and the risks relating to the unpredictability of
litigation increase. Management reviews on a quarterly basis with counsel all pending litigation and evaluates
the probability of a loss being incurred and whether an estimate can be made of the possible loss or range of
loss that could result from an unfavorable outcome. An unfavorable outcome or settlement of pending
tobacco-related litigation could encourage the commencement of additional litigation. Damages awarded in
tobacco-related litigation can be signiﬁcant.

Bonds. Although Liggett has been able to obtain required bonds or relief from bonding requirements in
order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there
remains a risk that such relief may not be obtainable in all cases. This risk has been reduced given that a
the dollar amount of bonds or require no bond at all. To obtain stays on
majority of states now limit
judgments pending current appeals of the Calloway, Boatright and Ward cases Liggett, as of December 31,
2016, had secured $4,241 in bonds.

In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies
to all Engle progeny cases in the aggregate and establishes individual bond caps for individual Engle progeny
cases in amounts that vary depending on the number of judgments in effect at a given time. The maximum
amount of any such bond for an appeal in the Florida state courts will be no greater than $5,000. In several
cases, plaintiffs challenged the constitutionality of the bond cap statute, but to date the courts have upheld the
constitutionality of the statute. It is possible that the Company’s consolidated ﬁnancial position, results of
operations, and cash ﬂows could be materially adversely affected by an unfavorable outcome of such
challenges.

Accounting Policy. The Company and its subsidiaries record provisions in their consolidated ﬁnancial
statements for pending litigation when they determine that an unfavorable outcome is probable and the amount
of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable
outcome in a case may occur, except as disclosed in this Note 15: (i) management has concluded that it is not
probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is
unable to reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome
of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the
consolidated ﬁnancial statements for unfavorable outcomes, if any.

Cautionary Statement About Engle Progeny Cases. Since 2009, judgments have been entered against
Liggett and other industry defendants in more than 120 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
December 31, 2016, 24 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts.
Fifteen verdicts were returned in favor of the plaintiffs (although in two of these cases (Irimi and Cohen) the
court granted defendants’ motion for a new trial) and nine in favor of Liggett. In four of the cases, punitive
damages were awarded against Liggett (although in Calloway, the intermediate appellate court reversed the
punitive and compensatory damages awards and remanded the case to the trial court for a new trial). In
certain cases, the judgments were entered jointly and severally with other defendants and Liggett may face the
risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an
appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, under certain
circumstances, Liggett may have to pay more than its proportionate share of any bonding or judgment related
amounts. Except as discussed in this Note 15 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

F-63

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

not occurred or is limited. As a result, the Company lacks information about whether plaintiffs are in fact
Engle class members (non-class members’ claims are generally time-barred), the relevant smoking history, the
nature of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs
typically do not specify their demand for damages.

Although Liggett has generally been successful in managing litigation, litigation is subject to uncertainty
and signiﬁcant challenges remain, including with respect to the remaining Engle progeny cases. There can be
no assurances that Liggett’s past litigation experience will be representative of future results. Judgments have
been entered against Liggett in the past, in Individual Actions and Engle progeny cases, and several of those
judgments were affirmed on appeal and satisﬁed by Liggett. It is possible that the consolidated ﬁnancial
position, results of operations and cash ﬂows of the Company could be materially adversely affected by an
unfavorable outcome or settlement of any of the remaining smoking-related litigation. Liggett believes, and
has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid
bases for appeal of adverse verdicts. All such cases are and will continue to be vigorously defended, however,
Liggett has entered into settlement discussions in individual cases or groups of cases where Liggett has
determined it was in its best interest to do so, and it may continue to do so in the future, including with
respect to the remaining Engle progeny cases. In October 2013, Liggett announced a settlement of the claims
of more than 4,900 Engle progeny plaintiffs (see Engle Progeny Settlement I below). On December 7, 2016,
to settle 124 Engle progeny cases for $17,650 (see Engle Progeny
Liggett entered into an agreement
Settlement II below). As of December 31, 2016, Liggett (and in certain cases the Company) had, on an
individual basis, settled 177 Engle progeny cases for approximately $6,025 in the aggregate, one of which
occurred in the fourth quarter of 2016.

Individual Actions

As of December 31, 2016, there were 35 Individual Actions pending against Liggett and, in certain cases,
the Company, where one or more individual plaintiffs allege injury resulting from cigarette smoking, addiction
to cigarette smoking or exposure to secondary smoke and seek compensatory and, in some cases, punitive
damages. These cases do not include the remaining Engle progeny cases or the individual cases pending in
West Virginia state court as part of a consolidated action. The following table lists the number of Individual
Actions by state:

State
Maryland
Florida
New York
Louisiana
West Virginia
Missouri
Ohio

Number
of Cases
16
7
6
2
2
1
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,
the federal Racketeer
Inﬂuenced and Corrupt Organizations Act (‘‘RICO’’), state RICO statutes and antitrust statutes. In many of
in addition to compensatory damages, plaintiffs also seek other forms of relief including
these cases,
treble/multiple damages, medical monitoring, disgorgement of proﬁts and punitive damages. Although alleged

indemnity, violations of deceptive trade practice laws,

F-64

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

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,
lack of design defect, statute of limitations, equitable

comparative fault and/or contributory negligence,
defenses such as ‘‘unclean hands’’ and lack of beneﬁt, failure to state a claim and federal preemption.

Engle Progeny Cases

Engle Case.

In May 1994, Engle was ﬁled against Liggett and others in Miami-Dade County, Florida.
The class consisted of all Florida residents who, by November 21, 1996, ‘‘have suffered, presently suffer or
have died from diseases and medical conditions caused by their addiction to cigarette smoking.’’ In July 1999,
after the conclusion of Phase I of the trial, the jury returned a verdict against Liggett and other cigarette
manufacturers on certain issues determined by the trial court to be ‘‘common’’ to the causes of action of the
plaintiff class. The jury made several ﬁndings adverse to the defendants including that defendants’ conduct
‘‘rose to a level that would permit a potential award or entitlement to punitive damages.’’ Phase II of the trial
was a causation and damages trial for three of the class plaintiffs and a punitive damages trial on a class-wide
basis before the same jury that returned the verdict in Phase I. In April 2000, the jury awarded compensatory
damages of $12,704 to the three class plaintiffs, to be reduced in proportion to the respective plaintiff’s fault.
In July 2000, the jury awarded approximately $145,000,000 in punitive damages, including $790,000 against
Liggett.

In May 2003, Florida’s Third District Court of Appeal reversed the trial court and remanded the case
with instructions to decertify the class. The judgment in favor of one of the three class plaintiffs, in the
amount of $5,831, was overturned as time barred and the court found that Liggett was not liable to the other
two class plaintiffs.

In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages award and
held that the class should be decertiﬁed prospectively, but determined that the following Phase I ﬁndings are
entitled to res judicata effect in Engle progeny cases: (i) that smoking causes lung cancer, among other
diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants placed cigarettes on the market that
were defective and unreasonably dangerous; (iv) that defendants concealed material information knowing that
the information was false or misleading or failed to disclose a material fact concerning the health effects or
addictive nature of smoking; (v) that defendants agreed to conceal or omit information regarding the health
effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to
their detriment; (vi) that defendants sold or supplied cigarettes that were defective; and (vii) that defendants
were negligent. The Florida Supreme Court decision also allowed former class members to proceed to trial on
liability issues (using the above ﬁndings) and compensatory and punitive damages issues. In
individual
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.

F-65

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

Engle Progeny Settlement I.

In October 2013, the Company and Liggett entered into a settlement with
approximately 4,900 Engle progeny plaintiffs and their counsel. Pursuant to the terms of the settlement,
Liggett agreed to pay a total of approximately $110,000, with approximately $61,600 paid in a lump sum and
the balance to be paid in installments over 14 years, starting in February 2015. In exchange, the claims of
more than 4,900 plaintiffs, including the claims of all plaintiffs with cases pending in federal court, were
dismissed with prejudice against the Company and Liggett. Due to the settlement, in 2013, the Company
recorded a charge of $86,213 of which approximately $25,000 is related to certain payments discounted to
their present value using an 11% annual discount rate. The installment payments total approximately $48,000
on an undiscounted basis. The Company’s future payments will be approximately $3,400 per annum through
2028, with a cost of living increase beginning in 2021.

Engle Progeny Settlement II. On December 7, 2016,

the Company and Liggett entered into an
agreement with 124 Engle progeny plaintiffs and their counsel. Pursuant to the terms of the settlement, Liggett
agreed to pay $17,650, $14,000 of which was paid on December 7, 2016 with the balance of $3,650 to be
paid in equal quarterly payments starting in January 2018, with 5% interest. Due to the settlement, in the
fourth quarter of 2016, the Company recorded a charge of $17,650.

Notwithstanding the

approximately
125 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.

the Engle Progeny Settlements,

comprehensive nature of

F-66

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

As of December 31, 2016, the following Engle progeny cases have resulted in judgments against Liggett:

Date

Case Name

County

Liggett
Compensatory
Damages (as
adjusted)(1)

Liggett
Punitive
Damages

Status(2)

June 2002

Lukacs v. R.J. Reynolds

Miami-Dade

$12,418

$ — Liggett satisﬁed the judgment and the case is

concluded.

August 2009

Campbell v. R.J. Reynolds

Escambia

156

— Liggett satisﬁed the judgment and the case is

concluded.

March 2010

Douglas v. R.J. Reynolds

Hillsborough

1,350

— Liggett satisﬁed the judgment and the case is

April 2010

Clay v. R.J. Reynolds

Escambia

349

1,000

concluded.

Liggett satisﬁed the judgment and the case is
concluded.

April 2010

Putney v. R.J. Reynolds

Broward

17

April 2011

Tullo v. R.J. Reynolds

Palm Beach

January 2012

Ward v. R.J. Reynolds

Escambia

225

1

May 2012

Calloway v. R.J. Reynolds

Broward

—

— On June 12, 2013, the Fourth District Court
of Appeal reversed and remanded the case
for further proceedings regarding the amount
of the award. Both sides sought discretionary
review from the Florida Supreme Court. In
February 2016,
the Florida Supreme Court
reinstated the jury’s verdict. The defendants
moved for clariﬁcation of that order. The
court clariﬁed that
reversed the district
it
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. A hearing
on
March 14, 2017.

scheduled

is

— Liggett satisﬁed the judgment and the case is

concluded.

— Liggett

satisﬁed

the merits

judgment.
Subsequently, the trial court entered a joint
and several ﬁnal judgment on attorneys’ fees
and costs for $981 and defendants appealed
that judgment. Brieﬁng is underway.

— A joint and several

in

the

part,

judgment for $16,100
was entered against R.J. Reynolds, Philip
Morris, Lorillard and Liggett. On January 6,
the Fourth District Court of Appeal
2016,
reversed
$7,600
including
punitive damages award against Liggett, and
remanded the case to the trial court for a
new trial on certain issues. Both sides moved
the
for rehearing and in September 2016,
appellate court reversed the judgment in its
entirety and remanded the case for a new
the $1,530 compensatory
trial. As a result,
reversed. The
award against Liggett was
invoke
plaintiff ﬁled
the
discretionary
the Florida
Supreme Court. Any potential liability as a
result of the pending appeal is included in
the amount Liggett will pay under Engle
Progeny Settlement II.

notice
jurisdiction

to
of

a

December 2012

Buchanan v. R.J. Reynolds

Leon

2,750

— Liggett satisﬁed the judgment and the case is

concluded.

F-67

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

Date

Case Name

County

Liggett
Compensatory
Damages (as
adjusted)(1)

Liggett
Punitive
Damages

Status(2)

May 2013

D. Cohen v. R.J. Reynolds

Palm Beach

—

— This case was settled in December 2016 as

August 2013

Rizzuto v. R.J. Reynolds

Hernando

3,479

part of Engle Progeny Settlement II.

— Liggett settled its portion of the judgment for
$1,500 and the case is concluded as to
Liggett.

August 2014

Irimi v. R.J. Reynolds

Broward

—

— This case was settled in December 2016 as

part of Engle Progeny Settlement II.

October 2014

Lambert v. R.J. Reynolds

Pinellas

3,600

9,500 Liggett satisﬁed the judgment and the case is

concluded.

November 2014

Boatright v. R.J. Reynolds

Polk

—

300

the

jury

2014,

In November
awarded
compensatory damages in the amount of
$15,000 with 15% fault
apportioned to
plaintiff and 85% to Philip Morris. The jury
further assessed punitive damages against
Philip Morris for $19,700 and Liggett for
$300. Post trial motions were denied. A joint
and several
judgment was entered in the
amount of $12,750 on the compensatory
damages.
entered
against Liggett for $300 in punitive damages.
Defendants
plaintiff
cross-appealed. Oral argument occurred on
October 18, 2016. A decision is pending. Any
potential liability as a result of the pending
appeal is included in the amount Liggett will
pay under Engle Progeny Settlement II.

Judgment was

appealed

further

and

June 2015

Caprio v. R.J. Reynolds

Broward

—

— This case was settled in December 2016 as

part of Engle Progeny Settlement II.

Total Damages Awarded:

24,345

10,800

Amounts accrued, paid or compromised:

(24,328)

(10,800)

Damages remaining on Appeal:

$

17

$

0

(1) Compensatory damages are adjusted to reﬂect the jury’s allocation of comparative fault and only include
Liggett’s jury allocated share, regardless of whether a judgment was joint and several. The amounts listed
above do not include attorneys’ fees or statutory interest.

(2) See Exhibit 99.1 for a more complete description of the cases currently on appeal.

Through December 31, 2016, Liggett paid $39,773, including interest and attorneys’ fees, to satisfy the
judgments in the following Engle progeny cases: Lukacs, Campbell, Douglas, Clay, Tullo, Ward, Rizzuto,
Lambert and Buchanan.

Except as disclosed elsewhere in this Note 15, the Company is unable to determine a range of loss
related to the remaining Engle progeny cases. As cases proceed through the appellate process, the Company
will consider accruals on a case-by-case basis if an unfavorable outcome becomes probable and the amount
can be reasonably estimated.

Appeals of Engle Progeny Judgments.

In December 2010, in the Martin case, a state court case against
R.J. Reynolds, the First District Court of Appeal held that the trial court correctly construed the Florida
Supreme Court’s 2006 decision in Engle in instructing the jury on the preclusive effect of the Phase I Engle
ﬁndings. In July 2011, the Florida Supreme Court declined to review the First District Court of Appeal’s

F-68

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

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.
time the Florida Supreme Court addressed the merits of an Engle progeny case. In
This was the ﬁrst
October 2013, the United States Supreme Court declined to review the decision and Liggett satisﬁed the
judgment. To date, the United States Supreme Court has declined to review any Engle progeny decisions.

In April 2015, in Hess, a state court case, the Florida Supreme Court held that Engle defendants cannot

raise a statute of repose defense to claims for concealment or conspiracy.

In April 2015, in Graham, a federal case, the Eleventh Circuit held that federal law impliedly preempts
use of the res judicata Engle ﬁndings to establish claims for strict liability or negligence. In January 2016, the
Eleventh Circuit Court of Appeals granted the plaintiff’s motion for rehearing en banc and vacated the panel’s
decision. Defendants ﬁled a motion requesting that the court enter a brieﬁng order directing the parties to
address both implied preemption and whether the application of the Engle ﬁndings violates federal due
process. Oral argument on rehearing occurred in June 2016 and a decision is pending.

In November 2015, in Schoeff, the Fourth District Court of Appeal affirmed the trial court’s decision to
reduce plaintiff’s compensatory damages award by the jury’s assessment of the deceased smoker’s assigned
comparative fault despite the jury’s ﬁnding in favor of plaintiff on her claims for intentional torts. The Florida

F-69

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

Supreme Court accepted discretionary jurisdiction of the issue based on a direct conﬂict with other district
courts of appeal which have held that reduction of a compensatory damages award is inappropriate where a
defendant is found liable for an intentional tort. Oral argument is scheduled for March 8, 2017.

In January 2016, in Marotta, the Fourth District Court of Appeal disagreed with the Graham panel’s
decision. The Florida Supreme Court accepted jurisdiction in Marotta. Oral argument occurred in
November 2016 and a decision is pending.

In March 2016, in Soffer, the Florida Supreme Court held that Engle progeny plaintiffs may seek punitive
damages on their claims for non-intentional torts, rejecting the argument that plaintiffs are precluded from
doing so because the Engle class did not pursue such damages on those claims.

Maryland Cases

Liggett is currently a defendant in 16 multi-defendant personal injury cases in Maryland that allege
claims arising from asbestos and tobacco exposure. The tobacco defendants, including Liggett, moved (or are
in the process of moving) to dismiss the cases. In the past, motions to dismiss have generally been successful,
typically resulting in the dismissal without prejudice of the tobacco company defendants. Recently, however, a
Maryland intermediate appellate court ruled, in Stidham, et al. v. R. J. Reynolds Tobacco Company, et al., that
dismissal of tobacco company defendants may not be appropriate where the asserted injury is based on both
asbestos and tobacco exposure (‘‘synergy cases’’). In May 2016,
the Court of Appeals for Maryland
(Maryland’s highest court) heard oral argument on the appeal of the intermediate appellate court’s decision. In
July 2016, the Court of Appeals 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. It is
possible that Liggett and other tobacco company defendants will not be dismissed from pending synergy
cases, and may be named as defendants in asbestos-related personal injury actions in Maryland going forward,
including approximately 20 additional synergy cases currently pending in Maryland state court.

Liggett Only Cases

There are currently three cases pending where Liggett is the only remaining defendant. Each of these
cases is an Individual Action. There has been no recent activity in two of the cases. It is possible that cases
where Liggett is the only defendant could increase as a result of the remaining Engle progeny cases.

Class Actions

As of December 31, 2016, three actions were pending for which either a class had been certiﬁed or
plaintiffs were seeking class certiﬁcation where Liggett is a named defendant. Other cigarette manufacturers
are also named in these actions.

Plaintiffs’ allegations of liability in class action cases are based on various theories of recovery, including
negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance,
breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of
deceptive trade practice laws and consumer protection statutes and claims under the federal and state
anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory
and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical
monitoring and smoking cessation funds, disgorgement of proﬁts, and injunctive and equitable relief.

Defenses raised in these cases include, among others,

issues
predominate, assumption of the risk, comparative fault and/or contributory negligence, statute of limitations
and federal preemption.

lack of proximate cause,

individual

F-70

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was
commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves
cigarette smokers, allege they were exposed to secondhand smoke from cigarettes that were manufactured by
the defendants, including Liggett, and suffered injury as a result of that exposure. The plaintiffs seek to
recover an unspeciﬁed amount of compensatory and punitive damages. No class certiﬁcation hearing has been
held. The case has been stayed for a number of years, with the stay renewed every few years. The last stay
was entered on March 16, 2016 and stays the case, including all discovery, pending the completion of the
smoking cessation program ordered by the court in Scott v. The American Tobacco Co.

In February 1998, in Parsons v. AC & S Inc., a purported class action was commenced on behalf of all
West Virginia residents who allegedly have personal injury claims arising from exposure to cigarette smoke
and asbestos ﬁbers. The complaint seeks to recover $1,000 in compensatory and punitive damages individually
and unspeciﬁed compensatory and punitive damages for
the class. The case is stayed due to the
December 2000 bankruptcy of three of the defendants.

Although not

technically a class action,

in In Re: Tobacco Litigation (Personal Injury Cases), a
West Virginia state court consolidated approximately 750 individual smoker actions that were pending prior to
2001 for trial of certain ‘‘common’’ issues. Liggett was severed from trial of the consolidated action. After
two mistrials, in May 2013, the jury rejected all but one of the plaintiffs’ claims, ﬁnding in favor of plaintiffs
on the claim that ventilated ﬁlter cigarettes between 1964 and July 1, 1969 should have included instructions
on how to use them. The issue of damages was reserved for further proceedings. The court entered judgment
in October 2013, dismissing all claims except the ventilated ﬁlter claim. The judgment was affirmed on appeal
and remanded to the trial court for further proceedings. In April 2015, the plaintiffs ﬁled a petition for writ of
certiorari to the United States Supreme Court which subsequently declined review. In July 2015, the trial court
ruled on the scope of the ventilated ﬁlter claim and determined that only 30 plaintiffs have potentially viable
claims against the non-Liggett defendants, which may be pursued in a second phase of the trial. The court
intends to try the claims of these plaintiffs in six consolidated trials, each with ﬁve plaintiffs. With respect to
Liggett, the trial court requested that Liggett and plaintiffs brief whether any claims against Liggett survive
given the outcome of the ﬁrst phase of the trial. On May 23, 2016, the trial court ruled that the case may
proceed against Liggett. Liggett requested that the trial court certify the matter to the West Virginia Supreme
Court of Appeals for review, but the trial court refused. A scheduling order was entered governing the Phase I
is estimated that Liggett could be a
common issues pre-trial proceedings and discovery is underway. It
defendant in approximately 90 individual cases.

In addition to the cases described above, numerous class actions remain certiﬁed against other cigarette
manufacturers including cases alleging, among other things, that use of the terms ‘‘lights’’ and ‘‘ultra lights’’
constitutes unfair and deceptive trade practices. Adverse decisions in these cases could have a material adverse
affect on Liggett’s sales volume, operating income and cash ﬂows.

Health Care Cost Recovery Actions

As of December 31, 2016, one Health Care Cost Recovery Action was pending against Liggett, Crow
Creek Sioux Tribe v. American Tobacco Company, a South Dakota case ﬁled in 1997, where the plaintiff seeks
to recover damages based on various theories of recovery as a result of alleged sales of tobacco products to
minors. The case is inactive. Other cigarette manufacturers are also named as defendants.

The claims asserted in health care cost recovery actions vary, but can include the equitable claim of
indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, breach
of special duty, fraud, negligent 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

F-71

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

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 produced to the
government or produced in any future court or administrative action concerning smoking and health; (vii) the
disclosure of disaggregated marketing data to the government in the same form and on the same schedules as
defendants now follow in disclosing such data to the Federal Trade Commission for a period of ten years;
(viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas
or cigarette business within the United States; and (ix) payment of the government’s costs in bringing the
action. In June 2014, the court approved a consent agreement between the defendants and the Department of
Justice regarding the ‘‘corrective statements’’ to be issued by the defendants. In May 2015, the court of
appeals issued an opinion on the legality of the ‘‘corrective statements,’’ affirming them in part and reversing
them in part. The implementation of the ‘‘corrective statements’’ is uncertain as proceedings are ongoing.

It is unclear what impact, if any, the Final Judgment will have on the cigarette industry as a whole. To
the extent that the Final Judgment leads to a decline in industry-wide shipments of cigarettes in the United
States or otherwise results in restrictions that adversely affect the industry, Liggett’s sales volume, operating
income and cash ﬂows could be materially adversely affected.

F-72

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

Upcoming Trials

As of December 31, 2016, there were six Engle progeny cases and one Individual Action scheduled for
trial through December 31, 2017, where Liggett (and/or the Company) is a named defendant. Trial dates are,
however, subject to change.

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 the ‘‘Participating Manufacturers’’) 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 Participating Manufacturers. Among other things, the MSA prohibits the targeting of
youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all
tobacco advertising and promotion;
limits each Participating Manufacturer to one tobacco brand name
sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions;
prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of
tobacco products without sufficient proof that
is an adult; prohibits Participating
Manufacturers from licensing third parties to advertise tobacco brand names in any manner prohibited under
the MSA; and prohibits Participating Manufacturers from using as a tobacco product brand name any
nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or
individual celebrities.

the intended recipient

The MSA also requires Participating Manufacturers 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 Participating Manufacturers. In addition, the MSA provides for the appointment of an
independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.

Under the payment provisions of the MSA, the Participating Manufacturers are required to make annual
payments of $9,000,000 (subject
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

adjustments, offsets

and reductions

to applicable

F-73

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

several, and not joint, obligation of each Participating Manufacturer and are not the responsibility of any
parent or affiliate of a Participating Manufacturer.

Liggett has no payment obligations under the MSA except to the extent its market share exceeds a
market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector Tobacco
has no payment obligations under the MSA except to the extent its market share exceeds a market share
exemption of approximately 0.28% of total cigarettes sold in the United States. Liggett and Vector Tobacco’s
domestic shipments accounted for 3.3% of the total cigarettes sold in the United States in 2016. If Liggett’s or
Vector Tobacco’s market share exceeds their respective market share exemption in a given year, then on
April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, must pay on each excess
unit an amount equal (on a per-unit basis) to that due from the OPMs for that year. On December 29, 2016,
Liggett and Vector Tobacco pre-paid $102,000 of their approximate $118,000 2016 MSA obligation, the
balance of which will be paid in April 2017, subject to any applicable disputes or adjustments.

Certain MSA Disputes

is a potential adjustment

NPM Adjustment. Liggett and Vector Tobacco contend that they are entitled to an NPM Adjustment for
each year from 2003 − 2015. The NPM Adjustment
to annual MSA payments,
available when the Participating Manufacturers suffer a market share loss to NPMs for a particular year and
an economic consulting ﬁrm selected pursuant to the MSA determines that the MSA was a ‘‘signiﬁcant factor
contributing to’’ that loss. A Settling State that has ‘‘diligently enforced’’ its qualifying escrow statute in the
year in question may be able to avoid its allocable share of the NPM Adjustment. For 2003 − 2015, 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.

that

the MSA was a signiﬁcant factor in that

The two requirements for application of the NPM Adjustment, a market share loss and a ﬁnding or
loss, have been satisﬁed, and the Participating
agreement
Manufacturers have engaged in disputes with certain of the Settling States over whether they diligently
enforced their respective escrow statutes in each of the years from 2003 − 2015. After several years of
litigation over whether the MSA’s arbitration clause required a multistate arbitration of the NPM Adjustment
dispute, 48 of 49 state courts ultimately compelled the states to participate in a single, multistate arbitration of
the 2003 NPM Adjustment. Notwithstanding, many states continued to refuse to arbitrate and agreed to do so
only after the Participating Manufacturers agreed to a 20% reduction in their 2003 NPM Adjustment claims.

The arbitration for the 2003 NPM Adjustment began in June 2010. During the proceedings,
the
Participating Manufacturers decided not to contest the diligent enforcement of 16 states, with a combined
allocable share of approximately 14%.

While the 2003 arbitration was underway, the Participating Manufacturers entered into a term sheet with
22 states settling the NPM Adjustment for 2003 − 2012 and agreed to terms to address the NPM Adjustment
with respect to those states for future years. The parties have been working towards converting the binding
term sheet into a ﬁnal settlement agreement.

The Participating Manufacturers continued to contest the diligence of 15 states relating to the 2003 NPM
Adjustment. In September 2013, the panel found that six of those states did not diligently enforce their MSA
escrow statutes in 2003.

Two of the states found non-diligent, Kentucky and Indiana, agreed to settle the dispute and enter into
the term sheet described above. The remaining four non-diligent states pursued motions in their respective
state courts seeking to vacate or reduce the amount of the arbitration award. The Pennsylvania, Maryland and
Missouri courts refused to vacate the award but reduced the recovery by approximately 50%. In October 2016,

F-74

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

the United States Supreme Court denied the Participating Manufacturers’ petitions for certiorari.
In
September 2013, the New Mexico trial court refused to vacate the award but reduced the recovery. The
Participating Manufacturers appealed that decision to the New Mexico Court of Appeals.

In October 2015, substantially all of the Participating Manufacturers settled the NPM Adjustment dispute
with the state of New York for 2004 − 2014 and agreed to a mechanism for potential future credits against the
Participating Manufacturers’ MSA payments for 2015 forward.

As a result of the settlements and arbitration award described above, Liggett and Vector Tobacco reduced
cost of sales in the aggregate by $21,739 for years 2013 − 2016. Liggett and Vector Tobacco may be entitled
to further adjustments for 2015 forward. The remaining NPM Adjustment accrual of approximately $20,000 at
December 31, 2016 relates to the disputed amounts Liggett withheld from the non-settling states for
2004 − 2010, which may be subject to payment, with interest, if Liggett loses the disputes for those years. As
of December 31, 2016, there remains approximately $28,600 in the disputed payments account relating to
Liggett’s 2011 − 2015 NPM Adjustment disputes with the non-settling states.

Disputes over the NPM Adjustments for 2004 − 2014 remain to be arbitrated with the states that have not
joined the settlement. The dispute over the NPM Adjustment for 2015 remains to be arbitrated with all the
states.

The arbitration for the 2004 NPM Adjustment dispute has commenced. Courts in two states, Pennsylvania
and Maryland, rejected arguments that those states’ claims of diligent enforcement should be addressed by a
separate state-speciﬁc panel and they are participating in the multistate arbitration. New Mexico’s trial court
recently granted a motion to compel it to participate as well, but, New Mexico appealed that order to its court
of appeals. The Missouri court of appeals ruled that Missouri was entitled to a state-speciﬁc arbitration, and
that issue is pending in the Missouri Supreme Court. Oral argument occurred in November 2016 and a
decision is pending. Discovery is underway in the 2004 NPM Adjustment proceeding and evidentiary hearings
are possible in 2017.

‘‘Gross’’ v. ‘‘Net’’ Calculations. In October 2004,

the independent auditor notiﬁed all Participating
Manufacturers that their payment obligations under the MSA, dating from the agreement’s execution in late
1998, had been recalculated using ‘‘net’’ units, rather than ‘‘gross’’ units (which had been used since 1999).
Liggett objected to this retroactive change and disputed the change in methodology.

In December 2012, the parties arbitrated the dispute. In February 2013, the arbitrators ruled that the
independent auditor was precluded from recalculating Liggett’s grandfathered market share exemption. The
panel further determined, in a subsequent order, that the independent auditor shall compute Liggett’s market
share for all years after 2000 on a ‘‘net’’ basis, but adjust that computation to approximate ‘‘gross’’ market
share by using actual returned product data for each year. In July 2015, the independent auditor issued
calculations, purportedly based on the arbitrators’ award, which indicated that Liggett owed approximately
$16,000 for years 2001 − 2013. Liggett disputed these calculations. In June 2016, the independent auditor
issued revised calculations indicating that Liggett owed approximately $8,100 for years 2001 − 2013. In
September 2016, Liggett paid the $8,100 and reduced cost of sales by $370, but, continued to dispute certain
aspects of the independent auditor’s revised calculations.

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
favored nation provisions which could reduce Liggett’s payment obligations based on
contained most
subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999,

F-75

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

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. These
payments are in lieu of any other payments allegedly due to Florida.

On January 12, 2016, the Attorney General for Mississippi ﬁled a motion in state court in Jackson
County, Mississippi (Chancery Division) to enforce the March 1996 settlement agreement alleging that Liggett
owes Mississippi at least $27,000 in damages (including interest), and $20,000 in punitive damages and
attorneys’ fees. Discovery is concluded and brieﬁng is underway. A hearing is scheduled on March 24, 2017.

Liggett may be required to make additional payments to Texas and Mississippi which could adversely

affect 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 15, 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.

F-76

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

The activity in the Company’s accruals for the MSA and tobacco litigation for the three years ended

December 31, 2016 were as follows:

Current Liabilities

Non-Current Liabilities

Payments due
under Master
Settlement
Agreement
$ 25,348
118,069
—

Litigation
Accruals
$ 59,310
2,849
—

Total
$ 84,658
120,918
—

Payments due
under Master
Settlement
Agreement
$27,571
—
(1,419)

Litigation
Accruals
$27,058
—
—

Total
$54,629
—
(1,419)

(1,095)
(116,343)
343
—
26,322
118,284
1,351

1,426
(118,142)
—
—
29,241
110,486

—
(62,878)
3,575
293
3,149
20,644
—

—
(5,869)
3,305
1,675
22,904
16,679

(1,095)
(179,221)
3,918
293
29,471
138,928
1,351

1,426
(124,011)
3,305
1,675
52,145
127,165

1,568
(122,977)
(2,163)
37
$ 16,192

—
(39,682)
3,252
506
$ 3,659

1,568
(162,659)
1,089
543
$ 19,851

—
—
(343)
—
25,809
—
(5,715)

—
—
—
20,094
—

—
—
2,163
—
$22,257

—
—
(3,575)
2,217
25,700
(195)
—

—
—
(3,305)
2,518
24,718
3,650

—
—
(3,918)
2,217
51,509
(195)
(5,715)

—
—
(3,305)
2,518
44,812
3,650

—
—
(3,252)
2,397
$27,513

—
—
(1,089)
2,397
$49,770

Balance at January 1, 2014 . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . .
NPM Settlement adjustment . . . . . . . . . . .
Change in MSA obligations capitalized as

inventory . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . .
Reclassiﬁcation from non-current liabilities . .
Interest on withholding . . . . . . . . . . . . . .
Balance as of December 31, 2014 . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . .
NPM Settlement adjustment . . . . . . . . . . .
Change in MSA obligations capitalized as

inventory . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . .
Reclassiﬁcation from non-current liabilities . .
Interest on withholding . . . . . . . . . . . . . .
Balance as of December 31, 2015 . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . .
Change in MSA obligations capitalized as

inventory . . . . . . . . . . . . . . . . . . . . .
Payments . . . . . . . . . . . . . . . . . . . . . .
Reclassiﬁcation from non-current liabilities . .
Interest on withholding . . . . . . . . . . . . . .
Balance as of December 31, 2016 . . . . . . . .

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
laws and regulations and other laws and
are conducted in material compliance with all environmental
regulations governing cigarette manufacturers. Compliance with federal, state and local provisions regulating
the discharge of materials into the environment, or otherwise relating to the protection of the environment, has
not had a material affect on the capital expenditures, results of operations or competitive position of Liggett or
Vector Tobacco.

Liggett Vector Brands entered into an agreement with a subsidiary of the Convenience Distribution
Association to support a program to permit certain tobacco distributors to secure, on reasonable terms, tax
stamp bonds required by state and local governments for the distribution of cigarettes. Under the agreement,
Liggett Vector Brands has agreed to pay a portion of losses incurred by the surety under the bond program,
with a maximum loss exposure of $500. The Company believes the fair value of Liggett Vector Brands’
obligation under the agreement was immaterial at December 31, 2016.

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.

F-77

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES − (continued)

Liggett was contacted in October 2015, by one of its software vendors, who suggested that Liggett
needed to purchase additional software licenses from it. Liggett believes that its use of the vendor’s software
is in compliance with the licenses previously purchased by Liggett. In January 2016, the software vendor
requested to audit Liggett’s use of the relevant software. Liggett has provided details of its use of the software
and is continuing to cooperate with requests for information.

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.

16. SUPPLEMENTAL CASH FLOW INFORMATION

Year Ended December 31,
2015

2014

2016

Cash paid during the period for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$108,422
46,811

$96,958
52,040

$ 98,754
16,610

Non-cash investing and ﬁnancing activities:

Issuance of stock dividend . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt retired in conversion to stock . . . . . . . . . . . . . . . . . . .
Embedded derivative, net retired in conversion to stock . . . . .

609
—
—
—

584
—
25,000
889

520
2,733
132,530
6,680

17. RELATED PARTY TRANSACTIONS

Ladenburg Thalmann Financial Services Inc. As of December 31, 2016,

the Company owned
15,191,200 common shares of Ladenburg Thalmann Financial Services Inc. (‘‘LTS’’), a publicly-traded,
diversiﬁed ﬁnancial-services company engaged in independent brokerage and advisory services, investment
banking, equity research, institutional sales and trading, asset management services, wholesale life insurance
brokerage and trust services. The Company,
through its various investments in LTS, beneﬁcially owned
approximately 8.28% and accounts for its investment in LTS under the equity method of accounting.

In September 2006, the Company entered into an agreement with LTS pursuant to which the Company
agreed to make available to LTS the services of the Company’s Executive Vice President (the ‘‘EVP’’) to
serve as the President and Chief Executive Officer of LTS and to provide certain other ﬁnancial, accounting
and tax services, including assistance with complying with Section 404 of the Sarbanes-Oxley Act of 2002
and assistance in the preparation of income tax returns. LTS paid the Company $850 for each of 2016, 2015
and 2014 under the agreement and pays the Company at a rate of $850 per year in 2017. These amounts are
recorded as equity income. LTS paid compensation to the President and Chief Executive Officer of the
Company, who serves as Vice Chairman of LTS, of $1,250, $1,300 and $1,375 for 2016, 2015 and 2014,
respectively, and director fees of $36, $38 and $39 for 2016, 2015 and 2014, respectively. LTS paid
compensation to the Company EVP, who serves as President and CEO of LTS, of $1,450, $1,450 and $1,375
for 2016, 2015 and 2014, respectively.

On November 4, 2011, Vector was part of a consortium, which included Dr. Phillip Frost, who is a
beneﬁcial owner of approximately 15.3% of the Company’s common stock as of February 21, 2017 and the
EVP that agreed to provide a ﬁve-year loan to LTS. Vector’s portion of the loan was $15,000. Interest on the
loan, which was due on November 4, 2016, was payable quarterly at 11% per annum and commenced on
December 31, 2011. The Company recorded equity in earnings of $205, $280 and $574 in 2016, 2015 and
2014, respectively, related to the interest payments. On October 26, 2016, the Company surrendered the

F-78

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

17. RELATED PARTY TRANSACTIONS − (continued)

remaining principal amount of $1,680 of its note to pay for the exercise price of 1,000,000 LTS Warrants that
were exercised in full on the same date. The LTS warrants had been received in connection with the funding
of the ﬁve-year loan to LTS.

The Company owns 240,000 shares of LTS’s 8% Series A Cumulative Redeemable Preferred Stock
(Liquidation Preference $25.00 Per Share) and recorded dividend income from the investment of $480 in each
of 2016, 2015 and 2014.

Castle Brands Inc. As of December 31, 2016, the Company owned 12,671,159 common shares of
Castle (NYSE MKT: ROX), a publicly-traded developer and importer of premium branded spirits. The
Company accounts for its investment in Castle under the equity method.

In October 2008, the Company entered into an agreement with Castle where the Company agreed to
make available to Castle the services of the EVP to serve as the President and Chief Executive Officer of
Castle and to provide other ﬁnancial, accounting and tax services. The Company recognized management fees
at a rate of $100 in each of 2016, 2015 and 2014, under the agreement and Castle has agreed to pay it at a
rate of $100 per year in 2017. In 2013, the Company purchased in a private placement $200 of Castle’s
convertible debt, which bears interest at 5% per annum, is convertible into 222,222 shares of Castle common
stock and is due on December 15, 2018. The Castle convertible debt was included in the ending carrying
value of the Company’s equity method investment in Castle.

Morgans Hotel Group Co. The Company’s President and Chief Executive Officer served as the
Chairman of the Board of Directors of Morgans Hotel Group Co. (NASDAQ: MHGC) in 2015 and 2016. As
of November 30, 2016, the Company beneﬁcially owned approximately 2,459,788 (7.03%) and accounted for
its investment in MHGC as investment securities available for sale. On December 1, 2016, MHGC merged
with another company and, as a result, the common shares of MHGC ceased to be outstanding and were
converted into the right to receive $2.25 in cash. The Company received $5,535 for its investment in MHGC
and recorded a gain of $2,140, after recognizing an impairment charge of $4,772 in the ﬁrst quarter of 2016.

Insurance. The Company’s Chief Executive Officer, a ﬁrm in which he is a shareholder, and affiliates of
that ﬁrm received insurance commissions aggregating approximately $247, $217 and $261 in 2016, 2015 and
2014, respectively, on various insurance policies issued for the Company and its subsidiaries.

Other.

In addition to its investment in LTS and Castle, the Company has made investments in entities
where Dr. Frost has a relationship. These include the following: (i) three investments in 2006, 2008, 2009,
2011, and 2015 totaling approximately $12,788 in common stock of OPKO Inc. (NYSE MKT: OPK) and its
the Company purchased $5,000 of Opko’s 3.00%
predecessor eXegenics Inc., and in January 2013,
convertible senior notes due 2033 which were converted into 726,036 shares of common stock in May 2015;
(ii) a $500 investment in 2008 in BioCardia, Inc (formerly known as Tiger X Medical Inc. and Cardo Medical
Inc); and (iii) a $250 investment in 2008 in Cocrystal Pharma, Inc. (f/ka/Cocrystal Discovery Inc.). Dr. Frost
is a director, executive officer and/or more than 10% shareholder in these entities as well as LTS. Additional
investments in entities where Dr. Frost has a relationship may be made in the future.

In May 2009, the Company issued in a private placement the 6.75% Note in the principal amount of
$50,000. The purchase price was paid in cash ($38,225) and by tendering $11,005 principal amount of the 5%
Notes, valued at 107% of principal amount. The purchaser of the 6.75% Note was an entity affiliated with
Dr. Frost. In March 2014, the holder of the 6.75% Note elected to convert $25,000 of the principal balance of
the Note into 2,455,877 shares of the Company’s common stock. On November 14, 2014, the Note was
amended to extend the stated maturity date of the Note from November 15, 2014 to February 15, 2015. On
February 3, 2015, the remaining $25,000 of principal of the Note was converted into 2,455,876 shares of the
Company’s common stock. Vector made cash interest payments of $1,094 associated with the Note in 2015.

F-79

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

17. RELATED PARTY TRANSACTIONS − (continued)

In September 2012, the Company entered into an office lease (the ‘‘Lease’’) with Frost Real Estate
Holdings, LLC (‘‘FREH’’), an entity affiliated with Dr. Frost. The Lease is for 12,390 square feet of space in
an office building in Miami, Florida. The initial term of the Lease is ﬁve years, subject to two optional
ﬁve-year term extensions. Payments under the lease commenced in May 2013. The Lease provides for
payments of $31 per month in the ﬁrst year increasing to $35 per month in the ﬁfth year, plus applicable sales
tax. The rent is inclusive of operating expenses, property taxes and parking. A $220 tenant improvement
allowance will be credited to the rent pro-rata over the initial ﬁve-year term. In connection with the execution
of the Lease, the Company received the advice and opinion of a commercial real estate ﬁrm that the Lease
terms were fair and that the Company received terms favorable in the market. The Company recorded rental
expense of $380 for each of the three years ended December 31, 2016, 2015 and 2014, respectively,
associated with the lease.

A son of the Company’s President and Chief Executive Officer is an associate broker with Douglas
Elliman Realty, LLC and he received commissions and other payments of $640 and $453 in accordance with
brokerage activities in 2016 and 2015, respectively. The Company’s President and Chief Executive Officer has
reserved a unit in a real estate venture for a purchase price of $5,200 in 2015 and he may reserve or
purchase units in other real estate ventures in the future.

F-80

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

18. INVESTMENTS AND FAIR VALUE MEASUREMENTS

The Company’s ﬁnancial assets and liabilities subject to fair value measurements were as follows:

Description
Assets:

Total

Fair Value Measurements as of December 31, 2016
Signiﬁcant
Other
Observable
Inputs
(Level 2)

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Signiﬁcant
Unobservable
Inputs
(Level 3)

Total Gains
(Losses)

Money market funds(1)
. . . . . . . . . .
Commercial paper(1)
. . . . . . . . . . . .
Certiﬁcates of deposit(2) . . . . . . . . . .
Bonds(2)
. . . . . . . . . . . . . . . . . . . .

$248,552
41,247
2,982
4,240

$248,552
—
—
4,240

$

$

—
41,247
2,982
—

Investment securities available for sale
Equity securities . . . . . . . . . . . . .
Mutual funds invested in ﬁxed

50,843

50,843

income securities . . . . . . . . . . .

20,582

20,582

—

—

30,642
36,687

6,500

1,398
8,980
770
501
85,478

—
—

—

—
—
—
—
—

—
—
—
—

—

—

—
—

—

—
—
—
—
—

—
—

156,903
$453,924

71,425
$324,217

85,478
$129,707

$

Fixed income securities

U.S. government securities
Corporate securities
U.S. government and federal

. . . .
. . . . . . . . .

30,642
36,687

agency . . . . . . . . . . . . . . . .

6,500

Commercial mortgage-backed

securities . . . . . . . . . . . . . . .
Commercial paper
. . . . . . . . . .
Index-linked U.S. bonds . . . . . .
Foreign ﬁxed-income securities . .
Total ﬁxed income securities . .
Total investment securities available
for sale . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .

Total

Liabilities:

Fair value of derivatives embedded

1,398
8,980
770
501
85,478

within convertible debt . . . . . . . . .

$112,332

$

—

$

—

$112,332

Nonrecurring fair value measurements
. . . . . . . . .

Long-term investments(3)

$
$

6,396
6,396

$ 6,396
$ 6,396

$(1,203)
$(1,203)

(1) Amounts included in cash and cash equivalents on the condensed consolidated balance sheet.
(2) Amounts included in current restricted assets and restricted assets on the condensed consolidated balance

sheet.

(3) Long-term investments with a carrying amount of $7,599 were written down to their fair value of $6,396,

resulting in an impairment charge of $1,203, which was included in earnings.

F-81

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

18. INVESTMENTS AND FAIR VALUE MEASUREMENTS − (continued)

Description
Assets:

Fair Value Measurements as of December 31, 2015

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Signiﬁcant
Other
Observable
Inputs (Level 2)

Signiﬁcant
Unobservable
Inputs
(Level 3)

Total

Money market funds(1)
. . . . . . . . . .
Certiﬁcates of deposit(2) . . . . . . . . . .
Bonds(2)
. . . . . . . . . . . . . . . . . . . .

$ 93,915
3,469
12,767

$ 93,915
—
12,767

$

$ —
3,469
—

Investment securities available for sale
Equity securities . . . . . . . . . . . . .
Mutual funds invested in ﬁxed

67,273

67,273

income securities . . . . . . . . . . .

20,111

20,111

Fixed income securities

. . . .
U.S. government securities
Corporate securities
. . . . . . . . .
U.S. government and agency . . .
Commercial mortgage-backed

securities . . . . . . . . . . . . . . .
U.S. asset-backed securities . . . .
Index-linked U.S. bonds . . . . . .
Total ﬁxed income securities . .
Total investment securities

28,132
41,561
5,790

8,728
8,276
2,105
94,592

—
—
—

—
—
—
—

—

—

28,132
41,561
5,790

8,728
8,276
2,105
94,592

available for sale . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .

181,976
$292,127

Total

87,384
$194,066

94,592
$98,061

$

—
—
—

—

—

—
—
—

—
—
—
—

—
—

Liabilities:

Fair value of derivatives embedded

within convertible debt . . . . . . . . .

$144,042

$

—

$ —

$144,042

Nonrecurring fair value measurements
. . . . . . . . .
. . . . . . . .

Long-term investments(3)
Real estate held for sale(4)

$ 11,189
3,780
$ 14,969

$ 11,189
3,780
$ 14,969

$ (811)
(230)
$(1,041)

(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 $12,000 were written down to their fair value of

$11,189, resulting in an impairment charge of $811, which was included in earnings.

(4) Real estate with a carrying value of $4,010 was written down to its fair value of $3,780, resulting in an

impairment charge of $230, which was included in earnings.

The fair value of the Level 2 certiﬁcates of deposit is based on the discounted value of contractual cash
ﬂows. The discount rate is the rate offered by the ﬁnancial institution. The fair value of investment securities
available for sale included in Level 1 is based on quoted market prices from various stock exchanges. The

F-82

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

18. INVESTMENTS AND FAIR VALUE MEASUREMENTS − (continued)

Level 2 investment securities available for sale are based on quoted market prices of securities that are thinly
traded, quoted prices for identical or similar assets n markets that are not active or inputs other than quoted
prices such as interest rates and yield curves.

The fair value of derivatives embedded within convertible debt was derived using a valuation model.
These derivatives have been classiﬁed as Level 3. The valuation model assumes future dividend payments by
the Company and utilizes interest rates and credit spreads based upon the implied credit spread of the 5.50%
Convertible Notes due 2020 to determine the fair value of the derivatives embedded within the convertible
debt. The changes in fair value of derivatives embedded within convertible debt are presented on the
consolidated statements of operations.

The value of the embedded derivatives is contingent on changes in implied interest rates of the
convertible debt, the Company’s stock price, stock volatility as well as projections of future cash and stock
dividends over the term of the debt. The interest rate component of the value of the embedded derivative is
computed by calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. This rate
is determined by calculating the implied rate on the Company’s 2020 Convertible Notes when removing the
embedded option value within the convertible security. This rate is based upon market observable inputs and
inﬂuenced by the Company’s stock price, convertible bond trading price, risk-free interest rates and stock
volatility.

The unobservable inputs related to the valuations of the Level 3 assets and liabilities were as follows at

December 31, 2016:

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at
December 31,
2016

Valuation
Technique

Fair value of derivatives
embedded within
convertible debt . . . . .

$112,332

Discounted
cash ﬂow

Unobservable Input

Range (Actual)

Assumed annual stock dividend
Assumed annual cash dividend
Stock price
Convertible trading price
(as a percentage of par value)
Volatility

Risk-free rate
Implied credit spread

5%
$1.60
$22.74

114.69%
19.47%
Term structure of US
Treasury Securities
4.5% − 5.5% (5.0%)

F-83

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

18. INVESTMENTS AND FAIR VALUE MEASUREMENTS − (continued)

The unobservable inputs related to the valuations of the Level 3 assets and liabilities were as follows at

December 31, 2015:

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at
December 31,
2015

Valuation
Technique

Fair value of derivatives
embedded within
convertible debt . . . . .

$144,042

Discounted
cash ﬂow

Unobservable Input

Range (Actual)

Assumed annual stock dividend
Assumed annual cash dividend
Stock price
Convertible trading price (of par)
Volatility
Implied credit spread

5%
$1.60
$23.59
114.3%
18.30%
5.0% − 5.5% (5.25%)

In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is
required to record assets and liabilities at fair value on a nonrecurring basis. Generally, assets and liabilities
are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company had no
nonrecurring nonﬁnancial assets subject to fair value measurements as of December 31, 2016 and 2015,
respectively.

19. SEGMENT INFORMATION

The Company’s business segments were Tobacco, E-Cigarettes and Real Estate. The Tobacco segment
includes the
consists of the manufacture and sale of conventional cigarettes. The E-Cigarettes segment
operations of
includes the Company’s
the Company’s e-cigarette business. The Real Estate segment
investment in New Valley, which includes Douglas Elliman, Escena, our previous investment in Indian Creek,
Sagaponack and investments in real estate ventures. The accounting policies of the segments are the same as
those described in the summary of signiﬁcant accounting policies.

F-84

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

19. SEGMENT INFORMATION − (continued)

Financial

information for the Company’s operations before taxes and non-controlling interests for

the years ended December 31, 2016, 2015 and 2014 follows:

Tobacco

E-Cigarettes Real Estate

Corporate
and Other

Total

2016
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $1,011,620
Operating income (loss)
. . . . . . . . . . . . . .
Equity in earnings from real estate ventures . .
Identiﬁable assets
. . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . .

—
328,349
10,224
6,445

238,293(1)

2015
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $1,017,761
Operating income (loss)
. . . . . . . . . . . . . .
Equity in earnings from real estate ventures . .
Identiﬁable assets
. . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . .

—
344,033
11,323
3,730

209,393(2)

2014
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $1,021,259
Operating income (loss)
. . . . . . . . . . . . . .
Equity in earnings from real estate ventures . .
Identiﬁable assets
. . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . .

—
325,870
10,885
9,256

199,119(3)

$

(776)
(1,403)
—
68
—
—

$ (1,970)
(13,037)
—
985
—
—

$ 8,589
(13,124)
—
8,139
—
—

$680,105
23,001
5,200
573,350(4)
10,485
20,160

$641,406
24,087
2,001
585,098(4)
12,589
7,247

$561,467
42,354
4,103
498,058(4)
12,204
6,923

$

(26,894)
—

— $1,690,949
232,997
5,200
502,268(5)(6) 1,404,035
22,359
26,691

1,650
86

$

(20,523)
—

— $1,657,197
199,920
2,001
350,499(5)(6) 1,280,615
25,654
10,977

1,742
—

$

(15,911)
—

— $1,591,315
212,438
4,103
556,975(5)(6) 1,389,042
24,499
23,404

1,410
7,225

(1) Operating income includes $247 of expense from MSA Settlement, $20,000 of litigation judgment

expense, and $41 of restructuring expense.

(2) Operating income includes $4,364 of income from MSA Settlement, $20,072 of litigation settlement and

judgment expense, $7,257 of restructuring expense, and $1,607 of pension settlement expense.

(3) Operating income includes $1,419 of income from NPM Settlement and $2,475 of litigation settlement

(4)

charges and judgment expense.
Includes real estate investments accounted for under the equity method of accounting of $221,258,
$217,168 and $163,460 as of December 31, 2016, 2015 and 2014, respectively.

(5) Corporate and Other identiﬁable assets primarily includes cash of $280,691, investment securities of
$156,903, and long-term investments of $34,975 as of December 31, 2016. Corporate and other
identiﬁable assets primarily includes cash of $112,130, investment securities of $181,976, and long-term
investments of $62,225 as of December 31, 2015. Corporate and other identiﬁable assets primarily
includes cash of $213,227, investment securities of $269,100, and long-term investments of $52,025 as of
December 31, 2014.
Includes long-term investments accounted for under the equity method of accounting of $17,721, $21,495
and $20,484 as of December 31, 2016, 2015 and 2014, respectively.

(6)

F-85

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

20. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Unaudited quarterly data for the years ended December 31, 2016 and 2015 are as follows:

Revenues
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shares attributed
. . . . . . . . . . . . . . . . . . .

to Vector Group Ltd.

Per basic common share(1):
Net income applicable to common shares attributed
. . . . . . . . . . . . . . . . . . .

to Vector Group Ltd.

Per diluted common share(1):
Net income applicable to common shares attributed
. . . . . . . . . . . . . . . . . . .

to Vector Group Ltd.

December 31,
2016
$412,772
138,923
30,754

September 30,
2016
$459,104
155,662
69,364

June 30,
2016
$438,273
154,642
70,720

March 31,
2016
$380,800
144,378
62,159

$

4,599

$ 23,175

$ 24,015

$ 19,338

$

0.04

$

0.18

$

0.19

$

0.15

$

0.04

$

0.18

$

0.19

$

0.15

(1) Per share computations include the impact of a 5% stock dividend paid on September 29, 2016. Quarterly
basic and diluted net income per common share were computed independently for each quarter and do
not necessarily total to the year to date basic and diluted net income per common share.

Revenues
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shares attributed
. . . . . . . . . . . . . . . . . . .

to Vector Group Ltd.

Per basic common share(1):
Net income applicable to common shares attributed
. . . . . . . . . . . . . . . . . . .

to Vector Group Ltd.

Per diluted common share(1):
Net income applicable to common shares attributed
. . . . . . . . . . . . . . . . . . .

to Vector Group Ltd.

December 31,
2015
$430,330
137,742
31,032

September 30,
2015
$449,934
154,017
69,367

June 30,
2015
$416,173
136,969
55,803

March 31,
2015
$360,760
118,742
43,718

$

7,904

$ 12,466

$ 17,607

$ 21,221

$

0.06

$

0.10

$

0.14

$

0.17

$

0.06

$

0.10

$

0.14

$

0.17

(1) Per share computations include the impact of a 5% stock dividend paid on September 29, 2015. Quarterly
basic and diluted net income per common share were computed independently for each quarter and do
not necessarily total to the year to date basic and diluted net income per common share.

F-86

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The accompanying condensed consolidating ﬁnancial

information has been prepared and presented
pursuant to Securities and Exchange Commission (‘‘SEC’’) Regulation S-X, Rule 3-10, ‘‘Financial Statements
of Guarantors and Affiliates Whose Securities Collateralize an Issue Registered or Being Registered.’’ Each of
the subsidiary guarantors is 100% owned, directly or indirectly, by the Company, and all guarantees are full
and unconditional and joint and several.

The Company’s investments in its consolidated subsidiaries are presented under the equity method of

accounting.

The Company had on December 31, 2016, outstanding $835,000 principal amount of its 7.75% Senior
Secured Notes due 2021 that were guaranteed subject to certain customary automatic release provisions on a
joint and several basis by all of the 100% owned domestic subsidiaries of the Company that are engaged in
the conduct of its cigarette businesses. (See Note 9.) The notes are not guaranteed by any of the Company’s
subsidiaries engaged in the real estate businesses conducted through its subsidiary New Valley.

Presented herein are Condensed Consolidating Balance Sheets as of December 31, 2016 and 2015 and
the related Condensed Consolidating Statements of Operations and Cash Flows for
the years ended
December 31, 2016, 2015 and 2014 of Vector Group. (Parent/Issuer), the guarantor subsidiaries (Subsidiary
Guarantors) and the subsidiaries that are not guarantors (Subsidiary Non-Guarantors).

Subsequent to year end, the Company issued $850,000 of its 6.125% Senior Secured Notes due 2025 in a
private offering to qualiﬁed institutional investors in accordance with Rule 144A of the Securities Act of 1933
on January 27, 2017. The Company is using the net proceeds of the issuance to redeem $835,000 of its 7.75%
Senior Secured Notes.

The Company and the guarantors have ﬁled a shelf registration statement for the offering of debt
securities on a delayed or continuous basis and the Company is ﬁling this condensed consolidating ﬁnancial
information in connection therewith.

F-87

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION − (continued)

CONDENSED CONSOLIDATING BALANCE SHEETS

December 31, 2016

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

ASSETS:
Current assets:

Cash and cash equivalents
Investment securities available for sale . . . . . . . . . .
Accounts receivable − trade, net
. . . . . . . . . . . . . .
Intercompany receivables . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable, net
. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Restricted assets
. . . . . . . . . . . . . . . . . . . . .
Other current assets
Total current assets . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . .
Investments in real estate, net . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . .
Investments in real estate ventures . . . . . . . . . . . . . .
Investments in consolidated subsidiaries
. . . . . . . . . .
Restricted assets . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets, net
. . . . . . . . . .
Prepaid pension costs . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . $ 279,815
121,016
—
22,789
—
18,387
—
517
442,524
1,134
—
52,308
—
501,659
1,728
—
—
7,534
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $1,006,887

$ 14,798
35,887
11,775
—
89,834
—
6,416
4,428
163,138
48,314
—
388
—
—
2,258
107,511
22,273
12,118
$356,000

$ 98,917
—
7,026
—
—
—
914
18,010
124,867
31,000
23,640
501
221,258
—
—
154,407
—
12,200
$567,873

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY:
Current liabilities:

Current portion of notes payable and long-term

debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Current portion of employee beneﬁts . . . . . . . . . . .
Intercompany payables
. . . . . . . . . . . . . . . . . . .
Income taxes payable, net . . . . . . . . . . . . . . . . . .
Litigation accruals and current payments due under

$

— $ 39,333
937
—
—
24
1,089
—

Other current liabilities

the Master Settlement Agreement

. . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . .
Notes payable, long-term debt and other obligations, less
current portion . . . . . . . . . . . . . . . . . . . . . . . .

Fair value of derivatives embedded within convertible

debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current employee beneﬁts . . . . . . . . . . . . . . . .
Deferred income taxes, net
. . . . . . . . . . . . . . . . . .
Other liabilities, primarily litigation accruals and
payments due under the Master Settlement
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies
Stockholders’ (deﬁciency) equity attributed to Vector

—
47,968
47,968

19,851
49,492
110,726

1,127,180

5,372

112,332
42,818
7,420

—
16,140
40,136

175
—
22,765
1,188

—
38,392
62,520

391

—
—
45,529

$

—
—
—
(22,789)
—
(2,277)
—
—
(25,066)
—
—
—
—
(501,659)
—
—
—
—
$(526,725)

$

—
—
(22,789)
(2,277)

—
—
(25,066)

—

—
—
—

$ 393,530
156,903
18,801
—
89,834
16,110
7,330
22,955
705,463
80,448
23,640
53,197
221,258
—
3,986
261,918
22,273
31,852
$1,404,035

$

39,508
937
—
—

19,851
135,852
196,148

1,132,943

112,332
58,958
93,085

1,169
1,338,887

49,861
222,235

12,811
121,251

—
(25,066)

63,841
1,657,307

Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest
. . . . . . . . . . . . . . . . . . . .
Total stockholders’ (deﬁciency) equity . . . . . . . . . . . .

(332,000)
—
(332,000)
Total liabilities and stockholders’ deﬁciency . . . . . $1,006,887

133,765
—
133,765
$356,000

367,894
78,728
446,622
$567,873

(501,659)
—
(501,659)
$(526,725)

(332,000)
78,728
(253,272)
$1,404,035

F-88

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION − (continued)

CONDENSED CONSOLIDATING BALANCE SHEETS

December 31, 2015

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

ASSETS:
Current assets:

Cash and cash equivalents
Investment securities available for sale . . . . . . . . . .
Accounts receivable − trade, net
. . . . . . . . . . . . . .
Intercompany receivables . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable, net
. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Restricted assets
. . . . . . . . . . . . . . . . . . . . .
Other current assets
Total current assets . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . .
Investments in real estate, net . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . .
Investments in real estate ventures . . . . . . . . . . . . . .
Investments in consolidated subsidiaries
. . . . . . . . . .
Restricted assets . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets, net
. . . . . . . . . .
Prepaid pension costs . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . $ 111,470
131,810
—
11,293
—
8,213
—
575
263,361
1,711
—
61,747
—
532,501
1,713
—
—
7,582
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 868,615

$ 12,375
50,166
15,913
—
86,516
—
7,781
3,747
176,498
54,097
—
478
—
—
10,590
107,511
20,650
11,769
$381,593

$116,523
—
7,976
—
—
—
1,414
34,632
160,545
19,824
23,318
501
217,168
—
—
156,448
—
1,769
$579,573

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY:
Current liabilities:

Current portion of notes payable and long-term debt . . $
Current portion of employee beneﬁts . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Intercompany payables
Income taxes payable, net . . . . . . . . . . . . . . . . . .
Litigation accruals and current payments due under

Other current liabilities

the Master Settlement Agreement

. . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . .
Notes payable, long-term debt and other obligations, less
current portion . . . . . . . . . . . . . . . . . . . . . . . .

Fair value of derivatives embedded within convertible

debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current employee beneﬁts . . . . . . . . . . . . . . . .
Deferred income taxes, net
. . . . . . . . . . . . . . . . . .
Other liabilities, primarily litigation accruals and
payments due under the Master Settlement
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies
Stockholders’ (deﬁciency) equity attributed to Vector

$

— $
—
—
—

8,733
915
586
5,464

—
38,140
38,140

52,145
74,083
141,926

848,368

7,519

144,042
39,244
2,675

—
15,811
33,791

186
—
10,707
4

—
41,994
52,891

221

—
—
42,963

$

—
—
—
(11,293)
—
(5,372)
—
—
(16,665)
—
—
—
—
(532,501)
—
—
—
—
$(549,166)

$

—
—
(11,293)
(5,372)

—
—
(16,665)

—

—
—
—

$ 240,368
181,976
23,889
—
86,516
2,841
9,195
38,954
583,739
75,632
23,318
62,726
217,168
—
12,303
263,959
20,650
21,120
$1,280,615

$

8,919
915
—
96

52,145
154,217
216,292

856,108

144,042
55,055
79,429

2,193
1,074,662

44,982
244,029

4,675
100,750

—
(16,665)

51,850
1,402,776

Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest
. . . . . . . . . . . . . . . . . . . .
Total stockholders’ (deﬁciency) equity . . . . . . . . . . . .

(206,047)
—
(206,047)
Total liabilities and stockholders’ deﬁciency . . . . . $ 868,615

137,564
—
137,564
$381,593

394,937
83,886
478,823
$579,573

(532,501)
—
(532,501)
$(549,166)

(206,047)
83,886
(122,161)
$1,280,615

F-89

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION − (continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Year Ended December 31, 2016

Parent/
Issuer

Subsidiary
Guarantors
— $1,011,322

Subsidiary
Non-
Guarantors
$680,105

Consolidating
Adjustments
(478)
$

Consolidated
Vector Group
Ltd.
$1,690,949

—

672,515

424,829

—

1,097,344

36,242

72,359

232,444

(478)

340,567

Revenues

. . . . . . . . . . . . . . . . . . . . . . .

$

Expenses:

Cost of sales
Operating, selling, administrative and

. . . . . . . . . . . . . . . . . . .

general expenses

. . . . . . . . . . . . . . .

Litigation settlement and judgment

expense . . . . . . . . . . . . . . . . . . . . .
Management fee expense
. . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . .
Operating (loss) income . . . . . . . . . . . .

Other income (expenses):

Interest expense
Change in fair value of derivatives

. . . . . . . . . . . . . . . . .

embedded within convertible debt

. . . .

Equity in earnings from real estate

ventures . . . . . . . . . . . . . . . . . . . . .
Equity in losses from investments . . . . . .
Gain on sale of investment securities

available for sale . . . . . . . . . . . . . . .

Impairment of investment securities

—
—
—
(36,242)

20,000
10,649
41
235,758

(139,524)

(3,438)

31,710

—
(2,664)

—

—
(90)

376

2,531

available for sale . . . . . . . . . . . . . . .

(609)

(4,772)

Equity in earnings in consolidated

Income before provision for income taxes

subsidiaries . . . . . . . . . . . . . . . . . . .
Management fee income . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Other, net
. .
. . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Net income attributed to non-controlling

Income tax beneﬁt (expense)

161,471
10,649
2,780
27,947
43,180
71,127

—
—
1,013
231,002
(83,008)
147,994

—
—
—
22,832

(20)

—

5,200
—

—

—

—
—
939
28,951
(9,335)
19,616

—
(10,649)
—
10,649

—

—

—
—

—

—

(161,471)
(10,649)
—
(161,471)
—
(161,471)

20,000
—
41
232,997

(142,982)

31,710

5,200
(2,754)

2,907

(5,381)

—
—
4,732
126,429
(49,163)
77,266

interest

. . . . . . . . . . . . . . . . . . . . . . .
Net income attributed to Vector Group Ltd. . .
Comprehensive income attributed to

non-controlling interest . . . . . . . . . . . . .

—
$ 71,127

—
$ 147,994

(6,139)
$ 13,477

—
$(161,471)

(6,139)
71,127

$

$

— $

— $ (6,139)

$

— $

(6,139)

Comprehensive income attributed to Vector

Group Ltd. . . . . . . . . . . . . . . . . . . . . .

$ 68,195

$ 146,841

$ 13,477

$(160,318)

$

68,195

F-90

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION − (continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Year Ended December 31, 2015

Parent/
Issuer

Subsidiary
Guarantors
— $1,016,279

Subsidiary
Non-
Guarantors
$641,406

Consolidating
Adjustments
(488)
$

Consolidated
Vector Group
Ltd.
$1,657,197

—

699,440

410,287

—

1,109,727

29,237

84,437

207,035

(488)

320,221

Revenues

. . . . . . . . . . . . . . . . . . . . . . .

$

Expenses:

Cost of sales
Operating, selling, administrative and

. . . . . . . . . . . . . . . . . . .

general expenses

. . . . . . . . . . . . . . .

Litigation settlement and judgment

expense . . . . . . . . . . . . . . . . . . . . .
Management fee expense
. . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . .
Operating (loss) income . . . . . . . . . . . .

Other income (expenses):

Interest expense
Change in fair value of derivatives

. . . . . . . . . . . . . . . . .

embedded within convertible debt

. . . .

Equity in earnings from real estate

ventures . . . . . . . . . . . . . . . . . . . . .
Equity in losses from investments . . . . . .
(Loss) gain on sale of investment securities
available for sale . . . . . . . . . . . . . . .

Impairment of investment securities

—
—
—
(29,237)

20,072
10,250
7,257
194,823

(115,731)

(4,953)

24,455

—
(2,640)

—

—
(41)

(2,037)

13,175

available for sale . . . . . . . . . . . . . . .

(4,859)

(7,987)

Equity in earnings in consolidated

Income before provision for income taxes

subsidiaries . . . . . . . . . . . . . . . . . . .
Management fee income . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Other, net
. .
. . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Net income attributed to non-controlling

Income tax beneﬁt (expense)

125,042
10,250
4,016
9,259
49,939
59,198

—
—
639
195,656
(82,282)
113,374

—
—
—
24,084

(7)

—

2,001
—

—

—

—
—
1,754
27,832
(8,890)
18,942

—
(10,250)
—
10,250

—

—

—
—

—

—

(125,042)
(10,250)
—
(125,042)
—
(125,042)

20,072
—
7,257
199,920

(120,691)

24,455

2,001
(2,681)

11,138

(12,846)

—
—
6,409
107,705
(41,233)
66,472

interest

. . . . . . . . . . . . . . . . . . . . . . .
Net income attributed to Vector Group Ltd. . .
Comprehensive income attributed to

non-controlling interest . . . . . . . . . . . . .

—
$ 59,198

—
$ 113,374

(7,274)
$ 11,668

—
$(125,042)

(7,274)
59,198

$

$

— $

— $ (7,274)

$

— $

(7,274)

Comprehensive income attributed to Vector

Group Ltd. . . . . . . . . . . . . . . . . . . . . .

$ 52,228

$ 105,456

$ 11,668

$(117,124)

$

52,228

F-91

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION − (continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $

Expenses:

Cost of sales . . . . . . . . . . . . . . . . . . . . .
Operating, selling, administrative and

general expenses . . . . . . . . . . . . . . . . .

Litigation settlement and judgment

expense

. . . . . . . . . . . . . . . . . . . . . .
Management fee expense . . . . . . . . . . . . .
Operating (loss) income . . . . . . . . . . . . . .

Other income (expenses):

Interest expense . . . . . . . . . . . . . . . . . . .
Changes in fair value of derivatives

embedded within convertible debt . . . . . .

Acceleration of interest expense related to

19,409

debt conversion . . . . . . . . . . . . . . . . .

(5,205)

Equity in earnings from real estate

ventures

. . . . . . . . . . . . . . . . . . . . . .

—

Loss on sale of investment securities

available for sale . . . . . . . . . . . . . . . . .
Equity in earnings from investments . . . . . .
Equity in earnings in consolidated

subsidiaries . . . . . . . . . . . . . . . . . . . .
Management fee income . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . .

(11)
3,122

124,001
9,870
4,178

Year Ended December 31, 2014

Parent/
Issuer

Subsidiary
Guarantors
— $1,030,157

Subsidiary
Non-
Guarantors
$561,467

Consolidating
Adjustments
(309)
$

Consolidated
Vector Group
Ltd.
$1,591,315

—

743,032

354,028

—

1,097,060

24,262

90,208

165,181

(309)

279,342

—
—
(24,262)

2,475
9,870
184,572

—
—
42,258

—
(9,870)
9,870

2,475
—
212,438

(157,321)

(4,241)

(41)

612

(160,991)

—

—

—

—
18

—
—
1,044

—

—

4,103

—
—

—
—
4,786

—

—

—

—
—

(124,001)
(9,870)
(612)

(124,001)
—
(124,001)
—
$(124,001)

19,409

(5,205)

4,103

(11)
3,140

—
—
9,396

82,279
(33,165)
49,114
(12,258)
36,856

$

(Loss) income before provision for income

(26,219)
taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
63,064
. . . . . . . . . .
Income tax beneﬁt (expense)
36,845
Net income . . . . . . . . . . . . . . . . . . . . . . .
Net loss attributed to non-controlling interest . .
—
Net income attributed to Vector Group Ltd. . . . $ 36,845

181,393
(78,801)
102,592
—
$ 102,592

51,106
(17,428)
33,678
(12,258)
$ 21,420

Comprehensive income attributed to

non-controlling interest

. . . . . . . . . . . . . . $

— $

— $ (12,258)

$

— $ (12,258)

Comprehensive income attributed to Vector

Group Ltd.

. . . . . . . . . . . . . . . . . . . . . . $ 34,922

$ 102,536

$ 21,420

$(123,956)

$

34,922

F-92

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION − (continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Net cash provided by operating activities . . . . . $ 135,820

Parent/
Issuer

Year Ended December 31, 2016

Subsidiary
Guarantors
$ 112,562

Subsidiary
Non-
Guarantors
$ 60,640

Consolidating
Adjustments
$(211,386)

Consolidated
Vector Group
Ltd.
$ 97,636

Cash ﬂows from investing activities:
Sale of investment securities . . . . . . . . . . .
Maturities of investment securities
. . . . . . .
. . . . . . . .
Purchase of investment securities
Proceeds from sale or liquidation of long-term
investments . . . . . . . . . . . . . . . . . . . .
. . . . . . .
Purchase of long-term investments
. . . . . . .
Investments in real estate ventures
Distributions from real estate ventures . . . . .
Increase in cash surrender value of life

insurance policies

. . . . . . . . . . . . . . . .
. . . . .
(Increase) decrease in restricted assets
Investments in subsidiaries . . . . . . . . . . . .
Proceeds from sale of ﬁxed assets . . . . . . . .
Purchase of subsidiaries . . . . . . . . . . . . . .
Repayment of notes receivable . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . .
Investments in real estate held for sale . . . . .
Pay down of investment securities . . . . . . . .

105,815
10,822
(117,211)

10,255
—
—

4,552
—
—
—

—
(15)
(19,219)
—
—
—
(86)
—
9,212

—
—
—
—

(484)
9,696
—
32
—
—
(6,445)
—
—

—
—
—

—
(50)
(44,107)
33,204

—
500
—
13
(250)
4,410
(20,160)
(245)
—

—
—
—

—
—
—
—

—
—
19,219
—
—
—
—
—
—

116,070
10,822
(117,211)

4,552
(50)
(44,107)
33,204

(484)
10,181
—
45
(250)
4,410
(26,691)
(245)
9,212

Net cash (used in) provided by investing

activities

. . . . . . . . . . . . . . . . . . . . . . .

(6,130)

13,054

(26,685)

19,219

(542)

Cash ﬂows from ﬁnancing activities:
Proceeds from issuance of debt
. . . . . . . . .
Deferred ﬁnancing costs . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Repayments of debt
Borrowings under revolver
. . . . . . . . . . . .
Repayments on revolver . . . . . . . . . . . . . .
Capital contributions received . . . . . . . . . .
Intercompany dividends paid . . . . . . . . . . .
Dividends and distributions on common stock
Distributions to non-controlling interest
Contributions from non-controlling

. . . .

interest . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of Vector options
. . .
Tax beneﬁt of options exercised . . . . . . . . .

Net cash provided by (used in) ﬁnancing

243,225
(6,600)
—
—
—
—
—
(198,947)
—

—
398
579

—
—
(5,226)
144,294
(110,614)
2,800
(154,447)
—
—

—
—
—

395
—
(139)
—
—
16,419
(56,939)
—
(11,545)

248
—
—

—
—
—
—
—
(19,219)
211,386
—
—

—
—
—

243,620
(6,600)
(5,365)
144,294
(110,614)
—
—
(198,947)
(11,545)

248
398
579

activities

. . . . . . . . . . . . . . . . . . . . . . .

38,655

(123,193)

(51,561)

192,167

56,068

Net increase (decrease) in cash and cash

equivalents . . . . . . . . . . . . . . . . . . . . . .
. .

Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

168,345
111,470
. . . . . . $ 279,815

2,423
12,375
$ 14,798

(17,606)
116,523
$ 98,917

$

—
—
—

153,162
240,368
$ 393,530

F-93

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION − (continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Net cash provided by operating activities . . . . . $ 136,370

Parent/
Issuer

Year Ended December 31, 2015

Subsidiary
Guarantors
$ 172,065

Subsidiary
Non-
Guarantors
$ 45,715

Consolidating
Adjustments
$(209,671)

Consolidated
Vector Group
Ltd.
$ 144,479

Cash ﬂows from investing activities:
Sale of investment securities . . . . . . . . . . .
. . . . . . .
Maturities of investment securities
. . . . . . . .
Purchase of investment securities
Proceeds from sale of or liquidation of

long-term investments . . . . . . . . . . . . . .
. . . . . . .
Purchase of long-term investments
. . . . . . .
Investments in real estate ventures
Distributions from real estate ventures . . . . .
Increase in cash surrender value of life

insurance policies

. . . . . . . . . . . . . . . .
Increase in restricted assets . . . . . . . . . . . .
Issuance of notes receivable
. . . . . . . . . . .
Investments in subsidiaries . . . . . . . . . . . .
Proceeds from sale of ﬁxed assets . . . . . . . .
Repayments of notes receivable . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . .
Proceeds from sale of preferred securities . . .
Investments in real estate, net
. . . . . . . . . .
Pay downs of investment securities . . . . . . .
Net cash used in investing activities . . . . . . . .

Cash ﬂows from ﬁnancing activities:
Proceeds from issuance of debt
. . . . . . . . .
Deferred ﬁnancing costs . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Repayments of debt
Borrowings under revolver
. . . . . . . . . . . .
Repayments on revolver . . . . . . . . . . . . . .
Capital contributions received . . . . . . . . . .
Intercompany dividends paid . . . . . . . . . . .
Dividends and distributions on common stock
Distributions to non-controlling interest
Contributions from non-controlling

. . . .

interest . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of Vector options
. . .
Tax beneﬁt of options exercised . . . . . . . . .

Net cash (used in) provided by ﬁnancing

256,161
5,491
(207,822)

1,106
(10,000)
—
—

(1,257)
(6)
—
(103,174)
—
—
—
—
—
8,739
(50,762)

—
—
—
—
—
—
—
(188,151)
—

—
1,441
821

14,415
—
(6,324)

—
—
—
—

(485)
(6,883)
—
—
4
—
(3,730)
—
—
—
(3,003)

1,799
(624)
(6,362)
153,361
(167,915)
33,658
(181,825)
—
—

—
—
1,497

—
—
—

197
—
(70,272)
17,563

—
—
(4,410)
—
—
4,000
(7,247)
1,000
(12,603)
—
(71,772)

306
—
(322)
—
—
69,516
(29,343)
—
(3,280)

813
—
—

—
—
—

—
—
—
—

—
—
—
103,174
—
—
—

—
—
103,174

—
—
—
—
—
(103,174)
211,168
—
—

—
—
(1,497)

270,576
5,491
(214,146)

1,303
(10,000)
(70,272)
17,563

(1,742)
(6,889)
(4,410)
—
4
4,000
(10,977)
1,000
(12,603)
8,739
(22,363)

2,105
(624)
(6,684)
153,361
(167,915)
—
—
(188,151)
(3,280)

813
1,441
821

activities

. . . . . . . . . . . . . . . . . . . . . . .

(185,889)

(166,411)

37,690

106,497

(208,113)

Net (decrease) increase in cash and cash

equivalents . . . . . . . . . . . . . . . . . . . . . .
. .

Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

(100,281)
211,751
. . . . . . $ 111,470

2,651
9,724
$ 12,375

11,633
104,890
$116,523

$

—
—
—

(85,997)
326,365
$ 240,368

F-94

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION − (continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Net cash provided by operating activities . . . . . $ 61,779

Parent/
Issuer

Year Ended December 31, 2014

Subsidiary
Guarantors
$ 83,671

Subsidiary
Non-
Guarantors
$ 62,656

Consolidating
Adjustments
$(100,730)

Consolidated
Vector Group
Ltd.
$ 107,376

Cash ﬂows from investing activities:
Sale of investment securities . . . . . . . . . . .
Maturities of investment securities
. . . . . . .
. . . . . . . .
Purchase of investment securities
Proceeds from sale or liquidation of long-term
investments . . . . . . . . . . . . . . . . . . . .
. . . . . . .
Purchase of long-term investments
. . . . . . .
Investments in real estate ventures
Distributions from real estate ventures . . . . .
Increase in cash surrender value of life

insurance policies

. . . . . . . . . . . . . . . .
Decrease (increase) in restricted assets . . . . .
Issuance of notes receivable
. . . . . . . . . . .
Proceeds from sale of ﬁxed assets . . . . . . . .
Purchase of subsidiaries . . . . . . . . . . . . . .
Repayments of notes receivable . . . . . . . . .
. . . . . . . . .
Purchase of preferred securities
Investments in subsidiaries . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . .
Pay downs of investment securities . . . . . . .
Net cash used in investing activities . . . . . . . .

Cash ﬂows from ﬁnancing activities:
. . . . . . . . .
Proceeds from issuance of debt
. . . . . . . . . . . . . . . .
Repayments of debt
Deferred ﬁnancing costs . . . . . . . . . . . . . .
Borrowings under revolver
. . . . . . . . . . . .
Repayments on revolver . . . . . . . . . . . . . .
Capital contributions received . . . . . . . . . .
Intercompany dividends paid . . . . . . . . . . .
Dividends and distributions on common stock
. . . .
Distributions to non-controlling interest
Proceeds from exercise of Vector options
. . .
Tax beneﬁt of options exercised . . . . . . . . .

Net cash provided by (used in) ﬁnancing

154,615
930
(299,417)

2,367
(12,000)
—
—

—
188
(35,000)
—
—
35,000
—
(85,278)
(15)
1,849
(236,761)

408,750
—
(12,360)
—
—
—
—
(167,328)
—
5,151
1,178

—
—
(6,314)

—
—
—
—

(484)
(371)
—
4
—
—
—
—
(16,466)
—
(23,631)

40,164
(43,724)
—
886,130
(898,788)
15,270
(61,180)
—
—
—
—

—
—
—

49
—
(40,916)
7,309

—
(689)
(8,250)
—
(750)
4,850
(1,000)
—
(6,923)
—
(46,320)

—
(3,877)
—
—
—
70,008
(39,550)
—
(9,339)
—
—

—
—
—

—
—
—
—

—
—
35,000
—
—
(35,000)
—
85,278
—
—
85,278

(35,000)
35,000
—
—
—
(85,278)
100,730
—
—
—
—

154,615
930
(305,731)

2,416
(12,000)
(40,916)
7,309

(484)
(872)
(8,250)
4
(750)
4,850
(1,000)
—
(23,404)
1,849
(221,434)

413,914
(12,601)
(12,360)
886,130
(898,788)
—
—
(167,328)
(9,339)
5,151
1,178

activities

. . . . . . . . . . . . . . . . . . . . . . .

235,391

(62,128)

17,242

15,452

205,957

Net increase (decrease) in cash and cash

equivalents . . . . . . . . . . . . . . . . . . . . . .
. .

Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

60,409
151,342
. . . . . . $ 211,751

(2,088)
11,812
9,724

$

33,578
71,312
$104,890

$

—
—
—

91,899
234,466
$ 326,365

F-95

VECTOR GROUP LTD.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)

Description
Year Ended December 31, 2016
Allowances for:

Doubtful accounts
. . . . . . . . . . . . . . . . . . . .
Cash discounts . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . . . . .
Sales returns . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31, 2015
Allowances for:

Doubtful accounts
. . . . . . . . . . . . . . . . . . . .
Cash discounts . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . . . . .
Sales returns . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31, 2014
Allowances for:

Doubtful accounts
. . . . . . . . . . . . . . . . . . . .
Cash discounts . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . . . . .
Sales returns . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at
Beginning of
Period

Additions
Charged to
Costs and
Expenses

Deductions

$

112
367
3,900
7,822
$12,201

$

37
415
4,933
7,720
$13,105

$

192
241
6,014
4,420
$10,867

$ —
25,237
539
4,962
$30,738

$
75
25,616
—
8,516
$34,207

$
31
25,801
—
6,886
$32,718

$
24
25,331
—
6,226
$31,581

$ —
25,664
1,033
8,414
$35,111

$
186
25,627
1,081
3,586
$30,480

Balance
at End
of Period

$

88
273
4,439
6,558
$11,358

$

112
367
3,900
7,822
$12,201

$

37
415
4,933
7,720
$13,105

F-96

Independent Accountants:

Transfer Agent and Registrar:

Corporate Officers:

Deloitte & Touche LLP
333 SE 2nd Avenue
Suite 3600
Miami, FL 33131

Corporate Headquarters:

Vector Group Ltd.
4400 Biscayne Boulevard
Miami, FL 33137

Website:

www.vectorgroupltd.com

Additional Information:

Requests for general information
should be directed to corporate
headquarters.
Attn: Investor Relations
(305) 579-8000

Requests for exhibits not attached
to the Annual Report, including
Exhibit 99.1, Material Legal
Proceedings, must be in writing,
and should be sent to corporate
headquarters.
Attn: Investor Relations Please
specify the exhibits requested.

Company Stock:

Vector Group Ltd. common stock
is listed on the New York Stock
Exchange (ticker symbol VGR).

American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Telephone: (800) 937-5449

Board of Directors:

Bennett S. LeBow1
Chairman of the Board

Howard M. Lorber1
President and Chief Executive
Officer

Howard M. Lorber
President and Chief Executive
Officer

Richard J. Lampen
Executive Vice President

J. Bryant Kirkland III
Senior Vice President,
Treasurer and
Chief Financial Officer

Marc N. Bell
Senior Vice President,
Secretary and
General Counsel

Ronald J. Bernstein
President and Chief Executive
Officer, Liggett Group LLC and
Liggett Vector Brands LLC

Ronald J. Bernstein
President and Chief Executive
Officer, Liggett Group LLC and
Liggett Vector Brands LLC

Corporate Governance:

The Company timely submitted to
the New York Stock Exchange a
Section 303A(12)(a) CEO
Certiﬁcation without qualiﬁcation
in 2016. In 2017, the Company
ﬁled with the Securities and
Exchange Commission the
CEO/CFO certiﬁcations required
by Section 302 of the
Sarbanes-Oxley Act as Exhibits to
its Form 10-K.

Stanley S. Arkin3, 4
Founding Member and Senior
Partner, Arkin Solbakken LLP
and Chairman of The Arkin
Group LLC

Henry C. Beinstein2, 4
Partner,
Gagnon Securities LLC

Jeffrey S. Podell2, 3
Private Investor

Jean E. Sharpe2, 3, 4
Private Investor

1 Executive Committee
2 Audit Committee
3 Compensation Committee
4 Corporate Governance and
Nominating Committee