Vector Group

2019 Stockholders’ Report

April 22, 2020

Dear Fellow Stockholder:

As I write this letter, we are bearing witness to an unprecedented global health crisis. Our thoughts and prayers go out to
the people who have been affected by the COVID-19 pandemic, and we appreciate the healthcare workers, first responders and
other essential workers around the world who are on the front lines helping with the crisis.

The COVID-19 pandemic has emerged as a critical business issue as well. While our tobacco segment is maintaining
production at normal levels (after an initial two-week closure for maintenance and to update safety protocols), our real estate
segment, along with the sector broadly, has been forced to make operating adjustments, including a reduction in staff and
meaningful budget cuts across the organization.

The health and safety of our employees remain our top priority. Our Board and management team continue to monitor the
situation and take the necessary and appropriate action as the pandemic continues to evolve. While the ultimate impact on our
business is difficult to predict at this time, we remain confident in our fundamentals and long-term prospects.

In 2019, our tobacco segment reported record earnings and its highest market share in unit volume since the mid-1980s,
and our real estate subsidiary, New Valley LLC, maintained a broad portfolio of real estate ventures. We were also pleased to
have been added to the S&P SmallCap 600 Index in 2019.

We have also recently monetized two of our long-term investments, receiving $16.4 million in cash for our interests in

Castle Brands in 2019 and $53.2 million in cash for our interests in Ladenburg Thalmann Financial Services in February 2020.

Financial Performance

Vector Group demonstrated improved financial performance in 2019, with revenues increasing to $1.90 billion in 2019,
compared to $1.87 billion in 2018, and net income increasing to $101 million in 2019, or $0.63 per diluted share, from
$58.1 million in 2018, or $0.35 per diluted share. The Company’s operating income increased to $231.1 million in 2019 from
$224 million in 2018. The Company recorded adjusted EBITDA of $259.4 million in 2019, compared to $245.3 million in the
2018 period, and adjusted net income was $110.1 million in 2019, or $0.70 per diluted share, compared to $88.2 million, or
$0.55 per diluted share, in the 2018 period.(1)

We maintained significant liquidity, with cash and cash equivalents of $371 million and investment securities and
investment partnership interests of another $253 million as of December 31, 2019. In November 2019, we issued $230 million of
10.5% unsecured senior notes due 2026. We used the proceeds to repurchase and retire our convertible notes due 2020.

Tobacco Business

We continued to see strong performance from our tobacco business in 2019, which reported $1.12 billion in revenues for
the year ended December 31, 2019, compared to $1.11 billion for the year ended December 31, 2018. Although this increase was
primarily driven by increased pricing, we continue to diligently manage our cost base across all areas of the business.

We are pleased with the results we have achieved from the continued income growth phase of our EAGLE 20’s business
strategy. Despite price increases that began in the fourth quarter of 2018, EAGLE 20’s volume and market share have continued
to grow, along with the brand’s profitability. Marketing programs have proven successful, and we remain optimistic about them
going forward. Liggett’s wholesale market share increased to 4.0% and its retail market share increased to 4.2%. These are
Liggett’s highest market share percentages since the mid-1980s.

EAGLE 20’s, which is now sold in over 77,000 stores nationwide, continues to provide an effective volume and profit
complement to PYRAMID, which delivers substantial profit and market presence to us. We remain committed to building on
our two-brand strategy and will opportunistically evaluate earnings and growth opportunities.

The year also marks the end of a nearly 30-year tenure for Ron Bernstein, President and Chief Executive Officer of Liggett
Group LLC and Liggett Vector Brands LLC. Ron retired on March 31, 2020 and has transitioned into the role of
Non-Executive Chairman of Liggett Vector Brands and Senior Advisor to both Liggett and Vector Group. He will also
continue to serve on Vector Group’s Board of Directors as a non-employee director. On behalf of the Board and management,
we sincerely thank Ron for his outstanding contributions and wish him all the best in his retirement.

Real Estate Business

For the year ended December 31, 2019, New Valley LLC had revenues of $788.9 million, compared to $759.2 million for
the year ended December 31, 2018. This includes growth at Douglas Elliman, the nation’s fourth-largest residential real estate
brokerage firm. Douglas Elliman’s revenues have grown over the last five years from $541 million in 2014 to $784.1 million in
2019, and its closed sales increased from $18.2 billion to $28.8 billion during that same timeframe.

As of December 31, 2019, New Valley had investments of approximately $178 million in a broad portfolio of real estate
projects. New Valley continued to invest opportunistically in 2019, with five new investments in projects in New York and
Florida. We invested $55 million in new and existing real estate ventures and received $37 million in monetization from our
interests in the Park Lane Hotel, 111 Murray Street, 20 Times Square and other investments.

Capital Allocation Strategy

Our Board regularly evaluates Vector Group’s dividend policy and the Company’s capital allocation strategy. In November,
as part of this evaluation, the Board determined that it was in the best interests of the Company and its stockholders to reduce
the Company’s quarterly cash dividend to $0.20 per share — effective the first quarter of 2020 — and to no longer pay an
annual stock dividend. The Company has a long-standing history of paying a quarterly cash dividend, and it remains an
important component of our capital allocation strategy.

Outlook

Like other companies operating in the tobacco and real estate industries and beyond, our business, and, in particular, our
real estate segment, is being impacted by the COVID-19 pandemic. Nonetheless, we will continue to assess new opportunities in
both our tobacco and real estate segments and will pursue those with the greatest value-creation potential.

On behalf of the Board and the management team, we would like to thank our stockholders, employees and customers for

their continued dedication, support and confidence.

Very truly yours,

Howard M. Lorber
President and Chief Executive Officer

(1) “Adjusted EBITDA and Adjusted Net 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 of
Adjusted EBITDA and Adjusted Net Income are included in Exhibit 99.1 to the Company's earnings release on Form 8-K,
furnished with the Securities Exchange Commission on February 28, 2020.”

This letter includes forward-looking statements within the meaning of the federal securities law. All statements other than
statements of historical or current facts, including statements regarding the current or anticipated impact of the COVID-19
pandemic on our business, made in this letter are forward-looking. We identify forward-looking statements in this
document 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. Forward-looking
statements reflect our current expectations and are inherently uncertain. Actual results could differ materially for a variety
of reasons. Risks and uncertainties that could cause our actual results to differ significantly from our current expectations
are described in our 2019 Annual Report on Form 10-K. We undertake no responsibility to publicly update or revise any
forward-looking statement except as required by applicable law.

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, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

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

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

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

Title of each class:
Common stock, par value $0.10 per share

Trading Symbol(s)
VGR

Name of each exchange on which registered:
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.

☑ 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 ☑ 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.
☑ Yes ☐ No

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be
submitted 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 such files). ☑ Yes ☐ No

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.
Accelerated filer ☐

Large accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☐
Emerging Growth Company ☐

Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. ☐ Yes ☑ No
The aggregate market value of the common stock held by non-affiliates of Vector Group Ltd. as of June 30, 2019 was

approximately $1.063 billion.

At February 27, 2020, Vector Group Ltd. had 148,084,900 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 2020 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year
covered by this report.

VECTOR GROUP LTD.
FORM 10-K

TABLE OF CONTENTS

PART I

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

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities; Executive Officers of the Registrant . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 6.
Item 7. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14. Principal Accounting Fees and Services

PART IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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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 two

business segments:

•

•

Tobacco: the manufacture and sale of cigarettes in the United States through our Liggett Group
LLC (“Liggett”) and Vector Tobacco Inc. (“Vector Tobacco”) subsidiaries, and

Real Estate: the real estate business through our New Valley LLC (“New Valley”) subsidiary,
which is seeking to acquire or invest in additional real estate properties or projects. New Valley
owns 100% of Douglas Elliman Realty, LLC (“Douglas Elliman”), which operates the largest
residential brokerage company in the New York metropolitan area and also conducts residential
real estate brokerage operations in Florida, California, Connecticut, Massachusetts, Colorado,
New Jersey and Texas.

Strategy

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

following ways:

Liggett and Vector Tobacco

•

•

•

•

•

•

Continuing to offer the best value proposition in the U.S. cigarette industry by consistently
delivering high quality products within the discount segment;

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;

Selectively expand the portfolio of partner brands and private label brands utilizing a pricing
strategy that offers long-term price stability for customers;

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

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

New Valley

•

•

•

Continue to expand Douglas Elliman’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; and

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

Tobacco Operations

General. Our Tobacco segment operates through our two subsidiaries, Liggett and Vector Tobacco.
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 Vector
Tobacco, unless otherwise specified.

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For the year ended December 31, 2019, 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.

The U.S. cigarette market consists of premium cigarettes, which are generally marketed under
well-recognized brand names at higher retail prices to adult smokers with a strong preference for branded
products, and discount cigarettes, which are marketed at lower retail prices to adult smokers who are more
value conscious. Since 2004, Liggett has only produced discount cigarettes and all of Liggett’s units sold in
2019, 2018 and 2017 were in the discount segment. In recent years, the discounting of premium cigarettes
has become far more significant in the marketplace.

According to data from Management Science Associates, Inc., the discount segment represented 28.3%
of the total U.S. cigarette market in 2019 compared to 27.7% in 2018 and 27.5% in 2017. Liggett’s domestic
shipments of approximately 9.0 billion cigarettes during 2019 accounted for 4.0% of the total cigarettes
shipped in the United States during such year. Liggett’s market share was 4.0% in 2019, 4.0% in 2018 and
3.7% in 2017. According to Management Science Associates, Liggett held a share of approximately 14.3%
of the overall discount market segment for 2019 compared to 14.3% for 2018 and 13.5% for 2017.

Liggett produces cigarettes in 100 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; EAGLE 20’s represented 59.9.% of Liggett’s unit volume
in 2019, 53.5% in 2018 and 44.4% in 2017. EAGLE 20’s is now the largest seller in Liggett’s family
of brands,

PYRAMID — the industry’s first deep discount product with a brand identity relaunched in the
second quarter of 2009; PYRAMID represented 26.5% of Liggett’s unit volume in 2019, 32.5% in
2018 and 39.4% in 2017,

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.

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 its grandfathered market share established under the
MSA of 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 gained 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 grandfathered market share 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 market share of
1.65%. We anticipate that both Liggett’s and Vector Tobacco’s payment exemptions will be fully utilized for
the foreseeable future.

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

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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 territories under 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 superior 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 15 public warehouses located throughout the United States by third-party
trucking companies. These warehouses serve as local distribution centers for Liggett’s customers.

Liggett’s customers are primarily wholesalers and distributors of tobacco and convenience products as
well as large grocery, drug and convenience store chains. Two customers accounted for 17% and 12% of
Liggett’s revenues in 2019, 18% and 12% of Liggett’s revenues in 2018, and 18% and 13% of Liggett’s
revenues in 2017. Concentrations of credit risk with respect to trade receivables are generally limited due to
Liggett’s large number of customers. Liggett’s two largest customers, represented approximately 2% and 4%,
respectively, of net accounts receivable at December 31, 2019, 11% and 4%, respectively, at December 31,
2018, and 7% and 5%, respectively, at December 31, 2017. Ongoing credit evaluations of customers’
financial condition are performed and, generally, no security is required. Liggett maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded management’s expectations.

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

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

Manufacturing. Liggett purchases and maintains leaf tobacco inventory to support its cigarette
manufacturing requirements. Liggett believes that there is a sufficient supply of tobacco within the
worldwide tobacco market to satisfy its current production requirements. Liggett stores its leaf tobacco
inventory in warehouses in North Carolina and Virginia. There are several different types of leaf tobacco,
including flue-cured, burley, Maryland, oriental, 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 these products may vary between premium
and discount products. Liggett purchases its tobacco requirements from both domestic and foreign leaf
dealers, much of it under long-term purchase commitments. As of December 31, 2019, 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 100 different cigarette brand styles.
Liggett’s facility produced approximately 9.1 billion cigarettes in 2019, but maintains the capacity to
produce approximately 17.4 billion cigarettes per year. Vector Tobacco has contracted with Liggett to
produce most of its cigarettes at Liggett’s manufacturing facility in Mebane.

Competition. Liggett’s competition is divided into two segments. The first segment consists of the
three largest manufacturers of cigarettes in the United States: Philip Morris USA Inc. (“Philip Morris”),
which is owned by Altria Group, Inc., RJ Reynolds Tobacco Company (“RJ Reynolds”), which is owned by
British American Tobacco Plc, 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.

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

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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 were
subsequently impacted by the state statutes enacted pursuant to the MSA; however, these companies still
have significant market share in the aggregate through competitive discounting in this segment.

In the cigarette business, Liggett competes on dual fronts. Philip Morris and RJ Reynolds compete
among themselves for premium brand market share based on advertising, promotional activities, trade
rebates and incentives. They compete with Liggett and others for discount market share, primarily on the
basis of price and in store merchandising. These 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 Inc.’s data, the unit sales of Philip Morris and
RJ Reynolds accounted in the aggregate for 75.1% of the domestic cigarette market in 2019. Liggett’s
domestic shipments of approximately 9.0 billion cigarettes during 2019 accounted for 4.0% of
the
approximately 223 billion cigarettes shipped in the United States, compared to 9.4 billion cigarettes in 2018
(4.0%) and 9.2 billion cigarettes in 2017 (3.7%).

Industry-wide shipments of cigarettes in the United States have been declining for a number of years,
with Management Science Associates Inc.’s data indicating that domestic industry-wide shipments declined
by 5.3% (approximately 12.5 billion units) and 4.7% (approximately 11.6 billion units) in 2019 and 2018,
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 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.

Philip Morris and RJ Reynolds dominate the domestic cigarette market, controlling 75.1% of the U.S.
cigarette market in 2019, which 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.

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 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. In addition, in recent years, the
discount segment has experienced increased price competition from smaller manufacturers and this has led
to more aggressive price discounting of certain “deep discount” brands when compared to “traditional
discount” brands. Consequently, changes in the price gap of products at retail between “deep discount” and
“traditional discount” has led to shifts in price segment performance.

Legislation and Regulation

In the United States, tobacco products are subject to substantial and increasing legislation, regulation,

taxation, and litigation, which have a negative effect on revenue and profitability.

The cigarette industry continues to be challenged on numerous fronts. The industry faces 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.

The 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

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have released a number of reports stating that cigarette smoking is a causative factor with respect to a
variety of health hazards, including certain cancers and heart 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.

On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “TCA”) became law.
The law grants the U.S. Food and Drug Administration (“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):

•

•

•

•

•

•

•

•

•

•

•

•

•

•

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 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;

requires FDA to establish “good manufacturing practices” to be followed at
manufacturing facilities;

tobacco

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.

The TCA imposes user fees on certain tobacco product manufacturers in order to fund tobacco-related
FDA activities. User fees are allocated among tobacco product classes according to a formula set out in the
statute, and then among manufacturers and importers within each class based on market share. FDA user
fees for 2019 were $24,947 for Liggett and Vector Tobacco combined and will likely increase in the future.

5

The law also required establishment of a Tobacco Products Scientific Advisory Committee (“TPSAC”)
to provide advice, information and recommendations with respect to safety, dependence and health issues
related to tobacco products.

Menthol and Flavorings

the use of menthol

TPSAC completed its review of

in cigarettes and issued a report with
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, if any, 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 manufacturers’ 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. In January 2016, the D.C. Circuit vacated the district court’s decision due
to the manufacturers’ 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.

In July 2017, FDA announced a comprehensive plan for Tobacco and Nicotine Regulation. As part of
this comprehensive plan, FDA announced its intent to issue an ANPR requesting public stakeholder input
on the impact of flavors (including menthol) on increased initiation among youth and young adults, as well
as assisting adult smokers to switch to potentially less harmful forms of nicotine delivery. In 2019,
approximately 20% of our cigarette unit sales were menthol flavored. FDA issued this ANPR on March 21,
2018, seeking comments, data, research results, or other information about, among other things, how
flavors attract youth to initiate tobacco product use and about whether and how certain flavors may help
adult cigarette smokers reduce cigarette use and switch to potentially less harmful products. In the ANPR,
FDA stated that potential regulatory actions include, but are not limited to, tobacco product standards and
restrictions on the sale and distribution of tobacco products with flavors.

In December 2019, Massachusetts enacted a ban on the sale of menthol cigarettes effective June 1,
2020. Although certain municipalities throughout the United States have banned the sale of menthol
cigarettes, Massachusetts is the first state to do so. We cannot predict how the menthol ban in
Massachusetts will impact product sales, whether it will have a material adverse effect on Liggett or Vector
Tobacco, or whether it will impact Liggett and Vector Tobacco to a greater degree than other companies in
the industry.

Minimum Age of Sale for Tobacco Products

On December 20, 2019, President Trump signed into law the Tobacco-Free Youth Act, increasing the
national age of sale for tobacco products from 18 to 21 years of age. The law took effect immediately. We
cannot predict how the change in the minimum age of sale will impact product sales, whether it will have a
material adverse effect on Liggett or Vector Tobacco, or whether it will impact Liggett and Vector Tobacco
to a greater degree than other companies in the industry.

Advertising and Warnings on Packaging

The TCA 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 then authority). Subject to limitations
imposed by a federal injunction (discussed below), these regulations took effect on June 22, 2010. As
written, these regulations significantly limit the ability of manufacturers, distributors and retailers to
advertise and promote tobacco products, by, for example, restricting the use of color and graphics in

6

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.

In August 2009, several cigarette manufacturers filed a federal lawsuit against FDA challenging the
constitutionality of a number of the restrictions imposed by the TCA, 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 the ban on the distribution of product samples. In March 2012, a federal appellate
court let stand many of the advertising and promotion restrictions, but held that the ban on the use of color
and graphics in advertising was unconstitutional.

In April 2010, a number of cigarette manufacturers filed a federal lawsuit challenging the TCA
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, in November 2013, the
lawsuit was dismissed. FDA’s proposal remains under consideration. We cannot predict the future impact of
the proposed amendment.

On August 16, 2019, FDA issued a proposed rule that would modify the required warnings that appear
on cigarette packages and advertisements. This rule would require each cigarette package and advertisement
to bear one of twelve textual warning statements accompanied by one of thirteen corresponding graphic
images covering 50% of the area of the front and rear panels of cigarette packages and at least 20% of the
area at the top of cigarette advertisements. Proposed rotation requirements would address the distribution
of warning statements among brands. In response to a lawsuit filed by public health groups, the District
Court for the District of Massachusetts ordered FDA to issue a final rule by March 15, 2020. The effective
date would be 15 months after issuance of the final rule, unless delayed by legal action. We cannot predict
whether a court would determine that some or all of the proposed textual and/or graphic warnings, or
proposed prominence of the warnings, violate the First Amendment, Administrative Procedure Act, or
other legal requirements, or what the impact of such a court ruling would have on the compliance timeline
or requirements imposed on the industry. We also cannot predict how the inclusion of new warnings and
rotation requirements will impact production costs or product sales, or whether it will have a material
adverse effect on us.

Product Review

The TCA 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. as of 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 (“NSE”).
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

7

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 each of their respective cigarette brand styles.

To date, Liggett has received NSE orders relating to 20 cigarette brand styles. With respect to the first
six NSE orders, Liggett discontinued the cigarette brand styles subject to the orders. Sales of these
discontinued cigarette brand styles were de minimis. With respect to NSE orders issued in September 2017
relating to 14 cigarette brand styles, Liggett has elected to pursue administrative appeals with FDA. Sales of
these 14 cigarette brand styles accounted for approximately 1% of the tobacco segment’s annual revenue in
2019. Liggett is continuing to sell the affected cigarette brand styles during the administrative appeal
process. Vector Tobacco received NSE orders relating to three cigarette brand styles in November 2017.
Sales of these three cigarette brand styles accounted for approximately 0.4% of the tobacco segment’s
annual revenue in 2019. Vector Tobacco elected to pursue administrative appeals with FDA and is
continuing to sell the affected cigarette brand styles during the administrative appeal process. There can be
no assurance as to the timing or outcome of these appeals and adverse decisions on the appeals could
require these cigarettes or other cigarette styles to be removed from the market.

On April 5, 2018, FDA announced a change in its process for reviewing “provisional” substantial
equivalence applications. These are the substantial equivalence applications for the subset of tobacco
products introduced into commercial distribution after February 15, 2007 and before March 22, 2011, that
were permitted to remain on the market because substantial equivalence applications were submitted before
March 22, 2011. Both Liggett and Vector Tobacco submitted provisional substantial equivalence
applications before the deadline for all of their respective cigarette brand styles. FDA announced that it will
continue to review the approximately 1,000 pending provisional applications that were determined to have
the greatest potential to raise different questions of public health and will remove from review the
approximately 1,500 provisional applications that were determined less likely to do so.

As a result, Vector Tobacco received a letter from FDA in April 2018, advising that FDA does not
intend to conduct further review of Vector Tobacco’s remaining substantial equivalence applications that
have not yet received a substantial equivalence determination unless one of the following occurs: (i) the new
tobacco product that is the subject of the provisional application is also the subject of another pending
application submitted by the same manufacturer; (ii) FDA receives new information (e.g., from inspectional
findings) suggesting that the new tobacco product that is the subject of a provisional application is more
likely to have the potential to raise different questions of public health than previously determined; or
(iii) FDA has reason to believe that the new tobacco product was not introduced or delivered for
introduction into interstate commerce for commercial distribution in the United States after February 15,
2007, and prior to March 22, 2011 ((i), (ii) and (iii) are collectively, the “Conditions”).

Liggett also received a letter from FDA requesting additional information on certain products subject
to provisional applications. The letter requested that Liggett certify the date on which each listed product
was introduced or delivered for introduction into interstate commerce for commercial distribution in the
United States between February 15, 2007 and March 22, 2011. On April 12, 2018, Liggett provided the
requested certification for all of the products identified in the FDA letter. On May 21, 2018, FDA sent a
letter to Liggett stating that the products identified in the letter would be removed from review unless one of
the Conditions occurs.

We cannot predict whether FDA will deem Liggett’s outstanding applications, including its 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 that some, or all, of these products are “not substantially
equivalent” to a preexisting tobacco product, as the agency has already done for 20 of Liggett’s applications.
NSE orders for other cigarette styles may require us to stop the sale of the applicable cigarettes and other
cigarette styles and could have a material adverse effect on us.

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

8

“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, among other things, that FDA’s guidance was contrary to and
exceeded FDA’s authority under the Federal Food, Drug, and Cosmetic Act (“FDCA”).

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, certain cigarette manufacturers filed a lawsuit in the federal
district court for the District of Colombia challenging FDA’s September 2015 “guidance” document. In
August 2016, the court ruled 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 extended the agency’s authority under the
TCA to other tobacco products not then regulated by the agency, such as e-cigarettes, cigars, pipe tobacco
and hookah. Under the “deeming” rule, manufacturers of
including
e-cigarettes, are subject to the same TCA provisions and relevant regulatory requirements that already apply
to cigarettes.

the newly-regulated products,

Nicotine

As part of the comprehensive plan announced in July 2017, FDA said it would focus on nicotine
addiction, with the goal of lowering nicotine levels in combustible cigarettes through a product standard
developed through notice and comment rulemaking (based upon, among other things, stakeholder
comments as well as published literature). On March 16, 2018, FDA issued an ANPR to obtain information
for consideration in developing a tobacco product standard to set the maximum nicotine level for cigarettes.
FDA stated that it is considering taking this action to reduce the level of nicotine in cigarettes so they are
minimally addictive or non-addictive, using the best available science to determine a level that is appropriate
for the protection of the public health. In the ANPR, FDA sought comments on a number of issues
regarding the development of a tobacco product standard that would limit the amount of nicotine in
cigarettes, including: (i) product categories that should be covered by a tobacco product standard; (ii) the
appropriate maximum nicotine level and how the nicotine level should be measured; (iii) whether a standard
should be implemented through a gradual stepped-down approach or all at once; (iv) the technical
achievability of nicotine reduction; and (v) potential countervailing effects, such as the illicit trade of
cigarettes containing nicotine at levels higher than a non-addictive threshold that may be established by the
FDA. Under the TCA, FDA may adopt a tobacco product standard for nicotine if the agency concludes
that such a standard is appropriate for the protection of the public health. FDA may refer the proposed
regulation to the TPSAC for a report and recommendation. FDA may consider a wide range of issues prior
to the promulgation of a final rule, including the technical achievability of compliance with the proposed
product standard. The rulemaking process could take many months or years and once a final rule is
published it ordinarily would not be expected to take effect until at least one year after the date of
publication. We cannot predict how a tobacco product standard, if ultimately issued by FDA, would impact
product sales, whether it would have a material adverse effect on Liggett or Vector Tobacco, or whether it
would impact Liggett and Vector Tobacco to a greater degree than other companies in the industry.

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.

9

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, R.J. Reynolds and two other companies (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
and various territories (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.

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; and (ii) the health
effects of, the exposure to, or research, statements or warnings about, tobacco products; and

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

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

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

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

Liggett has no payment obligations under the MSA except to the extent its market share exceeds a
market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector
Tobacco has no payment obligations under the MSA except to the extent its market share exceeds a market
share exemption of approximately 0.28% of total cigarettes sold in the United States. Liggett and Vector
Tobacco’s domestic shipments accounted for 4.0% of the total cigarettes sold in the United States in 2019.
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.

10

New Valley

New Valley, 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.

Prior to December 31, 2018, New Valley owned a 70.59% interest in Douglas Elliman, and on
December 31, 2018, New Valley acquired the remaining 29.41% interest for a purchase price of
$40.0 million. The transaction brought New Valley’s indirect ownership interest in Douglas Elliman to
100%. Douglas Elliman operates the largest residential brokerage company in the New York City
metropolitan area, which is known as Douglas Elliman Real Estate or Douglas Elliman. New Valley also
holds investment interests in various real estate projects domestically and internationally.

Business Strategy

New Valley’s business strategy is to continue to operate its real estate business and to acquire additional
real estate properties. New Valley may also seek from time to time to dispose of such businesses and
properties when favorable market conditions exist. New Valley’s cash and investments are available for
general corporate purposes, including for acquisition purposes.

Douglas Elliman

Real Estate Brokerage Business. Douglas Elliman is engaged in the real estate brokerage business
through twelve subsidiaries. The twelve brokerage companies have approximately 125 offices with
approximately 7,200 real estate agents in the New York metropolitan area as well as Florida, California,
Connecticut, Massachusetts, Colorado, and New Jersey. In addition, Douglas Elliman also owns a 1%
interest in DE Texas and receives commissions from transactions. Douglas Elliman achieved combined sales
of approximately $28.8 billion of real estate in 2019, approximately $28.1 billion of real estate in 2018 and
approximately $26.1 billion of real estate in 2017. Douglas Elliman was ranked as the fourth-largest
residential brokerage company in the United States in 2019 based on closed sales volume by the Real Trends
broker survey. Douglas Elliman had revenues of $784.1 million in 2019, $754.1 million in 2018, and
$722.3 million in 2017.

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 27
New York City offices with approximately 2,500 real estate agents and reported closed sales volume of
approximately $11.8 billion of real estate in 2019.

The Long Island brokerage operation is headquartered in Huntington, New York and is the largest
residential brokerage company on Long Island with 39 offices and approximately 2,400 real estate agents. It
serves approximately 250 communities in Long Island and Queens, New York. The Westchester brokerage
operation operates in a suburban area north of New York City with six offices and approximately 140 real
estate agents. The Connecticut brokerage operation operates in Greenwich, Connecticut. The New Jersey
brokerage operation operates in Hoboken, New Jersey. These brokerage operations reported closed sales
volume of approximately $7.2 billion of real estate in 2019.

The Florida brokerage operates in Florida with 22 offices and has approximately 1,200 real estate

agents and reported closed sales volume of approximately $5.1 billion of real estate in 2019.

The California brokerage operation is headquartered in Beverly Hills and operates with 23 offices
throughout the state. The offices have approximately 750 real estate agents and reported closed sales volume
of approximately $4 billion of real estate in 2019.

Douglas Elliman operates as a broker in residential real estate transactions. In performing these
services, the company has historically represented the seller or buyer, either as the listing broker for the
seller, or as a co-broker for the buyer side of the transaction. 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 selling co-broker involved in the transaction. The company also

11

offers buyer brokerage services. When acting as a broker for the buyer, its services include assisting the
buyer in locating properties that meet the buyer’s personal and financial specifications, showing the buyer
properties, and assisting the buyer in negotiating the terms of the purchase and closing the transaction. In
exchange for these services, a commission is paid to the company which also is generally a fixed percentage
of the purchase price and is usually, based upon a co-brokerage agreement with the listing broker, deducted
from, and payable out of, the commission payable to the listing broker. With the written 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 insurance services to real estate buyers
and financial institutions. DE Title Services acts in the capacity of a title insurance agent and sells title
insurance to property buyers and mortgage lenders. DE Title Services is licensed as a title insurance agent in
New York and Florida. Its affiliate, DE Title Services of Nevada, LLC, provides title insurance services in
Nevada.

elliman.com. Douglas Elliman’s website, elliman.com, serves as a destination where consumers can
search properties throughout all regions serviced by Douglas Elliman and access current market
information on all of those regions as well as comprehensive building and neighborhood guides and other
interactive content.

Marketing. Douglas Elliman 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 Douglas Elliman’s operating areas. 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.

Competition. The real estate brokerage business is highly competitive. However, Douglas Elliman
believes that its ability to offer its customers a range of inter-related services and its level of residential real
estate sales and marketing help position it to meet the competition and improve its 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 2020 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 competitors include Corcoran, Brown Harris Stevens, Halstead Properties, and
Compass. 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, the real estate brokerage divisions are licensed as real estate brokers in the states in
which they conduct their real estate brokerage businesses. In addition, 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 into new geographic markets may subject Douglas
Elliman to similar licensing requirements in other states.

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

12

Pursuant to the Dodd-Frank Act, administration of RESPA was transferred from United States
Department of Housing and Urban Development (“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 “It’s Time for Elliman,” “From Manhattan to Montauk” and “askelliman.com” are used
extensively in the Douglas Elliman’s brokerage operations. In addition, Douglas Elliman’s brokerage
operation continues to use the trade names of certain companies that it has acquired.

Residential Property Management Business. Douglas Elliman is also engaged in the management of
cooperative apartment buildings, condominium apartment buildings and rental apartment buildings though
its subsidiary, Residential Management Group, LLC, which conducts business as Douglas Elliman Property
Management and is one of the leading New York City based property managers in the New York
metropolitan area according to a survey in the November 2018 issue of The Real Deal. Residential
Management Group provides full service third-party fee management for approximately 389 properties,
representing approximately 47,400 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, all buildings located in New York City. Residential Management Group employs approximately
282 people, of whom approximately 202 work at Residential Management Group’s headquarters and the
remainder at remote offices in the New York metropolitan area.

Real Estate Investments

We own, and seek to acquire investment interests in various domestic and international real estate
projects through debt and equity investments. Our current real estate investments include the following
projects (as of December 31, 2019):

Land Development

Escena. We are developing a 450-acre approved master planned community in Palm Springs, CA. The
development consists 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.

Sagaponack. We are developing a luxury oceanfront property in Sagaponack, NY. We are the sole
owner of the land, and as of December 31, 2019, the assets of Sagaponack consist of land and land
improvements of $18,345. The property is expected to be completed by 2020, and is currently listed for sale.

Condominium and Mixed-Use Development

As of December 31, 2019, we had 20 investments in condominium and mixed-use development real
estate ventures. We had 15 condominium and mixed-use development real estate ventures in the New York
the 15 condominium and mixed-use
City Standard Metropolitan Statistical Area (“SMSA”). Of

13

development real estate ventures in the New York City SMSA, seven were closing on units as of
December 31, 2019 and the remainder had projected construction completion dates between May 2020 and
December 2020. We had five condominium and mixed-use development real estate ventures in other U.S.
areas as of December 31, 2019. The five condominium and mixed-use development real estate ventures in
other U.S. areas had projected construction completion dates between June 2020 and September 2023.

Apartment Buildings

As of December 31, 2019, we had one active investment in apartment buildings located in the

Baltimore, Maryland metropolitan area. The investment was operating as of December 31, 2019.

Hotels

As of December 31, 2019, we had three investments in hotels, two located in the New York City SMSA

and one located in Bermuda. The hotels were operating as of December 31, 2019.

Commercial

As of December 31, 2019, we had two investments in commercial real estate ventures, one located in
the New York City SMSA and one located in Las Vegas, Nevada. Both of the commercial real estate
ventures were operating as of December 31, 2019.

In our real estate investment business, we seek to acquire investment interests in domestic and
international real estate projects through debt and equity investments. We focus on new condominium
development in Douglas Elliman markets and investing in well-located real estate assets that generate, or
have the potential to generate, long-term, predictable and sustainable cash flows with attractive growth and
development potential. We believe our ownership of Douglas Elliman provides us with a strategic
advantage through its relationships with developers in jurisdictions where we operate. 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,
2019 included interests in the 26 properties discussed above. As of December 31, 2019, our real estate
investment business held interests in joint ventures recorded on our financial statements at approximately
$131.6 million and approximately $28.3 million in consolidated real estate investments.

For additional information concerning these investments, see Note 9 to our consolidated financial
statements and “Summary of Real Estate Investments” located in Item 7. — “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”

Employees

At December 31, 2019, we had 1,418 employees, of which approximately 902 were employed by
Douglas Elliman primarily in the New York area, 277 were employed at Liggett’s Mebane facility and
approximately 214 were employed in sales and administrative functions at Liggett Vector Brands LLC
(“LVB”), which coordinates our tobacco subsidiary’s sales and marketing efforts, along with certain support
functions. Approximately 14% 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

14

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.

15

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 2020, we have significant liquidity commitments that will require the use of our existing cash
resources. As of December 31, 2019, our corporate expenditures (exclusive of Liggett, Vector Tobacco and
New Valley) and other potential liquidity requirements over the next 12 months include the following:

•

•

•

repayment of $169.6 million in aggregate principal amount of our 5.5% Variable Interest Senior
Convertible Notes due April 2020 (which we intend to repay using proceeds from the
November 2019 offering of $230.0 million aggregate principal of unsecured notes;

cash interest expense of approximately $116.8 million,

dividends of approximately $124.9 million based on the anticipated quarterly cash dividend rate
of $0.20 per share and assuming 152,542,029 shares outstanding (148,084,900 common shares
outstanding as of December 31, 2019 and 4,457,129 employee stock options with dividend
equivalent rights), 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
the Liggett 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 LLC. 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. The Liggett Credit
Facility 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.

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
notes and our common stock.

16

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,
2019, we and our subsidiaries had total outstanding indebtedness of $1.6 billion, with $169.6 million due in
April 2020 that we expect to repay using proceeds of the November 2019 offering of $230.0 million
aggregate principal amount of unsecured notes. In addition, subject to the terms of any future agreements,
we and our subsidiaries may 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, as well as volatility in the capital and credit markets, could have

important consequences. For example, they 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.

Servicing our indebtedness requires a significant amount of cash and we may not generate sufficient cash flow
from our business to pay our substantial indebtedness.

Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our
indebtedness, depends on our future performance, which is subject to economic, financial, competitive and
regulatory factors, as well as other factors beyond our control. The cash flow from operations in the future
may be insufficient to service our indebtedness because of factors beyond our control. If we are unable to
generate the necessary cash flow, we may be required to adopt one or more alternatives, such as selling
assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly
dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial
condition at such time. We may not be able to engage in any of these activities or engage in these activities
on desirable terms, which could result in a default on our debt obligations.

Our 6.125% Senior Secured Notes, 10.5% Senior Notes, and Liggett Credit Facility contain restrictive
covenants, and the Liggett Credit Facility contains financial ratios, that limit our operating flexibility, and may
limit our ability to pay dividends in the future.

The indenture governing our 6.125% Senior Secured Notes due 2025 (the “2025 Indenture”), the
indenture governing our 10.5% Senior Notes due 2026 (the “2026 Indenture”) and the Liggett Credit

17

Facility contain covenants that, among other things, restrict our ability to take specific actions, even if we
believe them to be in our best interest, including restrictions on our ability to:

•

•

•

•

•

•

•

•

incur or guarantee additional indebtedness or issue certain preferred stock;

pay dividends or distributions on, or redeem or repurchase, capital stock or subordinated
indebtedness, or make other restricted payments;

create or incur liens with respect to our assets;

make investments, loans or advances;

incur dividend or other payment restrictions;

prepay subordinated indebtedness;

enter into certain transactions with affiliates; and

merge, consolidate, reorganize or sell our assets, or use asset sale proceeds.

The 2026 Indenture restricts our ability to pay dividends and make certain other distributions subject
to certain exceptions, including exceptions for (1) dividends and other distributions in an amount up to 50%
of the Company’s consolidated net income, plus certain specified proceeds received by the Company, if no
event of default has occurred, and the Company is in compliance with a Fixed Charge Coverage Ratio (as
defined in the 2026 Indenture) of at least 2.0x, and (2) dividends and other distributions in an unlimited
amount, if no event of default has occurred and the Company is in compliance with a Net Leverage Ratio
(as defined in the 2026 Indenture) no greater than 4.0x. The 2026 Indenture also restricts our ability to
incur debt if our Fixed Charge Coverage Ratio is less than 2.0x, and restricts our ability to secure debt
other than secured debt incurred pursuant to a Secured Leverage Ratio no greater than 3.75x, unless the
10.5% Senior Notes due 2026 (the “10.5% Senior Notes”) are secured on an equal and ratable basis. In
addition, the 2026 Indenture restricts our ability to spin-off or transfer New Valley and its subsidiaries as a
whole, or DER Holdings LLC and its subsidiaries (including Douglas Elliman) as a whole, unless (1) such
spin-off or transfer complies with the covenants restricting mergers and asset sales, or (2) our Net Leverage
Ratio is no greater than 4.0x. Our Fixed Charge Coverage Ratio is defined in the 2026 Indenture as the
ratio of our Consolidated EBITDA to our Fixed Charges (each as defined in the 2026 Indenture). Our Net
Leverage Ratio is defined in the 2026 Indenture as the ratio of our and our guaranteeing subsidiaries’ total
debt less our cash, cash equivalents, and the fair market value of our investment securities, long-term
investments,
investments in real estate, net, and investments in real estate ventures, to Consolidated
EBITDA, as defined in the 2026 Indenture. Our Secured Leverage Ratio is defined in the 2026 Indenture as
the ratio of our and our guaranteeing subsidiaries’ total secured debt, to Consolidated EBITDA, as defined
in the 2026 Indenture. There can be no guarantee that we will be in compliance with these financial metrics
and therefore, our ability to pay dividends or engage in other corporate transactions may be limited in the
future.

In addition, the 2025 Indenture and the 2026 Indenture require us to meet specified financial ratios in
order to take certain actions, including, a Leverage Ratio and a Secured Leverage Ratio (as defined in the
2025 Indenture) with respect to the 6.125% Senior Secured Notes due 2025 (the “6.125% Senior Secured
Notes”) and a Fixed Charge Coverage Ratio and a Net Leverage Ratio (as defined in the 2026 Indenture)
with respect to the 10.5% Senior Notes. See Part I. Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources for a discussion of these
ratios.

As of December 31, 2019, the Leverage Ratio under the 2025 Indenture exceeded 3.0 to 1.0 and,
indebtedness (with the exception of certain
consequently, we are not permitted to incur additional
categories of “Permitted Indebtedness” under the 2025 Indenture, which include draws under the Liggett
Credit Facility, equipment financings by Liggett and borrowings by non-guarantors of the 6.125% Senior
Secured Notes, such as New Valley, DER Holdings or Douglas Elliman) until such ratio declines below 3.0
to 1.0.

18

The Liggett Credit Facility also requires us to maintain specified financial ratios so long as any
obligations are outstanding under the facility. 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 2025 Indenture, the 2026 Indenture, and
the Liggett Credit Facility may be affected by changes in our operating and financial performance, changes
in general business and economic conditions, adverse regulatory developments or other events beyond our
control. The breach of any of these covenants 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.

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.
(“Moody’s”), and Standard & Poor’s Rating Services (“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.

The Tax Cuts and Jobs Act of 2017 may increase the after-tax cost of debt financings.

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) limits our interest expense deduction to 30% of
taxable income before interest, depreciation and amortization from 2018 to 2021 and then taxable income
before interest thereafter for non-excepted trade or businesses. One such excepted trade or business is any
electing real property trade or business, of which portions of our real estate business may qualify. Interest
expense allocable to an excepted trade or business is not subject to limitation. The Tax Act permits us to
carry forward disallowed interest expense indefinitely. Due to our high degree of leverage, beginning in
2018, a portion of our interest expense in future years may not be deductible, which may increase the after
tax cost of any new debt financings as well as the refinancing of our existing debt. We will continue to
evaluate the impact of the nondeductible interest on our operations and capital structure.

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.

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
in certain circumstances a more limited ability to respond to market developments. Further, all of Liggett’s
unit volume is generated in the discount segment, which is highly competitive, with consumers having less
brand loyalty and placing greater emphasis on price. Management Science Associates’ data indicate that in
2019, Philip Morris and RJ Reynolds, the two largest cigarette manufacturers, controlled 75.1% 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 58.2% of the premium segment
and 45.5% of the total domestic market during 2019. During 2019, all of Liggett’s sales were in the discount
segment, and its share of the total domestic cigarette market was 4.0%. Historically, because of their
dominant market share, Philip Morris and RJ Reynolds, have been able to determine cigarette prices for the
various pricing tiers within the industry.

19

Further consolidation in the industry could adversely affect our ability to compete in the U.S. cigarette

market.

Liggett’s business is highly dependent on the discount cigarette segment and to maintain market share, it may
be required to take steps to reduce prices.

All of Liggett’s unit volume is generated in the discount segment, which is highly competitive. While
Philip Morris, RJ Reynolds, and ITG Brands compete with Liggett in the discount segment of the market,
Liggett also faces intense competition for market share in the discount segment from a group of smaller
manufacturers and importers, most of which sell low quality and deep discount cigarettes. While Liggett’s
share of the discount market was 14.3% in 2019, 14.3% in 2018, and 13.5% in 2017, Management Science
Associates’ data indicate that the discount market share of these other smaller manufacturers and importers
was approximately 32.3% in 2019, 29.4% in 2018, and 27.2% in 2017. If pricing in the discount market
continues to be impacted by these smaller manufacturers and importers, margins in Liggett’s only market
segment could be negatively affected and, to maintain market share, Liggett may be required to take steps to
reduce prices. Thus, 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, which could result in
lower sales or higher costs for us.

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 5.3% in 2019 as compared to 2018, and by approximately 4.7% in 2018 as compared to 2017.
In addition to a declining market impacting our sales volume, operating income and cash flows, our annual
cost advantage from our payment exemption under the MSA declines by approximately $1.7 million for
each percentage point decline in shipment volumes in the U.S. market. 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 higher
cigarette prices 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, or if Liggett’s market share percentage falls below its MSA payment
exemption percentage, 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
have a negative effect on revenue and profitability.

Cigarettes are subject to substantial regulation and taxation at the federal, state and local levels, which
has had and may continue to have an adverse effect on our business. For a more complete discussion of the
material regulations and taxation applicable to our Business, see Item 1. Business. Legislation and
Regulation. For instance:

•

•

Federal, state and local laws have limited the advertising, sale and use of cigarettes in the United
States, such as laws prohibiting smoking in restaurants and other public places. Private businesses
have also implemented prohibitions on the use of cigarettes. Further regulations or rules limiting
advertising, sale or use of cigarettes or ingredients or flavorings could negatively impact sales of
cigarettes, which would have an adverse effect on our results of operations.

The federal government, as well as certain state, city and county governments, impose excise taxes
on cigarettes, which has had, and is expected to continue to have, an adverse effect on sales of
cigarettes. Since certain of these excise taxes were proportionately smaller on other types of
tobacco products, a dramatic increase in the sale of mislabled pipe tobacco occurred, which took
away market share from traditional cigarette products.

20

•

Various state and local government regulations have, among other things, increased the minimum
age to purchase tobacco products, banned the sale of menthol cigarettes, restricted or banned
sampling and advertising and required ingredient and constituent disclosure. Significantly, the
federal government increased the minimum age of sale for tobacco products from 18 to 21 years of
age in December 2019. Further regulations that limit the group of individuals able to purchase
cigarettes in the United States or other regulations that limit the types of products we can offer,
such as limitations on use of flavoring, could have a material adverse effect on demand for our
products, our results of operations and our business. FDA and other organizations have also
conducted anti-tobacco media campaigns, which have and may continue to have an adverse effect
on the demand for cigarettes.

There have also been adverse legislative and political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry, as well as restrictive actions by federal agencies,
including the Environmental Protection Agency and FDA. In 2009, legislation was enacted giving FDA
regulatory authority over tobacco products. Additionally, all states have enacted statutes requiring cigarettes
to meet a reduced ignition propensity standard. 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, state or local regulations 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.

FDA Regulation Under the Family Smoking Prevention and Tobacco Control Act may adversely affect our
sales and operating profit.

In June 2009, the TCA became law. The TCA 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. For a more complete discussion of the TCA, see Item 1. Business.
Legislation and Regulation.

In July 2017, FDA announced a comprehensive plan for Tobacco and Nicotine Regulation, proposing
an increased focus on the impact of flavors (including menthol) and on reducing the level of nicotine in
tobacco. FDA’s March 2018 ANPR relating to menthol indicated that it may, among other things, take
regulatory actions to implement tobacco product standards and restrict the sale and distribution of tobacco
products with flavors, including menthol. In 2019, approximately 20% of our cigarette unit sales were
menthol flavored. Regulations under the TCA that restrict or prohibit the sale of menthol flavored
cigarettes would reduce the demand for our cigarettes and may have an adverse effect on our business and
results of operations.

As part of the comprehensive plan announced in July 2017, FDA said it would focus on nicotine
addiction, with the goal of lowering nicotine levels in combustible cigarettes through a product standard
developed through notice and comment rulemaking, which FDA announced in March 2018. See Item 1.
Business. Legislation and Regulation. At this time, we cannot predict the specific regulations FDA will
enact, the timeframe for such regulations, or the effect of such regulations. The rulemaking process could
take years and once a final rule is issued it typically does not take effect for at least one year. We cannot
predict how a tobacco product standard, if ultimately issued by FDA, would impact product sales, whether
it would have a material adverse effect on Liggett or Vector Tobacco, or whether it would impact Liggett
and Vector Tobacco to a greater degree than other companies in the industry.

On August 16, 2019, FDA issued a proposed rule that would modify the required warnings that appear
on cigarette packages and advertisements. See Item 1. Business. Legislation and Regulation. This rule would
require each cigarette package and advertisement
to bear one of 12 textual warning statements
accompanied by one of 13 corresponding graphic images covering 50% of the area of the front and rear
panels of cigarette packages and at least 20% of the area at the top of cigarette advertisements. FDA must

21

issue a final rule by March 15, 2020, and the effective date would be 15 months after issuance of the final
rule, unless delayed by legal action. We cannot predict whether a court would determine that some or all of
the proposed textual and/or graphic warnings, or proposed prominence of the warnings, violate the First
Amendment, Administrative Procedure Act, or other legal requirements, or what the impact of such a court
ruling would have on the compliance timeline or requirements imposed on the industry. We also cannot
predict how the inclusion of new warnings and rotation requirements would impact production costs or
product sales, or whether it would have a material adverse effect on us.

In April 2018, FDA announced a change in its process for reviewing “provisional” substantial
equivalence applications. See Item 1. Business. Legislation and Regulation for additional information on the
substantial equivalence process. Vector Tobacco received a letter from FDA in April 2018 advising that
FDA does not intend to conduct further review of Vector Tobacco’s remaining applications, with certain
“conditions” (as described under Item 1. Business. Legislation and Regulation). Liggett received a letter from
FDA in May 2018 advising that FDA does not intend to conduct further review for certain applications,
also with certain “conditions” (as described under Item 1. Business. Legislation and Regulation). FDA has
not indicated whether the applications relating to Liggett’s other products not covered by that May 2018
letter would proceed through FDA review. We cannot predict whether FDA will deem Liggett’s outstanding
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 that some, or all, of these
products are “not substantially equivalent” to a preexisting tobacco product, as the agency has already done
for 20 of Liggett’s applications. NSE orders for other cigarette styles may require us to stop the sale of the
applicable cigarettes and other cigarette styles and could have a material adverse effect on us.

It is likely that the TCA and further regulatory efforts by FDA 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 effect on the
companies’ financial condition, results of operations, and cash flows. In addition, FDA has a number of
investigatory and enforcement tools available to it. Failure to comply with the law and with FDA regulatory
requirements could result in significant financial penalties and could have a material adverse effect on the
business, financial condition and results of operation of both Liggett and Vector Tobacco. At present, we
are not able to predict whether the law will impact Liggett and Vector Tobacco to a greater degree than
other companies in the industry, thus affecting our competitive position.

Litigation will continue to harm the tobacco industry, including Liggett.

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, including the Engle progeny cases in Florida (described below). New cases
continue to be commenced against Liggett and other cigarette manufacturers. As of December 31, 2019, in
addition to approximately 47 Engle progeny cases, there were 51 individual product liability lawsuits, two
purported class actions and one health care cost recovery action pending in the United States in which
Liggett and/or we 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
litigation. In addition, an unfavorable outcome in any tobacco-related
commencement of additional
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 is currently one case pending where Liggett is the only remaining tobacco

company defendant.

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.

22

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

In May 1994, the Engle case was filed as a class action 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.” A trial was held and the jury returned a verdict adverse to the defendants (approximately
$145.0 billion in punitive damages, including $790.0 million against Liggett). Following an appeal to the
Third District Court of Appeal, the Florida Supreme Court in July 2006 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 to file individual lawsuits. As a result, we and Liggett, and other cigarette
manufacturers, were sued in thousands of Engle progeny cases in both federal and state courts in Florida.
Although we were not named as a defendant in the Engle case, we were named as a defendant in
substantially all of the Engle progeny cases where Liggett was named as a defendant.

Lawsuits by individuals requesting the benefit of the Engle ruling are referred to as the “Engle progeny
cases.” Notwithstanding Liggett’s multi-plaintiff settlements, Liggett and Vector remain defendants in
approximately 47 state court Engle progeny cases. These Engle progeny cases have resulted in increased
filings in other jurisdictions.

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.

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 “NPM Adjustment.” As a result, the Participating Manufacturers may be entitled to potential
NPM Adjustments to their MSA payments.

As of December 31, 2019, the Participating Manufacturers had entered into agreements with
37 Settling States setting out terms for settlement of the NPM Adjustment and addressing the NPM
Adjustment with respect to those states for future years.

For 2003 – 2018, 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 agreement, or
otherwise settle, the arbitration for 2004 has commenced. As of December 31, 2019, Liggett and Vector
Tobacco had accrued approximately $13.4 million related to disputed amounts withheld from the
non-settling states for 2004 – 2010, which may be subject to payment, with interest, if Liggett and Vector
Tobacco lose the disputes for those years.

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 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, the Attorney General for Mississippi filed a motion in Chancery Court in Jackson
County, Mississippi to enforce the March 1996 settlement agreement (the “1996 Agreement”). In
April 2017, the Chancery Court ruled that the 1996 Agreement should be enforced and referred the matter
to a Special Master for further proceedings to determine the amount of damages, if any, to be awarded.

In July 2019, the parties stipulated that the unpaid principal (exclusive of interest) purportedly due
from Liggett
is
to the 1996 Agreement
approximately $14.4 million, subject to Liggett’s right to litigate and/or appeal the enforceability of the 1996

(from inception through 2019)

to Mississippi pursuant

23

Agreement (and all issues other than the calculation of such principal amount). In September 2019, the
Special Master held a hearing regarding the state’s claim for approximately $17.5 million in prejudgment
interest as well as post-judgment interest in amounts to be determined. A decision is pending. In the event
Liggett appeals an adverse judgment, the posting of a bond may be required.

Liggett may be required to make additional payments to Mississippi and Texas which could have a
material adverse effect on the Company’s consolidated financial position, results of operations and cash
flows.

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.

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

•

•

•

•

•

•

•

•

•

•

•

•

•

•

periods of economic slowdown or recession;

rising interest rates;

the general availability of mortgage financing;

a negative perception of the market for residential real estate;

commission pressure from brokers who discount their commissions;

an increase in the cost of homeowners’ insurance;

weak credit markets;

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

instability of financial institutions;

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

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

a decline in the affordability of homes;

declining demand for real estate;

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

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•

•

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

adverse changes in global, national, regional and local economic and market conditions,
particularly in the New York metropolitan area, including those relating to pandemics and health
crises, such as the recent outbreak of novel coronavirus (COVID-19).

New Valley is heavily dependent on the performance of the real estate market in the New York
metropolitan area. New Valley’s business primarily depends on the performance of the real estate market
in the New York metropolitan area. Our real estate brokerage businesses and our investments in real estate
developments are largely located in the New York metropolitan area and to a lesser extent in South Florida,
Los Angeles, Las Vegas and other markets. Further, as of December 31, 2019, we had investments in or
were developing 18 projects in the New York metropolitan area. Douglas Elliman’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 on sales
transactions is also likely to decline, as the residential real estate market experienced to some degree since
2017. 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, Los Angeles, Las Vegas 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 generally, 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.

The Tax Act could negatively impact New Valley’s and Douglas Elliman’s markets. The Tax Act places
new limits on mortgage interest deductions as well as state and local income and property tax deductions.
The loss of the use of these deductions may encourage residents of states with high income and property
taxes and costs of housing to migrate to states with lower tax rates and housing costs. In 2019,
approximately 80.0% of Douglas Elliman’s closed sales occurred in New York, California, Connecticut and
Massachusetts, and a migration of residents from these markets or a reduction in the attractiveness of these
markets as a place to live could adversely impact New Valley’s and Douglas Elliman’s business, financial
condition and results of operations.

New Valley is dependent on the attractiveness of New York City as a place to live and invest in and its
status as an international center for business and commerce. Through its investments in Douglas Elliman
and 18 developments in the New York metropolitan area, New Valley is dependent on the attractiveness of
New York City as a place to live and invest in. If New York City’s economy stagnates or contracts or if
there are significant concerns or uncertainty regarding the strength of New York City’s economy due to
domestic, international or global macroeconomic trends or other factors (including, in particular, any
matters which adversely affect New York City’s status as an international center for business and commerce
or the economic benefits of New York City’s financial services industry), the New York metropolitan area
may become a less attractive place to live, work, study or to own residential property for investment
purposes. The attractiveness of New York City may also be negatively affected 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, the impact of the Tax Act (discussed above), the impact of changes in state tax
law, such as the real estate transfer tax on luxury property (the “Mansion Tax”) and negative perceptions
surrounding quality of life, safety and security (including the risk or perceived risk of acts of terrorism or
protests).

Any reduction in the attractiveness of New York City as a place to live or a place to invest in
residential real estate and any matters which adversely affect New York City’s status as an international
center for business and commerce could result in a reduction, by volume and/or by value, in our investment

25

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, which have significant financial resources and experience. Competitive conditions in
the real estate development industry could result in: difficulty in acquiring suitable investments in properties
at acceptable prices; increased selling incentives; lower sales volumes and prices; lower profit margins;
impairments in the value of our investments in real estate developments and other assets; and increased
construction costs, delays in construction and increased carry costs. Development projects are subject to
special risks including potential increase in costs, changes in market demand, inability to meet deadlines
which may delay the timely completion of projects, reliance on contractors who may be unable to perform
and the need to obtain various governmental and third party consents.

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

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

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

Our success depends on the availability of suitable real estate investments at acceptable prices and having
sufficient liquidity to acquire such investments. Our success in investing in real estate depends in part upon

26

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 a venture. Further, our minority interest in these joint ventures means
that we may not be able to influence the outcome of any particular project, and our rights to obtain
information may be limited to the contractual requirements. As a result, we may not have adequate insight
into the financial condition of any of our joint ventures given that we do not oversee their financial
reporting or decision making. 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, improper acts committed by New Valley
(otherwise known as a “bad boy” guaranty), as well as carry and completion guarantees for a project. In the
event of a default, if a lender were to exercise its rights under these guarantees, it could have a material
adverse effect on our business and results of operations.

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

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

27

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.

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

28

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

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

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

Risks associated with Douglas Elliman.

Douglas Elliman 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 has developed a strong brand that we believe has contributed significantly to the success of its
business. Maintaining, protecting and enhancing Douglas Elliman as a premium real estate brokerage
brand is critical to growing its business. If Douglas Elliman does not successfully build and maintain a
strong brand, its real estate brokerage business could be negatively impacted. Preserving and increasing the
quality of the Douglas Elliman brand may require us to make substantial investments in areas such as
marketing, community relations, outreach technology and employee training. Douglas Elliman 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 manages its relationship with its agents, its growth strategies or the ordinary course of its business
or its brokerage business. Other incidents may arise from events that are or may be beyond its ability to
control and may damage its brand, such as actions taken (or not taken) by one or more agents relating to
health, safety, welfare or other matters; litigation and claims; failure to maintain high ethical and social
standards for all of its operations and activities; failure to comply with local laws and regulations; and
illegal activity targeted at Douglas Elliman or others. Douglas Elliman’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 City metropolitan area, Florida, California,
Massachusetts, Colorado, New Jersey, Connecticut, and Texas is extremely competitive. Douglas Elliman
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 City, South Florida and Los Angeles in which it operates. In addition, in
the real estate brokerage industry, new participants face minimal barriers to entry into the market. Douglas
Elliman 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 perception of brand value.

29

Douglas Elliman’s business is concentrated in the states of New York, California, Connecticut, New
Jersey and Massachusetts and changes in U.S. Tax Laws could impact these markets. The Tax Act places
new limits on mortgage interest deductions as well as state and local income and property tax deductions.
The loss of the use of these deductions may encourage residents of states with high income and property
taxes and costs of housing to migrate to states with lower tax rates and housing costs. In 2019,
approximately 80.0% of Douglas Elliman’s closed sales occurred in the states of New York, California,
Connecticut and Massachusetts, and a migration of residents from these markets or a reduction in the
attractiveness of these markets as a place to live could adversely impact Douglas Elliman’s business,
financial condition and results of operations.

The financial results of Douglas Elliman’s real estate brokerage business is affected directly by the success
of its agents. Douglas Elliman’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. As mentioned above, there is significant competition among brokerage
firms for the services of high producing agents. The failure to recruit and retain these agents could
negatively impact the financial success of Douglas Elliman’s brokerage business.

Infringement, misappropriation or dilution of Douglas Elliman’s intellectual property could harm its
business. We regard the Douglas Elliman trademark portfolio as having significant value and as being an
important factor in the marketing of its brand. Douglas Elliman believes that this and other intellectual
property are valuable assets that are critical to its success. Douglas Elliman 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 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 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
its competitors may misappropriate its
protection for its trademarks and other intellectual property,
intellectual property. Defending or enforcing our trademark rights, branding practices and other intellectual
property, and seeking an injunction and/or compensation for misappropriation of confidential information,
could result in the expenditure of significant resources and divert the attention of management, which in
turn may adversely affect our business and operating results.

Moreover, unauthorized third parties may use Douglas Elliman’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 relies on traffic to its websites, including its flagship website, elliman.com, directed from
search engines. If these websites fail to rank prominently in unpaid search results, traffic to these websites could
decline and its business would be adversely affected. Douglas Elliman’s success depends in part on its ability
to attract users through unpaid Internet search results on search engines. The number of users it attracts to
its websites, including its flagship website elliman.com, from search engines is due in large part to how and
where its websites rank in unpaid search results. These rankings can be affected by a number of factors,
many of which are not under our direct control, and they may change frequently. For example, a search
engine may change its ranking algorithms, methodologies or design layouts. As a result, links to Douglas
Elliman’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

30

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’s websites or website-based technology, either due to malfunction, outside intrusion through
hacking or otherwise, could significantly disrupt its business and lead to reduced revenue and reputational
damage as Douglas Elliman may not be able to effectively scale and adapt its existing technology and
network infrastructure to ensure its platforms are 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.

Goodwill and indefinite-lived intangible asset impairment charges may adversely affect our operating results
and financial condition.

We have a substantial amount of goodwill and other intangible assets on our balance sheet, primarily
comprised of goodwill and trademarks related to Douglas Elliman. Goodwill, trademarks and other
identifiable intangible assets must be tested for impairment at least annually. The fair value of the goodwill
assigned to a reporting unit could decline if projected revenues or cash flows were to be lower in the future
due to effects of the global economy or other causes. If the carrying value of intangible assets or of
goodwill were to exceed its fair value, the asset would be written down to its fair value, with the impairment
loss recognized as a non-cash charge in our Consolidated Statement of Operations.

As of December 31, 2019, we had approximately $266 million of goodwill and other intangible assets
on our balance sheet, which included $78 million of goodwill and $80 million of trademarks related to
Douglas Elliman. No impairment was identified in 2019. Changes in the future outlook of the Douglas
Elliman reporting unit could result in an impairment loss, which could have a material adverse effect on our
results of operations and financial condition.

Maintaining the integrity of our computer systems and protecting confidential information and personal
identifying information has become increasingly costly, as 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 that gain
unauthorized access to information technology systems both internally and externally to sophisticated and
targeted measures known as advanced persistent threats, directed at the Company and its affiliated agents.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary
business information and intellectual property, and personally identifiable information of our tobacco and
real estate 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. Our systems and the confidential information on
them may also be compromised by employee misconduct or employee error. While we and our third-party
service providers have experienced, and expect to continue to experience, these types of internal and
external threats and incidents, cybersecurity incidents, depending on their nature and scope, could
potentially result in the misappropriation, destruction, corruption or unavailability of critical data and
confidential or proprietary information (our own or that of third parties, including personally identifiable
information) and the disruption of business operations. Our business interruption insurance may be
insufficient to compensate us for losses that may occur. The potential consequences of a material
cybersecurity incident include reputational damage, litigation with third parties, diminution in the value of
the services we provide to our customers, and increased cybersecurity protection and remediation costs,
which in turn could adversely affect our competitiveness and results of operations. Developments in the

31

laws and regulations governing the handling and transmission of personal identifying information in the
United States may require us to devote more resources to protecting such information, which could in turn
adversely affect our results of operations and financial condition.

We depend on our key personnel.

We depend on the efforts of our executive officers and other key personnel as our named executive
officers have been employed by us for an average of 26 years at December 31, 2019. 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 $8.21 and $14.42 per share over the past

52 weeks.

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;

our dividend payment ratio and level;

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 potentially dilutive securities outstanding.

As of December 31, 2019, we had outstanding restricted shares and options granted to employees to
purchase approximately 5,528,135 shares of our common stock, with a weighted-average exercise price of
$11.90 per share, of which options for 2,689,673 shares were exercisable as of December 31, 2019. After we
paid the $230 million of principal related to the 7.5% variable interest senior convertible notes,
in
January 2019, we had outstanding convertible notes maturing in April 2020, which were convertible into
8,367,929 shares of our common stock, at a conversion price of $20.27, as of December 31, 2019. The

32

issuance of these shares would cause dilution which may adversely affect the market price of our common
stock and increase our dividend payment. 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. The lease is with an affiliate of the Company and expires in
April 2023, subject to another five-year renewal option.

We lease approximately 9,000 square feet of office space in New York, New York under a lease that
expires in 2025. New Valley’s operating properties are discussed above under the description of New Valley’s
business and in Note 9 to our consolidated financial statements.

Douglas Elliman leases 125 offices throughout New York, Connecticut, Florida, California, Colorado,
Massachusetts and New Jersey. Leases expire at various times between 2019 and 2033. As of December 31,
2019, the properties leased by Douglas Elliman are as follows:

Type

Offices

Offices

Offices

Offices

Offices

Offices

Number of
Offices

27

39

22

6

23

8

Location

New York City, NY

Long Island, NY

Florida

Owned or
Leased

Leased

Leased

Leased

Westchester County, NY Leased

California

Other

Leased

Leased

Approximate
Total Square
Footage

187,000

112,000

49,000

11,000

107,000

10,000

Liggett’s tobacco manufacturing facilities, and several of its distribution and storage facilities, are
currently located in or near Mebane, North Carolina. Some of these 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, 2019, 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 June 2026.

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.

33

Reference is made to Note 15 to our consolidated financial statements included elsewhere in this report
which is incorporated by reference and contains a general description of certain legal proceedings to which
we, or our subsidiaries are a party and certain related matters. Reference is also made to Exhibit 99.1 for
additional information regarding the pending smoking-related legal proceedings to which Liggett we are a
party. A copy of Exhibit 99.1 will be furnished without charge upon written request to us at our principal
executive offices, 4400 Biscayne Boulevard, 10th Floor, Miami, Florida 33137, Attn. Investor Relation.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

34

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.”

At February 18, 2020, there were approximately 1,614 holders of record of our common stock.

Purchases of Equity Securities by the Company

In December 2019, we repurchased $62,390 in aggregate principal amount of our 5.5% Convertible

Notes outstanding for a purchase price of $63,859.

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 the NYSE Arca Tobacco Index, formerly known as the AMEX Tobacco Index,
and the S&P 600 Index for the five years ended December 31, 2019. The graph assumes that $100 was
invested on December 31, 2014 in the Common Stock and each of the indices, and that all cash dividends
and distributions were reinvested.

The S&P 600 was not included in our performance graph in Form 10-K for the year ended
December 31, 2018. It has been included in our performance graph for the year ended December 31, 2019
because we became a constituent of the S&P 600 in July 2019. Thus, we believe the S&P 600 is a more
appropriate metric than the S&P MidCap 400 and we will delete the S&P MidCap 400 from our
performance graph in the future.

S
R
A
L
L
O
D

250

200

150

100

50

0

12/31/14

12/31/15

12/31/16

12/31/17

12/31/18

12/31/19

Vector Group Ltd.

NYSE Arca Tobacco

S&P 500

S&P 600

S&P MidCap 400

Vector Group Ltd.

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

S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 600 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

S&P MidCap 400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NYSE Arca Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12/14

12/15

12/16

12/17

12/18

12/19

100

100
100

100

100

125

101
98

98

121

136

113
124

118

154

151

138
140

137

171

77

132
128

122

133

127

174
157

154

176

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, 2019.

35

Issuer Purchase of Equity Securities

Our purchase of our common stock during the three months ended December 31, 2019 were as

follows:

Total Number
of Shares
Purchased
Period
October 1 to October 31, 2019 . . . . .
—
November 1 to November 30, 2019 . . 1,529,512
—
December 1 to December 31, 2019 . .
. . . . . . . . . . . . . . . . . . . . . 1,529,512

Total

Average Price
Paid per Share
$ —
12.46(1)
—
$12.46

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 exercise price and tax withholding in connection with stock

option exercises by employees. The shares were immediately canceled.

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 2, 2020. 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

Position

Age
71 President and Chief Executive Officer
66 Executive Vice President
54
59
66 President and Chief Executive Officer of Liggett

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

Year Individual
Became an
Executive Officer
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; 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 and was Chairman of the Board of
Ladenburg Thalmann Financial Services from May 2001 to July 2006 and Vice Chairman from July 2006 to
February 2020. 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. From September 2006 to February 2020, he has served as President and
Chief Executive Officer as well as a director of Ladenburg Thalmann Financial Services. Mr. Lampen also
served as Chairman of Ladenburg Thalmann Financial Services from September 2018 to February 2020.
From October 2008 to October 2019, Mr. Lampen served as President and Chief Executive Officer as well
as a director of Castle Brands Inc.

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

36

Valley. Mr. Kirkland served as a director of SG Blocks 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.

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. In February 2020, Mr. Bernstein announced his retirement
effective March 31, 2020. He has agreed to transition into the role of Non-Executive Chairman of Liggett
Vector Brands and Senior Advisor to Liggett and its affiliates.

ITEM 6.

SELECTED FINANCIAL DATA

2019

Year Ended December 31,
2017
(dollars in thousands, except per share amounts)

2016

2018

2015

Statement of Operations Data:
Revenues(1) . . . . . . . . . . . . . . . . . . . . . . . . . $1,903,711 $1,870,262 $1,807,476 $1,690,949 $1,657,197
Operating income(3) . . . . . . . . . . . . . . . . . . . $ 231,135 $ 224,049 $ 235,648 $ 234,505 $ 205,936
Net income attributed to Vector Group Ltd. . . $ 100,974 $
59,198
Per basic common share:(2) . . . . . . . . . . . . . .
Net income applicable to common shares

71,127 $

84,572 $

58,105 $

attributed to Vector Group Ltd. . . . . . . . . . $

0.64 $

0.35 $

0.54 $

0.48 $

0.40

Per diluted common share:(2) . . . . . . . . . . . . .
Net income applicable to common shares

attributed to Vector Group Ltd. . . . . . . . . . $

0.63 $

0.35 $

0.54 $

0.48 $

0.40

Cash distributions declared per common

share(2) . . . . . . . . . . . . . . . . . . . . . . . . . . $

1.54 $

1.47 $

1.40 $

1.33 $

1.27

Balance Sheet Data:
Current assets . . . . . . . . . . . . . . . . . . . . . . . $ 681,614 $ 872,221 $ 613,709 $ 705,463 $ 583,739
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $1,505,089 $1,549,504 $1,328,278 $1,404,035 $1,280,615
Current liabilities
. . . . . . . . . . . . . . . . . . . . $ 461,133 $ 484,920 $ 204,639 $ 196,148 $ 216,292
Notes payable, embedded derivatives,

long-term debt and other obligations, less
current portion . . . . . . . . . . . . . . . . . . . . $1,397,216 $1,411,486 $1,270,657 $1,245,275 $1,000,150

Non-current employee benefits, deferred
income taxes and other long-term
liabilities(4)

. . . . . . . . . . . . . . . . . . . . . . . $ 331,756 $ 200,464 $ 184,742 $ 215,884 $ 186,334
Stockholders’ deficiency . . . . . . . . . . . . . . . . $ (685,016) $ (547,366) $ (331,760) $ (253,272) $ (122,161)

(1) Revenues include federal excise taxes of $451,256, $469,836, $460,561, $425,980 and $439,647,

respectively.

(2) Per share computations include the impact of 5% stock dividends on September 27, 2019,

September 27, 2018, September 28, 2017, September 29, 2016, and September 29, 2015.

37

(3) Operating income includes $6,298, $2,721 and $4,364 of income from MSA Settlements for the years
ended December 31, 2018, 2017, and 2015, respectively and $247 of expense from MSA Settlements for
the year ended December 31, 2016; $990, $6,591, $20,000 and $20,072 of litigation judgment and
settlement expense for the years ended December 31, 2019, 2017, 2016, and 2015, respectively; $1,784
of litigation judgment and settlement income for the year ended December 31, 2018 and $41 and
$1,819 of restructuring charges for the years ended December 31, 2016, and 2015, respectively.

(4) Total assets, current liabilities and non-current liabilities are not comparable across the periods because
they reflect the impact of recognizing leases assets and lease liabilities on the balance sheet after we
adopted ASU No. 2016-02 — Leases (Topic 842) on January 1, 2019.

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 two business segments:

•

•

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

Real Estate: the real estate business through our New Valley subsidiary, which is seeking to acquire
or invest in additional real estate properties or projects. As of December 31, 2018, New Valley
owned a 100% interest in Douglas Elliman. Douglas Elliman operates the largest residential
brokerage company in the New York metropolitan area and also conducts residential real estate
brokerage operations in Florida, California, Connecticut, Massachusetts, Colorado, New Jersey,
and Texas.

Our tobacco subsidiaries’ cigarettes are produced in 100 combinations of length, style and packaging.

Liggett’s current brand portfolio includes:

•

•

•

•

•

•

EAGLE 20’s

PYRAMID

GRAND PRIX

LIGGETT SELECT

EVE

USA and various Partner Brands and private label brands.

The discount segment is a challenging marketplace, with consumers having less brand loyalty and
placing greater emphasis on price. 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 owned by British American
Tobacco Plc, 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.

See Item 1. “Business” for detailed overview and description of our principal operations.

Certain discussions of the changes in our results of operations and liquidity and capital resources from
the year ended December 31, 2017 as compared to the year ended December 31, 2018 have been omitted
from this Form 10-K, but may be found in “Item 7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of our Form 10-K for the fiscal year ended December 31, 2018 filed
with the Securities and Exchange Commission on March 1, 2019.

38

Recent Developments

Maturity of 7.5% Variable Interest Senior Convertible Notes due 2019.

In January 2019, we paid
$230,000 of principal and $8,102 of accrued interest as full payment of our 7.5% Convertible Notes that
matured on January 15, 2019.

Corporate Governance Matters.

In June 2019, our Compensation Committee began the process of
reviewing our executive compensation program by engaging FTI Consulting, Inc. with a view to
implementing any appropriate changes to our compensation program in the 2020 compensation year. Our
Board of Directors also asked management and outside counsel to review our governance practices and
propose enhancements that align with market better-practices. The results of these reviews will be discussed
in our 2020 proxy statement.

Castle Brands, Inc. (“Castle”). On October 9, 2019, Castle was acquired pursuant to a cash tender
offer of $1.27 per outstanding common share and, in connection therewith, we tendered all of our
12,895,017 common shares of Castle. We received proceeds of $16,377 from the transaction and recorded
$16,377 in pre-tax gain in the fourth quarter of 2019 from the transaction. At the closing of the transaction,
our Executive Vice President resigned as President and Chief Executive Officer of Castle and our
management agreement with Castle was terminated.

Liggett Credit Facility. On October 31, 2019, Liggett and 100 Maple LLC (“Maple”), a subsidiary of
Liggett, entered into an amendment (the “Amendment”) to their existing credit agreement entered into on
January 14, 2015 (the “Existing Credit Agreement” and as so amended, the “Credit Agreement”), among
Liggett, Maple and Wells Fargo Bank, National Association, as agent and lender. The Amendment, among
other things, (i) extends the maturity of the Credit Agreement to January 31, 2025, (ii) updates the
borrowing base to adjust the advance rates in respect of eligible inventory and adds certain eligible real
property, and (iii) reflects the repayment in full of the term loan facility that had previously been
outstanding thereunder. The obligations under the Credit Agreement continue to be secured on a first
priority basis by all inventories, receivables and certain other personal property of Liggett and Maple, a
mortgage on Liggett’s manufacturing facility and certain real property of Maple, subject to certain
permitted liens.

Sale of Innova. On November 1, 2019, Douglas Elliman sold its 50% interest in Innova Risk
Management, an insurance brokerage company. Douglas Elliman received $8,732 in cash in November 2019
and may receive an additional $1,000 in a potential earn out over a period of two years. We recorded a
pre-tax gain of $7,117 in connection with the transaction in the fourth quarter of 2019.

Dividend Reduction. On November 5, 2019, we announced that our board of directors had declared a
regular quarterly cash dividend on our common stock of $0.40 per share, payable on December 30, 2019 to
holders of record as of December 17, 2019. We also announced that our board of directors has decided to
reduce our quarterly cash dividend to $0.20 per share, effective the first quarter of 2020, and that we will no
longer pay an annual stock dividend. The amount of the quarterly cash dividend and the payment of any
annual stock dividend are subject to the Board’s regular evaluation of our dividend policy and capital
allocation strategy.

Issuance of 10.5% Senior Notes.

In November 2019, we sold $230,000 of our 10.5% Senior Notes due
2026 in a private offering to qualified institutional buyers in accordance with Rule 144A of the Securities
Act of 1933. There are no registration rights associated with the notes. The 10.5% Senior Notes pay interest
on a semi-annual basis at a rate of 10.5% per year and mature on November 1, 2026. We may redeem some
or all of the 10.5% Senior Notes at any time at a make-whole redemption price. On or after February 1,
2020, we may redeem some or all of the 10.5% Senior Notes at a premium that will decrease over time, plus
accrued and unpaid interest. The aggregate net proceeds from the sale of the 10.5% Senior Notes were
approximately $220,400 after deducting the initial purchaser’s discount and estimated expenses and fees.
The 10.5% Senior Notes due 2026 contain covenants that place significant limitations on our operations.
See “Liquidity and Capital Resources.”

Early Partial Redemption of

In
November 2019, we redeemed $62,390 in aggregate principal amount of our 5.5% Convertible Notes
outstanding at a redemption price of 102.175% using a portion of the proceeds of the November 2019
offering of 10.5% Senior Notes. We paid $63,859 to redeem the notes and recorded a loss of $4,301 for the
early extinguishment of debt.

the 5.5% Variable Interest Convertible Senior Notes due 2020.

39

Ladenburg Thalmann Financial Services Inc. (“LTS”). On November 11, 2019 LTS entered into an
Agreement and Plan of Merger with Advisor Group. On February 14, 2020, the merger was completed and
each share of LTS common stock was converted into a cash payment of $3.50 per share. We received
proceeds of $53,169 from our 15,191,205 common shares of LTS and we anticipate recording a pre-tax gain
of $52,737 from the transaction in the first quarter of 2020. We have also tendered 240,000 shares of LTS’s
8% Series A Cumulative Redeemable Preferred Stock for redemption and anticipate receiving an additional
$6,009 in March 2020. At the closing of the transaction, our Executive Vice President resigned as
Chairman, President and Chief Executive Officer of LTS, and our management agreement with LTS was
terminated.

Recent Developments in Smoking-Related Litigation

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

Critical Accounting Policies

General. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) 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, valuation of intangible assets, promotional accruals,
actuarial assumptions of pension plans, deferred tax assets, 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.

Revenue Recognition. Revenue is measured based on a consideration specified in a contract with a
customer and excludes any sales incentives. Revenue is recognized when (a) an enforceable contract with a
customer exists, that has commercial substance, and collection of substantially all consideration for services
is probable; and (b) the performance obligations to the customer are satisfied either over time or at a point
in time.

Revenue from cigarette sales, which include federal excise taxes billed to customers, are recognized
upon shipment of cigarettes when control has passed to the customer. Average collection terms for Tobacco
sales range between three and twelve days from the time cigarettes are shipped to the customer. We record a
liability for goods estimated to be returned in other current liabilities and the associated receivable for
anticipated federal excise tax refunds in other current assets on the consolidated balance sheet. The
allowance for returned goods is based principally on sales volumes and historical return rates. The estimated
costs of sales incentives, including customer incentives and trade promotion activities, are based principally
on historical experience and are accounted for as reductions in Tobacco revenue. Expected payments for
sales incentives are included in other current liabilities on our consolidated balance sheet. We account for
shipping and handling costs as fulfillment costs as part of cost of sales.

Real estate commissions earned by our Real Estate brokerage businesses are recognized as revenue
when the real estate sale is completed or lease agreement is executed, which is the point in time that the
performance obligation is satisfied. Any commission and other payments received in advance are deferred
until the satisfaction of the performance obligation. Corresponding agent commission expenses, including
any advance commission or other direct expense payments, are deferred and recognized as cost of sales
concurrently with related revenues.

40

Contracts in our development marketing business provide us with the exclusive right to sell units in a
subject property for a commission fee per unit sold calculated as a percentage of the sales price of each unit.
Accordingly, a performance obligation exists for each unit in the Development Marketing property under
contract, and a portion of the total contract transaction price is allocated to and recognized at the time
each unit is sold.

Under development marketing service arrangements, dedicated staff are required for a subject property
and these costs are typically reimbursed from the customer through advance payments that are recoupable
from future commission earnings. Advance payments received and associated direct costs paid are deferred,
allocated to each unit in the subject property, and recognized at the time of the completed sale of each unit.

Development marketing service arrangements also include direct fulfillment costs incurred in advance
of the satisfaction of the performance obligation. We capitalize costs incurred in fulfilling a contract with a
customer if the fulfillment costs 1) relate directly to an existing contract or anticipated contract, 2) generate
or enhance resources that will be used to satisfy performance obligations in the future, and 3) are expected
to be recovered. These costs are amortized over the estimated customer relationship period which is the
contract term. We use an amortization method that is consistent with the pattern of transfer of goods or
services to its customers by allocating these costs to each unit in the subject property and expensing these
costs as each unit sold is closed over the contract.

Commission revenue is recognized at the time the performance obligation is met for our Real Estate
commercial leasing contracts, which is when the lease agreement is executed, as there are no further
performance obligations, including any amounts of future payments under extended payment terms.

Our Real Estate property management revenue arrangements consist of providing operational and
administrative services to manage a subject property. Fees for these services are typically billed and collected
monthly. Property management service fees are recognized as revenue over time using the output method as
the performance obligations under the customer arrangement are satisfied each month. Our Real Estate
title insurance commission fee revenue is earned when the sale of the title insurance is completed, which
corresponds to the point in time when the underlying real estate sale transaction closes and the payment is
received.

Leasing Standard. On January 1, 2019, we adopted ASU No. 2016-02- Leases (Topic 842), therefore,
our lease accounting policy has been modified as discussed in Note 1 to our consolidated financial
statements. Under ASC 842, we determine if an arrangement is a lease at contract inception. At lease
commencement, we record and recognize right-of-use (“ROU”) assets for the lease liability amount and
initial direct costs incurred, offset by lease incentives received. We record lease liabilities for the net present
value of future lease payments over the lease term. The discount rate we use is generally our estimated
incremental borrowing rate unless the lessor’s implicit rate is readily determinable. We calculate discount
rates periodically to estimate the rate we would pay to borrow the funds necessary to obtain an asset of
similar value, over a similar term, with a similar security. The lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will exercise that option. We recognize operating
lease expense on a straight-line basis over the lease term. We recognize finance lease cost on a straight-line
basis over the shorter of the useful life of the asset and the lease term. Operating leases are included in
operating lease ROU assets and lease liabilities on the consolidated balance sheets. Finance leases are
included in investments in real estate, net, property, plant and equipment and current and long-term
portions of notes payable and long-term debt on the consolidated balance sheets.

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

We record provisions in our consolidated financial statements for pending litigation when we determine
that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the
present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as
discussed in Note 15 to our consolidated financial statements and discussed below related to the 16 cases
where an adverse verdict was entered against Liggett: (i) management has concluded that it is not probable

41

that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to
reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome of any
of the pending tobacco-related cases and, therefore, management has not provided any amounts in the
consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as
incurred.

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.

A reader of this Form 10-K 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.

Master Settlement Agreement. As discussed in Note 15 to our consolidated financial statements,
Liggett and Vector Tobacco are participants in the Master Settlement Agreement (“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
$165,471 for 2019, $162,522 for 2018 and $146,634 for 2017. 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, 2019 and 2018, the fair value of derivative liabilities was estimated at $4,999 and
$31,424, respectively. The decline was primarily due to the amortization of the 2019 interest payments
associated with the derivative liability as well as the partial redemption of the 5.5% variable interest
convertible senior notes and higher interest rates at December 31, 2019.

Changes to the fair value of these embedded derivatives are reflected on our 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. We recognized gains of $26,425, $44,989 and $35,919 in 2019, 2018 and 2017, 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.

42

We recognized non-cash interest expense of $18,512, $55,769 and $37,210 in 2019, 2018 and 2017,
respectively, due to the amortization of the debt discount attributable to the embedded derivatives and
$6,301, $30,854 and $19,577 in 2019, 2018 and 2017, respectively, due to the amortization of the debt
discount attributable to the beneficial conversion feature.

Stock-Based Compensation. Our stock-based compensation uses a fair-value-based method to
recognize non-cash compensation expense for share-based transactions. Under the fair value recognition
provisions, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize
compensation cost for those shares expected to vest on a straight-line basis over the requisite service period
of the award. We recognized stock-based compensation expense of $1,923, $2,246 and $2,207 in 2019, 2018
and 2017, respectively, related to the amortization of stock option awards and $7,546, $7,705 and $8,680,
respectively, related to the amortization of restricted stock grants. As of December 31, 2019 and 2018, there
was $2,657 and $3,537, respectively, of total unrecognized cost related to employee stock options and
$15,095 and $22,077, 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, 2019, our benefit obligations were computed assuming a discount rate between
2.55% – 3.3%. As of December 31, 2019, our service cost was computed assuming a discount rate of
3.9% – 4.35%. 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 7.6%, 8.3% and 5.2% for the years ended December 31, 2019, 2018
and 2017, respectively, and our actual five-year annual rate of return on our pension plan assets was 5.41%,
3.19% and 7.28% for the years ended December 31, 2019, 2018 and 2017, respectively. In computing
expense for the year ended December 31, 2020, we will use an assumption of a 4% annual rate of return on
our pension plan assets. In accordance with GAAP, 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 $2,834,
$1,611 and $2,527 for the years ended December 31, 2019, 2018 and 2017, respectively, and we currently
anticipate benefit expense will be approximately $2,405 for 2020. 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, 2020
and ending on December 31, 2020.

Long-Term Investments and Impairments. At December 31, 2019, we had long-term investments of
$61,723, of which $45,781 were equity securities at fair value that qualify for the net asset value (“NAV”)
practical expedient and $15,942 were accounted for under the equity method. Our investments in equity
securities at fair value that qualify for the NAV practical expedient consisted primarily of investment
partnerships investing in investment securities. The investments in these investment partnerships are illiquid
the underlying
and the ultimate realization of
partnership and its management by the general partners. The estimated fair value of these investments was
provided by the partnerships based on the indicated market values of the underlying assets or investment
portfolio. Our investments accounted for under the equity method included interests in partnerships and
various companies in which we have the ability to exercise significant influence over their operating and

these investments is subject to the performance of

43

financial policies. The estimated fair value of the investments is either provided by the partnerships 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 or losses 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.
Pursuant to the amendments provided by ASU 2016-01, Financial Instruments — Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), our
long-term investments are measured at fair value with changes in fair value recognized in net income.
Therefore, impairment analyses for these investments are no longer warranted.

At December 31, 2019, we also had investments of $6,200 in the common stock of a reinsurance
company, membership units of a real estate limited liability company and membership units of a
commercial real estate limited liability company that were classified as equity securities without readily
determinable fair values that do not qualify for the NAV practical expedient. The investments are included
in “Other assets” on the consolidated balance sheet and are valued at cost minus impairment, if any, plus or
minus changes resulting from observable price changes in orderly transactions for the identical or a similar
investment. 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. The impairment indicators that are taken into consideration
as part of our analysis include (a) a significant deterioration in the earnings performance, credit rating,
asset quality, or business prospects of the investee, (b) a significant adverse change in the regulatory,
economic, or technological environment of the investee, (c) a significant adverse change in the general
market condition of either the geographical area or the industry in which the investee operates, and
(d) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as
negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital
requirements or debt covenants.

Goodwill and Indefinite Life Assets. Goodwill and intangible assets with indefinite lives are not
amortized, but instead are tested for impairment on an annual basis, or whenever events or changes in
business circumstances indicate the carrying value of the assets may not be recoverable.

Our goodwill and trademarks are related to Douglas Elliman. Our intangible asset associated with the

benefit under the MSA is related to Vector Tobacco.

We follow ASC 350, Intangibles — Goodwill and Other, included in ASU 2011-08, Testing Goodwill
for Impairment. The amendments permit entities to first perform a qualitative assessment to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
Based on the results of the qualitative assessment, if the entity determines that it is more likely than not that
the fair value of a reporting unit is less than its carrying amount, it would then perform the first step of the
goodwill impairment test; otherwise, no further impairment test would be required. We elected to bypass
the qualitative assessment and perform the quantitative assessment for the year ended December 31, 2019.
No impairment was indicated as a result of this testing.

The fair value of the intangible asset associated with the Douglas Elliman trademark is determined
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. We performed the quantitative assessment
for the year ended December 31, 2019 and no impairment was noted.

The fair value of the intangible asset associated with the benefit under the MSA is determined 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. We performed our impairment test as of December 31,
2019 and no impairment was noted.

44

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

See Note 13 to our consolidated financial statements for additional

information regarding our

accounting for income taxes and uncertain tax positions.

Results of Operations

The following discussion provides an assessment of our results of operations, capital resources and
liquidity and should be read in conjunction with our consolidated financial statements and related notes
included elsewhere in this report. The consolidated financial statements include the accounts of Liggett,
Vector Tobacco, Liggett Vector Brands, New Valley, and other less significant subsidiaries.

Our business segments were Tobacco and Real Estate for the three years ended December 31, 2019,
2018 and 2017. The Tobacco segment consists of the manufacture and sale of cigarettes. The Real Estate
segment includes our investment in New Valley, which includes Douglas Elliman, Escena, Sagaponack, and
investments in real estate ventures.

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

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

Year Ended December 31,

2019

2018

2017

(Dollars in thousands)

Revenues:

Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,114,840

$1,111,094

$1,080,950

Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

788,871

759,168

727,364

Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

(838)

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,903,711

$1,870,262

$1,807,476

Operating income (loss):

Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 261,630(1) $ 246,527(2)
3,435(3)
(25,913)

(27,565)

(2,930)

$ 240,400(4)
21,439

(26,191)

Total operating income . . . . . . . . . . . . . . . . . . . . . . .

$ 231,135

$ 224,049

$ 235,648

(1) Operating income includes $990 of litigation settlement and judgment expense.

(2) Operating income includes $6,298 of income from MSA Settlement, and $685 of litigation settlement

and judgment expense.

(3) Operating income includes $2,469 of litigation settlement and judgment income.

(4) Operating income includes $2,721 of income from MSA Settlement, and $6,591 of litigation settlement

and judgment expense.

2019 Compared to 2018

Revenues. Total revenues were $1,903,711 for the year ended December 31, 2019 compared to
$1,870,262 for the year ended December 31, 2018. The $33,449 (1.8%) increase in revenues was due to a
$29,703 increase in Real Estate revenues, primarily related to increases in Douglas Elliman’s brokerage
revenues, and a $3,746 increase in Tobacco revenues, which was primarily related to Liggett’s decision to
raise prices on EAGLE 20’s after careful analysis, as part of its long-term strategy to gradually shift its
focus from volume growth to income growth.

45

Cost of sales. Total cost of sales was $1,301,579 for the year ended December 31, 2019 compared to
$1,292,484 for the year ended December 31, 2018. The $9,095 (0.7%) increase in cost of sales was due to a
$25,216 increase in Real Estate cost of sales, which was primarily related to Douglas Elliman’s agent
commissions, offset by a $16,121 decline in Tobacco cost of sales related to decreased sales volume.

Expenses. Operating, selling, general and administrative expenses were $370,007 for the year ended
December 31, 2019 compared to $355,513 for the year ended December 31, 2018. The $14,494 (4.1%)
increase in operating, selling, general and administrative expenses is due to a $8,383 increase in Real Estate
operating, selling, general and administrative expenses primarily at Douglas Elliman, a $4,459 increase in
Tobacco expenses, and a $1,652 increase in Corporate and Other expenses associated with increased
professional fees, compensation and rent.

Operating income. Operating income was $231,135 for the year ended December 31, 2019 compared
to $224,049 for the year ended December 31, 2018, an increase of $7,086 (3.2%). Tobacco operating income
increased by $15,103, while Real Estate operating income declined by $6,365, primarily related to Douglas
Elliman’s operations, and Corporate and Other operating loss increased by $1,652.

Other expenses. Other expenses were $97,307 and $144,490 for the years ended December 31, 2019
and 2018, respectively. For the year ended December 31, 2019, other expenses primarily consisted of interest
expense of $138,448 , loss on extinguishment of debt of $4,301 and equity in losses from real estate
ventures of $19,288. This was offset by income of $26,425 from changes in the fair value of derivatives
embedded within convertible debt, and other income of $38,305. For the year ended December 31, 2018,
other expenses primarily consisted of interest expense of $203,780, and loss on extinguishment of debt of
$4,066. This was offset by income of $44,989 from changes in fair value of derivatives embedded within
convertible debt, equity in earnings from real estate ventures of $14,446 and other income of $3,921.

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 each of the two series of our Convertible
Notes after 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 $26,425 and $44,989 for the years ended December 31, 2019 and 2018, respectively. The
decrease in income was primarily due to the absence of the full year amortization of the embedded
derivative related to the 7.5% Variable Interest Convertible Senior Notes that matured in January 2019. This
was partially offset by an increase of $1,829 related to the partial redemption of the 5.5% Variable Interest
Convertible Senior Notes.

Income before provision for income taxes.

Income before income taxes was $133,828 and $79,559 for

the years ended December 31, 2019, and 2018, respectively.

Income tax expense.

Income tax expense was $32,813 for the year ended December 31, 2019
compared to income tax expense of $21,552 for the year ended December 31, 2018. Our income tax rates
for the years ended December 31, 2019 and 2018 do not bear a customary relationship to statutory income
tax rates as a result of the impact of nondeductible expenses, state income taxes, and excess tax benefits on
stock-based compensation. The tax rate for the year ended December 31, 2019 was also impacted by
changes in valuation allowances, while the tax rate for the year ended December 31, 2018 was impacted by
the Tax Cuts and Jobs Act of 2017.

Tobacco.

Tobacco revenues. Liggett increased the list price of PYRAMID, LIGGETT SELECT, EVE and
GRAND PRIX by $0.80 per carton in February 2020, $0.80 per carton in October 2019, $0.60 per carton
in June 2019, $1.10 per carton in February 2019, $1.00 per carton in September 2018 and $0.90 per carton
in March 2018. Liggett increased the list price of EAGLE 20’s by $0.80 per carton in February 2020, $0.80
per carton in October 2019, $1.10 per carton in February 2019 and $1.00 per carton in September 2018.

46

All of our Tobacco sales were in the discount category in 2019 and 2018. For the year ended
December 31, 2019, Tobacco revenues were $1,114,840 compared to $1,111,094 for the year ended
December 31, 2018. Revenues increased by $3,746 (0.3%) due primarily to an increase in the average selling
price of our brands for the year ended December 31, 2019. The higher selling prices resulted in a $46,301
favorable price variance offset by a $42,555 (357.2 million units) decline in unit sales volume.

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

Year Ended December 31,

2019

2018

Manufacturing overhead, raw materials and labor . . . . . . . . . . . . .

$123,654

Federal excise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FDA expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MSA expense, net of market share exemption . . . . . . . . . . . . . . . .
Customer shipping and handling . . . . . . . . . . . . . . . . . . . . . . . . .

451,256

24,947

165,471
5,802

$125,807

469,836

23,428
162,522(1)
5,658

Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$771,130

$787,251

(1)

Includes $6,298 reduction in expense from MSA Settlement.

The Tobacco segment’s MSA expense is included in cost of sales. Under the terms of the MSA, we
have no payment obligations except to the extent that our tobacco subsidiaries’ market share of the U.S.
Cigarette market exceeds 1.92%. The calculation of this benefit from the MSA is an estimate based on
taxable unit shipments of cigarettes in the U.S. As of December 31, 2019, we estimate taxable shipments in
the U.S. declined by approximately 5.5% in 2019. Our annual MSA liability changes by approximately
$1,700 for each percentage change in the estimated shipment volumes in the U.S. market. For the year
ended December 31, 2019, the estimated decline in taxable shipments in excess of the annual MSA inflation
adjustment resulted in an increase in cost of sales of approximately $3,800 because the value of Liggett’s
market share exemption declined compared to the year ended December 31, 2018.

Tobacco gross profit was $343,710 for the year ended December 31, 2019 compared to $323,843 for the
year ended December 31, 2018, an increase of $19,867 (6.1%). The increase in gross profit for the year
ended December 31, 2019 was primarily attributable to increased pricing associated with the EAGLE 20’s
brand and was offset by the absence of a $6,298 reduction in cost of sales from a settlement of a
long-standing dispute related to the MSA for the year ended December 31, 2018. Related to the increased
pricing of EAGLE 20’s brand, after careful market analysis and based on our long-term strategy, in
September 2018, we began the process of gradually shifting focus from volume to income growth by
increasing pricing on EAGLE 20’s in connection with industry-wide price increases. Despite recent pricing
increases, EAGLE 20’s remains Liggett’s primary low-cost cigarette brand and its percentage of Liggett’s
total unit volume sales has increased from 53.5% for the year ended December 31, 2018 to 59.9% for the
year ended December 31, 2019. Pyramid, Liggett’s second largest brand, declined from 32.5% of total unit
volume sales for the year ended December 31, 2018 to 26.5% for the year ended December 31, 2019. As
a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit increased from 50.5% in the
2018 period to 51.8% in the 2019 period. The increase is the result of the increased EAGLE 20’s pricing
discussed above and was offset by the absence of the favorable resolution of a long-standing dispute related
to the MSA.

Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding
settlements and judgments, were $81,090 for the year ended December 31, 2019 compared to $76,631 for
the year ended December 31, 2018. The $4,459 (5.8%) increase is primarily due to higher incentive
compensation, sales and marketing expenses and increased professional fees. Tobacco product liability legal
expenses, including settlements and judgments, were $7,363 and $7,144 for the years ended December 31,
2019 and 2018, respectively.

Tobacco operating income. Tobacco operating income was $261,630 for the year ended December 31,
2019 compared to $246,527 for the year ended December 31, 2018. The increase of $15,103 (6.1%) was
primarily attributable to higher gross profit margins, as discussed above, and was partially offset by
increased operating, selling, general and administrative expenses.

47

Real Estate.

Real Estate revenues. Real Estate revenues were $788,871 and $759,168 for the years ended
December 31, 2019 and 2018, respectively. Real Estate revenues increased by $29,703 (3.9%), which was
primarily related to an increase of $26,956 in Douglas Elliman’s commission and other brokerage income.
This increase in commission and other brokerage income was primarily related to increased existing-home
sales in the New York City of $7,684, the Southeast market of $6,867 and the West market of $5,143, as
well as increased revenues from development marketing of $8,638. This was offset by declines in the
Northeast market of $1,376. Effective July 1, 2019, New York State increased its transfer tax and
“mansion” tax associated with resales of homes of more than $1,000. We believe that the July 1, 2019 tax
increase resulted in an acceleration of home sales and, therefore, commission and other brokerage income at
Douglas Elliman,
in New York City, before June 30, 2019 and, consequently, may have increased
commission and other brokerage income for the year ended December 31, 2019.

Real Estate revenues and cost of sales were as follows:

Year Ended December 31,

2019

2018

Real Estate Revenues:

Commission and other brokerage income . . . . . . . . . . . . . . . . . . . . . .

$742,414

$715,458

Property management income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,461

33,350

Title fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales on facilities primarily from Escena . . . . . . . . . . . . . . . . . . . . . .

6,233

4,763

5,281

5,079

Total real estate revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$788,871

$759,168

Real Estate Cost of Sales:

Real estate agent commissions

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

$525,233

$500,369

Cost of sales on facilities primarily from Escena . . . . . . . . . . . . . . . . .

Title fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,755

1,461

3,736

1,128

Total real estate cost of sales

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

$530,449

$505,233

Brokerage cost of sales. Douglas Elliman real estate agent commissions increased by $24,864 as a

result of changes in sales mix between markets with varying agent commission percentages.

Douglas Elliman’s gross margin on real estate brokerage income declined from 30.1% for the year

ended December 31, 2018 to 29.3% for the year ended December 31, 2019.

Real Estate expenses. Real Estate operating, selling, general and administrative expenses were
$261,352 and $252,969 for the years ended December 31, 2019 and 2018, respectively. The increased
expenses were associated with increased expenses in Douglas Elliman’s brokerage administrative operations.

Real Estate operating (loss) income. The Real Estate segment had operating loss of $2,930 for the
year ended December 31, 2019 compared to operating income of $3,435 for the year ended December 31,
2018. Real estate operating income for the year ended December 31, 2018 included $2,469 of litigation and
settlement income. The remaining difference of $3,896 was the result of increased operating, selling, general
and administrative expenses offset by the increase in Douglas Elliman’s gross profit.

Corporate and other.

Corporate and other loss. The operating loss at the corporate segment was $27,565 for the year ended
December 31, 2019 compared to $25,913 for the same period in 2018. The increase of $1,652 was primarily
due to increased professional fees, compensation and rent for the year ended December 31, 2019.

48

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Liquidity and Capital Resources

Cash and cash equivalents declined by $212,253 in 2019 and increased by $280,792 in 2018.

Cash provided from operations was $124,071 and $181,834 in 2019 and 2018, respectively. The decline
primarily related to lower distributions from real estate ventures in the 2019 period, increased purchases of
inventory in the tobacco segment, increased payments of accounts payable in the 2019 period and a
higher percentage of payments associated with the MSA liability balances in the tobacco segment being
made in the 2019 period compared to the 2018 period (which was due to income tax planning strategies in
December 2017, which increased payments of the MSA liability in December 2017 that lowered payments
in April 2018). This was offset by increases in operating income in the 2019 period and increased
distributions from long-term investments in the 2019 period.

Cash used in investing activities was $23,099 in 2019 and cash provided by investing activities was
$43,463 in 2018. 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. In 2019, cash used in investing activities was for the purchase of investment securities of
$87,766, investments in real estate ventures of $52,529, capital expenditures of $12,575, purchase of
long-term investments of $9,223, purchase of subsidiaries of $380, investments in real estate, net of $2,295,
and an increase in cash surrender value of corporate-owned life insurance policies of $719. This was offset
by the sale of investment securities of $21,879, distributions from investments in real estate ventures of
$41,300, proceeds from sale or liquidation of long-term investments of $8,256, pay downs of investment
securities of $1,083, maturities of investment securities of $68,859, the proceeds from the sale of fixed assets
of $17, and a decrease in restricted assets of $994. In 2018, cash provided by investing activities was from
the sale of investment securities of $18,628, distributions from investments in real estate ventures of
$54,233, proceeds from the sale or liquidation of
long-term investments of $19,487, pay downs of
investment securities of $1,611, maturities of investment securities of $24,719, the proceeds from the sale of
fixed assets of $9, repayment of notes receivable of $67, cash acquired in purchase of subsidiaries of $654,
and a decrease in restricted assets of $526. This was offset by the purchase of investment securities of
$34,445,
investments in real estate ventures of $9,728, capital expenditures of $17,682, purchase of
long-term investments of $415, purchase of subsidiaries of $10,404, investments in real estate, net of
$2,583, an increase in cash surrender value of corporate-owned life insurance policies of $764, issuance of
notes receivable of $450.

Cash used in financing activities was $313,225 in 2019 and cash provided by financing activities was
$55,495 in 2018. In 2019, cash used for financing activities was for dividends and distributions on common
stock of $238,249, repayments of debt of $293,419, payment of deferred financing costs of $9,802, tax
withholdings related to net share settlements of stock option exercise of $5,415, distributions to
non-controlling interest of $286 and other of $216. This was offset by proceeds of debt issuance of
$230,000 associated with the issuance of an additional amount of our 10.5% Senior Notes due 2026 in
November 2019, and net borrowings of debt under the revolver of $4,162. In 2018, cash provided by
financing activities was from proceeds of debt issuance of $325,000. This was offset by cash used for
dividends and distributions on common stock of $225,367, repayments of debt of $28,689, net repayments
of debt under the revolver of $3,528, payment of deferred financing costs of $9,400 and distributions to
non-controlling interest of $2,521.

For the years ended December 31, 2019 and 2018, cash payments of dividends and distributions on
common stock exceeded cash from operations by $114,178 and $43,533, respectively. The terms of our
10.5% Senior Notes due 2026 contain covenants that place significant limitations on our ability to pay
dividends and distributions in the future. See “10.5% Senior Notes due 2026” below. For the next
twelve months beginning January 1, 2020, we have significant liquidity commitments at the corporate level
(not including our tobacco and real estate operations) that require the use of existing cash resources. These
include the repayment of $169,610 of convertible notes due April 2020, for which we will use the cash
proceeds of the November 2019 issuance of additional 10.5% Senior Notes due 2026, cash interest expense
of approximately $116,800, dividends on our outstanding common shares of approximately $124,900,
which is based on an anticipated quarterly cash dividend of $0.20 per share, and other corporate expenses
and taxes.

50

In order to meet these liquidity requirements as well as other liquidity needs in the normal course of
business, we have in the past used cash flows from operations as well as existing cash and cash equivalents,
which have, in the past, been generated from operations, monetization of investments and proceeds from
debt issuances. Should these resources be insufficient to meet upcoming liquidity needs, we may also
liquidate investment securities 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. As of December 31, 2019, we had cash and cash equivalents of $371,341
(including $71,485 of cash at Douglas Elliman and $27,017 of cash at Liggett), investment securities, which
were carried at $129,641 (see Note 5 to our consolidated financial statements), and long-term investments,
which were carried at $61,723 (and, based on market prices as of December 31, 2019, had a fair value of
$122,657, including in-transit redemptions (see Note 8 to our consolidated financial statements)). As of
December 31, 2019, our investments in real estate ventures were carried at $131,556 and our investments in
real estate, net were carried at $28,317.

Corporate Impact of the Tax Act. The Tax Act limits our interest expense deduction to 30% of
taxable income before interest, depreciation and amortization from 2018 to 2021 and then taxable income
before interest thereafter for non-excepted trade or businesses. One such excepted trade or business is any
electing real property trade or business, which portions of our real estate business may qualify. Interest
expense allocable to an excepted trade or business is not subject to limitation. The Tax Act permits us to
carry forward disallowed interest expense indefinitely. Due to our high degree of leverage, a portion of our
interest expense in future years may not be deductible, which would increase the after-tax cost of any new
debt financings as well as the refinancing of our existing debt. We expect a portion of our interest expense
in 2018 and future years to be disallowed as a tax deduction and, based on current projections, we do not
expect any of this disallowed interest expense to be tax deductible in the future. Consequently, as part of
our annual effective tax rate, we have established an interest expense carryforward deferred tax asset and
corresponding valuation allowance for any disallowed interest expense in 2019 and 2018. We continue to
analyze the impact of the nondeductible interest on our operations and capital structure.

Tobacco Litigation. As of December 31, 2019, 16 verdicts have been entered in Engle progeny cases
against Liggett. Liggett has paid $39,773, including interest and attorney’s fees, to satisfy the judgments
entered against it. 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.

Notwithstanding the comprehensive nature of

the Engle Progeny Settlements, approximately 47
plaintiffs’ claims remain outstanding. Therefore, we and Liggett may still be subject to periodic adverse
judgments which could have a material adverse effect 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.

6.125% Senior Secured Notes.

In January 2017, we issued $850,000 of our 6.125% Senior Secured
Notes 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 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

51

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 “2025 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
2025 Indenture, for the most recently ended four full quarters is less than $75,000. The 2025 Indenture also
restricts the incurrence of debt if our Leverage Ratio and our Secured Leverage Ratio, as defined in the
2025 Indenture, exceed 3.0 and 1.5, respectively. Our Leverage Ratio is defined in the 2025 Indenture as the
ratio of our guaranteeing subsidiaries’ total debt less the fair market value of our cash, investment securities
and long-term investments to Consolidated EBITDA, as defined in the 2025 Indenture. Our Secured
Leverage Ratio is defined in the 2025 Indenture in the same manner as the Leverage Ratio, except that
secured indebtedness is substituted for indebtedness. The following table summarizes the requirements of
these financial covenants and the results of the calculation, as defined in the 2025 Indenture on an actual
basis as of December 31, 2019.

Covenant

Indenture
Requirement

December 31,
2019

Consolidated EBITDA, as defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$75,000

$338,697

Leverage ratio, as defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

<3.0 to 1

Secured leverage ratio, as defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

<1.5 to 1

3.03 to 1

0.96 to 1

As of December 31, 2019 and 2018, we were in compliance with all debt covenants related to the 2025
Indenture. Nonetheless, as of December 31, 2019, our Leverage Ratio exceeded 3.0 to 1, and,
consequentially, we are not permitted to incur additional indebtedness (with the exception of certain
categories of “Permitted Indebtedness”, which include draws under the Liggett Credit Facility, equipment
financings by Liggett and borrowings by non-guarantors of the 6.125% Senior Secured Notes, such as New
Valley, DER Holdings or Douglas Elliman) until such ratio declines below 3.0 to 1.0.

10.5% Senior Notes. On November 2, 2018 and November 18, 2019, respectively, we sold $325,000
and $230,000 of our 10.5% Senior Notes in a private offerings exempt from the registration requirements of
the Securities Act to qualified institutional buyers in accordance with Rule 144A of the Securities Act.
There are no registration rights associated with the notes, and the Company does not intend to offer notes
registered under the Securities Act in exchange for the 10.5% Senior Notes or file a registration statement
with respect to the 10.5% Senior Notes. The aggregate net proceeds from the 2018 sale of the 10.5% Senior
Notes and the 2019 sale of the 10.5% Senior Notes were approximately $315,000 and $220,400, respectively,
after deducting underwriting discounts, commissions, fees and offering expenses. We used the net cash
proceeds from the 2018 issuance of our 10.5% Senior Notes to retire the principal amount, plus accrued
and unpaid interest on our outstanding 7.5% Variable Interest Senior Convertible Notes due 2019, and for
general corporate purposes. We intend to use the net cash proceeds from the 2019 issuance of our 10.5%
Senior Notes to redeem, repurchase, repay or otherwise retire the principal amount, plus accrued and
unpaid interest on our outstanding 5.5% Variable Interest Senior Convertible Notes due 2020.

The 10.5% Senior Notes bear interest at a rate of 10.5% per year, payable semi-annually on May 1 and
November 1 of each year, beginning on May 1, 2019, and mature on November 1, 2026. Interest will accrue
from November 2, 2018. The Company may redeem some or all of the 10.5% Senior Notes at any time
prior to November 1, 2021 at a make-whole redemption price. On or after November 1, 2021, the Company
may redeem some or all of the 10.5% Senior Notes at redemption prices set forth in the indenture, plus
accrued and unpaid interest, if any, to the redemption date. In addition, any time prior to November 1,
2021, the Company may redeem up to 40% of the aggregate outstanding amount of the 10.5% Senior Notes
with the net proceeds of certain equity offerings at 110.5% of the aggregate principal amount of the 10.5%
Senior Notes, plus accrued and unpaid interest, if any, to the redemption date, if at least 60% of the
aggregate principal amount of the 10.5% Senior Notes originally issued remains outstanding after such
redemption, and the redemption occurs within 90 days of the closing of such equity offering. In the event
of a change of control, as defined in the indenture, each holder of the 10.5% Senior Notes will have the
right to require the Company to make an offer to repurchase some or all of its 10.5% Senior Notes at a

52

repurchase price equal to 101% of the aggregate principal amount of the 10.5% Senior Notes plus accrued
and unpaid interest 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 10.5% Senior Notes at the
prices listed in the indenture.

The 10.5% Senior 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, and by DER Holdings LLC, through which the
Company indirectly owns a 100% interest in Douglas Elliman as of December 31, 2018. DER Holdings
LLC does not guarantee our 6.125% Senior Secured Notes.

The “2026 Indenture” restricts our ability to pay dividends and make certain other distributions subject
to certain exceptions, including exceptions for (1) dividends and other distributions in an amount up to 50%
of the Company’s consolidated net income, plus certain specified proceeds received by the Company, if no
event of default has occurred, and the Company is in compliance with a Fixed Charge Coverage Ratio (as
defined in the 2026 Indenture) of at least 2.0x, and (2) dividends and other distributions in an unlimited
amount, if no event of default has occurred and the Company is in compliance with a Net Leverage Ratio
(as defined in the 2026 Indenture) no greater than 4.0x. As a result, absent an event of default, we can pay
dividends if the Net Leverage ratio is below 4.0x, regardless of the value of the Fixed Charge Coverage
Ratio at the time. The 2026 Indenture also restricts our ability to incur debt if our Fixed Charge Coverage
Ratio is less than 2.0x, and restricts our ability to secure debt other than secured debt incurred pursuant to
a Secured Leverage Ratio no greater than 3.75x, unless the 10.5% Senior Notes are secured on an equal and
ratable basis. In addition, the 2026 Indenture restricts our ability to spin-off or transfer New Valley and its
subsidiaries as a whole, or DER Holdings LLC and its subsidiaries (including Douglas Elliman) as a whole,
unless (1) such spin-off or transfer complies with the covenants restricting mergers and asset sales, or
(2) our Net Leverage Ratio is no greater than 4.0x. Our Fixed Charge Coverage Ratio is defined in the 2026
Indenture as the ratio of our Consolidated EBITDA to our Fixed Charges (each as defined in the 2026
Indenture). Our Net Leverage Ratio is defined in the 2026 Indenture as the ratio of our and our
guaranteeing subsidiaries’ total debt less our cash, cash equivalents, and the fair market value of our
investment securities, long-term investments, investments in real estate, net, and investments in real estate
ventures, to Consolidated EBITDA, as defined in the 2026 Indenture. Our Secured Leverage Ratio is
defined in the 2026 Indenture as the ratio of our and our guaranteeing subsidiaries’ total secured debt, to
Consolidated EBITDA, as defined in the 2026 Indenture. The following table summarizes the requirements
of these financial covenants and the results of the calculation, as defined in the 2026 Indenture on an actual
basis as of December 31, 2019.

Covenant

Indenture
Requirement

December 31,
2019

Fixed charge coverage ratio, as defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

>2.0 to 1

<4.0 to 1
Net leverage ratio, as defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured leverage ratio, as defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <3.75 to 1

2.63 to 1

3.08 to 1
0.46 to 1

As of December 31, 2019, we were in compliance with all of the debt covenants related to the 2026

Indenture.

Liggett Financing. Liggett did not enter into any equipment financing arrangements in 2019, 2018

and 2017.

Liggett Credit Facility. As of December 31, 2019, $34,952 was outstanding under the Credit
Agreement, all of which was classified as current liabilities. Availability as determined under the Credit
Agreement was $25,048 based on eligible collateral at December 31, 2019. At December 31, 2019,
management believed that Liggett was in compliance with all covenants under the credit facility; Liggett’s
EBITDA, as defined, were $238,295 for the last twelve months ended December 31, 2019.

53

In January, 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 governed a $60,000 credit facility
(the “Credit Facility”) that consisted of a revolving credit facility (the “Revolver”) and a $3,600 term loan
(the “Term Loan”) that was within the $60,000 commitment under the Credit Facility and reduced the
amount available under the Revolver.

In connection with the issuances of our 6.125% Senior Secured Notes, in January 2017, and our 10.5%
Senior Notes in November 2018, Liggett and Maple entered into amendments to the Credit Agreement to
update certain defined terms of the Credit Agreement relating to issuances of new notes.

On October 31, 2019, Liggett and Maple amended the Credit Agreement to, among other things,
(i) extend its maturity to January 31, 2025, (ii) update the borrowing base, to adjust the advance rates in
respect of eligible inventory and add certain eligible real property and (iii) reflect the repayment in full of
the term loan facility. Accordingly, the term loan portion of the Credit Agreement no longer exists.

As of October 31, 2019, all borrowings under the Credit Agreement are limited to a borrowing base
equal to the sum of (I) the lesser of 85% of eligible trade receivables less certain reserves and $10,000; plus
(II) 80% of the value of eligible inventory consisting of packaged cigarettes plus (III) the lesser of 65%
multiplied by Liggett’s eligible cost of inventory consisting of leaf tobacco less certain reserves against
inventory, bank products or other items which Wells Fargo may establish from time to time in its permitted
discretion or 85% of the appraised liquidation value of eligible inventory plus (IV) 60% of the fair market
value of eligible real property. The obligations under the Credit Agreement 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 term loan under the Credit Facility was retired during the fourth quarter of 2019 and had a $0

outstanding balance as of December 31, 2019.

The term of the Credit Agreement now expires on January 31, 2025. Loans under the Credit
Agreement bear interest at a rate equal to LIBOR plus 2.25%. The interest rate applicable to this Credit
Agreement at December 31, 2019 was 4.01%.

The Credit Agreement, as amended, permits the guaranty of the 6.125% Senior Secured Notes and the
10.5% Senior Notes by each of Liggett and Maple. 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 Agreement 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, including a
restriction on Liggett’s ability to pay cash dividends unless Liggett’s average borrowing availability, as
defined under the Credit Agreement, 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 Credit
Agreement,
including Liggett’s compliance with the covenants in the Credit Agreement. The Credit
Agreement 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 Agreement, on a
trailing twelve month basis, shall not be less than $100,000 if Liggett’s excess availability, as defined under
the Credit Agreement, is less than $20,000. The covenants also require that annual capital expenditures, as
defined under the Credit Agreement (before a maximum carryover amount of $10,000), shall not exceed
$20,000 during any fiscal year. The Credit Agreement also contains customary events of default. Liggett
was in compliance with all of these covenants as of December 31, 2019.

Anticipated Liquidity Obligations. We and our subsidiaries have significant indebtedness and debt
service obligations. As of December 31, 2019, we and our subsidiaries had total outstanding indebtedness
of $1,640,055, of which $169,610 of our 5.5% variable interest senior convertible notes mature in 2020,

54

$850,000 of our 6.125% Senior Secured Notes mature in 2025, and $555,000 of our 10.5% Senior Notes
mature in 2026. 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 could have a material adverse effect on our business and results of
operations.

We believe that our cigarette and real estate operations are positive cash-flow-generating units and will

continue to be able to sustain their operations without any significant liquidity concerns.

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 $371,300, investment
securities at fair value of approximately $129,600, long-term investments with an estimated value of
approximately $61,723 (and, based on market prices as of December 31, 2019, had a fair value of $122,657,
including in-transit redemptions (see Note 8 to our consolidated financial statements)) and availability
under Liggett’s credit facility of approximately $25,000 as of December 31, 2019. 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 to the extent available, 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 debt securities available for sale and equity securities without
readily determinable fair values that do not qualify for the NAV practical expedient 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 the assessment of temporary or other-than-temporary
impairment is facts-and-circumstances driven. The impairment indicators that are taken into consideration
as part of our analysis include (a) a significant deterioration in the earnings performance, credit rating,
asset quality, or business prospects of the investee, (b) a significant adverse change in the regulatory,
economic, or technological environment of the investee, (c) a significant adverse change in the general
market condition of either the geographical area or the industry in which the investee operates, and
(d) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as
negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital
requirements or debt covenants.

The total amount of unrecognized tax benefits was $391 as of January 1, 2019 and increased $1,256
during the year ended December 31, 2019, primarily due to accruals for state tax audits offset by the
expiration of various state statutes of limitations. The total amount of unrecognized tax benefits was $628
as of January 1, 2018 and decreased $237 during the year ended December 31, 2018, primarily from the
expiration of various state statutes of limitations and the reversal of a LIFO inventory difference.

Contractual Obligations

Our significant contractual obligations as of December 31, 2019 were as follows:

Contractual Obligations

2020

2021

2022

2023

2024

Thereafter

Total

Notes payable, long-term debt

and other obligations(1) . . . . $214,947 $ 10,026 $ 10,045 $

29 $

8 $1,405,000 $1,640,055

Operating leases(2)
Inventory purchase

. . . . . . . . .

36,611

35,453

32,943

30,866

25,415

117,040

278,328

commitments(3) . . . . . . . . . .

20,693

—

—

—

—

—

20,693

Capital expenditure purchase

commitments(4) . . . . . . . . . .
276
Interest payments(5)
702,943
. . . . . . . .
Engle progeny settlements . . . .
30,834
Total(6) . . . . . . . . . . . . . . . . . $394,266 $159,744 $156,946 $144,661 $139,187 $1,678,325 $2,673,129

276
118,313
3,426

—
142,581
13,704

—
110,532
3,426

—
110,340
3,426

—
110,338
3,426

—
110,839
3,426

(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 11 to our
consolidated financial statements.

55

(2) Operating lease obligations represent estimated lease payments for facilities and equipment. See Note 4

to our consolidated financial statements.

(3)

Inventory purchase commitments represent primarily purchase commitments under our leaf inventory
management program. See Note 6 to our consolidated financial statements.

(4) Capital expenditure purchase commitments represent purchase commitments for machinery and

equipment at Liggett. See Note 7 to our consolidated financial statements.

(5)

Interest payments are based on current interest rates at December 31, 2019 and our current policy of a
cash dividend of $0.20 per quarter, as the interest payable on the convertible notes due 2020 is
calculated based on the dividends we pay on our common stock. For more information concerning our
long-term debt, see “Liquidity and Capital Resources” above and Note 11 to our consolidated financial
statements. Interest payments also include payments for interest related to finance leases.

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

plans unfunded obligations of $68,618 at December 31, 2019.

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, 2019, 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.

As of December 31, 2019, we had outstanding approximately $7,174 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, 2019, Liggett had tobacco purchase commitments of approximately $20,693. We have a
single source supply agreement for reduced ignition propensity cigarette paper through 2022.

Future machinery and equipment purchase commitments at Liggett were $276 at December 31, 2019.

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.

56

As of December 31, 2019, approximately $35,000 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, 2019, 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 $350.

In addition, as of December 31, 2019, $164,334 ($169,610 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, and debt issuance costs. Changes to the
estimated fair value of these embedded derivatives are reflected within our 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 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 “Change in fair
value of derivatives embedded within convertible debt” could increase or decrease by approximately $6
resulting from the embedded derivative associated with our 5.5% variable interest senior convertible
debentures due 2020. An increase in our quarterly dividend rate by $0.10 per share would increase interest
expense by approximately $840 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 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 5.5% variable interest senior convertible
debentures 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 $5,005 and $4,993. We recorded the fair market value of our embedded derivatives at the
approximate midpoint of the range at $4,999 as of December 31, 2019. The estimated fair market value of
our embedded derivatives could change significantly based on future market conditions.

We held investment securities at fair value totaling $129,641 as of December 31, 2019. See Note 5 to
our consolidated financial statements. Adverse market conditions could have a significant effect on the
value of these investments.

We also held long-term investments in various investment partnerships. These investments are illiquid,
and their ultimate realization is subject to the performance of the underlying entities. See Note 8 to our
consolidated financial statements.

Equity Security Price Risk

As of December 31, 2019, we held various investments in equity securities with a fair value of $91,977.
The impact to our consolidated statement of operations related to equity securities fluctuates based on
changes in their fair value.

Upon our adoption of ASU 2016-01 on January 1, 2018, we record changes in the fair value of equity
securities in net income. To the extent that we continue to hold equity securities, our operating results may
fluctuate significantly. Based on our equity securities held as of December 31, 2019, under this standard, a
hypothetical decrease of 10% in the price of these equity securities would reduce the fair value of the
investments and, accordingly, our net income by approximately $9,198.

New Accounting Pronouncements

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

for further information on New Accounting Pronouncements.

57

Legislation, Regulation, Taxation and Litigation

In the United States, tobacco products are subject to substantial and increasing legislation, regulation,

taxation, and litigation, which have a negative effect on revenue and profitability.

The cigarette industry continues to be challenged on numerous fronts. The industry faced 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 1. “Business — Legislation and
Regulation”, Item 1A. “Risk Factors”, Item 3. “Legal Proceedings” and Note 15 to our consolidated
financial statements, which contain a description of litigation.

58

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, 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:

•

•

•

•

•

•

•

•

•

economic outlook,

capital expenditures,

cost reduction,

competition,

legislation and regulations,

cash flows,

operating performance,

litigation, 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,

adverse changes in global, national, regional and local economic and market conditions, including
those relating to pandemics and health crises, such as the recent outbreak of novel coronavirus
(COVID-19),

the impact of the Tax Act, including the deductibility of interest expense and the impact on the
markets of our Real Estate segment,

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 on our results of operations and product costs, e.g. the impact of federal
legislation providing for regulation of tobacco products by FDA,

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

uncertainty related to product liability and other tobacco-related litigations including the Engle
progeny cases pending in Florida and other individual and class action cases where certain
plaintiffs have alleged compensatory and punitive damage amounts ranging into the hundreds of
million and even billions of dollars; and,

potential additional payment obligations for us under the MSA and other settlement agreements
with the states that did not join the MSA.

59

Further information on the risks and uncertainties to our business include the risk factors 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.

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 2, 2020, 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, 2019, 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, 2019, the Company’s disclosure controls and
procedures were effective as of December 31, 2019.

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 limitations, 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.

60

Management, including the Chief Executive Officer and Chief Financial Officer, has conducted an
assessment of
the Company’s internal control over financial reporting as of
December 31, 2019, based on the criteria in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

the effectiveness of

Based on this assessment, management concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2019 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, 2019
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

There were no changes in the Company’s internal control over financial reporting during the year
ended December 31, 2019 that have materially affected or are reasonably likely to materially affect the
Company’s internal control over financial reporting.

61

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Vector Group Ltd.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Vector Group Ltd. and subsidiaries
(the “Company”) as of December 31, 2019, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
Framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2019, based on the criteria established
in Internal Control-Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended
December 31, 2019, of the Company and our report dated March 2, 2020, expressed an unqualified opinion
on the financial statements and included explanatory paragraphs regarding the Company’s adoption of new
accounting standards.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, 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. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the US federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control over Financial Reporting

A company’s 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. 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 its inherent limitations, 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.

/s/ Deloitte & Touche LLP

Miami, Florida
March 2, 2020

62

ITEM 9B. OTHER INFORMATION

None.

63

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information contained under the following headings in our definitive Proxy Statement for our
2020 Annual Meeting of Stockholders (the “2020 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 “Executive Compensation” and “Compensation
Committee Interlocks and Insider Participation” in our 2020 Proxy Statement is incorporated herein by
reference.

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 2020 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 2020 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 2020 Proxy Statement is incorporated herein by reference.

64

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) INDEX TO 2019 CONSOLIDATED FINANCIAL STATEMENTS:

Our consolidated financial statements and the notes thereto, together with the report thereon of
Deloitte & Touche LLP for the three years ended December 31, 2019, dated March 2, 2020 appear
beginning on page F-1 of this report.

(a)(2) FINANCIAL STATEMENT SCHEDULES:

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

F-100

(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

*4.6

Amended and Restated Certificate of Incorporation of Vector Group Ltd. (formerly
known as Brooke Group Ltd.) (“Vector”) (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. (incorporated by reference to
Exhibit 3.4 in Vector’s Form 8-K dated October 19, 2007).
Indenture, dated as of November 20, 2012, by and between Vector Group Ltd. and Wells
Fargo Bank, N. A., as trustee (incorporated by reference to Exhibit 4.1 of Vector’s
Form 8-K dated November 20, 2012).
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 5.5% Variable Interest Senior Convertible Notes
due 2020 (incorporated by reference to Exhibit 4.2 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).

65

EXHIBIT NO.

DESCRIPTION

*4.7

*4.8

*4.9

*4.11

4.12

*10.1

*10.2

*10.3

*10.4

*10.5

*10.6

*10.7

*10.8

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).
Indenture, dated as of November 2, 2018, among Vector Group Ltd., the guarantors
named therein and U.S. Bank National Association, as trustee (incorporated by reference
to Exhibit 4.1 to Vector’s Form 8-K dated November 2, 2018).
First Supplemental Indenture, dated as of November 18, 2019, among Vector Group
Ltd., the guarantors named therein and U.S. Bank National Association, as trustee
(incorporated by reference to Exhibit 4.2 in Vector’s Form 8-K dated November 18,
2019).
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange
Act of 1934.
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, Brooke Group Holding and Liggett (incorporated by reference to Exhibit 15
in the 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
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).

(incorporated by reference to

66

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

*10.23

*10.24

DESCRIPTION

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).
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, 2010).
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).
Letter Agreement, dated as of February 18, 2020, by and among Ronald J. Bernstein,
(incorporated by reference to
Liggett Vector Brands LLC, Vector Group Ltd.
Exhibit 10.1 in Vector’s Form 8-k dated February 18, 2020).
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 dated February 29, 2016).
Vector Group Ltd. Amended and Restated 1999 Long-Term Incentive Plan
(incorporated by reference to Appendix B in Vector’s Proxy Statement dated April 21,
2004).
Vector Group Ltd. Management
Exhibit 10.3 of Vector’s Form 8-K dated March 10, 2014).
Form of 1999 Amended and Restated Incentive Plan Option Agreement to Named
Executive Officers (incorporated by reference to Exhibit 10.21 of Vector’s Form 10-K
dated December 31, 2017).
Form of 2014 Management Incentive Plan Option Award to Named Executive Officers
(incorporated by reference to Exhibit 10.22 of Vector’s Form 10-K dated December 31,
2017).
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).

Incentive Plan (incorporated by reference to

67

EXHIBIT NO.

*10.25

*10.26

*10.27

*10.28

*10.29

*10.30

*10.31

*10.32

*10.33

*10.34

*10.35

*10.36

21
23.1
31.1

31.2

32.1

DESCRIPTION

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 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).
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).
Second Amendment, dated as of September 1, 2017, to Office Lease, dated as of
September 10, 2012, between Vector Group Ltd. and Frost Real Estate Holdings, LLC.
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
Exhibit 10.1 of Vector’s Form 8-K dated March 10, 2014).
Vector Group Ltd. Executive Compensation Clawback Policy (incorporated by reference
to Exhibit 10.2 of Vector’s Form 8-K dated March 10, 2014).
Third Amended and Restated Credit Agreement, dated as of January 14, 2015, among
Liggett Group LLC, 100 Maple LLC, the lenders party thereto from time to time and
Wells Fargo Bank, National Association, as administrative and collateral agent, as
amended by Amendment No. 1 to Third Amended and Restated Credit Agreement,
dated as of January 27, 2017, Amendment No. 2 to Third Amended and Restated Credit
Agreement, dated as of October 30, 2018, and Amendment No. 3 to Third Amended and
Restated Credit Agreement, dated as of October 31, 2019 (incorporated by reference to
Exhibit 10.1 in Vector’s Form 8-K dated November 5, 2019).
Subsidiaries of Vector.
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.

(incorporated by reference to

68

EXHIBIT NO.

DESCRIPTION

32.2

99.1

Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Material Legal Proceedings.

*

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 numbers 10.10 through 10.25.

ITEM 16. FORM 10-K SUMMARY.

Not applicable.

69

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly
authorized.

SIGNATURES

VECTOR GROUP LTD.
(Registrant)

By:

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

Date: March 2, 2020

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 2, 2020.

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/ Paul V. Carlucci
Paul V. Carlucci

/s/ Jean E. Sharpe
Jean E. Sharpe

/s/ Barry Watkins
Barry Watkins

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

Director

70

VECTOR GROUP LTD.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019
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 . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets as of December 31, 2019 and 2018 . . . . . . . . . . . . . . . . . . . . . .

Page

F-2

F-5

Consolidated Statements of Operations for the years ended December 31, 2019, 2018

and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-6

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019,

2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-7

Consolidated Statements of Stockholders’ Deficiency for the years ended December 31, 2019,

2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-8

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018

and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

F-9

F-11

FINANCIAL STATEMENT SCHEDULE:

Schedule II — Valuation and Qualifying Accounts

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

F-100

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 Stockholders and the Board of Directors of Vector Group Ltd.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Vector Group Ltd. and subsidiaries
(the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations,
comprehensive income, stockholders’ deficiency and cash flows, for each of the three years in the period
ended December 31, 2019, and the related notes and the financial statement schedule listed in the Index at
Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and
2018, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2019, in conformity with accounting principles generally accepted in the United States of
America.

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, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 2, 2020, expressed an unqualified opinion on the Company’s internal control over financial
reporting.

(PCAOB),

Change in Accounting Principles

As discussed in Note 2 to the financial statements, effective January 1, 2018, the Company adopted
Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, Revenue
from Contracts with Customers, using the modified retrospective approach.

As discussed in Note 4 to the financial statements, effective January 1, 2019, the Company adopted

FASB Accounting Standards Update 2016-02, Leases, using the modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the US federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the
financial statements that were communicated or required to be communicated to the audit committee and
that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does
not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or
on the accounts or disclosures to which they relate.

F-2

Investments in Real Estate Ventures-Impairment-Refer to Note 9 to the financial statements

Critical Audit Matter Description

On a quarterly basis, the Company evaluates its investments in real estate ventures to determine
whether impairment indicators exist and 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
is
facts-and-circumstances driven. Total investments in real estate ventures as of December 31, 2019, were
$131.6 million, net of impairment losses recorded in 2019 of $39.8 million.

temporary or other-than-temporary impairment

the assessment of

that

Given the Company’s evaluation of possible indications of impairment of real estate ventures requires
management to make significant judgements, performing audit procedures to evaluate whether management
appropriately identified circumstances indicating that the carrying amounts of real estate ventures may not
be recoverable required a high degree of auditor judgment and an increased extent of effort, including the
need to involve our real estate specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the evaluation of real estate ventures for possible indicators of

impairment included the following, among others:

• We tested the effectiveness of controls over management’s identification of possible circumstances that
may indicate that the carrying amounts of real estate ventures may not be recoverable and controls
over management’s evaluation of whether indicators of impairment existed used to determine fair
value, including controls over management’s review of the real estate venture financial information and
real estate market information for the real estate venture’s real estate holdings.

• We evaluated the Company’s determination and recording of other-than-temporary impairments for
real estate ventures by performing detailed procedures on selected real estate investments. These
procedures included:

— Evaluating whether indicators of impairment existed related to the Company’s real estate ventures

in certain key markets.

— Obtaining financial information of the real estate venture such as audited financial statements, if
available, as well as obtaining real estate market information for the real estate ventures real estate
holdings from our fair value specialists, as needed.

— Performing site visits and inquiries of real estate venture managers, real estate venture accounting

firms, and other valuation procedures.

Contingencies: Tobacco Product Liability-Refer to Note 15 to the financial statements

Critical Audit Matter Description

The Company’s wholly owned subsidiary Liggett Group LLC (“Liggett”) is subject to litigation related
to tobacco product liability. Legal proceedings regarding Liggett’s tobacco products are pending or
threatened in various jurisdictions against Liggett and the Company. The Company records provisions for
pending litigation when it determines 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 for certain 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 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 financial statements for unfavorable outcomes, if any.
Total tobacco product liabilities as of December 31, 2019, were $24.8 million.

F-3

Given the subjectivity of estimating the projected liability of reported and unreported claims and
assessing the probability of the outcome, performing audit procedures to evaluate whether tobacco product
liabilities were appropriately recorded as of December 31, 2019 required a high level of auditor judgment
and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the evaluation of whether tobacco product

liabilities were

appropriately recorded included the following, among others:

• We tested the effectiveness of controls relating to the determination of tobacco product liability

contingencies.

• We evaluated the provisions for tobacco litigation by:

— Obtaining letters from the Company’s internal and external counsel which include schedules and

analysis of all pending tobacco cases.

— Meeting quarterly with the Company’s general counsel and obtaining updates on tobacco

litigation activity.

— Reviewing tobacco product liability activity of other public tobacco companies for which Liggett

is often a codefendant.

— Evaluating recorded provisions and disclosures based on the information obtained.

— Utilizing the information obtained from the letters from the Company’s internal and external
counsel, quarterly meetings with the Company’s general counsel, and tobacco product liability
activity of other tobacco companies to assess management’s conclusion of the probability of the
outcome for pending litigation.

/s/ Deloitte & Touche LLP

Miami, Florida
March 2, 2020

We have served as the Company’s auditor since 2015.

F-4

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,
2019

December 31,
2018

(Dollars in thousands,
except per share amounts)

ASSETS:
Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable – trade, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments (of which $45,781 and $54,628 were carried at fair value) . . .
Investments in real estate ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right of use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total assets

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY:
Current liabilities:

Current portion of notes payable and long-term debt
. . . . . . . . . . . . . . . . . . .
Current portion of fair value of derivatives embedded within convertible debt . . .
Current payments due under the Master Settlement Agreement . . . . . . . . . . . . .
Current operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments due under the Master Settlement Agreement . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 371,341
129,641
36,959
98,762
44,911
681,614
82,160
28,317
61,723
131,556
149,578
265,993
104,148
$1,505,089

$ 209,269
4,999
34,116
18,294
5,138
189,317
461,133
1,397,216
—
67,853
33,695
156,963
17,275
55,970
2,190,105

$ 584,581
131,569
34,246
90,997
30,828
872,221
86,736
26,220
66,259
141,105
—
266,611
90,352
$1,549,504

$ 256,134
6,635
36,561
—
5,252
180,338
484,920
1,386,697
24,789
61,288
37,411
—
16,383
85,382
2,096,870

Commitments and contingencies (Notes 4 and 15)

Stockholders’ deficiency:

Preferred stock, par value $1 per share, 10,000,000 shares authorized . . . . . . . . .
Common stock, par value $0.1 per share, 250,000,000 shares authorized,

148,084,900 and 140,914,642 shares issued and outstanding . . . . . . . . . . . . .
Accumulated deficit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Vector Group Ltd. stockholders’ deficiency . . . . . . . . . . . . . . . . . . . .
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ deficiency . . . . . . . . . . . . . . . . . . . . . . . .

—

—

14,808
(678,464)
(21,808)
(685,464)
448
(685,016)
$1,505,089

14,092
(542,169)
(19,982)
(548,059)
693
(547,366)
$1,549,504

The accompanying notes are an integral part of the consolidated financial statements.
F-5

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,

2019

2018

2017

(Dollars in thousands, except per share amounts)

Revenues:

Tobacco* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,114,840

$1,111,094

$1,080,950

Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

788,871

759,168

727,364

Corporate and other

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

—

—

(838)

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,903,711

1,870,262

1,807,476

Expenses:

Cost of sales:

Tobacco* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

771,130

530,449

787,251

505,233

750,768

477,278

Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,301,579

1,292,484

1,228,046

Operating, selling, administrative and general expenses

. . . .

370,007

355,513

Litigation settlement and judgment expense (income) . . . . . .

990

(1,784)

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

231,135

224,049

337,191

6,591

235,648

Other income (expenses):

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(138,448)

(203,780)

(173,685)

Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . .

(4,301)

(4,066)

(34,110)

Change in fair value of derivatives embedded within

convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equity in (losses) earnings from real estate ventures . . . . . . .

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before provision for income taxes

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

Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . .

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

Net (income) loss attributed to non-controlling interest . . . . . .

26,425

(19,288)

38,305

133,828

32,813

101,015

(41)

44,989

14,446

3,921

79,559

21,552

58,007

98

35,919

21,395

4,001

89,168

(1,582)

90,750

(6,178)

Net income attributed to Vector Group Ltd.

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

$ 100,974

$

58,105

$

84,572

Per basic common share:

Net income applicable to common shares attributed to

Vector Group Ltd.

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

$

0.64

$

0.35

$

0.54

Per diluted common share:

Net income applicable to common shares attributed to

Vector Group Ltd.

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

$

0.63

$

0.35

$

0.54

* Revenues and cost of sales include federal excise taxes of $451,256, $469,836 and $460,561 for

the years ended December 31, 2019, 2018 and 2017, respectively.

The accompanying notes are an integral part of the consolidated financial statements.
F-6

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

2019

2018

2017

(Dollars in thousands)

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

$101,015

$58,007

$90,750

Net unrealized gains (losses) on investment securities available for sale:

Change in net unrealized gains (losses)

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

Net unrealized (gains) losses reclassified into net income . . . . . . . . . . . . .

Net unrealized gains (losses) on investment securities available for sale . . .

Net change in forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

681

(118)

563

—

Net change in pension-related amounts

Amortization of prior service costs . . . . . . . . . . . . . . . . . . . . . . . . . .

(33)

Net gain (loss) arising during the year . . . . . . . . . . . . . . . . . . . . . . . .

Amortization of loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net change in pension-related amounts . . . . . . . . . . . . . . . . . . . . . . .

Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,454

1,961

3,382

3,945

(1,056)

(6,655)

1,121

296

65

—

—

(3,723)

1,763

(1,960)

(6,359)

2

—

1,768

1,955

3,723

(1,895)

(2,634)

Income tax effect on:

Change in net unrealized gains (losses) on investment securities

. . . . . .

(187)

290

2,707

Net unrealized (gains) losses reclassified into net income on investment

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

Pension-related amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income tax (provision) benefit on other comprehensive

32

(919)

(308)

538

(120)

(1,279)

income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,074)

520

1,308

Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . .

2,871

(1,375)

(1,326)

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103,886

56,632

89,424

Comprehensive (income) loss attributed to non-controlling interest

. . . . .

(41)

98

(6,178)

Comprehensive income attributed to Vector Group Ltd.

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

$103,845

$56,730

$83,246

The accompanying notes are an integral part of the consolidated financial statements.
F-7

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

Common Stock
Shares

Amount

Additional
Paid-In
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Non-
controlling
Interest

Total

Balance, January 1, 2017 . . . . . . . . 127,739,481 $12,774 $
Net income . . . . . . . . . . . . . . . . .
Total other comprehensive loss . . .

—
—

—
—

(Dollars in thousands)

— $(333,529)
84,572
—
—
—

$(11,245)
—
(1,326)

$ 78,728 $(253,272)
90,750
(1,326)

6,178
—

Distributions and dividends on

common stock ($1.40 per share) . .

—

— (49,998)

(165,184)

Surrender of shares in connection

with restricted stock vesting . . . . .
Effect of stock dividend . . . . . . . . .
Issuance of common stock . . . . . . .
Cancellation of shares under share

lending agreement . . . . . . . . . . .
Stock-based compensation . . . . . . .
Distributions to non-controlling

(191,967)
6,436,512
2,000,000

(19)
644
200

(4,081)
—
43,030

(1,618,602)
—

(162)

162
— 10,887

—
(644)
—

—
—

—

—
—
—

—
—

— (215,182)

—
—
—

—
—

(4,100)
—
43,230

—
10,887

interest . . . . . . . . . . . . . . . . . .

—
Balance, December 31, 2017 . . . . . . 134,365,424
Impact of adoption of new

—
13,437

—
—
— (414,785)

—
(12,571)

(2,747)
82,159

(2,747)
(331,760)

accounting standards . . . . . . . . .
Net income . . . . . . . . . . . . . . . . .
Total other comprehensive loss . . .

Distributions and dividends on

common stock ($1.47 per share) . .
Restricted stock grant . . . . . . . . . .
Surrender of shares in connection

with restricted stock vesting . . . . .
Effect of stock dividend . . . . . . . . .
Stock-based compensation . . . . . . .
Acquisition of Douglas Elliman

Realty, LLC . . . . . . . . . . . . . . .

Distributions to non-controlling

—
—
—

—
—
—

—
—
—

6,354
58,105
—

(6,036)
—
(1,375)

(4,894)
(98)
—

(4,576)
58,007
(1,375)

—
31,666

— (6,311)
(3)
3

(219,972)
—

(192,119)
6,709,671
—

(19)
671
—

(3,637)
—
9,951

—
(671)
—

—

—

—

28,800

—
—

—
—
—

—

— (226,283)
—
—

—
—
—

(3,656)
—
9,951

(73,953)

(45,153)

interest . . . . . . . . . . . . . . . . . .

—
Balance, December 31, 2018 . . . . . . 140,914,642
Impact of adoption of new

—
14,092

—
—
— (542,169)

—
(19,982)

(2,521)
693

(2,521)
(547,366)

accounting standards . . . . . . . . .
Net income . . . . . . . . . . . . . . . . .
Total other comprehensive loss . . .

Distributions and dividends on

common stock ($1.54 per share) . .
Restricted stock grant . . . . . . . . . .
Surrender of shares in connection

with restricted stock vesting . . . . .

Surrender of shares in connection

with stock option exercise . . . . . .
Effect of stock dividend . . . . . . . . .
Exercise of stock options . . . . . . . .
Stock-based compensation . . . . . . .
Basis adjustment on non-controlling

interest . . . . . . . . . . . . . . . . . .

Distributions to non-controlling

interest . . . . . . . . . . . . . . . . . .

—
—
—

—
—
—

—
3,147
— 100,974
—
—

(4,697)
—
2,871

—
60,000

— (4,041)
(6)
6

(233,298)
—

(221,668)

(22)

(2,152)

—

(1,529,512)
7,037,087
1,824,351
—

(153)
703
182
—

(18,905)
—
15,635
9,469

—
(703)
—
—

—

—

—

—

—

(6,415)

—
—

—

—
—
—
—

—

—
41
—

(1,550)
101,015
2,871

— (237,339)
—
—

—

(2,174)

— (19,058)
—
—
15,817
—
9,469
—

—

(6,415)

Balance, December 31, 2019 . . . . . . 148,084,900 $14,808 $

—
—
— $(678,464)

—
$(21,808)

(286)
(286)
448 $(685,016)

$

The accompanying notes are an integral part of the consolidated financial statements.
F-8

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

2019

2018

2017

(Dollars in thousands)

Cash flows from operating activities:

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

$101,015

$ 58,007

$ 90,750

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .

17,851

18,807

Non-cash stock-based expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . .

9,469
2,944

9,951
3,758

18,614

10,887
1,754

Loss (gain) on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(42)
(11,198)

10
(17,635)

(40)
(33,311)

Distributions from long-term investments . . . . . . . . . . . . . . . . . .

17,940

1,472

1,436

Equity in (earnings) losses from long-term investments . . . . . . . . .

(17,000)

(3,158)

Net (gains) losses on investment securities . . . . . . . . . . . . . . . . . .

(7,440)

9,570

765

660

Equity in losses (earnings) from real estate ventures . . . . . . . . . . .

19,288

(14,446)

(21,395)

Distributions from real estate ventures

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

Non-cash interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-cash lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Excess tax benefit of stock compensation . . . . . . . . . . . . . . . . . .

Impairment of long-term investments . . . . . . . . . . . . . . . . . . . . .

Changes in assets and liabilities:

Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . .

Payments due under the Master Settlement Agreement . . . . . . . . .

7,028

2,052

21,088

1,488

—

(7,950)

(7,767)

(3,983)

(1,553)

Other assets and liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . .

(19,159)

25,935

52,048

—

18,412

—

37,995

29,620

—

1,143

50

(13,372)

(17,492)

(1,207)

4,443

19,081

10,158

43

14,218

(4,679)

568

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . .

124,071

181,834

131,586

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)

Year Ended December 31,

2019

2018

2017

(Dollars in thousands)

Cash flows from investing activities:

Sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 21,879

$ 18,628

$ 28,761

Maturities of investment securities . . . . . . . . . . . . . . . . . . . . . . .

68,859

24,719

101,097

Purchase of investment securities . . . . . . . . . . . . . . . . . . . . . . . .

(87,766)

(34,445)

(132,654)

Proceeds from sale or liquidation of long-term investments . . . . . .

Purchase of long-term investments . . . . . . . . . . . . . . . . . . . . . . .

Decrease in restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,256

(9,223)

994

19,487

(415)

526

966

(32,510)

2,250

Investments in real estate ventures

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

(52,529)

(9,728)

(38,807)

Distributions from investments in real estate ventures . . . . . . . . . .

41,300

54,233

Issuance of notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash acquired in purchase of subsidiaries . . . . . . . . . . . . . . . . . .

Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . . . . . .

—

—

17

(450)

654

9

61,718

(1,633)

—

76

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(12,575)

(17,682)

(19,869)

Increase in cash surrender value of life insurance policies

. . . . . . .

Purchase of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Repayments of notes receivable . . . . . . . . . . . . . . . . . . . . . . . . .

Pay downs of investment securities . . . . . . . . . . . . . . . . . . . . . . .

Investments in real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . . .

(719)

(380)

—

1,083

(2,295)

(764)

(10,404)

67

1,611

(2,583)

(802)

(6,569)

—

2,633

(619)

Net cash (used in) provided by investing activities . . . . . . . . . . . . . .

(23,099)

43,463

(35,962)

Cash flows from financing activities:

Proceeds from issuance of debt

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

230,000

325,000

850,021

Repayments of debt

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

(293,419)

(28,689)

(837,205)

Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9,802)

(9,400)

(19,200)

Borrowings under revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

243,688

307,023

157,630

Repayments on revolver

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

(239,526)

(310,551)

(163,474)

Dividends and distributions on common stock . . . . . . . . . . . . . . .
Distributions to non-controlling interest . . . . . . . . . . . . . . . . . . .
Proceeds from the issuance of Vector stock . . . . . . . . . . . . . . . . .

(238,249)
(286)
—

(225,367)
(2,521)
—

(211,488)
(2,779)
43,230

Tax withholdings related to net share settlements of stock option

exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5,415)
(216)

—
—

—
—

Net cash (used in) provided by financing activities . . . . . . . . . . . . . .

(313,225)

55,495

(183,265)

Net (decrease) increase in cash, cash equivalents and restricted cash . .
Cash, cash equivalents and restricted cash, beginning of year . . . . . .

(212,253)
591,729

280,792
310,937

(87,641)
398,578

Cash and cash equivalents and restricted cash, end of year . . . . . . . .

$ 379,476

$ 591,729

$ 310,937

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 Liggett Group LLC (“Liggett”), Vector Tobacco Inc. (“Vector Tobacco”), Liggett Vector
Brands LLC (“Liggett Vector Brands”), 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.
Liggett Vector Brands coordinates Liggett and Vector Tobacco’s sales and marketing efforts. Certain
references to “Liggett” refer to the Company’s tobacco operations, including the business of Liggett and
Vector Tobacco, unless otherwise specified. New Valley is engaged in the real estate business.

(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 impairment charges, valuation of intangible assets, promotional accruals, actuarial assumptions of
pension plans, deferred tax assets, 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.

(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 and Securities Investor Protection
Corporation insure these balances, up to $250 and $500, respectively. Substantially all of the Company’s
cash balances at December 31, 2019 are uninsured.

(d) Reconciliation of Cash, Cash Equivalents and Restricted Cash:

Restricted cash amounts included in other current assets and other assets represent cash and cash
equivalents required to be deposited into escrow for bonds required to appeal adverse product liability
judgments, amounts required for letters of credit related to office leases, and certain deposit requirements
for banking arrangements. The restrictions related to the appellate bonds will remain in place until the
appeal process has been completed. The restrictions related to the letters of credit will remain in place for
the duration of the respective lease. The restrictions related to the banking arrangements will remain in
place for the duration of the arrangement.

F-11

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 “Cash, cash equivalents and restricted cash” in the Consolidated Statement of

Cash Flows were as follows:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents included in other

December 31,
2019

December 31,
2018

December 31,
2017

$371,341

$584,581

$301,353

current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,423

2,697

9,081

Restricted cash and cash equivalents included in other

assets

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

3,712

4,451

503

Total cash, cash equivalents, and restricted cash shown
. . . . . .

in the consolidated statement of cash flows

$379,476

$591,729

$310,937

(e) Investment Securities:

The Company classifies investments in debt 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.

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 decline exists in one of the Company’s debt securities, it is the Company’s policy to
record an impairment charge with respect to such investment in the Company’s consolidated statements of
operations.

The Company classifies investments in marketable equity securities as equity securities at fair value.
The Company’s marketable equity securities are measured at fair value with changes in fair value recognized
in net income. Gains and losses are recognized when realized in the Company’s consolidated statements of
operations. 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.

(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, high credit quality
financial institutions.

Liggett’s customers are primarily wholesalers and distributors of tobacco and convenience products as
well as large grocery, drug and convenience store chains. Two customers accounted for 17% and 12% of
Liggett’s revenues in 2019, 18% and 12% in 2018, and 18% and 13% in 2017. Concentrations of credit risk
with respect to trade receivables are generally limited due to Liggett’s large number of customers. Liggett’s
two largest customers represented approximately 2% and 4%, respectively, of Liggett’s net accounts
receivable at December 31, 2019, and 11% and 4%, respectively, at December 31, 2018. 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.

F-12

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

(g) Accounts Receivable:

Accounts receivable-trade are recorded at their net realizable value. The allowance for doubtful
accounts and cash discounts was $993 and $766 at December 31, 2019 and 2018, 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.

(i) 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
the improvements. Costs of major additions and betterments are capitalized, while

useful
expenditures for routine maintenance and repairs are charged to expense as incurred.

lives of

(j) 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 at risk (1) cannot directly or indirectly make decisions about the entity’s activities through
their voting rights or similar rights; (2) do not have the obligation to absorb the expected losses of the
entity; (3) do not have the right to receive the expected residual returns of the entity; or (4) have voting
rights that are not proportionate to their economic interests and the entity’s activities involve or are
conducted on behalf of an investor with a disproportionately small voting interest.

The Company’s interest in VIEs is primarily in the form of equity ownership. The Company examines
specific criteria and uses judgment when determining if the Company is the primary beneficiary of a VIE.
Factors considered include risk and reward sharing, experience and financial condition of other partner(s),
voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive
committee, existence of unilateral kick-out rights exclusive of protective rights or voting rights and level of
economic disproportionality between the Company and its other partner(s).

Accounting guidance requires the consolidation of VIEs in which the Company is the primary
beneficiary. The guidance requires consolidation of VIEs that an enterprise has a controlling financial
interest. A controlling financial interest will have both of the following characteristics: (a) the power to
direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the
obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive
benefits from the VIE that could potentially be significant to the VIE.

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 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.

On a quarterly basis, the Company evaluates its investments in real estate ventures to determine if there
are indicators of impairment. If so, the Company further investigates to determine if an impairment has
occurred and whether such impairment is considered temporary or other than temporary. The Company
believes that the assessment of temporary or other-than-temporary impairment is facts-and-circumstances
driven.

(k) 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.

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.

F-14

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

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.

(l) 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.

Additionally, the Company performs impairment reviews on its long-term investments that are
classified as equity securities without readily determinable fair values that do not qualify for the net asset
value (“NAV”) practical expedient. On a quarterly basis, the Company evaluates the investments to
determine if there are indicators of impairment. If so, a determination is made of whether there is an
impairment and if it is considered temporary or other than temporary. The assessment of temporary or
other-than-temporary impairment is facts-and-circumstances driven. The impairment indicators that are
taken into consideration as part of the analysis include (a) a significant deterioration in the earnings
performance, credit rating, asset quality, or business prospects of the investee, (b) a significant adverse
change in the regulatory, economic, or technological environment of the investee, (c) a significant adverse
change in the general market condition of either the geographical area or the industry in which the investee
operates, and (d) factors that raise significant concerns about the investee’s ability to continue as a going
concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with
statutory capital requirements or debt covenants.

(m) Leases:

The Company determines if an arrangement is a lease at inception. Operating leases are included in
operating lease right-of-use (“ROU”) assets and lease liabilities on the Company’s 2019 balance sheet.
Finance leases are included in investments in real estate, net, property, plant and equipment and current and
long-term portions of notes payable and long-term debt on the Company’s balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the duration of the lease
term. Lease liabilities represent the Company’s obligation to make lease payments as determined by the
lease agreement. Lease liabilities are recorded at commencement for the net present value of future lease
payments over the lease term. The discount rate used is generally the Company’s estimated incremental
borrowing rate unless the lessor’s implicit rate is readily determinable. Discount rates are calculated
periodically to estimate the rate the Company would pay to borrow the funds necessary to obtain an asset
of similar value, over a similar term, with a similar security. ROU assets are recorded and recognized at
commencement for the lease liability amount, initial direct costs incurred and is reduced for lease incentives
received. The Company’s lease terms may include options to extend or terminate the lease when it is
reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a
straight-line basis over the lease term. Finance lease cost is recognized on a straight-line basis over the
shorter of the useful life of the asset and the lease term.

The Company has lease agreements with lease and non-lease components; the Company has elected

the accounting policy to combine lease and non-lease components for all underlying asset classes.

F-15

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

(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. (See Note 12).

(o) Stock Options and Awards:

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 and under the 1999 Plan 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 ($8,967, $8,696 and $7,655, net of income taxes, for the years ended
December 31, 2019, 2018 and 2017, 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 the enacted tax rates relative to when the
deferred item is expected to reverse. 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 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: Revenue from cigarette sales, which include federal excise taxes billed to customers, are
recognized upon shipment of cigarettes when control has passed to the customer. Average collection terms
for Tobacco sales range between three and twelve days from the time that the cigarettes are shipped to the
customer. The Company records an allowance for goods estimated to be returned in other current liabilities
and the associated receivable for anticipated federal excise tax refunds in other current assets on the
condensed consolidated balance sheet. The allowance for returned goods is based principally on sales

F-16

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

volumes and historical return rates. The estimated costs of sales incentives, including customer incentives
and trade promotion activities, are based principally on historical experience and are accounted for as
reductions in Tobacco revenue. Expected payments for sales incentives are included in other current
liabilities on the Company’s condensed consolidated balance sheet. The Company accounts for shipping
and handling costs as fulfillment costs as part of cost of sales.

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 were $5,802 in 2019,
$5,658 in 2018 and $5,012 in 2017. Shipping and handling costs related to sales transactions were part of
cost of sales in 2019 and 2018 after the adoption of Topic 606. The 2017 shipping and handling costs
related to sales transactions were part of operating, selling, administrative and general expenses.

Real estate sales: Real estate commissions earned by the Company’s real estate brokerage businesses are
recognized as revenue when the real estate sale is completed or lease agreement is executed, which is the
point in time that the performance obligation is satisfied. Any commission and other payments received in
advance are deferred until the satisfaction of the performance obligation. Corresponding agent commission
expenses, including any advance commission or other direct expense payments, are deferred and recognized
as cost of sales concurrently with related revenues. The accounting for these commissions and other
brokerage income under Topic 606 are largely consistent with the previous accounting for these transactions
under Topic 605, except for customer arrangements in the development marketing business and extended
payments terms that exist in some commercial leasing contracts.

Property management revenue arrangements consist of providing operational and administrative
services to manage a subject property. Fees for these services are typically billed and collected monthly.
Property management service fees are recognized as revenue over time using the output method as the
performance obligations under the customer arrangement are satisfied each month.

(s) Advertising:

Tobacco advertising costs, which are expensed as incurred and included within operating, selling,
administration and general expenses, were $3,751, $3,672 and $3,712 for the years ended December 31,
2019, 2018 and 2017, respectively.

Real estate advertising costs, which are expensed as incurred and included within operating, selling,
administration and general expenses, were $22,917, $23,424 and $19,412 for the years ended December 31,
2019 and 2018 and 2017, 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-17

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 $200, $60, and $3,687,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pension-related amounts, net of income taxes of $8,120,

December 31,
2019

December 31,
2018

December 31,
2017

$

530

$

108

$ 6,097

$13,750, and $13,212, respectively . . . . . . . . . . . . . . .

(22,338)

(20,090)

(18,668)

Accumulated other comprehensive loss . . . . . . . . . . . . .

$(21,808)

$(19,982)

$(12,571)

(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 the Company’s stock
price. At December 31, 2019, the range of estimated fair market values of the Company’s embedded
derivatives was between $4,993 and $5,005. The Company recorded the fair market value of its embedded
derivatives at the approximate midpoint of the range at $4,999 as of December 31, 2019. At December 31,
2018, the range of estimated fair market values of the Company’s embedded derivatives was between
$31,371 and $31,519. The Company recorded the fair market value of its embedded derivatives at the
midpoint of the range at $31,424 as of December 31, 2018. The estimated fair market value of the
Company’s embedded derivatives could change significantly based on future market conditions.
(See Note 11).

(v) Contingencies:

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. 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. 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
therefore,
result
management has not provided any amounts in the consolidated financial statements for unfavorable
outcomes, if any.

from an unfavorable outcome of any of

the pending tobacco-related cases and,

The Company records Liggett’s product liability legal expenses as operating, selling, administrative and

general expenses as those costs are incurred.

F-18

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

(w) Other, Net:

Other, net consisted of:

Year Ended
December 31,

2019

2018

2017

Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,590

$11,349

$ 7,391

Equity in earnings (losses) from investments . . . . . . . . . . . . . . . .

17,000

3,158

Net gains (losses) recognized on investment securities

. . . . . . . . .

7,440

(9,570)

(765)

(296)

Net periodic benefit cost other than the service costs . . . . . . . . . .

(2,298)

(1,020)

(1,960)

Other income (expense)

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

3,573

4

(369)

Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$38,305

$ 3,921

$ 4,001

(x) Other Current Liabilities:

Other current liabilities consisted of:

December 31,
2019

December 31,
2018

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 10,222

$ 13,144

Accrued promotional expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accrued excise and payroll taxes payable, net . . . . . . . . . . . . . . . . . .

Accrued interest

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

Commissions payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accrued salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Allowance for sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other current liabilities

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

35,900

18,653

35,756

18,378

29,464

7,785

33,159

37,940

14,612

38,673

12,975

30,228

6,935

25,831

Total other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$189,317

$180,338

(y) New Accounting Pronouncements:

Accounting Standards Updates (“ASU”) adopted in 2019:

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance
for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases
and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months
regardless of the lease classification. The lease classification will determine whether the lease expense is
recognized based on an effective interest rate method or on a straight-line basis over the term of the lease.
Accounting for lessors remains largely unchanged from current U.S. GAAP. In July 2018, the FASB issued
ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11 “Leases (Topic 842):
Targeted Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to
ASU 2018-11, a modified retrospective transition was required for financing or operating leases existing at
or entered into after the beginning of the earliest comparative period presented in the financial statements.
ASU 2018-11 allows entities an additional transition method to the existing requirements whereby an entity
could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption without adjustment to the financial statements for
periods prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not

F-19

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

separate non-lease components from the associated lease component if certain conditions are present. In
December 2018, the FASB also issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for
Lessors, which requires lessors to exclude lessor costs paid directly to a third party by lessees from lease
revenues and expenses, provides an election for lessors to exclude sales taxes and other similar taxes
collected from lessees from consideration in the contract, and clarifies lessors accounting for variable
payments related to lease and nonlease components. ASU 2016-02, ASU 2018-10, ASU 2018-11 and
ASU 2018-20 was effective for the Company’s fiscal year beginning January 1, 2019 and subsequent interim
periods.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements (“ASU 2018-09”). This
standard does not prescribe any new accounting guidance, but instead makes minor improvements and
clarifications of several different FASB Accounting Standards Codification areas based on comments and
suggestions made by various stakeholders. Certain updates were applicable immediately while others were
effective for the Company’s fiscal year beginning January 1, 2019. Adoption of this update did not have a
material impact on the Company’s condensed consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income
resulting from the Tax Act to be reclassified to retained earnings. The Company adopted ASU 2018-02
effective January 1, 2019. The reclassification from the adoption of this standard resulted in a decrease of
$4,697 to accumulated deficit and an increase of $4,697 to accumulated other comprehensive loss.

On January 1, 2019, the Company adopted ASU No. 2016-02- Leases (Topic 842) applying the
modified retrospective method
and the option presented under ASU 2018-11 to transition only active
leases as of January 1, 2019 with a cumulative effect adjustment as of that date. See Note 4 — Leases, for
additional accounting policy and transition disclosures.

ASUs to be adopted in future periods:

In October 2018,

the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted
Improvements to Related Party Guidance for Variable Interest Entities. The guidance requires indirect
interests held through related parties under common control arrangements be considered on a proportional
basis for determining whether fees paid to decision makers and service providers are variable interests. The
guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. The Company is currently evaluating the impact of the new guidance on our condensed
consolidated financial statements.

In October 2018, the FASB issued ASU No. 2018-16, Inclusion of the Secured Overnight Financing
Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting
Purposes (“ASU 2018-16”), which amends ASC 815, Derivatives and Hedging. This ASU adds the OIS rate
based on SOFR to the list of permissible benchmark rates for hedge accounting purposes. The amendments
are effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Adoption of ASU 2018-16 will be on a prospective basis for qualifying new or redesignated
hedging relationships entered into on or after the date of adoption. The Company is currently assessing the
impact the adoption of ASU 2018-16 will have on the Company’s condensed consolidated financial
statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other Internal Use
Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract. The amendments in this update align the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service

F-20

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing
the impact the adoption of ASU 2018-15 will have on the Company’s condensed consolidated financial
statements.

In August 2018, the FASB issued ASU No. 2018-14, Compensation — Retirement Benefits — Defined
to the Disclosure
(Subtopic 715-20): Disclosure Framework — Changes
Benefit Plans — General
Requirements for Defined Benefit Plans (“ASU 2018-14”). ASU 2018-14 eliminates the requirement to
disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net
periodic benefit cost over the next year. The ASU also removes the disclosure requirements for the effects of
a one-percentage-point change on the assumed health care costs and the effect of this change in rates on
service cost, interest cost and the benefit obligation for postretirement health care benefits. ASU 2018-14 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. Early
adoption is permitted. The adoption of ASU 2018-14 will impact financial statement disclosure with no
impact on operating results.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to
improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value
measurements. The ASU eliminates disclosures such as the amount of and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy. The ASU also adds new disclosure requirements for Level 3
measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. The adoption of ASU 2018-13 will impact financial statement
disclosure with no impact on operating results.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which sets forth a current
expected credit loss model that changes how entities will measure credit losses for most financial assets and
certain other instruments that are not measured at fair value through net income. This guidance is effective
for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is
currently assessing the impact the adoption of ASU 2016-13 will have on the Company’s condensed
consolidated financial statements.

2. REVENUE RECOGNITION

Revenue Recognition Policies

On January 1, 2018, the Company adopted Topic 606 applying the modified retrospective method.
Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior
period amounts are not adjusted and continue to be reported under the FASB Accounting Standard
Codification Topic 605 (“Topic 605”) in effect for the prior periods and are, therefore, not comparative.

Revenue is measured based on a consideration specified in a contract with a customer less any sales
incentives. Revenue is recognized when (a) an enforceable contract with a customer exists, that has
commercial substance, and collection of substantially all consideration for services is probable; and (b) the
performance obligations to the customer are satisfied either over time or at a point in time.

Tobacco sales: Revenue from cigarette sales, which include federal excise taxes billed to customers, is
recognized upon shipment of cigarettes when control has passed to the customer. Average collection terms
for Tobacco sales range between three and twelve days from the time that the cigarettes are shipped to the
customer. The Company records a liability for goods estimated to be returned in other current liabilities and

F-21

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

2. REVENUE RECOGNITION – (continued)

the associated receivable for anticipated federal excise tax refunds in other current assets on the
consolidated balance sheet. The liability for returned goods is based principally on sales volumes and
historical return rates. The estimated costs of sales incentives, including customer incentives and trade
promotion activities, are based principally on historical experience and are accounted for as reductions in
Tobacco revenue. Expected payments for sales incentives are included in other current liabilities on the
Company’s consolidated balance sheet. The Company accounts for shipping and handling costs as
fulfillment costs as part of cost of sales.

Real estate sales: Real estate commissions earned by the Company’s real estate brokerage businesses are
recognized as revenue when the real estate sale is completed or lease agreement is executed, which is the
point in time that the performance obligation is satisfied. Any commission and other payments received in
advance are deferred until the satisfaction of the performance obligation. Corresponding agent commission
expenses, including any advance commission or other direct expense payments, are deferred and recognized
as cost of sales concurrently with related revenues.

The Company’s Real Estate revenue contracts with customers do not have multiple material
performance obligations to customers under Topic 606, except for contracts in the Company’s development
marketing business. Contracts in the development marketing business provide the Company with the
exclusive right to sell units in a subject property for a commission fee per unit sold calculated as
a percentage of the sales price of each unit. Accordingly, a performance obligation exists for each unit in
the development marketing property under contract, and a portion of the total contract transaction price is
allocated to and recognized at the time each unit is sold. The Company applies the optional exemption in
paragraph 606-10-50-14A of Topic 606, and does not disclose the amount of the transaction price allocated
to the remaining performance obligations for the Real Estate development marketing business because the
transaction prices in these contracts are comprised entirely of variable consideration based on the ultimate
selling price of each unit in the subject property. The total contract transaction price is allocated to each
unit in the subject property and recognized when the performance obligation, i.e. the sale of each unit, is
satisfied. Accordingly, the transaction price allocated to the remaining performance obligations for the
development marketing business represents variable consideration allocated entirely to wholly unsatisfied
performance obligations.

Under development marketing service arrangements, dedicated staff are required for a subject property
and these costs are typically reimbursed from the customer through advance payments that are recoupable
from future commission earnings. Advance payments received and associated direct costs paid are deferred,
allocated to each unit in the subject property, and recognized at the time of the completed sale of each unit.

Development marketing service arrangements also include direct fulfillment costs incurred in advance
of the satisfaction of the performance obligation. The Company capitalizes costs incurred in fulfilling a
contract with a customer if the fulfillment costs 1) relate directly to an existing contract or anticipated
contract, 2) generate or enhance resources that will be used to satisfy performance obligations in the future,
and 3) are expected to be recovered. These costs are amortized over the estimated customer relationship
period which is the contract term. The Company uses an amortization method that is consistent with the
pattern of transfer of goods or services to its customers by allocating these costs to each unit in the subject
property and expensing these costs as each unit sold is closed over the contract.

Commission revenue is recognized at the time the performance obligation is met for commercial leasing
contracts, which is when the lease agreement is executed, as there are no further performance obligations,
including any amounts of future payments under extended payment terms.

Property management revenue arrangements consist of providing operational and administrative
services to manage a subject property. Fees for these services are typically billed and collected monthly.
Property management service fees are recognized as revenue over time using the output method as the

F-22

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

2. REVENUE RECOGNITION – (continued)

performance obligations under the customer arrangement are satisfied each month. The Company applies
the optional exemption in paragraph 606-10-50-14 of Topic 606, and does not disclose the amount of the
transaction price allocated to the remaining performance obligations for the Real Estate property
management business because the contracts to provide property management services are typically annual
contracts and provide cancellation rights to customers.

Title insurance commission fee revenue is earned when the sale of the title insurance policy is
completed, which corresponds to the point in time when the underlying real estate sale is completed, which
is when the performance obligation is satisfied.

Disaggregation of Revenue

In the following table, revenue is disaggregated by major product line for the Tobacco segment:

Year Ended
December 31,

2019

2018

2017

Tobacco Segment Revenues:

Core Discount Brands – EAGLE 20’s, PYRAMID, GRAND

PRIX, LIGGETT SELECT and EVE . . . . . . . . . . . . . . . . .

$1,008,050

$1,005,071

$ 969,796

Other Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

106,790

106,023

111,154

Total tobacco revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,114,840

$1,111,094

$1,080,950

F-23

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

2. REVENUE RECOGNITION – (continued)

In the following table, revenue is disaggregated by major services line and primary geographical market

for the Real Estate segment:

Year Ended December 31, 2019

Total

New York
City

Northeast

Southeast

West

Real Estate Segment Revenues:

Commission brokerage income . . . . . . . . . . .

$669,489

$293,009

$164,724

$106,587

$105,169

Development marketing . . . . . . . . . . . . . . .

Property management revenue . . . . . . . . . . .

Title fees . . . . . . . . . . . . . . . . . . . . . . . . . .

72,925

35,461

6,233

48,850

34,741

—

720

—

6,233

19,594

4,481

—

—

—

—

Total Douglas Elliman revenue . . . . . . . . . . .

784,108

376,600

171,677

126,181

109,650

Other real estate revenues . . . . . . . . . . . . . . .

4,763

—

—

—

4,763

Total real estate revenues

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

$788,871

$376,600

$171,677

$126,181

$114,413

Year Ended December 31, 2018

Total

New York
City

Northeast

Southeast

West

Real Estate Segment Revenues:

Commission brokerage income . . . . . . . . . . .

$651,171

$285,325

$166,100

$ 99,720

$100,026

Development marketing . . . . . . . . . . . . . . .

Property management revenue . . . . . . . . . . .

Title fees . . . . . . . . . . . . . . . . . . . . . . . . . .

64,287

33,350

5,281

48,072

32,635

252

715

—

5,281

15,068

—

—

895

—

—

Total Douglas Elliman revenue . . . . . . . . . . .

754,089

366,032

172,348

114,788

100,921

Other real estate revenues . . . . . . . . . . . . . . .

5,079

—

—

—

5,079

Total real estate revenues

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

$759,168

$366,032

$172,348

$114,788

$106,000

Year Ended December 31, 2017

Total

New York
City

Northeast

Southeast

West

Real Estate Segment Revenues:

Commission brokerage income . . . . . . . . . . . .
Development marketing . . . . . . . . . . . . . . . . .

$633,093
52,061

$332,319
37,761

$168,834
402

$79,547
11,211

$52,393
2,687

Property management revenue . . . . . . . . . . . . .
Title fees . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31,924
5,265

31,224
—

700
5,265

—
—

—
—

Total Douglas Elliman revenue . . . . . . . . . . . .

722,343

401,304

175,201

90,758

55,080

Other real estate revenues . . . . . . . . . . . . . . . .

5,021

—

—

—

5,021

Total real estate revenues . . . . . . . . . . . . . . .

$727,364

$401,304

$175,201

$90,758

$60,101

F-24

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

2. REVENUE RECOGNITION – (continued)

Contract Balances

The following table provides information about contract assets and contract

liabilities from

development marketing and commercial leasing contracts with customers:

December 31,
2019

December 31,
2018

Receivables, which are included in accounts receivable — trade, net . . .

$ 2,129

$ 2,050

Contract assets, net, which are included in other current assets . . . . . .

Payables, which are included in other current liabilities

. . . . . . . . . . .

Contract liabilities, which are included in other current liabilities

. . . .

Contract assets, net, which are included in other assets

. . . . . . . . . . .

Contract liabilities, which are included in other liabilities . . . . . . . . . .

8,766

1,663

9,358

18,443

29,045

9,264

1,082

7,071

15,794

30,445

Receivables and payables relate to commission receivables and commissions payable from the Real
Estate commercial leasing contracts for which the performance obligation has been satisfied, have extended
payment terms and are expected to be received and paid in the next twelve months. Receivables increased
$79 for the twelve-month period ended December 31, 2019 primarily due to revenue accrued as
performance obligations are satisfied of $3,522, offset by cash collections. Correspondingly, payables
increased $581 primarily due to additional expense accruals as performance obligations are satisfied of
$2,570, offset by cash payments.

Contract assets increased by $2,151 during the year ended December 31, 2019 due to $18,213 of
payments made for direct fulfillment costs incurred in advance of the satisfaction of the performance
obligations for Real Estate development marketing contracts, offset by costs recognized for units closed
during the quarter.

Contract liabilities relate to payments received in advance of the performance obligations being
satisfied under the contract for the Real Estate development marketing and are recognized as revenue at the
points in time when the Company performs under the contract. Performance obligations related to the Real
Estate development marketing contracts are considered satisfied when each unit is closed. Development
marketing projects tend to span 4 to 6 years from the time the Company enters into the contract with the
developer to the time that all of the sales of the units in a subject property are closed. The timing for sales
closings are dependent upon several external factors outside the Company’s control, including but not
limited to, economic factors, seller and buyer actions, construction timing and other real estate market
factors. Accordingly, all contract liabilities and contract costs associated with development marketing are
considered long-term until closing dates for unit sales are scheduled. As of December 31, 2019, the
Company estimates approximately $9,358 of contract liabilities will be recognized as revenue within the
next twelve months.

Contract liabilities increased by $887 during the year ended December 31, 2019 due to $21,102 of
advance payments received from customer prior to the satisfaction of performance obligations for Real
Estate development marketing contracts, offset by revenue recognized for units sold during the year.
Revenue recognized during the current reporting period that was included in the contract liabilities balance
at December 31, 2018 was $14,973.

F-25

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

2. REVENUE RECOGNITION – (continued)

Topic 606 requires an entity to disclose the revenue recognized in the reporting period from
performance obligations satisfied (or partially satisfied) in previous periods (for example, due to changes in
transaction price). For the year ended December 31, 2019, there was no revenue recognized relating to
performance obligations satisfied or partially satisfied in prior periods.

3. EARNINGS PER SHARE

Information concerning the Company’s common stock has been adjusted to give retroactive effect to
the 5% stock dividends distributed to Company stockholders on September 27, 2019, September 27, 2018
and September 28, 2017. 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 $703 in
2019, $671 in 2018 and $644 in 2017, since the Company did not have retained earnings in each of the
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.

For purposes of calculating basic earnings per share (“EPS”), net income available to common
stockholders attributed to Vector Group Ltd. for the period is 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, 2019, 2018 and 2017 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 ($8,967, net of
income taxes of $0, $8,696, net of income taxes of $0, and $7,655, net of income taxes of $0, for the years
ended December 31, 2019, 2018 and 2017, respectively) on these options as reductions in additional
paid-in-capital on the Company’s consolidated balance sheet. For the years ended December 31, 2019 and
2018, the Company included the income tax benefit associated with the dividend equivalent rights as a
component of income tax expense due to the adoption of ASU 2016-09. As a result, in its calculation of
basic EPS for the years ended December 31, 2019, 2018 and 2017, respectively, the Company has adjusted
its net income for the effect of these participating securities as follows:

For the year ended
December 31,

2019

2018

2017

Net income attributed to Vector Group Ltd. . . . . . . . . . . . . . . .

$100,974

$58,105

$84,572

Income attributable to participating securities . . . . . . . . . . . . . .

(7,464)

(7,016)

(6,071)

Net income available to common stockholders attributed to

Vector Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 93,510

$51,089

$78,501

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.

F-26

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

3. EARNINGS PER SHARE – (continued)

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

For the year ended
December 31,

2019

2018

2017

Net income attributed to Vector Group Ltd. . . . . . . . . . . . . . . .

$100,974

$58,105

$84,572

Income attributable to 7.5% Variable Interest Senior Convertible
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income attributable to participating securities . . . . . . . . . . . . . .

Net income available to common stockholders attributed to

(1,255)

(7,464)

—

—

(7,016)

(6,071)

Vector Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 92,255

$51,089

$78,501

Basic and diluted EPS were calculated using the following common shares for the years ended

December 31, 2019, 2018 and 2017:

For the year ended
December 31,

2019

2018

2017

Weighted-average shares for basic EPS . . . . . . . . . . .

146,633,036

146,362,270

145,987,002

Plus incremental shares related to convertible debt . . .

718,918

—

—

Plus incremental shares related to stock options and

non-vested restricted stock . . . . . . . . . . . . . . . . .

16,509

122,542

284,817

Weighted-average shares for diluted EPS . . . . . . . . .

147,368,463

146,484,812

146,271,819

The following non-vested restricted stock and shares issuable upon the conversion of convertible debt
were outstanding during the years ended December 31, 2019, 2018 and 2017, but were not included in the
computation of diluted EPS because the impact of common shares issuable under the convertible debt were
anti-dilutive to EPS.

Year Ended
December 31,

2019

2018

2017

Weighted-average shares of non-vested restricted

stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,207,366

Weighted-average expense per share . . . . . . . . . . . . .

$

17.97

$

—

— $

—

—

Weighted-average number of shares issuable upon

conversion of debt . . . . . . . . . . . . . . . . . . . . . . .

11,118,139

30,212,414

30,260,607

Weighted-average conversion price . . . . . . . . . . . . .

$

20.27

$

16.14

$

16.15

4. LEASES

Leasing Accounting Pronouncement Adoption

On January 1, 2019, the Company adopted ASU No. 2016-02 — Leases (Topic 842) applying the
modified retrospective method and the option presented under ASU 2018-11 to transition only active leases
as of January 1, 2019 with a cumulative effect adjustment as of that date. All comparative periods prior to
January 1, 2019 retain the financial reporting and disclosure requirements of ASC 840. The Company
elected the package of practical expedients permitted under the transition guidance within the new

F-27

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

4. LEASES – (continued)

standard. The package of three expedients includes: 1) the ability to carry forward the historical lease
classification, 2) the elimination of the requirement to reassess whether existing or expired agreements
contain leases, and 3) the elimination of the requirement to reassess initial direct costs. The Company also
elected the practical expedient related to short-term leases without purchase options reasonably certain to
exercise, allowing it to exclude leases with terms of less than twelve (12) months from capitalization for all
asset classes. The Company did not elect the hindsight practical expedient when determining the lease
terms. The adoption of the new standard resulted in the recording of ROU assets and lease liabilities of
$128,890 and $153,676, respectively, as of January 1, 2019. The difference between the ROU assets and
lease liabilities reflects the reclassification of historical deferred rent balances of approximately $22,881, and
tenant improvement receivable of $355 as adjustments to the ROU asset balances, and an adjustment that
increased accumulated deficit by $1,550 to recognize the impairment in ROU assets for asset groups
the Company’s
previously identified as being impaired. The standard did not materially impact
consolidated net earnings and had no impact on cash flows. The new standard had no material impact on
liquidity and had no impact on the Company’s debt-covenant compliance under its current debt
agreements.

Leases

The Company has operating and finance leases for corporate and sales offices, and certain vehicles and
equipment. The leases have remaining lease terms of one year to 14 years, some of which include options to
extend for up to five years, and some of which include options to terminate the leases within one year.
However, the Company in general is not reasonably certain to exercise options to renew or terminate, and
therefore renewal and termination options are not considered in the lease term or the ROU asset and lease
liability balances. The Company’s lease population includes purchase options on equipment leases that are
included in the lease payments when reasonably certain to be exercised. The Company’s lease population
does not include any residual value guarantees. The Company’s lease population does not contain any
material restrictive covenants.

The Company has leases with variable payments, most commonly in the form of Common Area
Maintenance (“CAM”) and tax charges which are based on actual costs incurred. These variable payments
were excluded from the ROU asset and lease liability balances since they are not fixed or in-substance fixed
payments. Variable payments are expensed as incurred.

The components of lease expense were as follows:

Year Ended
December 31,
2019

Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$37,817

Short-term lease cost
Variable lease cost

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

Finance lease cost:

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest on lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,379
3,149

224

15

Total lease cost

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

$42,584

F-28

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

4. LEASES – (continued)

Supplemental cash flow information related to leases was as follows:

Year Ended
December 31,
2019

Cash paid for amounts included in measurement of lease liabilities:

Operating cash flows from operating leases

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

$37,684

Operating cash flows from finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Financing cash flows from finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15

217

Right-of-use assets obtained in exchange for lease obligations:

Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41,776

Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

159

Rent expense for the year ended December 31, 2019 consisted of $21,088 of amortization and

impairment of ROU assets and $17,489 of lease expense for interest accretion on operating lease liabilities.

Supplemental balance sheet information related to leases was as follows:

December 31,
2019

Operating leases:

Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$149,578

Current operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 18,294

Non-current operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

156,963

Total operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$175,257

Finance leases:

Investments in real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current portion of notes payable and long-term debt
. . . . . . . . . . . . . . . . . . . .
Notes payable, long-term debt and other obligations, less current portion . . . . . .

Total finance lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

$

$

$

88(1)
127

(19)

108

86
108

194

Weighted average remaining lease term in years:

Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.46
3.01

Weighted average discount rate:

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

Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.75%
8.61%

(1)

Included in Investments in real estate, net on the consolidated balance sheet are finance lease
equipment, at a cost of $762 and accumulated amortization of $674 as of December 31, 2019.

F-29

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

4. LEASES – (continued)

As of December 31, 2019, maturities of lease liabilities were as follows:

Operating
Leases

Finance
Leases

Year Ending December 31:

2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 36,611

$ 98

2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thereafter

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

Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,453

32,943

30,866

25,415

117,040

278,328

Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(103,071)

44

39

31

8

—

220

(26)

Total

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

$ 175,257

$194

Under ASC 840, Leases, future minimum lease payments under noncancelable operating leases as of

December 31, 2018 were as follows:

Lease
Commitments

Sublease
Rentals

Net

Year Ending December 31:

2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 35,973

$69

$ 35,904

2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,917

27,592

25,185

23,589

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

104,126

—

—

—

—

—

29,917

27,592

25,185

23,589

104,126

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$246,382

$69

$246,313

The Company has one lease for office space wherein the lessor is an affiliate of a significant
shareholder of the Company. This lease represents $1,288 of the ROU asset balances and $1,351 of lease
liability balances as of December 31, 2019. The rent expense for this lease was approximately $458 for the
year ended December 31, 2019.

As of December 31, 2019, the Company did not have any operating leases for office space or

equipment that have not yet commenced.

The Company’s rental expense for the years ended December 31, 2019, 2018 and 2017 was $38,577,

$38,893 and $34,858, respectively.

F-30

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

5. INVESTMENT SECURITIES AT FAIR VALUE

Investment securities at fair value consisted of the following:

Debt securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 83,445

$ 84,367

Equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46,196

47,202

Total investment securities at fair value . . . . . . . . . . . . . . . . . . . . .

$129,641

$131,569

Net gains (losses) recognized on investment securities were as follows:

December 31,
2019

December 31,
2018

Net gains (losses) recognized on equity securities at fair value(1) . . . . .
Net gains (losses) recognized on debt and equity securities available

for sale(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses on other-than-temporary impairments(3) . . . . . .
Net gains (losses) recognized on investment securities . . . . . . . . . . . .

Year Ended
December 31,

2019

2018

2017

$7,320

$(8,449) $ —

135

(34)

169

(15)

(1,087)

(465)

$7,440

$(9,570) $(296)

(1)

Includes net gains (losses) recognized on equity securities at fair value and net gains (losses) recognized
on equity securities at fair value that qualify for the NAV practical expedient. The latter securities are
included in the “Long-term investments” line item on the consolidated balance sheet and are further
discussed in Note 8.

(2)

Includes net gains recognized on equity securities that were classified as available for sale in 2017.

(3)

Includes impairments on equity securities that were classified as equity securities available for sale in
2017.

Proceeds from sales of investment securities totaled $21,879, $18,628 and $28,761 and proceeds from
early redemptions by issuers totaled $69,943, $26,330 and $103,730 for the years ended December 31, 2019,
2018 and 2017, respectively, mainly from sales of Corporate securities and U.S. Government securities.

(a) Debt and Equity Securities Available for Sale

The components of debt securities available for sale at December 31, 2019 were as follows:

Marketable debt securities . . . . . . . . . . . . . . . . . . . .

$82,714

$731

$—

$83,445

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Cost

F-31

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

5. INVESTMENT SECURITIES AT FAIR VALUE – (continued)

The table below summarizes the maturity dates of debt securities available for sale at December 31,

2019.

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 debt securities available for sale by

Fair Value Under 1 Year

1 Year up to 5
Years

More than 5
Years

$14,660

$ 4,914

$ 9,746

$—

54,413
6,816

382
5,887

779

508

25,824
3,337

382
5,887

779

—

28,589
3,479

—
—

—

508

—
—

—
—

—

—

maturity dates . . . . . . . . . . . . . . . . . . . .

$83,445

$41,123

$42,322

$—

The components of debt securities available for sale at December 31, 2018 were as follows:

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Cost

Marketable debt securities . . . . . . . . . . . . . . . . . . . .

$84,199

$168

$—

$84,367

There were no available-for-sale debt securities with continuous unrealized losses for less than

12 months and 12 months or greater at December 31, 2019 and 2018, respectively.

Gross realized gains and losses recognized on debt and equity securities available for sale were as

follows:

Gross realized gains on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$144

$

4

$ 479

Gross realized losses on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9)

(38)

(310)

Net gains (losses) recognized on debt and equity securities available

for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$135

$

(34) $ 169

Gross realized losses on other-than-temporary impairments . . . . . . . . .

$ (15) $(1,087) $(465)

Year Ended December 31,

2019

2018

2017

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.

F-32

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

5. INVESTMENT SECURITIES AT FAIR VALUE – (continued)

(b) Equity Securities at Fair Value

Equity securities at fair value consisted of the following:

Marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$23,819

Mutual funds invested in fixed-income securities . . . . . . . . . . . . . . . .

22,377

Total equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . . .

$46,196

$26,010

21,192

$47,202

December 31,
2019

December 31,
2018

The following is a summary of unrealized and realized net gains (losses) recognized in net income on
equity securities at fair value after the adoption of ASU 2016-01, for the years ended December 31, 2019
and 2018, respectively:

Net gains (losses) recognized on equity securities(1) . . . . . . . . . . . . . . . . .
Less: Net gains (losses) recognized on equity securities sold(2) . . . . . . . . . .
Net unrealized gains (losses) recognized on equity securities still held at the
reporting date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2019

$7,320
1,526

2018

$(8,449)
(808)

$5,794

$(7,641)

(1)

(2)

Includes $6,619 of net gains and $517 of net losses recognized on equity securities at fair value that
qualify for the NAV practical expedient for the years ended December 31, 2019 and 2018, respectively.
These equity securities are included in the “Long-term investments” line item on the consolidated
balance sheet and are further discussed in Note 8.

Includes $1,797 and $84 of net gains recognized on sales of equity securities at fair value that qualify
for the NAV practical expedient for the years ended December 31, 2019 and 2018, respectively. These
equity securities are included in the “Long-term investments” line item on the consolidated balance
sheet and are further discussed in Note 8.

The Company’s marketable equity securities and mutual funds invested in fixed-income securities are
classified as Level 1 under the fair value hierarchy disclosed in Note 18. Their fair values are based on
quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar
instruments in active markets.

(c) Equity Securities Without Readily Determinable Fair Values That Do Not Qualify for the NAV

Practical Expedient

Equity securities without readily determinable fair values that do not qualify for the NAV practical
expedient consisted of investments in the common stock of a reinsurance company, membership units of a
real estate limited liability company and membership units of a commercial real estate limited liability
company at December 31, 2019. At December 31, 2018, the Company owned an investment in the common
stock of a reinsurance company. The total carrying value of these investments was $6,200 and $5,000 and
was included in “Other assets” on the consolidated balance sheet at December 31, 2019 and 2018,
respectively. No impairment or other adjustments related to observable price changes in orderly
transactions for identical or similar investments were identified for the years ended December 31, 2019 and
2018, respectively.

F-33

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

6. INVENTORIES

Inventories consist of:

December 31,
2019

December 31,
2018

Leaf tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 44,516

$ 42,917

Other raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,669

333

Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71,183

Inventories at current cost

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

120,701

3,750

1,931

63,937

112,535

LIFO adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(21,939)

(21,538)

$ 98,762

$ 90,997

All of the Company’s inventories as of December 31, 2019 and 2018 have been reported under the
LIFO method. The $21,939 LIFO adjustment as of December 31, 2019 decreases the current cost of
inventories by $15,210 for Leaf tobacco, $182 for Other raw materials, $24 for Work-in-process, and $6,523
for Finished goods. The $21,538 LIFO adjustment as of December 31, 2018 decreased the current cost of
inventories by $14,932 for Leaf tobacco, $219 for Other raw materials, $25 for Work-in-process, and $6,362
for Finished goods. Cost of goods sold was reduced by $46 and $567 for the years ended December 31,
2019 and December 31, 2018, 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.
As of December 31, 2019, Liggett had tobacco purchase commitments of approximately $20,693. The
Company has a single source supply agreement for reduced ignition propensity cigarette paper through
2022.

Each year, the Company capitalizes in inventory that portion of its MSA liability that relates to
cigarettes shipped to public warehouses but not sold. The amount of capitalized MSA cost in “Finished
goods” inventory was $20,472 and $16,001 as of December 31, 2019 and 2018, respectively. Federal excise
tax in inventory was $27,676 as of December 31, 2019 and $26,419 at December 31, 2018.

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of:

December 31,
2019

December 31,
2018

Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

1,624

$

1,624

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,733
202,667

52,652

274,676

16,919
198,649

51,322

268,514

Less accumulated depreciation and amortization . . . . . . . . . . . . . . . .

(192,516)

(181,778)

$ 82,160

$ 86,736

Depreciation and amortization expense related to property, plant and equipment for the years ended

December 31, 2019, 2018 and 2017 was $24,196, $17,506 and $17,479, respectively.

F-34

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

7. PROPERTY, PLANT AND EQUIPMENT – (continued)

The Company, through Liggett, had future machinery and equipment purchase commitments of $276

at December 31, 2019.

8. LONG-TERM INVESTMENTS

Long-term investments consisted of the following:

Equity securities at fair value that qualify for the NAV practical

expedient

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

$45,781

Equity-method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,942

$61,723

$54,628

11,631

$66,259

December 31,
2019

December 31,
2018

(a) Equity Securities at Fair Value That Qualify for the NAV Practical Expedient

The estimated fair value of the Company’s equity securities at fair value that qualify for the NAV
practical expedient 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 accordance with Subtopic 820-10, these investments are not
classified under the fair value hierarchy disclosed in Note 18 because they are investments measured at fair
value using the NAV practical expedient.

The Company redeemed a portion of two of its investments that qualify for the NAV practical
expedient and redeemed 100% of another investment during the year ended December 31, 2019. The
Company received cash distributions of $8,320 and recorded $8,502 of in-transit redemptions as of
December 31, 2019. The Company classified $8,256 of these distributions as investing cash inflows. The
Company recognized a gain of $1,796 on its redemptions for the year ended December 31, 2019.

(b) Equity-Method Investments:

Equity-method investments consisted of the following:

December 31,
2019

December 31,
2018

Indian Creek Investors LP (“Indian Creek”) . . . . . . . . . . . . . . . . . . .

$

735

$ 1,167

Boyar Value Fund (“Boyar”)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Optika Fund LLC (“Optika”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ladenburg Thalmann Financial Services Inc. (“LTS”) . . . . . . . . . . . .
Castle Brands, Inc. (“Castle”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,989
4,785

433
—

8,384
—

2,080
—

$15,942

$11,631

At December 31, 2019, the Company’s ownership percentages in Indian Creek, Boyar, and LTS were
12.44%, 35.62%, and 10.22%, respectively. During the third quarter of 2019, the Company contributed
$5,000 to Optika and its ownership percentage in the fund was 9.14% at December 31, 2019. The Company
accounted for its Indian Creek, Boyar and Optika interests as equity-method investments because the
Company’s ownership percentage meets the threshold for equity-method accounting. The Company
accounted for its LTS interest as equity-method investments because the Company has the ability to
exercise significant influence over their operating and financial policies.

F-35

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

8. LONG-TERM INVESTMENTS – (continued)

The fair value of the investment in Boyar, based on the quoted market price as of December 31, 2019,
was $9,989, equal to its carrying value. At December 31, 2019, the fair value of LTS based on the quoted
market price was $52,865. The difference between the amount at which the LTS was carried and the fair
value of such investment which corresponds to its share in underlying equity in net assets was $24,992.

The Company received cash distributions of $17,875, $7,007 and $1,239 from the Company’s
equity-method investments in 2019, 2018 and 2017, respectively. The cash distributions of $17,875 in 2019
were classified as operating cash inflows. Included as part of these distributions, the Company received
$16,377 from the sale of the Company’s common shares of Castle during the year ended December 31,
2019. Of the $7,007, $5,535 was classified as investing cash inflows received on the 50% redemption of the
Company’s investment in Indian Creek and the remaining $1,472 were classified as operating cash inflows
received during the year ended December 31, 2018. The 2017 cash distributions were classified as operating
cash inflows. The Company recognized equity in earnings from equity-method investments of $17,000 and
$3,158 for the years ended December 31, 2019 and 2018, respectively, and equity in losses from
equity-method investments of $765 for the year ended December 31, 2017. On October 9, 2019, Castle was
acquired pursuant to a cash tender offer of $1.27 per outstanding Common Share and, in connection
therewith, the Company tendered the entire amount of its 12,895,017 common shares of Castle. The
Company received and recognized a gain of $16,377 from the transaction. At the closing of the transaction,
the Company’s Executive Vice President resigned as President and Chief Executive Officer of Castle, and
the Company’s management agreement with Castle was terminated.

On November 11, 2019, LTS entered into an Agreement and Plan of Merger with Advisor Group
whereby each LTS common share was converted into the right to receive $3.50 per common share. On
February 14, 2020, the merger was completed and the Company received proceeds of $53,169 from the
Company’s 15,191,205 common shares of LTS. The Company has also tendered 240,000 shares of LTS 8%
Series A Cumulative Redeemable Preferred Stock (Liquidation Preference $25.00 Per Share) for redemption
and anticipates receiving an additional $6,009 in March 2020. At the closing of the transaction, the
Company’s Executive Vice President resigned as Chairman, President and Chief Executive Officer of LTS,
and the Company’s management agreement with LTS was terminated.

If

it is determined that an other-than-temporary decline in fair value exists in equity-method
investments, the Company records an impairment charge with respect to such investment in its 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 equity-method investments are carried on the consolidated balance sheet at cost under the equity
method of accounting. The fair values disclosed for Boyar and LTS would be classified as Level 1 under the
fair value hierarchy disclosed in Note 18 if such assets were recorded on the consolidated balance sheet at
fair value. The fair values are based on quoted prices for identical assets in active markets or inputs that are
based upon quoted prices for similar instruments in active markets.

The estimated fair value of the Company’s investments in Indian Creek and Optika represents the NAV
per share and was provided by the partnership based on the indicated market value of the underlying assets
or investment portfolio. The investments are illiquid and their ultimate realization is subject to the
performance of the underlying partnership and their management by the general partners. In accordance
with Subtopic 820-10, these investments are not classified under the fair value hierarchy disclosed in Note
18 because they are investments measured at fair value using the NAV practical expedient.

F-36

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

8. LONG-TERM INVESTMENTS – (continued)

(d) Combined Financial Statements for Unconsolidated Subsidiaries Accounted for on Equity Method

Pursuant to Rule 4-08(g), the following summarized financial data for unconsolidated subsidiaries

includes information for Indian Creek, Boyar and Optika.

December 31,
2019

December 31,
2018

Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$210,685
26,088

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,861

$33,830
521

33

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$238,634

$34,384

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 85,623

$

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85,623

738

738

Partners’ capital

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

153,011

33,646

Total liabilities and partners’ capital . . . . . . . . . . . . . . . . . . . . . . .

$238,634

$34,384

Year Ended December 31,

Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,834

$

Expenses

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

6,756

549

861

Net investment (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,922)

(312)

2019

2018

2017

$792

690

102

Total net realized gain (loss) and net change in unrealized

depreciation from investments . . . . . . . . . . . . . . . . . . . . . . . . . .

18,822

(5,781)

100

Net increase (decrease) in partners’ capital resulting from

operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,900

$(6,093) $202

Pursuant to Rule 4-08(g), the following summarized financial data is presented for LTS. The Company

accounts for its investment in LTS using a three-month lag reporting period.

F-37

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

8. LONG-TERM INVESTMENTS – (continued)

September 30,
2019

September 30,
2018

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$251,033

$ 262,834

Receivables from clearing brokers, note receivable and other

receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Goodwill and intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . .

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

175,600

188,975

202,516

165,149

200,199

172,409

Total assets

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

$818,124

$ 800,591

Accrued compensation, commissions and fees payable . . . . . . . . . . .

$142,875

$ 141,260

Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . .

37,197

50,122

Notes payable, net of $5,881 and $115 unamortized discount in 2019

and 2018, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

315,898

73,380

569,350

2

15

185,199

37,658

414,239

2

20

Additional paid-in capital

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

317,735

487,752

Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(68,971)

(101,467)

Total controlling shareholders’ equity . . . . . . . . . . . . . . . . . . . . .

248,781

386,307

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7)

45

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

248,774

386,352

Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . .

$818,124

$ 800,591

(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,

2019

2018

2017

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,428,688
1,385,699

$1,380,031
1,345,768

$1,221,195
1,217,331

Income before other items . . . . . . . . . . . . . . . . . . . .
Change in fair value of contingent consideration . . . . . .

Income from continuing operations . . . . . . . . . . . . . . .

42,989
(363)

42,626

34,263
(232)

34,031

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

$

31,779

$

30,858

$

3,864
48

3,912

1,669

9. NEW VALLEY LLC

Douglas Elliman Acquisition. On December 31, 2018, New Valley purchased the remaining 29.41%
interest in Douglas Elliman for a total purchase price of $40,000, in the form of $10,000 in cash and
$30,000 in notes payable. Non-cash consideration was also provided in the form of a contingent liability,
with an assigned fair value as of the purchase date of $6,304.

The transaction increased New Valley’s indirect ownership interest in Douglas Elliman to 100% from
70.59%. As the transaction represented the purchase of a non-controlling interest with no change of

F-38

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

control, no gain or loss was recognized in the Company’s consolidated statement of operations, and the
Company did not step up a portion of the subsidiary’s net assets to fair value.

As the purchase occurred at the end of the 2018 fiscal year, there were no additional

income
attributable to the change in ownership in the consolidated financial statements for the year ended
December 31, 2018.

(a) Investments in real estate ventures.

New Valley also holds equity investments

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.

in various

The components of “Investments in real estate ventures” were as follows:

Range of Ownership(1)

December 31,
2019

December 31,
2018

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . .

3.1% – 49.5%
15.0% – 77.8%

$ 51,078
55,842

106,920

$ 65,007(2)
31,392

96,399

Apartment Buildings:

New York City SMSA . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . .

45.4%
7.6% – 16.3%

Hotels:

New York City SMSA . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
International

1.0% – 18.4%
49.0%

Commercial:

New York City SMSA . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . .

49.0%
1.6%

—
—

—

2,462
2,161

4,623

1,852
7,634

9,486

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15.0% – 50.0%

10,527

—(3)
—

—

15,782(2)
2,334

18,116

1,867
7,053

8,920
17,670(3)

Investments in real estate ventures . . . . . . . . . . .

$131,556

$141,105

(1) The Range of Ownership reflects New Valley’s estimated current ownership percentage. New Valley’s
actual ownership percentage as well as the percentage of earnings and cash distributions may
ultimately differ as a result of a number of factors including potential dilution, financing or admission
of additional partners.

(2) One New York City SMSA venture, with a carrying value of $267, was reclassified from Condominium

and Mixed Use Development to Hotels as of December 31, 2018.

F-39

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

(3) One New York City SMSA venture, with a carrying value of $1,783, was reclassified from Apartment

Buildings to Other as of December 31, 2018.

Contributions

New Valley made contributions to its investments in real estate ventures as follows:

December 31,
2019

December 31,
2018

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apartment Buildings:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hotels:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$21,760
29,993

51,753

—

—

172

172

604

Total contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$52,529

$4,135
—

4,135

975

975

168

168

4,450

$9,728

During the years ended December 31, 2019 and 2018, New Valley did not make certain capital
contributions to Monad Terrace, a Condominium and Mixed Use Development located in All other U.S.
areas. The Company’s ownership percentage remained at 18% for the year ended December 31, 2019 and
was reduced from 24% to 18% for the year ended December 31, 2018. 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, 2019 and 2018.
New Valley’s direct investment percentage for these ventures did not materially change.

F-40

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

Distributions

New Valley received distributions from its investments in real estate ventures as follows:

December 31,
2019

December 31,
2018

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 7,955

$39,207

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apartment Buildings:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,279

9,234

—

79

79

Hotels:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21,572

International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

215

21,787

16

250

266

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,962

—

39,207

27,569

422

27,991

1,542

220

1,762

9

10,139

10,148

1,060

Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$48,328

$80,168

Of the distributions received by New Valley from its investment in real estate ventures, $7,028 and
$25,935 were from distributions of earnings and $41,300 and $54,233 were a return of capital for the years
ended December 31, 2019 and 2018, respectively.

F-41

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

Equity in (Losses) Earnings from Real Estate Ventures

New Valley recognized equity in (losses) earnings from real estate ventures as follows:

Year Ended December 31,

2019

2018

2017

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(31,011) $ (923) $35,578

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6,467)

(1,063)

(2,063)

(37,478)

(1,986)

33,515

Apartment Buildings:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

— 17,467

(6,703)

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

79

79

164

(532)

17,631

(7,235)

Hotels:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,081

(2,727)

(5,347)

International

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

41

(246)

232

8,122

(2,973)

(5,115)

Commercial:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

773

774

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,215

(562)

1,608

1,046

728

(742)

403

(339)

569

Total equity in (losses) earnings from real estate ventures . . . . . .

$(19,288) $14,446

$21,395

During the year ended 2019, New Valley’s Park Lane joint venture sold 80% of its interest in the Park
Lane Hotel, a Hotel located in the New York City SMS A. New Valley recognized equity in earnings of
$10,328 from the sale and received distributions of $20,788 for the year ended 2019. The sale reduced New
Valley’s direct ownership percentage of the Park Lane Hotel from 5.20% to 1.04%. New Valley continues to
account for its investment in the joint venture under the equity method of accounting because its
ownership percentage in its direct investment continues to meet the threshold for equity method accounting.

On November 1, 2019, Douglas Elliman sold its 50.0% interest in Innova Risk Management, an
insurance brokerage company. Douglas Elliman received $8,732 in cash in November 2019 and may receive
an additional $1,000 in a potential earn out over a period of two years.

During the fourth quarter of 2018, the Company’s New York City SMSA Apartment Building venture
sold a building. The venture, with a carrying value of $1,783, was reclassified from Apartment Buildings to
Other as of December 31, 2018. In the second quarter of 2019, the venture sold its remaining parcel of
land. The Company recognized equity in earnings from the venture of $740 and $17,467 for the years ended
December 31, 2019 and 2018, respectively, and equity in losses of $6,701 for the year ended 2017. The
Company received cash distributions of $2,524 and $27,569 from the venture for the years ended
December 31, 2019 and 2018. The Company did not receive any cash distributions from the venture in
2017. As of December 31, 2019, the venture had a carrying value of $0.

As part of the Company’s ongoing assessment of the carrying values of its investments in real estate
ventures, the Company determined that the fair value of six New York City SMSA and one All other U.S.

F-42

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

areas Condominium and Mixed Use Development ventures were less than their carrying value for the year
ended December 31, 2019. The Company determined that the impairments were other than temporary. The
Company recorded impairment charges as a component of equity in losses from real estate ventures of
$39,757 of which $39,717 was attributed to the Company for the year ended December 31, 2019.

During the Company’s 2018 assessment of carrying value of its investment in real estate ventures, the
Company had determined that the fair value of a New York City SMSA Condominium and Mixed Used
Development venture was less than its carrying value as of December 31, 2018. The Company determined
that the impairment was other than temporary and recorded an impairment charge of $10,174 of which
$8,467 was attributed to the Company for the year ended December 31, 2018.

During the Company’s 2017 assessment of carrying value of its investment in real estate ventures, the
Company had determined that the fair value of a New York City SMSA Hotel venture was less than its
carrying value as of December 31, 2017. The Company determined that the impairment was other than
temporary and recorded an impairment charge of $2,862 for the year ended December 31, 2017.

As a result of the Company recording impairment charges on certain of its investments in real estate
ventures, the impaired real estate ventures were carried at fair value as of the period when the impairment
charge was recorded. The impaired real estate ventures were measured at fair value on a nonrecurring basis
as a result of recording an other-than-temporary impairment charge.

Investment in Real Estate Ventures Entered Into During 2019

In February 2019, New Valley invested $500 for an approximate 37.0% interest in 352 6th, LLC. The
joint venture plans to develop a condominium complex. The venture is a VIE; 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 352 6th, LLC was $540 at
December 31, 2019.

In April 2019, New Valley invested $10,018 for an approximate 16.9% interest in Meatpacking Plaza.
The joint venture plans to construct a mixed use development. The venture is a VIE; 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 Meatpacking Plaza was
$9,524 at December 31, 2019.

Also in April 2019, New Valley invested $5,000 for an approximate 4.9% interest in 9 DeKalb. The joint
venture plans to develop a mixed use development. The venture is a VIE; 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 9 DeKalb was $5,334 at December 31,
2019.

In September 2019, New Valley invested $14,000 for an approximate 38.9% interest in The Park on
Fifth. The joint venture plans to construct a mixed use development. The venture is a VIE; 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 The Park on Fifth was
$14,430 at December 31, 2019.

In December 2019, New Valley invested $12,522 for an approximate 77.8% interest in West Hialeah.
The joint venture plans to construct a mixed use development. The venture is a VIE; 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 West Hialeah was
$12,522 at December 31, 2019.

F-43

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

VIE Consideration

It was determined that New Valley is the primary beneficiary of two ventures as New Valley controls
the activities that most significantly impact economic performance of the entities. Therefore, New Valley
consolidates these VIEs.

The carrying amount of the consolidated VIEs’ assets were $897 and $1,387 as of December 31, 2019
and 2018, respectively. Those assets are owned by the VIEs, not the Company. Neither of the consolidated
VIEs had non-recourse liabilities as of December 31, 2019 and 2018. 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

VIEs but New Valley was not the primary beneficiary.

Maximum Exposure to Loss

New Valley’s maximum exposure to loss was as follows:

December 31,
2019

Condominium and Mixed Use Development:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 54,208

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hotels:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International

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

Commercial:

New York City SMSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other U.S. areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55,842

110,050

2,462

2,161

4,623

1,852

7,634

9,486
24,626

Total maximum exposure to loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$148,785

New Valley capitalized $5,480 and $8,580 of interests costs into the carrying value of its ventures
whose projects were currently under development during the years ended December 31, 2019 and
December 31, 2018, 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 real estate venture
investments. Douglas Elliman had gross commissions of approximately $18,952, $20,118 and $10,888 from
these projects for the years ended December 31, 2019, 2018 and 2017, respectively.

(b) Guarantees and Commitments:

The joint venture agreements through which New Valley invests in real estate ventures set forth certain
conditions where New Valley or its affiliate may be required to contribute payments towards the satisfaction
of liabilities of the other partners in the joint venture, or to otherwise indemnify other partners. Mostly,

F-44

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

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 loan. The guarantees given in connection with the loans may include non-recourse
carve-out, environmental, carry 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.

The Company believes that as of December 31, 2019, 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 has executed limited recourse guarantees with a maximum exposure to New Valley of
approximately $3,578. In two projects, New Valley has additional capital commitments of $14,099 as of
December 31, 2019. The recourse guarantees and additional capital commitments are included in the
calculation of New Valley’s maximum exposure to loss in the table above.

(c) Combined Financial Statements for Unconsolidated Subsidiaries Accounted for on Equity Method:

Pursuant to Rule 4-08(g), the following summarized financial data for unconsolidated subsidiaries
includes information for the following: 1 QPS Tower, 10 Madison Square West, Greenwich, Other
Condominium and Mixed Use Development, Apartment Buildings, Hotels, Commercial and Other. The
equity in earnings in 1 QPS Tower and Greenwich for the year ended December 31, 2018 were significant
enough to warrant separate disclosure. For the year ended December 31, 2017, 10 Madison Square West
was significant enough to warrant separate disclosure.

10 Madison Square West:

Income Statement

Year Ended December 31,

2019

2018

2017

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

281

$28,539

$197,157

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

— 24,250
(4,236)

8,877

116,120
11,649

(Loss) income from continuing operations

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

$(8,596) $ 8,525

$ 69,388

December 31,
2019

December 31,
2018

Balance Sheets
Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities

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

$ 4,989

15,186

3,275

3,575

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,228

$ 2,369

15,071

3,319

3,616

10,091

F-45

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

1 QPS Tower:

Income Statement

Year Ended December 31,

2019

2018

2017

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$386,470

$ 14,625

$ 4,216

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

220,316

141,742

—

—

26,357

18,508

Income (loss) from continuing operations

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

$ 24,412

$(11,732) $(14,292)

Balance Sheets

Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$—

$215,956

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities

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

—

—

—

220,350

209,602

212,640

December 31,
2019

December 31,
2018

Greenwich:

Income Statement

Year Ended December 31,

2019

2018

2017

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

5

$

28

$ (768)

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,658

146,286

2,696

Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . .

$(6,653) $(146,258) $(3,464)

December 31,
2019

December 31,
2018

Balance Sheets

Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities

$504,221
512,038

460,124
544,687

$403,815
419,518

408,779
445,514

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(23,942)

(19,064)

Other Condominium and Mixed Use Development:

Year Ended December 31,

2019

2018

2017

Income Statement

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$208,481

$365,890

$176,306

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76,162

Other expenses

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

132,931

71,623

44,211

93,766

47,590

(Loss) income from continuing operations

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

$

(612) $250,056

$ 34,950

F-46

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

Balance Sheets
Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apartment Buildings:

December 31,
2019

December 31,
2018

$3,569,915
3,628,402
2,593,606
2,896,607
69,787

$2,541,994
2,701,652
1,798,296
2,036,431
150,897

Income Statement
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . .

Year Ended December 31,

2019

2018

2017

$70,862
67,094
$ 3,768

$66,588
$ 44,366
105,899
64,431
$ (61,533) $ 2,157

December 31,
2019

December 31,
2018

Balance Sheets

Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$545,400

$558,268

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities

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

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

562,879

402,526

410,723

114,193

574,664

412,447

420,164

115,952

Hotels:

Year Ended December 31,

2019

2018

2017

Income Statement
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$147,446
5,399

$ 171,949
4,522

$ 75,862
4,035

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

220,045

268,007

112,124

Loss from continuing operations . . . . . . . . . . . . . . . . . . . . .

$ (77,998) $(100,580) $ (40,297)

December 31,
2019

December 31,
2018

Balance Sheets

Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,017,810

$1,019,133

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,133,697

1,126,598

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities

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

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

778,194

816,118

284,298

696,200

736,101

348,451

F-47

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

Commercial:

Income Statement

Year Ended December 31,

2019

2018

2017

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$31,980

$56,773

$6,636

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,724

11,647

3,294

Income from continuing operations

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

$24,256

$45,126

$3,342

Balance Sheets

Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$52,384

$53,193

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities

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

70,169

55,625

54,342

70,395

55,625

54,645

December 31,
2019

December 31,
2018

Other:

Income Statement

Year Ended December 31,

2019

2018

2017

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,008

$ 4,823

$ 3,442

Other expenses

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

13,515

6,382

5,069

Loss income from continuing operations . . . . . . . . . . . . . . . . . . .

$ (9,507) $(1,559) $(1,627)

December 31,
2019

December 31,
2018

Balance Sheets

Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,054,134

$ 710,549

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,192,149

1,152,124

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

671,845
850,587

263,438

658,592
665,463

392,933

(d) Investments in real estate, net:

The components of “Investments in real estate, net” were as follows:

Escena, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,972

Sagaponack . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18,345

Investment in real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$28,317

$10,170

16,050

$26,220

December 31,
2019

December 31,
2018

F-48

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

9. NEW VALLEY LLC – (continued)

Escena.

In March 2008, a wholly owned 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.
The project consists of 667 residential lots with site and public infrastructure, an 18-hole golf course, a
completed clubhouse, and a seven-acre site approved for a 450-room hotel.

The assets have been classified as an “Investments in real estate, net” on the Company’s consolidated

balance sheet and the components were as follows:

December 31,
2019

December 31,
2018

Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,910

$ 8,910

Building and building improvements . . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,926

1,659

12,495

(2,523)

1,900

2,162

12,972

(2,802)

$ 9,972

$10,170

The Company recorded an operating loss of $862, $576 and $868 for the years ended December 31,

2019, 2018 and 2017, respectively, from Escena.

Investment in Sagaponack.

In April 2015, New Valley invested $12,502 in a residential real estate
project located in Sagaponack, NY. The project is wholly owned and the balances of the project are
included in the consolidated financial statements of the Company. As of December 31, 2019, the assets of
Sagaponack consist of land and land improvements of $18,345.

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.

10. GOODWILL AND OTHER INTANGIBLE ASSETS

The components of Goodwill and other intangible assets, net were as follows:

Goodwill
Indefinite life intangibles:

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

December 31,
2019

December 31,
2018

$ 78,008

$ 77,568

Intangible asset associated with benefit under the MSA . . . . . . .
Trademark – Douglas Elliman . . . . . . . . . . . . . . . . . . . . . . . . .

Intangibles with a finite life, net

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

107,511
80,000

474

107,511
80,000

1,532

Total goodwill and other intangible assets, net . . . . . . . . . . . . . . . .

$265,993

$266,611

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 example, interest rate and foreign exchange rate fluctuations, and loss of key personnel), supply costs,
unanticipated competitive activities, and acts by governments and courts.

F-49

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

10. GOODWILL AND OTHER INTANGIBLE ASSETS – (continued)

The Company follows ASC 350, Intangibles — Goodwill and Other, included in ASU 2011-08, Testing
Goodwill for Impairment. The Company elected to bypass the qualitative assessment and performed the
quantitative assessment for the year ended December 31, 2019. No impairment was indicated as a result of
this testing. If the Company fails to meet the financial projections used in the quantitative assessment of
goodwill in future periods, this could result in an impairment charge related to the Company’s goodwill.

Other intangible assets and contract liabilities assumed were as follows:

Useful
Lives in
Years

December 31,
2019

December 31,
2018

Intangible asset associated with benefit under the MSA . .
Trademark – Douglas Elliman . . . . . . . . . . . . . . . . . . .

Indefinite
Indefinite

$107,511
80,000

$107,511
80,000

Favorable leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 – 10

1 – 5

Less: Accumulated amortization on amortizable

intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . .

Contract liabilities assumed:

Unfavorable leases . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 – 10

Less: Accumulated amortization on unfavorable leases . . .

Unfavorable leases, net . . . . . . . . . . . . . . . . . . . . . . .

—

4,689

4,689

13,444

1,724

15,168

(4,215)

(13,636)

474

$ 1,532

— $ 4,022

—

(3,076)

— $

946

$

$

$

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 determined 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, 2019 and no impairment was noted.

The trademark intangible is attributed to the acquisition of the Douglas Elliman 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 determined using a “relief from royalty payments”
method. This approach involves two steps: (i) estimating reasonable royalty rates for its 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 quantitative assessment for the year ended December 31, 2019 and no impairment
was noted. In future periods if there is a decrease in the royalty rate that was used in the quantitative
assessment or if the financial projections used in the quantitative assessment are not met, this could result
in an impairment charge related to the Douglas Elliman trademark.

As of December 31, 2019, other intangibles with finite lives included non-compete agreements
recognized in prior business combinations. Other intangibles in prior periods included backlog and listing

F-50

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

10. GOODWILL AND OTHER INTANGIBLE ASSETS – (continued)

inventory for Development sales, and favorable and unfavorable leases arising from leases with terms that
are less than or greater than market value assumed in the business combination.

For the years ended December 31, 2019, 2018, and 2017, respectively, amortization of other intangibles
were $182, $806 and $871. For the years ended December 31, 2018 and 2017, respectively, $1,175 and
$1,373 was taken as rent expense for amortization of favorable leases, and $369 and $502 was taken as
offsets to rent expense for amortization of unfavorable leases. The Company did not recognize rent expense
for amortization of favorable or unfavorable leases due to the adoption of ASU 2016-02 — Leases
(Topic 842) in 2019.

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

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

December 31,
2019

December 31,
2018

Vector:

6.125% Senior Secured Notes due 2025 . . . . . . . . . . . . . . . . . . . . .

$ 850,000

$ 850,000

10.5% Senior Notes due 2026, net of unamortized discount of

$3,392 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

551,608

325,000

5.5% Variable Interest Senior Convertible Debentures due 2020, net

of unamortized discount of $5,276 and $29,465* . . . . . . . . . . . .

164,334

202,535

7.5% Variable Interest Senior Convertible Notes due 2019, net of

unamortized discount of $0 and $3,359* . . . . . . . . . . . . . . . . . .

—

226,641

Liggett:

Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

34,952

Term loan under credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equipment loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

347

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30,146

28,381

2,409

1,039

30,440

Total notes payable, long-term debt and other obligations

. . . . . . . . .

1,631,387

1,666,445

Less:

Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(24,902)

(23,614)

Total notes payable, long-term debt and other obligations
Less:

. . . . . . . . .

1,606,485

1,642,831

Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(209,269)

(256,134)

Amount due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,397,216

$1,386,697

*

The fair value of the derivatives embedded within the 5.5% Variable Interest Senior Convertible
Debentures ($4,999 at December 31, 2019 and $24,789 at December 31, 2018, respectively) and the
7.5% Variable Interest Senior Convertible Debentures ($6,635 at December 31, 2018) is separately
classified as a derivative liability in the consolidated balance sheets.

Senior Notes — Vector:

6.125% Senior Secured Notes due 2025:
On January 27, 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

F-51

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS – (continued)

1933. The aggregate net proceeds from the sale of the 6.125% Senior Secured Notes due 2025 were
approximately $831,100 after deducting underwriting discounts, commissions, fees and offering expenses.
As discussed above, the Company used the net cash proceeds from the issuance of its 6.125% Senior
Secured Notes due 2025, together with the proceeds of the concurrent sale of 2,315,250 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 Company
accounted for the redeemed $835,000 of the 7.75% Senior Secured Notes due 2021 as an extinguishment of
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
due 2025 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 that restrict the payment of dividends by the Company if the
Company’s consolidated earnings before interest, taxes, depreciation and amortization, as defined in the
indenture, for the most recently ended four full quarters is less than $75,000. The indenture also restricts the
incurrence of debt if the Company’s Leverage Ratio and its Secured Leverage Ratio, as defined in the
indenture, exceed 3.0 and 1.5, respectively. The Company’s Leverage Ratio is defined in the indenture as the
ratio of the Company’s and the guaranteeing subsidiaries’ total debt less the fair market value of the
Company’s cash, investments in marketable securities and long-term investments to Consolidated EBITDA,
as defined in the indenture. The Company’s Secured Leverage Ratio is defined in the indenture in the same
manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness. As of
December 31, 2019, the Company was in compliance with all debt covenants.

10.5% Senior Notes due 2026:

On November 2, 2018, the Company completed the sale of $325,000 of its 10.5% Senior Notes due
2026 (“10.5% Senior Notes”) in a private offering that is exempt from registration requirements of the
Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers in accordance
with Rule 144A of the Securities Act. There are no registration rights associated with the notes, and the
Company does not intend to offer notes registered under the Securities Act in exchange for the 10.5%
Senior Notes or file a registration statement with respect to the 10.5% Senior Notes. The aggregate net
proceeds from the sale of
the 10.5% Senior Notes were approximately $315,000 after deducting
underwriting discounts, commissions, fees and offering expenses.

On November 18, 2019, the Company completed the sale of an additional $230,000 principal amount
of its 10.5% Senior Notes. The Company received net proceeds of approximately $220,400 after deducting
underwriting discounts, commissions, fees and offering expenses. The Company intends to use the net cash

F-52

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS – (continued)

proceeds from the offering to redeem, repurchase, repay or otherwise retire the Company’s outstanding
5.5% Variable Interest Senior Convertible Notes due 2020, including accrued interest thereon, at, or prior
to, their maturity, to pay costs and expenses in connection with the offering of the Notes and the
transactions contemplated thereby, and for general corporate purposes. After giving effect to the 2019
issuance, the Company has outstanding $555,000 aggregate principal amount of its 10.5% Senior Notes.

The Company will pay cash interest at a rate of 10.5% per year, payable semi-annually on May 1 and
November 1 of each year. Interest on the additional notes issued will accrue from November 1, 2019. The
10.5% Senior Notes mature on November 1, 2026. Interest on overdue principal and interest, if any, will
accrue at a rate that is 1% higher than the then applicable interest rate on the 10.5% Senior Notes. The
Company will make each interest payment to the holders of record on the immediately preceding April 15
and October 15. The Company may redeem some or all of the 10.5% Senior Notes at any time prior to
November 1, 2021 at a make-whole redemption price. On or after November 1, 2021, the Company may
redeem some or all of the 10.5% Senior Notes at redemption prices set forth in the indenture, plus accrued
and unpaid interest, if any, to the redemption date. In addition, any time prior to November 1, 2021, the
Company may redeem up to 40% of the aggregate outstanding amount of the 10.5% Senior Notes with the
net proceeds of certain equity offerings at 110.5% of the aggregate principal amount of the 10.5% Senior
Notes, plus accrued and unpaid interest, if any, to the redemption date, if at least 60% of the aggregate
principal amount of the 10.5% Senior Notes originally issued remains outstanding after such redemption,
and the redemption occurs within 90 days of the closing of such equity offering. In the event of a change of
control, as defined in the indenture, each holder of the 10.5% Senior Notes will have the right to require the
Company to make an offer to repurchase some or all of its 10.5% Senior Notes at a repurchase price equal
to 101% of the aggregate principal amount of the 10.5% Senior Notes plus accrued and unpaid interest 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 10.5% Senior Notes at the prices listed in the
indenture.

The 10.5% Senior 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, and by DER Holdings LLC, through which the
Company indirectly owns a 100% interest in Douglas Elliman. The 10.5% Senior Notes are the Company’s
general senior unsecured obligations, and are pari passu in right of payment with all of the Company’s
existing and future senior indebtedness and senior in right of payment to all of our future subordinated
indebtedness. The 10.5% Senior Notes are effectively subordinated in right of payment to all of our existing
and future indebtedness that is secured by assets of the Company or assets of the Guarantors, to the extent
of the value of the assets securing such indebtedness. The 10.5% Senior Notes are structurally subordinated
to all of the liabilities and preferred stock of any of our subsidiaries that do not guarantee the notes. Each
guarantee of the 10.5% Senior Notes are the general obligation of the Guarantor and are pari passu in right
of payment with all other senior indebtedness of such Guarantor, including the indebtedness of Liggett and
100 Maple LLC (“Maple”), a subsidiary of Liggett, under their Third Amended and Restated Credit
Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). Each
guarantee of the 10.5% Senior Notes are senior in right of payment to all future subordinated indebtedness
of the Guarantor, if any.

The indenture contains covenants that limit the Company and each Guarantor’s ability to, among
other things: (i) incur additional indebtedness; (ii) pay dividends or make other distributions, including
dividends, repurchases or redemptions of
its equity interests; (iii) prepay, redeem or repurchase its
subordinated indebtedness; (iv) make investments; (v) sell assets; (vi) incur certain liens; (vii) enter into
agreements restricting its subsidiaries’ ability to pay dividends; (viii) enter into transactions with affiliates;

F-53

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS – (continued)

and (ix) consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a
number of important exceptions and qualifications, as described in the indenture. As of December 31, 2019,
the Company was in compliance with all debt covenants.

Variable Interest Senior Convertible Debt:

Vector has one outstanding series of variable interest senior convertible debt. The debt pays 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”).

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 “7.5% Convertible Notes”) in a public offering registered under the Securities Act. The 7.5%
Convertible Notes were the Company’s senior unsecured obligations and were effectively subordinated to
any of its secured indebtedness to the extent of the assets securing such indebtedness. The notes matured on
January 15, 2019 and the Company paid $230,000 of principal and $8,102 of accrued interest.

5.5% Variable Interest Senior Convertible Notes due 2020:

On March 24, 2014, the Company completed the sale of $258,750 of its 5.5% Variable Interest
Convertible Senior Notes due 2020 (the “5.5% Convertible Notes”). The 5.5% 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 5.5% 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 5.5% Convertible Notes were approximately $250,300
after deducting underwriting discounts, commissions, fees and offering expenses. The net proceeds were
used for general corporate purposes,
investments in real estate and in the
including for additional
Company’s tobacco business.

During December 2018, the Company repurchased $26,750 in aggregate principal amount of its 5.5%
Convertible Notes outstanding at a repurchase price of 101.15%. The Company paid $27,141 to repurchase
the notes and recorded a loss of $4,066 for the early extinguishment of debt.

During November 2019, the Company repurchased $62,390 in aggregate principal amount of its 5.5%
Convertible Notes outstanding at a repurchase price of 102.18%. The Company paid $63,859 to repurchase
the notes and recorded a loss of $4,301 for the early extinguishment of debt.

During December 2019, the Company cancelled the $89,140 aggregate principal amount of
its
repurchased 5.5% Convertible Notes. After giving effect to the cancellation, the Company had outstanding
$169,610 aggregate principal amount of its 5.5% Convertible Notes as of December 31, 2019.

The 5.5% Convertible Notes pay interest (“Total Interest”) on a quarterly basis 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 is the higher of (i) the Total Interest
and (ii) 5.5% per annum. The notes are convertible into the Company’s common stock at the holder’s

F-54

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS – (continued)

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.

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

The conversion rates for all convertible debt outstanding are summarized below:

December 31, 2019

December 31, 2018

Conversion
Price

Shares per
$1,000

Conversion
Price

Shares per
$1,000

7.5% Convertible Notes . . . . . . . . . . . . . . . . . . . .

5.5% Convertible Notes . . . . . . . . . . . . . . . . . . . .

$ —

$20.27

— $13.14

49.3363

$20.27

76.0595

49.3363

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
was as follows:

Year Ended December 31,

2019

2018

2017

7.5% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.5% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,031
16,481

$39,845
15,924

$23,720
13,490

Interest expense associated with embedded derivatives . . . . . . . . .

$18,512

$55,769

$37,210

A summary of non-cash changes in fair value of derivatives embedded within convertible debt was as

follows:

7.5% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,635

$24,530

$21,734

5.5% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19,790

20,459

14,185

Gain on changes in fair value of derivatives embedded within

convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$26,425

$44,989

$35,919

Year Ended December 31,

2019

2018

2017

F-55

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS – (continued)

The following table reconciles the fair value of derivatives embedded within convertible debt:

7.5%
Convertible
Notes

5.5%
Convertible
Notes

Total

Balance at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . .

$ 52,899

$ 59,433

$112,332

Gain from changes in fair value of embedded derivatives . . .

(21,734)

(14,185)

(35,919)

Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . .

31,165

45,248

76,413

Gain from changes in fair value of embedded derivatives . . .

(24,530)

(20,459)

(44,989)

Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . .

6,635

24,789

31,424

Gain from changes in fair value of embedded derivatives . . .

(6,635)

(19,790)

(26,425)

Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . .

$

— $ 4,999

$

4,999

Beneficial Conversion Feature on Variable Interest Senior Convertible Debt:

After giving effect to the recording of the embedded derivative liability as a discount to the convertible
debt, the Company’s common stock had a fair value at the issuance date of the 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.

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: . . . . . . . . . . . . . . .

7.5% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,328

$26,049

$15,507

5.5% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,973

4,805

4,070

Interest expense associated with beneficial conversion feature . . . .

$6,301

$30,854

$19,577

Year Ended December 31,

2019

2018

2017

F-56

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. 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, 2017 . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of embedded derivatives . . . . . . . . . . . . . . . . .
Amortization of beneficial conversion feature . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . .
Partial redemption of 5.5% convertible notes
. . . . . . . . . . . .
Amortization of embedded derivatives . . . . . . . . . . . . . . . . .
Amortization of beneficial conversion feature . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
Partial redemption of 5.5% convertible notes
Amortization of embedded derivatives . . . . . . . . . . . . . . . . .
Amortization of beneficial conversion feature . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . .

Revolving Credit Agreement — Liggett:

7.5%
Convertible
Notes
$108,480
(23,720)
(15,507)
69,253
—
(39,845)
(26,049)
3,359
—
(2,031)
(1,328)

5.5%
Convertible
Notes
$ 71,247
(13,490)
(4,070)
53,687
(3,493)
(15,924)
(4,805)
29,465
(2,735)
(16,481)
(4,973)
— $ 5,276

$

Total
$179,727
(37,210)
(19,577)
122,940
(3,493)
(55,769)
(30,854)
32,824
(2,735)
(18,512)
(6,301)
5,276

$

In January, 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 governed a $60,000 credit facility
(the “Credit Facility”) that consisted of a revolving credit facility (the “Revolver”) and a $3,600 term loan
(the “Term Loan”) that was within the $60,000 commitment under the Credit Facility and reduced the
amount available under the Revolver. In connection with the November 2017 issuance of 6.125% Senior
Secured Notes and the November 2018 issuance of 10.5% Senior Notes, Liggett and Maple entered into
amendments to the Credit Agreement to update certain defined terms of the Credit Agreement relating to
such issuances.

On October 31, 2019, Liggett and Maple amended the Credit Agreement to, among other things,
(i) extend its maturity to January 31, 2025, (ii) update the borrowing base to adjust the advance rates in
respect of eligible inventory and add certain eligible real property, and (iii) reflect the repayment in full of
the Term Loan. Accordingly, the Term Loan portion of the credit facility no longer exists. The $60,000
commitment available in the Credit Agreement is unchanged. As of October 31, 2019, all borrowings under
the Credit Agreement are limited to a borrowing base equal to the sum of (I) the lesser of 85% of eligible
trade receivables less certain reserves and $10,000; plus (II) 80% of the value of eligible inventory consisting
of packaged cigarettes plus (III) the lesser of 65% multiplied by Liggett’s eligible cost of inventory
consisting of leaf tobacco less certain reserves against inventory, bank products or other items which Wells
Fargo may establish from time to time in its permitted discretion or 85% of the appraised liquidation value
of eligible inventory plus (IV) 60% of the fair market value of eligible real property. The obligations under
the Credit Agreement 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 term of the Credit Agreement expires on January 31, 2025. Loans under the Credit Agreement
bear interest at a rate equal to LIBOR plus 2.25%. The interest rate applicable to this Credit Agreement at
December 31, 2019 was 4.01%.

F-57

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS – (continued)

The Credit Agreement, as amended, permits the guaranty of the 6.125% Senior Secured Notes and the
10.5% Senior Notes by each of Liggett and Maple. Wells Fargo, Liggett, Maple and the collateral agent for
the holders of the 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 Agreement 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, including a
restriction on Liggett’s ability to pay cash dividends unless Liggett’s average borrowing availability, as
defined under the Credit Agreement, 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 has occurred under the Credit
Agreement,
including Liggett’s compliance with the covenants in the Credit Agreement. The Credit
Agreement 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 Agreement, on a
trailing twelve month basis, shall not be less than $100,000 if Liggett’s excess availability, as defined under
the Credit Agreement, is less than $20,000. The covenants also require that annual capital expenditures, as
defined under the Credit Agreement (before a maximum carryover amount of $10,000), shall not exceed
$20,000 during any fiscal year. The Credit Agreement also contains customary events of default. Liggett
was in compliance with these covenants as of December 31, 2019.

As of December 31, 2019, a total of $34,952 was outstanding under the revolving portion of the Credit
Agreement. Availability as determined under the Credit Agreement was approximately $25,048 based on
eligible collateral at December 31, 2019.

Other:

Other Notes Payable consist primarily of $30,000 of notes payable issued by New Valley. On
December 31, 2018, New Valley acquired the remaining 29.41% interest in Douglas Elliman for a total
purchase price of $40,000, which included $10,000 of cash paid and the remaining $30,000 of notes payable
to the sellers. Interest on the outstanding principal balance of the notes accrued at the mid-term applicable
federal rate (“AFR”) in effect as of December 31, 2018. This interest rate will be adjusted to the
then-current AFR on January 1, 2020 and on each payment date thereafter. New Valley will pay principal
and interest in equal quarterly installments beginning with January 1, 2020 through October 1, 2022.

Fair Value of Notes Payable and Long-Term Debt:

The estimated fair value of the Company’s notes payable and long-term debt were as follows:

December 31, 2019

December 31, 2018

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value

Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable Interest Senior Convertible Debt . . . . . . . .

$1,401,608
164,334

$1,409,920
176,289

$1,175,000
429,176

$1,034,500
468,704

Liggett and other . . . . . . . . . . . . . . . . . . . . . . . . .

Notes payable and long-term debt

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

65,445

65,456
$1,631,387(1) $1,651,665

62,269

62,255
$1,666,445(1) $1,565,459

(1) The carrying value does not include the carrying value of the embedded derivative. See Note 18.

F-58

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

11. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS – (continued)

Notes payable and long-term debt are carried on the consolidated balance sheet at amortized cost. The
fair value determinations disclosed above would be 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, 2019 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 notes payable and long-term debt were as follows:

Year Ending December 31:
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

12. EMPLOYEE BENEFIT PLANS

Defined Benefit Plans and Postretirement Plans:

Principal

$ 214,947
10,026
10,045
29
8
1,405,000
$1,640,055

Unamortized
Discount/
(Premium)

Net

$5,276
—
—
—
—
3,392
$8,668

$ 209,671
10,026
10,045
29
8
1,401,608
$1,631,387

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, 2019 and 2018, respectively.

The Company also sponsors a Supplemental Retirement Plan (“SERP”) where the Company will pay
supplemental retirement benefits to certain key employees, including certain executive officers of 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.

F-59

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

12. EMPLOYEE BENEFIT PLANS – (continued)

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, 2019, 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:
2020 — $0; 2021 — $7,644; 2022 — $0; 2023 — $0; 2024 — $51,155 and 2025 to 2029 — $0. 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 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, 2019 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 126 hourly retirees, who
retired prior to 1991, for Medicare Part B premiums. In addition, the Company provides life insurance
benefits to approximately 101 active employees and 389 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

2019

2018

2019

2018

Change in benefit obligation:

Benefit obligation at January 1 . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendment

Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expenses paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(123,165) $(132,722) $(8,296)
(3)

(587)

(533)

(4,860)
—

7,696

391
(8,526)

(4,495)
—

8,524

260
5,855

(347)
—

594

—
(934)

$(8,967)
(4)

(330)
(39)

553

—
491

Benefit obligation at December 31 . . . . . . . . . . . . . . . . .

$(128,997) $(123,165) $(8,986)

$(8,296)

F-60

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

12. EMPLOYEE BENEFIT PLANS – (continued)

Pension Benefits

Other
Postretirement Benefits

2019

2018

2019

2018

Change in plan assets:

Fair value of plan assets at January 1 . . . . . . . . . . . . . . .

$ 93,167

$106,192

$ — $ —

Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . .

15,788

(4,497)

Expenses paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Contributions

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

(391)

183

(260)

256

Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7,696)

(8,524)

—

—

594

(594)

—

—

553

(553)

Fair value of plan assets at December 31 . . . . . . . . . . . . .

$101,051

$ 93,167

$ — $ —

Unfunded status at December 31 . . . . . . . . . . . . . . . . . . . .

$ (27,946)

$ (29,998)

$(8,986)

$(8,296)

Amounts recognized in the consolidated balance sheets:

Prepaid pension costs . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 31,686

$ 23,869

$ — $ —

Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

(111)

(228)

(654)

(647)

Non-current employee benefit liabilities

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

(59,521)

(53,639)

(8,332)

(7,649)

Net amounts recognized . . . . . . . . . . . . . . . . . . . . . . . .

$ (27,946)

$ (29,998)

$(8,986)

$(8,296)

Pension Benefits

Other Postretirement
Benefits

2019

2018

2017

2019

2018

2017

Service cost – benefits earned during the period . . . . .

$

533

$

587

$

564

$

3

$

4

$ 5

Interest cost on projected benefit obligation . . . . . . .

4,860

4,495

5,059

347

330

368

Expected return on assets . . . . . . . . . . . . . . . . . . . .

(4,874)

(5,572)

(5,424) —

Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

—

4

—

4

—

—

Amortization of net loss (gain)

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

2,001

1,804

2,009

(40)

(41)

(54)

Net expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,520

$ 1,314

$ 2,208

$314

$297

$319

The following table summarizes amounts in accumulated other comprehensive loss that are expected to

be recognized as components of net periodic benefit cost for the year ending 2020.

Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —
$1,836

$ 4
$11

Defined
Benefit
Pension Plans

Post-
Retirement
Plans

Total

$
4
$1,847

F-61

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

12. EMPLOYEE BENEFIT PLANS – (continued)

As of December 31, 2019, accumulated other comprehensive (loss) income, before income taxes,

consisted of the following:

Defined
Benefit
Pension Plans

Post-
Retirement
Plans

Total

Accumulated other comprehensive (loss) income as of January 1,

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service costs . . . . . . . . . . . . . . . . . . . . . . . . .

$(34,053)
—

Prior service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net gain (loss) arising during the year . . . . . . . . . . . . . . . . . . . . . . .

—
2,001

2,388

$ 213
4

(37)
(40)

(934)

$(33,840)
4

(37)
1,961

1,454

Accumulated other comprehensive loss as of December 31, 2019 . . . .

$(29,664)

$(794)

$(30,458)

As of December 31, 2018, accumulated other comprehensive (loss) income, before income taxes,

consisted of the following:

Defined
Benefit
Pension Plans

Post-
Retirement
Plans

Total

Accumulated other comprehensive loss as of January 1, 2018 . . . . . . .

$(31,643)

$(237)

$(31,880)

Amortization of loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net (loss) gain arising during the year . . . . . . . . . . . . . . . . . . . . . . .

1,804

(4,214)

(41)

491

1,763

(3,723)

Accumulated other comprehensive loss (income) as of December 31,

2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(34,053)

$ 213

$(33,840)

As of December 31, 2019, 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 $59,631, $59,631 and $0, respectively. As
of December 31, 2018, 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 $53,865, $53,865 and $0, respectively.

Pension Benefits

Other Postretirement Benefits

2019

2018

2017

2019

2018

2017

Weighted average assumptions:

Discount rates – benefit obligation . . . . . . 2.55% – 3.1% 3.9% – 4.25% 3.25% – 3.7% 3.30% 4.35% 3.80%

Discount rates – service cost . . . . . . . . . . 3.9% – 4.25% 3.25% – 3.7% 3.6% – 4.2% 4.35% 3.80% 4.40%

Assumed rates of return on invested

assets

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

Salary increase assumptions . . . . . . . . . .

5.50%

N/A

5.50%

N/A

5.50%

N/A

N/A

N/A

N/A

3.00% 3.00% 3.00%

F-62

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

12. EMPLOYEE BENEFIT PLANS – (continued)

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 7.6%, 8.3% and 5.2% for the years ended December 31, 2019, 2018 and 2017,
respectively, and the Company’s actual five-year annual rate of return on its pension plan assets was 5.41%,
3.19% and 7.28% for the years ended December 31, 2019, 2018 and 2017, 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, 2019, Liggett used a 13.20-year period for its Hourly Plan and a
12.46-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 fund includes managed funds investing in fixed income securities issued or guaranteed by the U.S.
government, or by its respective agencies, mortgage backed securities, including collateralized mortgage
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 35.0% equity investments, 55.0% investment grade fixed income, and 10.0% high yield fixed income,
with a rebalancing range of approximately plus or minus 5% around the target asset allocations.

F-63

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

12. EMPLOYEE BENEFIT PLANS – (continued)

Vector’s defined benefit retirement plan allocations by asset category, were as follows:

Plan Assets at
December 31,
2018
2019

Asset category:

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment grade fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High yield fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

38% 52%
53% 39%
9% 9%
100% 100%

The defined benefit plans’ recurring financial assets subject to fair value measurements and the

necessary disclosures were as follows:

Description
Assets:

Fair Value Measurements as of December 31, 2019

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Total

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

Insurance contracts . . . . . . . . . . . . . . . . $ 2,398
Amounts in individually managed

investment accounts:

Cash, mutual funds and common stock . .
Common collective trusts . . . . . . . . . . . .
Common collective trusts at NAV(1) . . . . .
Mutual Funds . . . . . . . . . . . . . . . . . . . .

76
38,537
51,068
8,972
Total . . . . . . . . . . . . . . . . . . . . . . . . . $101,051

$—

76
—
—
—
$76

$ 2,398

—
38,537
—
8,972
$49,907

$—

—
—
—
—
$—

(1)

In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV
practical expedient are not classified in the fair value hierarchy.

Description
Assets:

Fair Value Measurements as of December 31, 2018

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Total

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

Insurance contracts . . . . . . . . . . . . . . . . . $ 2,161
Amounts in individually managed

investment accounts:

Cash, mutual funds and common stock . . .
Common collective trusts . . . . . . . . . . . . .
Common collective trusts at NAV(1) . . . . . .
Investment Partnership . . . . . . . . . . . . . .
Total

175
48,126
33,731
8,974
. . . . . . . . . . . . . . . . . . . . . . . . . . . $93,167

$ —

$ 2,161

175
—
—
—
$175

—
48,126
—
8,974
$59,261

$—

—
—
—
—
$—

(1)

In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV
practical expedient are not classified in the fair value hierarchy.

F-64

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

12. EMPLOYEE BENEFIT PLANS – (continued)

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, 2019 and 2018 were as

follows:

Balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$— $ 127

Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (127)

Balance as of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$— $ —

2019

2018

For 2019 measurement purposes, annual increases in Medicare Part B trends were assumed to equal
rates between 3.95% and 8.02% between 2020 and 2027 and 4.5% thereafter. For 2018 measurement
purposes, annual increases in Medicare Part B trends were assumed to equal rates between 4.04% and 6.13%
between 2019 and 2026 and 4.5% thereafter.

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

1% Decrease

$ 2

47

$ (2)

(44)

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, 2020
and ending on December 31, 2020. Any additional funding obligation that the Company may have for
subsequent years is contingent on several factors and is not reasonably estimable at this time.

Estimated future pension and postretirement medical benefits payments were as follows:

2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 – 2029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pension

$ 7,548
14,708
6,614

6,200

56,959
23,303

Postretirement
Medical

$ 655
651
650

644

640
2,897

Profit Sharing and 401(k) Plans:

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 $1,933, $1,793 and $1,736 for the years ended December 31, 2019, 2018 and 2017,
respectively.

F-65

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

13. INCOME TAXES

The amounts provided for income taxes were as follows:

Current:

U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred:

U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2019

2018

2017

$ 33,379
10,632
$ 44,011

$ 27,962
11,225
$ 39,187

$ 28,271
3,458
$ 31,729

$ (7,209) $(12,524) $(31,049)
(2,262)
(5,111)
(33,311)
(17,635)
$ (1,582)
$ 21,552

(3,989)
(11,198)
$ 32,813

The tax effect of temporary differences which give rise to a significant portion of deferred tax assets

and liabilities is as follows:

Deferred tax assets:

Employee benefit accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of timing of settlement payments . . . . . . . . . . . . . . . . . . .
Disallowed interest expense carryforward . . . . . . . . . . . . . . . . . . .
Various U.S. state tax loss carryforwards
. . . . . . . . . . . . . . . . . . .
Operating lease liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax liabilities:

Basis differences on non-consolidated entities(1) . . . . . . . . . . . . . . .
Basis differences on fixed and intangible assets . . . . . . . . . . . . . . .
Capitalized interest expense(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Basis differences on inventory . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basis differences on long-term investments . . . . . . . . . . . . . . . . . .
Impact of accounting for convertible debt . . . . . . . . . . . . . . . . . . .
Basis differences on available for sale securities . . . . . . . . . . . . . . .
Operating lease right of use assets . . . . . . . . . . . . . . . . . . . . . . . .

Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2019

December 31,
2018

$ 11,709
9,772
19,313
—
4,296
3,679
2,274
51,043
(1,292)
$ 49,751

$ (7,990)
(35,082)
—
(10,645)
(22,424)
(813)
(3,219)
(3,273)
$(83,446)
$(33,695)

$ 12,801
4,131
20,551
1,619
5,137
—
1,966
46,205
(3,817)
$ 42,388

$ (7,752)
(35,854)
(6,532)
(11,497)
(16,496)
(385)
(1,283)
—
$(79,799)
$(37,411)

(1) The Company reclassified its capitalized interest expense to its basis differences on non-consolidated

entities during the year ended December 31, 2019.

F-66

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

13. INCOME TAXES – (continued)

The Company files a consolidated U.S. income tax return that includes its more than 80%-owned U.S.
subsidiaries. Vector Tobacco had tax-effected state and local net operating loss carryforwards of $4,296 and
$5,137 at December 31, 2019 and 2018, respectively, expiring through tax year 2027. The Company records
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 Company had a valuation
allowance of $1,292 and $3,817 at December 31, 2019 and 2018, respectively. The valuation allowance at
December 31, 2019 primarily relates to Vector Tobacco’s state and local net operating loss carryforwards.
The valuation allowance at December 31, 2018 primarily relates to a reserve against the Company’s
disallowed interest expense carryforward and Vector Tobacco’s state and local net operating loss
carryforwards. The valuation allowance was decreased in 2019 as compared to 2018, due to the removal of
the valuation allowance related to the Company’s disallowed interest expense.

The consolidated balance sheets of the Company include deferred income tax assets and liabilities,
which represent temporary differences in the application of accounting rules established by U.S. GAAP and
income tax laws.

Differences between the amounts provided for income taxes and amounts computed at the federal

statutory tax rate are summarized as follows:

Year Ended December 31,

2019

2018

2017

Income before provision for income taxes . . . . . . . . . . . . . . . .

$133,828

$79,559

$ 89,168

Federal income tax expense at statutory rate . . . . . . . . . . . . . .

28,104

16,707

31,209

Increases (decreases) resulting from:

State income taxes, net of federal income tax benefits . . . . . .

6,430

6,060

Impact of non-controlling interest

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

Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . .

Impact of domestic production deduction . . . . . . . . . . . . . .

(9)

1,385

—

21

1,993

359

3,833

(2,162)

2,146

(2,960)

Impact of Tax Cuts and Jobs Act of 2017 . . . . . . . . . . . . . .

— (2,691)

(28,845)

Excess tax benefits on stock-based compensation . . . . . . . . .

(1,488)

Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other

Inclusion of tax liabilities from unincorporated entities . . . . .
Changes in valuation allowance, net of equity and tax audit

(166)
791

291

(778)

(127)
(545)

400

(1,143)

(2,683)
(155)

(47)

adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,525)

153

(775)

Income tax expense (benefit)

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

$ 32,813

$21,552

$ (1,582)

The Company’s income tax expense is principally attributable to the Company’s federal and state
income taxes based on the Company’s earnings. The non-deductible expenses presented in the table above
largely relate to the Company’s non-deductible executive compensation.

F-67

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

13. INCOME TAXES – (continued)

The following table summarizes the activity related to the unrecognized tax benefits:

Balance at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . .

$ 515
208

Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . .

Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
(95)

628
26

(100)
(163)

391

Additions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . .

1,586

Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

Expirations of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(330)

Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,647

In the event the unrecognized tax benefits of $1,647 at December 31, 2019 were recognized, such
recognition would impact the effective tax rate. The Company classifies all tax-related interest and penalties
as income tax expense.

It is reasonably possible the Company may recognize up to approximately $51 of unrecognized tax
benefits over the next 12 months, primarily pertaining to expiring statutes of limitations on prior state and
local income tax return positions. The Company files U.S. and state and local income tax returns in
jurisdictions with varying statutes of limitations.

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 7,676,038 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 $1,923, $2,246 and $2,207 related

to stock options in the years ended December 31, 2019, 2018 and 2017, respectively.

All awards have a contractual term of ten years and awards vest over a period of two 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 fair value estimate, the existing models
do not necessarily provide a reliable single measure of the fair value of stock-based compensation awards.

F-68

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

14. STOCK COMPENSATION – (continued)

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, 2019, 2018
and 2017 were as follows:

2019

2018

2017

Risk-free interest rate . . . . . . . . . . . . . . . . .

2.5% – 2.7%

2.7% – 2.9%

2.1%2.4%

Expected volatility . . . . . . . . . . . . . . . . . . .

20.24% – 20.45% 19.02% – 21.05% 18.88% – 21.62%

Dividend yield . . . . . . . . . . . . . . . . . . . . . .

0.0%

0.0%

0.0%

Expected holding period . . . . . . . . . . . . . . .
Weighted-average grant date fair value(1) . . . .

4.00 – 10.00 years
$2.36 – $4.08

5.00 – 10.00 years
$4.62 – $7.58

6.00 – 10.00 years
$5.39 – $8.17

(1) Per share amounts have not been adjusted to give effect to the stock dividends in 2019, 2018 and 2017.

A summary of employee stock option transactions follows:

Outstanding on January 1, 2017 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding on December 31, 2017 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding on December 31, 2018 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding on December 31, 2019 . . . . . . . . . . . . . . . . .

Options exercisable at:

Number of
Shares
4,985,059
448,580

Weighted-
Average
Exercise
Price
$12.10
$19.70
— $ —
$ —
(13)
$12.74
5,433,626
$18.42
427,219
— $ —
$ —
(12)
$13.16
5,860,833
$10.92
406,875
$ 8.67
(1,824,351)
$ —
(11)
$14.80
4,443,346

Weighted-
Average
Remaining
Contractual
Term
(Years)
5.3

Aggregate
Intrinsic
Value(1)
$37,557

4.7

$41,069

4.1

$ 1,095

5.0

$ 4,427

December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,500,201
4,019,477
2,689,673

(1) The aggregate intrinsic value represents the amount by which the fair value of the underlying common
stock ($13.39, $9.27 and $20.30 at December 31, 2019, 2018 and 2017, respectively) exceeds the option
exercise price.

F-69

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

14. STOCK COMPENSATION – (continued)

Additional information relating to options outstanding at December 31, 2019 follows:

Options Outstanding

Options Exercisable

Range of Exercise Prices

$9.86 – $11.83 . . . . . . .
$11.83 – $13.80 . . . . . .

Outstanding
as of
12/31/2019

2,082,717
—

$13.80 – $15.77 . . . . . .

519,278

$15.77 – $17.74 . . . . . .

—

$17.74 – $19.71 . . . . . .

1,841,351

4,443,346

Weighted-
Average
Remaining
Contractual
Life
(Years)

3.7
0

4.4

0

6.6

5.0

Weighted-
Average
Exercise
Price

$11.26
$ —

$14.68

$ —

$18.84

Exercisable
as of
12/31/2019

1,675,842
—

519,278

—

494,553

$14.80

2,689,673

Weighted-
Average
Remaining
Contractual
Life
(Years)

2.4
0

4.4

0

5.2

3.3

Weighted-
Average
Exercise
Price

$11.35
$ —

$14.68

$ —

$18.12

$13.24

Aggregate
Intrinsic
Value

$ —
—

—

—

—

$4,427

As of December 31, 2019, there was $2,657 of total unrecognized compensation cost related to
unvested stock options. The cost is expected to be recognized over a weighted-average period of
approximately 1.60 years at December 31, 2019.

As a result of adopting ASU 2016-09, the Company reflects the net excess tax benefits of stock-based
compensation in its consolidated financial statements as a component of “Cash Flows from Operating
Activities.” Prior to the adoption of ASU 2016-09 as of January 1, 2017, the Company reflected the excess
tax benefits of stock-based compensation 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 2019. The exercise price
of the options granted was $10.92 in 2019. The exercise price of the options granted in 2019 was at the fair
value on the date of the grants.

Non-qualified options for 427,219 shares of common stock were issued during 2018. The exercise price
of the options granted was $18.42 in 2018. The exercise price of the options granted in 2018 was at the fair
value on the date of the grants.

Non-qualified options for 448,580 shares of common stock were issued during 2017. The exercise price
of the options granted was $19.70 in 2017. The exercise price of the options granted in 2017 was 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 in order to calculate the related tax benefits and deficiencies. With the adoption of ASU 2016-09 as of
January 1, 2017, all excess tax benefits and deficiencies are recognized as a component of income tax
expense or benefit on the income statement.

The total intrinsic value of options exercised during the year ended December 31, 2019 was $6,577. Tax
benefits related to option exercises of $363 were recorded as increases to stockholders’ deficiency for the
year ended December 31, 2019. A total of 1,824,351 options were exercised during the year ended
December 31, 2019.

F-70

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

14. STOCK COMPENSATION – (continued)

Restricted Stock Awards. On May 2, 2019, the Company granted 63,000 restricted shares of the
Company’s common stock (the “May 2019 Grant”) pursuant to the 1999 Plan to six of its outside directors.
The shares vest over a period of three years and the Company will recognize $564 of expense over the
vesting period of the May 2019 grant. The Company recognized expense of $124 for the year ended
December 31, 2019.

On May 29, 2018, the Company granted 27,563 restricted shares of the Company’s common stock
pursuant to the 1999 Plan to one of its executive officers. The shares vest over a period of two years with
one-half of the shares vesting on the first anniversary of the grant date and the remaining half vesting on
the second anniversary of the date thereof. The Company will recognize $481 of expense over the vesting
period of the May 2018 grant. The Company recognized expense of $241 and $142 for the years ended
December 31, 2019 and 2018, respectively.

Additionally, on May 29, 2018, the Company granted 7,348 restricted shares of the Company’s
common stock pursuant to the 1999 Plan to two of its outside directors. The shares vested on April 25,
2019 and the Company recognized $128 of expense through the vesting date. The Company recognized
expense of $46 and $82 for the years ended December 31, 2019 and 2018, respectively.

In April 2016, the Company granted 60,775 restricted shares of the Company’s common stock (the
“April 2016 Grant”) pursuant to the 1999 Plan to five of its outside directors. The shares vested in
April 2019 and the Company recognized $1,054 of expense over the vesting period of three years. The
Company recognized expense of $92, $374 and $351 for the years ended December 31, 2019, 2018 and
2017, respectively.

On November 10, 2015, the Company granted its President and Chief Executive Officer an award of
1,458,608 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 $4,053, $4,053 and $5,275 for the years ended December 31, 2019, 2018
and 2017, respectively.

On July 23, 2014, the Company granted its President and Chief Executive Officer an award of
1,340,096 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 is being amortized over the performance period as a charge to compensation expense. The
Company recognized expense of $2,969 for each of the years ended December 31, 2019, 2018 and 2017,
respectively.

In October 2013, the President and Chief Executive Officer of Liggett and Liggett Vector Brands was
awarded a restricted stock grant of 36,853 shares of Vector’s common stock pursuant to the 1999 Plan. The
shares vested on March 15, 2019, contingent upon the certification of performance-based targets being
achieved by the Company’s Tobacco segment. He received dividends on the restricted shares as paid. The
fair market value of the restricted shares on the date of grant was $458 and was amortized over the vesting
period as a charge to compensation expense. The Company recognized expense of $21, $85 and $85 for
the years ended December 31, 2019, 2018 and 2017, respectively.

F-71

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

14. STOCK COMPENSATION – (continued)

As of December 31, 2019, there was $15,095 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 1.30 years.

As of December 31, 2018, there was $22,077 of total unrecognized compensation costs related to

unvested restricted stock awards.

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 by various foreign and domestic governmental plaintiffs and non-governmental
plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or
disgorgement of profits (“Health Care Cost Recovery Actions”). The future financial impact of the risks
and expenses of litigation are not quantifiable. For the years ended December 31, 2019, 2018, and 2017,
Liggett incurred tobacco product liability legal expenses and costs totaling $7,363, $7,144, and $12,809,
respectively. The tobacco product liability legal expenses and costs are included in the operating, selling,
administrative and general expenses and litigation settlement and judgment expense line items in the
Condensed Consolidated Statements of Operations. Legal defense costs are expensed as incurred.

Litigation is subject to uncertainty and it is possible that there could be adverse developments in
pending cases. With the commencement of new cases, the defense costs and the risks relating to the
unpredictability of litigation increase. Management reviews on a quarterly basis with counsel all pending
litigation and evaluates the probability of a loss being incurred and whether an estimate can be made of the
possible loss or range of loss that could result from an unfavorable outcome. An unfavorable outcome or
settlement of pending tobacco-related litigation could encourage the commencement of additional
litigation. Damages awarded in tobacco-related litigation can be significant.

Bonds. Although Liggett has been able to obtain required bonds or relief from bonding requirements
in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there
remains a risk that such relief may not be obtainable in all cases. This risk has been reduced given that a
majority of states now limit the dollar amount of bonds or require no bond at all. As of December 31,
2019, to obtain a stay of the judgment pending the appeal of the Santoro case, Liggett had secured $535 in
bonds.

In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that
applies to all Engle progeny cases in the aggregate and establishes individual bond caps for individual Engle
progeny cases in amounts that vary depending on the number of judgments in effect at a given time. The
maximum amount of any such bond for an appeal in the Florida state courts will be no greater than $5,000.

F-72

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES – (continued)

In several cases, plaintiffs challenged the constitutionality of the bond cap statute, but to date the courts
have upheld the constitutionality of the statute. It is possible that the Company’s consolidated financial
position, results of operations, and cash flows could be materially adversely affected by an unfavorable
outcome of such challenges.

Accounting Policy. The Company and its subsidiaries record provisions in their consolidated financial
statements for pending litigation when they determine that an unfavorable outcome is probable and the
amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an
unfavorable outcome in a case may occur, except as discussed in this Note 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.

Although Liggett has generally been successful in managing the litigation filed against it, litigation is
subject to uncertainty and significant challenges remain, including with respect to the remaining Engle
progeny cases. There can be no assurances that Liggett’s past litigation experience will be representative of
future results. Judgments have been entered against Liggett in the past, in Individual Actions and Engle
progeny cases, and several of those judgments were affirmed on appeal and satisfied by Liggett. It is
possible that the consolidated financial position, results of operations and cash flows of the Company
could be materially adversely affected by an unfavorable outcome or settlement of any of the remaining
smoking-related litigation. Liggett believes, and has been so advised by counsel, that it has valid defenses to
the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are and
will continue to be vigorously defended. Liggett has entered into settlement discussions in individual cases
or groups of cases where Liggett has determined it was in its best interest to do so, and it may continue to
do so in the future. 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.

Individual Actions

As of December 31, 2019, there were 51 Individual Actions pending against Liggett, where one or
more individual plaintiffs allege injury resulting from cigarette smoking, addiction to cigarette smoking or
exposure to secondary smoke and seek compensatory and, in some cases, punitive damages. These cases do
not include the remaining Engle progeny cases. The following table lists the number of Individual Actions
by state:

State

Number
of Cases

Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32

Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

West Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8
4

2
2

2

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,

F-73

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES – (continued)

failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of
action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental
anguish, emotional distress, disability, shock, indemnity, violations of deceptive trade practice laws, the
federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), state RICO statutes and antitrust
statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of
relief
including treble/multiple damages, medical monitoring, disgorgement of profits and punitive
damages. Although alleged damages often are not determinable from a complaint, and the law governing
the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction,
compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in
amounts ranging into the hundreds of millions and even billions of dollars.

Defenses raised in Individual Actions include lack of proximate cause, assumption of the risk,
comparative fault and/or contributory negligence, lack of design defect, statute of limitations, equitable
defenses such as “unclean hands” and lack of benefit, failure to state a claim and federal preemption.

Engle Progeny Cases

In May 1994, the Engle case was filed as a class action 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.” A trial was held and the jury returned a verdict adverse to the defendants (approximately
$145,000,000 in punitive damages, including $790,000 against Liggett). Following an appeal to the Third
District Court of Appeal, the Florida Supreme Court in July 2006 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 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.

Cautionary Statement About Engle Progeny Cases. Since 2009, judgments have been entered against
Liggett and other cigarette manufacturers in Engle progeny cases. A number of the judgments have been
affirmed on appeal and satisfied by the defendants. Many have been overturned on appeal. As of
December 31, 2019, 25 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts.

There have been 16 verdicts returned in favor of the plaintiffs and nine in favor of Liggett. In five of
the cases, punitive damages were awarded against Liggett. Several of the adverse verdicts were overturned
on appeal and new trials were ordered. 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,
management is unable to estimate the possible loss or range of loss from the remaining Engle progeny cases
as there are currently multiple defendants in each case and, in most cases, discovery has not occurred or is
limited. As a result, the Company lacks information about whether plaintiffs are in fact Engle class
members, the relevant smoking history, the nature of the alleged injury and the availability of various
defenses, among other things. Further, plaintiffs typically do not specify the amount of their demand for
damages. As cases proceed through the appellate process, the Company will consider accruals on a
case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably
estimated.

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VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES – (continued)

Engle Progeny Settlements.

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 $61,600 paid in an initial lump sum and the balance of $48,000 to be paid in
installments over 14 years starting in February 2015. In exchange, the claims of these plaintiffs were
dismissed with prejudice against the Company and Liggett. The Company’s future payments will be
approximately $3,400 per annum through 2028, with a cost of living increase beginning in 2021.

In December 2016, the Company and Liggett entered into an agreement with 124 Engle progeny

plaintiffs and their counsel. Pursuant to the terms of this settlement, Liggett agreed to pay $17,650.

Liggett subsequently settled an additional 28 Engle progeny cases and one Individual Action for
$5,500. As of December 31, 2019, Liggett (and in certain cases the Company) had, on an individual basis,
settled an additional 196 Engle progeny cases for approximately $8,000 in the aggregate. Nine of these
settlements were paid in the fourth quarter of 2019.

Notwithstanding the comprehensive nature of the Engle Progeny Settlements, 47 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 effect on the Company’s consolidated financial position,
results of operations and cash flows.

Judgments Paid in Engle Progeny Cases.

As of December 31, 2019, Liggett had paid in the aggregate $39,773, including interest and attorneys’
fees, to satisfy the judgments in the following Engle progeny cases: Lukacs, Campbell, Douglas, Clay, Tullo,
Ward, Rizzuto, Lambert and Buchanan. An adverse verdict against Liggett for $160 in Santoro is currently
on appeal.

Maryland Cases

Liggett was a defendant in 16 multi-defendant personal injury cases in Maryland alleging claims
arising from asbestos and tobacco exposure (“synergy cases”). In July 2016, the Court of Appeals
(Maryland’s highest court) ruled that joinder of tobacco and asbestos cases may be possible in certain
circumstances, but plaintiffs must demonstrate at the trial court level how such cases may be joined while
providing appropriate safeguards to prevent embarrassment, delay, expense or prejudice to defendants and
“the extent to which, if at all, the special procedures applicable to asbestos cases should extend to tobacco
companies.” The Court of Appeals remanded these issues to be determined at the trial court level. In
June 2017, the trial court issued an order dismissing all synergy cases against the tobacco defendants,
including Liggett, without prejudice. Plaintiffs may seek appellate review or file new cases against the
tobacco companies.

Liggett Only Cases

There is currently one case pending where Liggett is the sole defendant: Cowart, a Florida Individual
Action. It is possible that cases where Liggett is the only defendant could increase as a result of the
remaining Engle progeny cases and newly filed Individual Actions.

Class Actions

As of December 31, 2019, two 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 two cases.

F-75

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES – (continued)

Plaintiffs’ allegations of liability in class action cases are based on various theories of recovery,
including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to
warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of
action, violation of deceptive trade practice laws and consumer protection statutes and claims under the
federal and state anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief,
including compensatory and punitive damages, treble/multiple damages and other statutory damages and
penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and
injunctive and equitable relief.

Defenses raised in these cases include, among others, lack of proximate cause, individual issues
the risk, comparative fault and/or contributory negligence, statute of

predominate, assumption of
limitations and federal preemption.

In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was
commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not
themselves cigarette smokers, allege they were exposed to secondhand smoke from cigarettes that were
manufactured by the defendants, including Liggett, and suffered injury as a result of that exposure. The
plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. No class
certification hearing has been held. The stay order entered on March 16, 2016 stays the case pending
completion of the smoking cessation program ordered by the court in Scott v. The American Tobacco Co.

In February 1998, in Parsons v. AC & S Inc., a purported class action was commenced on behalf of all
West Virginia residents who allegedly have claims arising from their exposure to cigarette smoke and
asbestos fibers. The operative complaint seeks to recover unspecified compensatory and punitive damages
on behalf of the putative class. The case is stayed as a result of the December 2000 bankruptcy of three of
the defendants.

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 that trial. In or about 2013, after a favorable court ruling, the other
cigarette manufacturers settled with plaintiffs. In May 2016, the trial court ruled that the case could proceed
against Liggett. In June 2019, Liggett settled the litigation. The settlement was approved by the court and
this matter is now concluded.

Health Care Cost Recovery Actions

As of December 31, 2019, one Health Care Cost Recovery Action was pending against Liggett, Crow
Creek Sioux Tribe v. American Tobacco Company, a South Dakota case filed in 1997, where the plaintiff
seeks to recover damages from Liggett and other cigarette manufacturers based on various theories of
recovery as a result of alleged sales of tobacco products to minors. The case is dormant.

The claims asserted in health care cost recovery actions vary, but can include the equitable claim of
indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, breach
of special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under state and
federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and
claims under RICO. Although no specific damage amounts are typically pleaded, it is possible that
requested damages might be in the billions of dollars. In these cases, plaintiffs typically assert equitable
claims that the tobacco industry was “unjustly enriched” by their payment of health care costs allegedly
attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs
include punitive damages, multiple damages and other statutory damages and penalties,
injunctions
prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding
of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert
witness fees.

F-76

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES – (continued)

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, among other things, an unspecified amount of health care costs paid and to be paid by the
federal government for smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of
defendants. In August 2006, the trial court entered a Final Judgment against each of the cigarette
manufacturing defendants, except Liggett. The judgment was affirmed on appeal. As a result, the cigarette
manufacturing defendants, other than Liggett, are now subject to the trial court’s Final Judgment which
ordered, among other things, 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.

Upcoming Trials

As of December 31, 2019, there were three Individual Actions and one Engle Progeny case scheduled
for trial through December 31, 2020, where Liggett (and/or the Company) is a named defendant. Trial dates
are subject to change and additional cases could be set for trial during this time.

MSA and Other State Settlement Agreements

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

In November 1998, Philip Morris, R.J. Reynolds and two other companies (the “Original Participating
Manufacturers” or “OPMs”) and Liggett and Vector Tobacco (together with any other tobacco product
manufacturer that becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”) (the
OPMs and SPMs are hereinafter referred to jointly as “PMs”) entered into the Master Settlement
Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States
Virgin Islands, American Samoa and the Northern Mariana Islands (collectively, the “Settling States”) to
settle the asserted and unasserted health care cost recovery and certain other claims of the Settling States.
The MSA received final judicial approval in each Settling State.

As a result of the MSA, the Settling States released Liggett and Vector Tobacco from:

•

•

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

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

The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise
restricts the activities of PMs. Among other things, the MSA prohibits the targeting of youth in the
advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco
advertising and promotion; limits each PM to one tobacco brand name sponsorship during any 12-month
period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco

F-77

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES – (continued)

product placement in various media; bans gift offers based on the purchase of tobacco products without
sufficient proof that the intended recipient is an adult; prohibits PMs from licensing third parties to
advertise tobacco brand names in any manner prohibited under the MSA; and prohibits PMs from using as
a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of
sports teams, entertainment groups or individual celebrities.

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

Under the payment provisions of the MSA, PMs are required to make annual payments of $9,000,000
(subject to applicable adjustments, offsets and reductions including a “Non-Participating Manufacturers
Adjustment” or “NPM Adjustment”). These annual payments are allocated based on unit volume of
domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint,
obligation of each PM and are not the responsibility of any parent or affiliate of a PM.

Liggett has no payment obligations under the MSA except to the extent its market share exceeds a
market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector
Tobacco has no payment obligations under the MSA except to the extent its market share exceeds a market
share exemption of approximately 0.28% of total cigarettes sold in the United States. Liggett and Vector
Tobacco’s domestic shipments accounted for approximately 4.0% of the total cigarettes sold in the United
States in 2019. 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 30, 2019, Liggett and Vector Tobacco pre-paid $140,000 of their approximate
$171,000 2019 MSA obligation, the balance of which will be paid in April 2020, subject to applicable
disputes or adjustments.

Certain MSA Disputes

NPM Adjustment. Liggett and Vector Tobacco contend that they are entitled to an NPM Adjustment
for each year from 2003 – 2019. The NPM Adjustment is a potential adjustment to annual MSA payments,
available when PMs suffer a market share loss to NPMs for a particular year and an economic consulting
firm selected pursuant to the MSA determines (or the parties agree) that the MSA was a “significant factor
contributing to” that loss. A Settling State that has “diligently enforced” its qualifying escrow statute in the
year in question may be able to avoid its allocable share of the NPM Adjustment. For 2003 – 2019, Liggett
and Vector Tobacco, as applicable, disputed that they owed the Settling States the NPM Adjustments as
calculated by the independent auditor. As permitted by the MSA, Liggett and Vector Tobacco either paid
subject to dispute, withheld payment, or paid into a disputed payment account, the amounts associated
with these NPM Adjustments.

In June 2010, after the PMs prevailed in 48 of 49 motions to compel arbitration, the parties
commenced the arbitration for the 2003 NPM Adjustment. That arbitration concluded in September 2013.
It was followed by various challenges filed in state courts by states that did not prevail in the arbitration.
Those challenges resulted in reductions, but not elimination of, the amounts awarded.

The PMs have now settled most of the disputed NPM Adjustment years with 37 states representing
approximately 75% of the MSA share. The 2004 NPM Adjustment arbitration started in 2016 and separate
court proceedings continue for states with which the PMs have not settled.

As a result of the settlements and arbitration award described above, Liggett and Vector Tobacco
reduced cost of sales for the year ended December 31, 2019 by $5,925, for an aggregate reduction in costs of

F-78

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES – (continued)

sales for years 2013 – 2019 of $48,032. Liggett and Vector Tobacco may be entitled to further adjustments.
As of December 31, 2019, Liggett and Vector Tobacco had accrued approximately $13,400 related to the
disputed amounts withheld from the non-settling states for 2004 — 2010, which may be subject to payment,
with interest, if Liggett and Vector Tobacco lose the disputes for those years. As of December 31, 2019,
there remains approximately $36,300 in the disputed payments account relating to Liggett and Vector
Tobacco’s 2011 – 2018 NPM Adjustment disputes with the non-settling states. If Liggett and Vector
Tobacco lose the disputes for all or any of those years, pursuant to the MSA, no interest would be due on
the amounts paid into the disputed payment account.

Other State Settlements. The MSA replaced Liggett’s prior settlements with all states and territories
except for Florida, Mississippi, Texas and Minnesota. Each of these four states, prior to the effective date of
the MSA, negotiated and executed settlement agreements with each of the other major tobacco companies,
separate from those settlements reached previously with Liggett. Except as described below, Liggett’s
agreements with these states remain in full force and effect. These states’ settlement agreements with Liggett
contained most favored nation provisions which could reduce Liggett’s payment obligations based on
subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in
1999, Liggett determined that, based on settlements or resolutions with United States Tobacco Company,
Liggett’s payment obligations to those four states were eliminated. With respect to all non-economic
obligations under the previous settlements, Liggett believes it is entitled to the most favorable provisions as
between the MSA and each state’s respective settlement with the other major tobacco companies. Therefore,
Liggett’s non-economic obligations to all states and territories are now defined by the MSA.

In 2003, as a result of a dispute with Minnesota regarding its settlement agreement, Liggett agreed to
pay $100 a year in any year cigarettes manufactured by Liggett are sold in that state. Further, the Attorneys
General for Florida, Mississippi and Texas advised Liggett that they believed Liggett had failed to make
payments under the respective settlement agreements with those states. In 2010, Liggett settled with Florida
and agreed to pay $1,200 and to make further annual payments of $250 for a period of 21 years, starting in
March 2011, with the payments from year 12 forward being subject to an inflation adjustment.

In January 2016, the Attorney General for Mississippi filed a motion in Chancery Court in Jackson
County, Mississippi to enforce the March 1996 settlement agreement (the “1996 Agreement”) alleging that
Liggett owes Mississippi at least $27,000 in compensatory damages and additional amounts for interest,
punitive damages and attorneys’ fees. In April 2017, the Chancery Court ruled that the 1996 Agreement
should be enforced and referred the matter to a Special Master for further proceedings to determine the
amount of damages, if any, to be awarded. In June 2018, the Chancery Court granted Liggett’s motion to
compel arbitration as to two issues concerning damages and stayed the proceedings before the Special
Master pending completion of the arbitration. In March 2019, the arbitration panel issued its final
arbitration award on the two issues before it: (i) the panel ruled in favor of Liggett, finding that the
$294,000 of proceeds from Eve Holdings’ 1999 brand sale should not be included in Liggett’s pre-tax
income; and (ii) ruled in favor of Mississippi on the remaining issue, finding that compensatory damages to
Mississippi, if any, would be based on 0.5% of Liggett’s annual pre-tax income for the term of the
settlement agreement. Following confirmation of the arbitration award, Mississippi voluntarily dismissed
with prejudice its claims for punitive damages and attorneys’ fees.

to Mississippi pursuant

In July 2019, the parties stipulated that the unpaid principal (exclusive of interest) purportedly due
is
to the 1996 Agreement
from Liggett
approximately $14,400, subject to Liggett’s right to litigate and/or appeal the enforceability of the 1996
Agreement (and all issues other than the calculation of such principal amount). In September 2019, the
Special Master held a hearing regarding the state’s claim for approximately $17,500 in prejudgment interest
as well as post-judgment interest in amounts to be determined. A decision is pending. Liggett continues to

(from inception through 2019)

F-79

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES – (continued)

believe that the April 2017 Chancery Court order is in error because the most favored nations provision in
the 1996 Agreement eliminated all of Liggett’s payment obligations to Mississippi, and reserved all rights to
appeal this and other issues at the conclusion of the case. In the event Liggett appeals an adverse judgment,
the posting of a bond may be required.

Liggett may be required to make additional payments to Mississippi and Texas which could have a
material adverse effect on the Company’s consolidated financial position, results of operations and cash
flows.

Cautionary Statement

Management is not able to reasonably predict the outcome of the litigation pending or threatened
against Liggett or the Company. Litigation is subject to many uncertainties. Liggett has been found liable in
multiple Engle progeny cases and Individual Actions, several of which were affirmed on appeal and satisfied
by Liggett. It is possible that other cases could be decided unfavorably against Liggett and that Liggett will
be unsuccessful on appeal. Liggett may attempt to settle particular cases if it believes it is in its best interest
to do so.

Management cannot predict the cash requirements related to any future defense costs, settlements or
judgments, including cash required to bond any appeals, and there is a risk that those requirements will not
be able to be met. An unfavorable outcome of a pending smoking-related case could encourage the
commencement of additional litigation. Except as discussed in this Note 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-80

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, 2019 were as follows:

Current Liabilities

Non-Current Liabilities

Payments
due under
Master
Settlement
Agreement
$ 16,192
149,355

Litigation
Accruals
$ 3,659
6,566

Total
$ 19,851
155,921

Payments
due under
Master
Settlement
Agreement
$22,257
—

Litigation
Accruals
$27,513
—

Total
$49,770
—

76
(151,296)

—
(17,537)

76
(168,833)

—
—

—
(3,426)

—
(3,426)

(150)
—
12,384
168,820
(595)

7,143
429
260
735
—

6,993
429
12,644
169,555
(595)

150
—
21,479
—
(5,703)

(6,993)
(7,143)
2,896
2,896
41,319
19,840
—
—
— (5,703)

(1,438)
(141,963)

—
(935)

(1,438)
(142,898)

—
(40)

—
—

—
(40)

(647)
—
36,561
165,471

218
32
310
990

(429)
32
36,871
166,461

647
—
16,383
—

(218)
2,172
21,794
—

429
2,172
38,177
—

4,936
(171,960)

—
(670)

4,936
(172,630)

—
—

—
—

—
—

(892)
—
$ 34,116

3,338
281
$ 4,249

2,446
281
$ 38,365

892
—
$17,275

(3,338)
2,138
$20,594

(2,446)
2,138
$37,869

Balance as of January 1, 2017 . . . . . .
Expenses . . . . . . . . . . . . . . . . . . .
Change in MSA obligations

capitalized as inventory . . . . . . .
. . . . . . . . . . . . . . . . . .

Payments
Reclassification to/(from)
non-current liabilities

. . . . . . . .
Interest on withholding . . . . . . . . .
Balance as of December 31, 2017 . . . .
Expenses . . . . . . . . . . . . . . . . . . .
NPM Settlement adjustment . . . . .
Change in MSA obligations

capitalized as inventory . . . . . . .
. . . . . . . . . . . . . . . . . .

Payments
Reclassification to/(from)
non-current liabilities

. . . . . . . .
Interest on withholding . . . . . . . . .
Balance as of December 31, 2018 . . . .
Expenses . . . . . . . . . . . . . . . . . . .
Change in MSA obligations

capitalized as inventory . . . . . . .
. . . . . . . . . . . . . . . . . .

Payments
Reclassification to/(from)
non-current liabilities

. . . . . . . .
Interest on withholding . . . . . . . . .
Balance as of December 31, 2019 . . . .

Other Matters:

Liggett’s and Vector Tobacco’s management are unaware of any material environmental conditions
affecting their existing facilities. Liggett’s and Vector Tobacco’s management believe that current operations
are conducted in material compliance with all environmental laws and regulations and other laws and
regulations governing cigarette manufacturers. Compliance with federal, state and local provisions
regulating the discharge of materials into the environment, or otherwise relating to the protection of the
environment, has not had a material effect on the capital expenditures, results of operations or competitive
position of Liggett or Vector Tobacco.

F-81

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

15. CONTINGENCIES – (continued)

Liggett and the Company have received three separate demands for indemnification from Altria Client
Services, on behalf of Philip Morris, relating to lawsuits alleging smokers’ use of L&M cigarettes. The
indemnification demands are purportedly issued in connection with Eve Holdings’ 1999 sale of certain
brands to Philip Morris.

In addition to the foregoing, Douglas Elliman and certain of its subsidiaries are subject to numerous
proceedings, lawsuits and claims in connection with their ordinary business activities. Many of these
matters are covered by insurance or, in some cases, the company is indemnified by third parties.

Management is of the opinion that the liabilities, if any, resulting from other proceedings, lawsuits and
claims pending against the Company and its consolidated subsidiaries, unrelated to tobacco product
liability, should not materially affect the Company’s consolidated financial position, results of operations or
cash flows.

16. SUPPLEMENTAL CASH FLOW INFORMATION

Year Ended December 31,

2019

2018

2017

Cash paid during the period for:

Interest, including interest related to finance leases . . . . . . . . . . . . . .

$118,974

$107,021

$117,453

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44,184

26,529

26,885

Non-cash investing and financing activities:

Issuance of stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

703

671

644

Decrease in non-controlling interest related to purchase of subsidiary

— (73,953)

Notes payable issued for purchase of subsidiary . . . . . . . . . . . . . . . .

Contingent consideration related to purchase of subsidiary . . . . . . . .

Net receivable from purchase of subsidiary . . . . . . . . . . . . . . . . . . .

—

—

—

30,000

6,304

497

—

—

—

—

17. RELATED PARTY TRANSACTIONS

Ladenburg Thalmann Financial Services Inc. As of December 31, 2019, the Company owned
15,191,205 common shares of Ladenburg Thalmann Financial Services Inc. (NYSE American: LTS), a
publicly-traded diversified financial services company engaged in independent advisory and brokerage
services, asset management services,
institutional sales and
trading, wholesale life insurance brokerage, annuity marketing and trust services through its subsidiaries.
The Company, through its various investments in LTS, beneficially owned approximately 10.22% and
accounts for its investment in LTS under the equity method of accounting.

investment research,

investment banking,

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 2019, 2018
and 2017 under the agreement. These amounts are recorded as equity income. LTS paid cash compensation
to the President and Chief Executive Officer of the Company, who served as Vice Chairman of LTS, of
$1,525, $1,525 and $1,425 for 2019, 2018 and 2017, respectively, and director fees of $75, $50 and $53 for
2019, 2018 and 2017, respectively. LTS paid cash compensation to the Company EVP, who served as
President and CEO of LTS, of $2,142, $2,025 and $1,625 for 2019, 2018 and 2017, respectively.

F-82

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

17. RELATED PARTY TRANSACTIONS – (continued)

The Company owned 240,000 shares of LTS’s 8% Series A Cumulative Redeemable Preferred Stock
(Liquidation Preference $25.00 Per Share) as of December 31, 2019 and recorded dividend income from the
investment of $480 in each of 2019, 2018 and 2017.

On November 11, 2019, LTS entered into an Agreement and Plan of Merger with Advisor Group
whereby each LTS common share was converted into the right to receive $3.50 per common share. On
February 14, 2020, the merger was completed and the Company received proceeds of $53,169 from the
Company’s 15,191,205 common shares of LTS. The Company has also tendered 240,000 shares of LTS 8%
Series A Cumulative Redeemable Preferred Stock (Liquidation Preference $25.00 Per Share) for redemption
and anticipates receiving an additional $6,009 in March 2020. At the closing of the transaction, the
Company’s Executive Vice President resigned as Chairman, President and Chief Executive Officer of LTS,
and the Company’s management agreement with LTS was terminated.

Castle Brands Inc.

In October 2008, the Company entered into an agreement with Castle Brands Inc.
(NYSE American: ROX), a publicly-traded developer and importer of premium branded spirits 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 of $75 in 2019 and $100 in both 2018 and 2017 under the agreement,
respectively. Castle paid retention payments of $515 in 2019, $500 in 2018 and $400 in 2017 to the EVP who
served as President and Chief Executive Officer as well as a director of Castle until October 2019.

On October 9, 2019, Castle was acquired pursuant to a cash tender offer of $1.27 per outstanding
Common Share and, in connection therewith, the Company tendered the entire amount of its 12,895,017
common shares of Castle. The Company received $16,377 in proceeds from this sale. Additionally, at the
closing of the transaction, the Company’s Executive Vice President resigned as President and Chief
Executive Officer of Castle and the Company’s management agreement with Castle was terminated.

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 $215, $247 and $249 in 2019, 2018
and 2017, 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 other
entities where Dr. Frost has a relationship. Dr. Frost is a director, executive officer and/or more than 10%
shareholder in these entities other than LTS. As of December 31, 2019, these included the following: (i) an
investment in BioCardia, Inc. (OTC: BCDA) and (ii) an investment in Cocrystal Pharma, Inc. (OTCQB:
COCP). Additional investments in entities where Dr. Frost has a relationship may be made in the future.

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 and will expire on April 20, 2023. The Lease provides for payments
of $36 per month increasing to $41 per month. The Company recorded rental expense of $458, $450 and
$415 for the years ended December 31, 2019, 2018 and 2017, respectively, associated with the lease.

A son of the Company’s President and Chief Executive Officer is an associate broker with Douglas
in

Elliman and he received commissions and other payments of $712, $318 and $787, respectively,
accordance with brokerage activities in 2019, 2018 and 2017, respectively.

F-83

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:

Money market funds(1)
. . . . . . . . . . . . . . . . . . . . . . .
Commercial paper(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit(2)
. . . . . . . . . . . . . . . . . . . . . .
Money market funds securing legal bonds(2)
. . . . . . . .
Investment securities at fair value
Equity securities at fair value

Marketable equity securities . . . . . . . . . . . . . . . .
Mutual funds invested in fixed-income securities . .
Total equity securities at fair value . . . . . . . . . .

Debt securities available for sale

U.S. government securities . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . .
U.S. government and federal agency . . . . . . . . . . .
Commercial mortgage-backed securities . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
Index-linked U.S. bonds . . . . . . . . . . . . . . . . . . .
Foreign fixed-income securities . . . . . . . . . . . . . .
Total debt securities available for sale . . . . . . . .
Total investment securities at fair value . . . . . . . . . .

Long-term investments

Equity securities at fair value that qualify for the

NAV practical expedient(3)

. . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fair Value Measurements as of December 31, 2019

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

Total

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

$307,655
47,328
2,193
535

$307,655
—
—
535

$

—
47,328
2,193
—

$ —
—
—
—

23,819
22,377
46,196

14,660
54,413
6,816
382
5,887
779
508
83,445
129,641

23,819
22,377
46,196

—
—
—
—
—
—
—
—
46,196

—
—
—

14,660
54,413
6,816
382
5,887
779
508
83,445
83,445

—
—
—

—
—
—
—
—
—
—
—
—

45,781
$533,133

—
$354,386

—
$132,966

—
$ —

Liabilities:

Fair value of contingent liability . . . . . . . . . . . . . . . . .
Fair value of derivatives embedded within convertible

$ 3,147

$

— $

debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,999
$ 8,146

$

—
— $

—

—
—

$3,147

4,999
$8,146

(1) Amounts included in Cash and cash equivalents on the consolidated balance sheet, except for $4,423

that is included in current restricted assets and $3,160 that is included in non-current restricted assets.

(2) Amounts included in current restricted assets and non-current restricted assets on the consolidated

balance sheet.

(3)

In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV
practical expedient are not classified in the fair value hierarchy.

F-84

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

18. INVESTMENTS AND FAIR VALUE MEASUREMENTS – (continued)

Description
Assets:

Money market funds(1)
. . . . . . . . . . . . . . . . . . . . . . .
Commercial paper(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit(2)
. . . . . . . . . . . . . . . . . . . . . .
Money market funds securing legal bonds(2)
. . . . . . . .
Investment securities at fair value
Equity securities at fair value

Marketable equity securities . . . . . . . . . . . . . . . .
Mutual funds invested in fixed-income securities . .
Total equity securities at fair value . . . . . . . . . .

Debt securities available for sale

U.S. government securities . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . .
U.S. government and federal agency . . . . . . . . . . .
Commercial mortgage-backed securities . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
Index-linked U.S. bonds . . . . . . . . . . . . . . . . . . .
Foreign fixed-income securities . . . . . . . . . . . . . .
Total debt securities available for sale . . . . . . . .
Total investment securities at fair value . . . . . . . . . .

Long-term investments

Equity securities at fair value that qualify for the

NAV practical expedient(3)

. . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fair Value Measurements as of December 31, 2018

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

Total

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

$448,560
46,062
2,251
535

$448,560
—
—
535

$

— $ —
—
—
—

46,062
2,251
—

26,010
21,192
47,202

28,514
41,733
4,369
401
5,870
2,330
1,150
84,367
131,569

26,010
21,192
47,202

—
—
—
—
—
—
—
—
47,202

—
—
—

28,514
41,733
4,369
401
5,870
2,330
1,150
84,367
84,367

—
—
—

—
—
—
—
—
—
—
—
—

54,628
$683,605

—
$496,297

—
$132,680

—
$ —

Liabilities:

Fair value of contingent liability . . . . . . . . . . . . . . . . .
Fair value of derivatives embedded within convertible

$ 6,304

$

— $

— $ 6,304

debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31,424
$ 37,728

$

—
— $

—
31,424
— $37,728

(1) Amounts included in Cash and cash equivalents on the consolidated balance sheet, except for $2,570

that is included in current restricted assets and $3,910 that is included in non-current restricted assets.

(2) Amounts included in current restricted assets and non-current restricted assets on the consolidated

balance sheet.

(3)

In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV
practical expedient are not classified in the fair value hierarchy.

F-85

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

18. INVESTMENTS AND FAIR VALUE MEASUREMENTS – (continued)

The fair value of the Level 2 certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is the rate offered by the financial institution. The fair value of investment
securities at fair value included in Level 1 is based on quoted market prices from various stock exchanges.
The Level 2 investment securities at fair value are based on quoted market prices of securities that are thinly
traded, quoted prices for identical or similar assets in markets that are not active or inputs other than
quoted prices such as interest rates and yield curves.

The long-term investments are based on NAV per share provided by the partnerships based on the
indicated market value of the underlying assets or investment portfolio. In accordance with Subtopic
820-10, these investments are not classified under the fair value hierarchy disclosed above because they are
measured at fair value using the NAV practical expedient.

The fair value of derivatives embedded within convertible debt was derived using a valuation model.
These derivatives have been classified as Level 3. The valuation model assumes future dividend payments by
the Company and utilizes interest rates and credit spreads based upon the implied credit spread of the 5.5%
Convertible Notes due 2020 to determine the fair value of the derivatives embedded within the convertible
debt. The changes in fair value of derivatives embedded within convertible debt are presented on the
consolidated statements of operations.

The value of the embedded derivatives is contingent on changes in implied interest rates of the
convertible debt, the Company’s stock price, stock volatility as well as projections of future cash and stock
dividends over the term of the debt. The interest rate component of the value of the embedded derivative is
computed by calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. This
rate is determined by calculating the implied rate on the Company’s 5.5% 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 fair value of the Level 3 contingent liability was derived using a Monte Carlo valuation model. As
part of the acquisition of the 29.41% non-controlling interest in Douglas Elliman, New Valley entered into
a four-year payout agreement that requires it to pay the sellers a portion of the fair value in excess of the
purchase price of Douglas Elliman should a sale of a controlling interest in Douglas Elliman occur.

The contingent liability is recorded within “Other liabilities” in the consolidated balance sheet, and any
change in fair value will be recorded in “Other, net” within the consolidated statements of operations. The
value of the contingent liability is calculated using the outstanding payable owed to the sellers and the
estimated fair value of Douglas Elliman. The liability is contingent upon the sale of a controlling interest in
Douglas Elliman by the Company prior to October 1, 2022.

F-86

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, 2019:

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at
December 31,
2019

Valuation
Technique

$4,999

Discounted
cash flow

Fair value of
derivatives
embedded
within
convertible debt

Fair value of
contingent
liability . . . . . .

$3,147

Monte Carlo
simulation
model

Unobservable Input

Range (Actual)

Assumed annual 2019 stock
dividend
Assumed remaining cash
dividends – Q4 2019 and Q1
2020
Stock price
Convertible trading price (as
a percentage of par value)
Maturity
Volatility

Risk-free rate
Implied credit spread

5%

$0.40/$0.20
$13.39

103.94%
April 15, 2020
36.94%
Term structure of US
Treasury Securities
1.0% – 3.0% (2.0%)

Estimated fair value of the
Douglas Elliman reporting unit
Risk-free rate for a 3-year term
Leverage-adjusted equity
volatility of peer firms

$271,500
1.61%

35.56%

F-87

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, 2018:

Quantitative Information about Level 3 Fair Value Measurements

Fair Value at
December 31,
2018

Valuation
Technique

$31,424

Discounted
cash flow

Fair value of
derivatives
embedded
within
convertible debt

Fair value of
contingent
liability . . . . . .

$ 6,304

Monte Carlo
simulation
model

Unobservable Input

Range (Actual)

Assumed annual stock dividend
Assumed annual cash
dividend(1)
Stock price(1)
Convertible trading price (as
a percentage of par value)
Maturity
Volatility

Risk-free rate
Implied credit spread

Estimated fair value of the
Douglas Elliman reporting unit
Risk-free rate for a 4-year term
Leverage-adjusted equity
volatility of peer firms

5%

$1.60
$9.73

100.31%
April 15, 2020
20.39%
Term structure of US
Treasury Securities
8.0% – 9.0% (8.5%)

$320,000
2.45%

30.22%

(1) Amount has not been adjusted to give effect to the stock dividend in 2019.

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 except for investments in real estate
ventures that were impaired as of December 31, 2019 and 2018, respectively.

The Company’s investment in real estate ventures subject to nonrecurring fair value measurements are

as follows:

Description

Assets:

Year Ended
December 31,
2019

Impairment Charge

Total

Fair Value Measurement Using:

Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Investments in real estate ventures . . .

$39,757

$18,335

$—

$—

$18,335

F-88

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

18. INVESTMENTS AND FAIR VALUE MEASUREMENTS – (continued)

The Company estimated the fair value of its investments in real estate ventures using observable inputs
such as market pricing based on recent events, however, significant judgment was required to select certain
inputs from observed market data. The decrease in the investments in real estate ventures was attributed to
the decline in the projected sales prices and the duration of the estimated sell out of the respective real estate
ventures. The $39,757 of impairment charges were included in the results from operations for the year
ended December 31, 2019.

19. SEGMENT INFORMATION

The Company’s business segments were Tobacco and Real Estate. The Tobacco segment consists of the
manufacture and sale of conventional cigarettes. The Real Estate segment includes the Company’s
investment in New Valley LLC, which includes Douglas Elliman, Escena, Sagaponack and investments in
real estate ventures. The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.

Financial information for the Company’s operations before taxes and non-controlling interests for

the years ended December 31, 2019, 2018 and 2017 was as follows:

Tobacco

Real
Estate

Corporate
and Other

Total

2019
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Equity in losses from real estate ventures . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable assets
Depreciation and amortization . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures

2018
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings from real estate ventures
. . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable assets
Depreciation and amortization . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures

2017
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings from real estate ventures
. . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable assets
Depreciation and amortization . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures

$1,114,840

261,630(1)

336,566
7,824
4,173

$1,111,094

246,527(2)

—
315,706
8,210
4,599

$1,080,950

240,400(3)

—
309,316
8,826
3,705

$

$788,871
(2,930)
— (19,288)

(27,565)
—

— $1,903,711
231,135
(19,288)
666,550(4) 501,973(6) 1,505,089
17,851
994
12,575
126

9,033
8,276

$759,168

$

(25,913)
—

— $1,870,262
3,435(5)
224,049
14,446
14,446
539,828(4) 693,970(6) 1,549,504
18,807
1,017
17,682
22

9,580
13,061

$

(26,191)
—

(838) $1,807,476
$727,364
235,648
21,439
21,395
21,395
558,776(4) 460,186(6) 1,328,278
18,614
1,277
19,869
35

8,511
16,129

(1) Operating income includes $990 of litigation settlement and judgment expense.

(2) Operating income includes $6,298 of income from MSA Settlement, and $685 of litigation settlement

and judgment expense.

F-89

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

19. SEGMENT INFORMATION – (continued)

(3) Operating income includes $2,721 of income from MSA Settlement, and $6,591 of litigation settlement

and judgment expense.

(4)

Includes real estate investments accounted for under the equity method of accounting of $131,556,
$141,105 and $188,131 as of December 31, 2019, 2018 and 2017, respectively.

(5) Operating income includes $2,469 of litigation settlement and judgment income.

(6) Corporate and Other identifiable assets primarily includes cash of $272,459, investment securities of
$129,641, equity securities at fair value that qualify for the NAV practical expedient of $45,781, and
equity-method investments of $15,942 as of December 31, 2019. Corporate and other identifiable
assets primarily includes cash of $474,974, investment securities of $131,569, equity securities at fair
value that qualify for the NAV practical expedient of $54,628, and equity-method investments of
$11,631 as of December 31, 2018. Corporate and other identifiable assets primarily includes cash of
$195,053, investment securities of $150,489, long-term investments accounted at cost of $65,450, and
long-term investments accounted for under the equity method of accounting of $15,841 as of
December 31, 2017.

20. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Unaudited quarterly data for the years ended December 31, 2019 and 2018 are as follows:

December 31,
2019

September 30,
2019

June 30,
2019

March 31,
2019

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$439,565

$504,790

$538,432

$420,924

Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

137,636

159,334

170,258

134,904

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

45,581

10,667

66,720

36,008

76,244

39,307

42,590

15,033

Net income applicable to common shares attributed to

Vector Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .

10,706

36,008

39,307

14,953

Per basic common share(1):
Net income applicable to common shares attributed to

Vector Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .

$

0.06

$

0.23

$

0.25

$

0.09

Per diluted common share(1):
Net income applicable to common shares attributed to

Vector Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .

$

0.06

$

0.23

$

0.25

$

0.08

(1) Per share computations include the impact of a 5% stock dividend paid on September 27, 2019.
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-90

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

20. QUARTERLY FINANCIAL RESULTS (UNAUDITED) – (continued)

December 31,
2018

September 30,
2018

June 30,
2018

March 31,
2018

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$445,939

$513,869

$481,488

$428,966

Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shares attributed to

140,798
48,086

20,319

153,567
66,018

15,028

148,722
61,861

18,996

134,691
48,084

3,664

Vector Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .

21,074

12,002

17,818

7,211

Per basic common share(1):
Net income applicable to common shares attributed to

Vector Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .

$

0.13

$

0.07

$

0.11

$

0.04

Per diluted common share(1):
Net income applicable to common shares attributed to

Vector Group Ltd. . . . . . . . . . . . . . . . . . . . . . . . . .

$

0.13

$

0.07

$

0.11

$

0.04

(1) Per share computations include the impact of a 5% stock dividend paid on September 27, 2018.
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.

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The condensed consolidating financial information is based upon the following subsidiaries being
subsidiary guarantors of unsecured debt securities that may be issued by the Company: VGR Holding
LLC; Liggett Group LLC; Liggett Vector Brands LLC; Vector Research LLC; Vector Tobacco Inc.;
Liggett & Myers Holdings Inc.; 100 Maple LLC; V.T. Aviation LLC; VGR Aviation LLC; Eve Holdings
LLC; Zoom E-Cigs LLC; and DER Holdings LLC. 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 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 including this condensed consolidating
financial information in connection therewith. Any such debt securities may be issued by the Company and
guaranteed by the guarantors, but any such debt securities would not be guaranteed by any of the
Company’s other subsidiaries, including those subsidiaries other than DER Holdings LLC that are engaged
in the real estate businesses conducted through its subsidiary, New Valley.

Presented herein are Condensed Consolidating Balance Sheets as of December 31, 2019 and 2018, the
related Condensed Consolidating Statements of Operations for the years ended December 31, 2019, 2018
and 2017, and the related Condensed Consolidating Statements of Cash Flows for the years ended
December 31, 2019, 2018 and 2017 of Vector Group Ltd. (Parent/Issuer), the guarantor subsidiaries
(Subsidiary Guarantors) and the subsidiaries that are not guarantors (Subsidiary Non-Guarantors).

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 BALANCE SHEETS

ASSETS:
Current assets:

Cash and cash equivalents
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities at fair value . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable – trade, net . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories
Income taxes receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in real estate, net
Long-term investments (of which $45,781 were carried at fair value)
. . . . .
Investments in real estate ventures
. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right of use assets
Investments in consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets, net
. . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY:
Current liabilities:

Current portion of notes payable and long-term debt
Current portion of fair value of derivatives embedded within convertible

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

debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
Current payments due under the Master Settlement Agreement
Current operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, long-term debt and other obligations, less current portion . .
Non-current employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current operating lease liability . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities, including litigation accruals and payments due under the

December 31, 2019

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

$ 272,282
129,641
—
44,043
—
—
9,159
455,125
425
—
61,723
—
7,085
420,353
—
15,080
$ 959,791

$ 27,178
—
15,646
—
98,762
—
9,021
150,607
33,816
—
—
—
4,830
238,040
107,511
46,416
$581,220

$ 71,881
—
21,313
—
—
95
26,731
120,020
47,919
28,317
—
131,556
137,663
—
158,482
42,652
$666,609

$

—
—
—
(44,043)
—
(95)
—
(44,138)
—
—
—
—
—
(658,393)
—
—
$(702,531)

$ 371,341
129,641
36,959
—
98,762
—
44,911
681,614
82,160
28,317
61,723
131,556
149,578
—
265,993
104,148
$1,505,089

$ 163,932

$ 45,210

$ 10,127

$ (10,000)

$ 209,269

4,999
—
2,398
—
508
52,065
223,902
1,377,108
50,806
(14,492)
7,558

—
236
2,835
34,116
2,015
78,947
163,359
20,089
17,047
22,620
3,402

—
43,807
—
—
15,771
59,202
128,907
20,019
—
25,567
146,003

34,999
355,495

—
(44,043)
(95)
—
—
(897)
(55,035)
(20,000)
—
—
—

(3,147)
(78,182)

4,999
—
5,138
34,116
18,294
189,317
461,133
1,397,216
67,853
33,695
156,963

73,245
2,190,105

Master Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

373
1,645,255

41,020
267,537

Commitments and contingencies
Stockholders’ (deficiency) equity attributed to Vector Group Ltd. . . . . . . .
Non-controlling interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ (deficiency) equity . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ deficiency . . . . . . . . . . . . . . . .

(685,464)
—
(685,464)
$ 959,791

313,683
—
313,683
$581,220

310,666
448
311,114
$666,609

(624,349)
—
(624,349)
$(702,531)

(685,464)
448
(685,016)
$1,505,089

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 BALANCE SHEETS

December 31, 2018

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

ASSETS:
Current assets:

Cash and cash equivalents
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities at fair value . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable – trade, net . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories
Income taxes receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 474,880
131,569
—
38,391
—
—
1,500

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in real estate, net
Long-term investments (of which $54,628 were carried at fair value)
. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Investments in real estate ventures
Investments in consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets, net
. . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets

646,340
506
—
66,259
—
431,288
—
14,616

$ 23,308
—
15,440
—
90,997
—
7,599

137,344
38,562
—
—
—
252,113
107,511
38,154

$ 86,393
—
18,806
—
—
1,268
21,729

128,196
47,668
26,220
—
141,105
—
159,100
37,582

$

—
—
—
(38,391)
—
(1,268)
—

(39,659)
—
—
—
—
(683,401)
—
—

$ 584,581
131,569
34,246
—
90,997
—
30,828

872,221
86,736
26,220
66,259
141,105
—
266,611
90,352

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,159,009

$573,684

$539,871

$(723,060)

$1,549,504

$ 226,343

$ 29,480

$

311

$

—

$ 256,134

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY:
Current liabilities:

Current portion of notes payable and long-term debt
Current portion of fair value of derivatives embedded within convertible

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

debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current payments due under the Master Settlement Agreement
. . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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, including litigation accruals and payments due under the

6,635
—
5,257
—
55,915

294,150
1,354,219
24,789
45,615
(13,084)

Master Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .

1,379

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,707,068

Commitments and contingencies
Stockholders’ (deficiency) equity attributed to Vector Group Ltd. . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest

Total stockholders’ (deficiency) equity . . . . . . . . . . . . . . . . . . . . . . .

(548,059)
—

(548,059)

—
479
1,263
36,561
73,279

141,062
2,349
—
15,673
17,732

38,179

214,995

358,689
—

358,689

—
37,912
—
—
51,144

89,367
30,129
—
—
32,763

62,207

214,466

324,712
693

325,405

—
(38,391)
(1,268)
—
—

(39,659)
—
—
—
—

6,635
—
5,252
36,561
180,338

484,920
1,386,697
24,789
61,288
37,411

—

101,765

(39,659)

2,096,870

(683,401)
—

(683,401)

(548,059)
693

(547,366)

Total liabilities and stockholders’ deficiency . . . . . . . . . . . . . . . .

$1,159,009

$573,684

$539,871

$(723,060)

$1,549,504

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 OPERATIONS

Year Ended December 31, 2019

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

Revenues . . . . . . . . . . . . . . . . . . . . . . .

$

— $1,115,318

$788,871

$

(478)

$1,903,711

Expenses:

Cost of sales . . . . . . . . . . . . . . . . . . .

—

771,130

530,449

— 1,301,579

Operating, selling, administrative and

general expenses . . . . . . . . . . . . . . .

38,051

71,001

261,433

(478)

370,007

Litigation settlement and judgment

expense (income)

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

Management fee expense . . . . . . . . . .

—

—

990

11,971

—

—

—

(11,971)

990

—

Operating (loss) income . . . . . . . . . . .

(38,051)

260,226

(3,011)

11,971

231,135

Other income (expenses):

Interest expense . . . . . . . . . . . . . . . . .

(134,594)

(3,838)

(913)

897

(138,448)

Change in fair value of derivatives

embedded within convertible debt

. .

Loss on extinguishment of debt . . . . . .

Equity in losses from real estate

26,425

(4,301)

—

—

—

—

ventures

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

—

— (19,288)

—

—

—

Equity in earnings in consolidated

subsidiaries . . . . . . . . . . . . . . . . . .

182,959

Management fee income . . . . . . . . . . .

Other, net . . . . . . . . . . . . . . . . . . . . .

Income (loss) before provision for income
. . . . . . . . . . . . . . . . . . . . . . . .

taxes

Income tax benefit (expense) . . . . . . . .

11,971

30,193

74,602

26,372

6,185

—

5,340

— (189,144)

—

5,929

(11,971)

(3,157)

267,913

(17,283)

(191,404)

(65,069)

5,884

—

Net income (loss)

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

100,974

202,844

(11,399)

(191,404)

26,425

(4,301)

(19,288)

—

—

38,305

133,828

(32,813)

101,015

Net income attributed to non-controlling

interest . . . . . . . . . . . . . . . . . . . . . . .

—

—

(41)

—

(41)

Net income (loss) attributed to Vector

Group Ltd. . . . . . . . . . . . . . . . . . . . .

$ 100,974

$ 202,844

$ (11,440)

$(191,404)

$ 100,974

Comprehensive income attributed to

non-controlling interest

. . . . . . . . . . .

$

— $

— $

(41)

$

— $

(41)

Comprehensive income (loss) attributed to
Vector Group Ltd. . . . . . . . . . . . . . . .

$ 103,845

$ 204,269

$ (11,440)

$(192,829)

$ 103,845

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 OPERATIONS

Year Ended December 31, 2018

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $

— $1,111,572

$759,168

$

(478) $1,870,262

Expenses:

Cost of sales . . . . . . . . . . . . . . . . . . . . .

—

787,251

505,233

— 1,292,484

Operating, selling, administrative and

general expenses

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

35,332

66,781

253,878

(478)

355,513

Litigation settlement and judgment

expense . . . . . . . . . . . . . . . . . . . . . . .

Management fee expense . . . . . . . . . . . .

—

—

685

(2,469)

—

(1,784)

11,509

—

(11,509)

—

Operating (loss) income . . . . . . . . . . . . .

(35,332)

245,346

2,526

11,509

224,049

Other income (expenses):

Interest expense . . . . . . . . . . . . . . . . . .

(200,916)

(2,797)

(67)

Change in fair value of derivatives

embedded within convertible debt . . . .

Loss on extinguishment of debt

. . . . . . .

44,989

(4,066)

Equity in earnings from real estate

ventures . . . . . . . . . . . . . . . . . . . . . .

—

Equity in earnings in consolidated

subsidiaries . . . . . . . . . . . . . . . . . . . .

195,582

Management fee income . . . . . . . . . . . .

Other, net . . . . . . . . . . . . . . . . . . . . . . .

Income before provision for income taxes . .

Income tax benefit (expense)

. . . . . . . . .

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

Net loss attributed to non-controlling

11,509

3,193

14,959

43,146

58,105

—

—

—

—

—

14,446

—

—

—

—

3,669

—

— (199,251)

—

(11,509)

(997)

1,725

—

245,221

18,630

(199,251)

(60,749)

(3,949)

—

184,472

14,681

(199,251)

(203,780)

44,989

(4,066)

14,446

—

—

3,921

79,559

(21,552)

58,007

interest

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

—

—

98

—

98

Net income attributed to Vector Group

Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,105 $ 184,472

$ 14,779

$(199,251) $

58,105

Comprehensive loss attributed to

non-controlling interest . . . . . . . . . . . . . $

— $

— $

98

$

— $

98

Comprehensive income attributed to Vector

Group Ltd. . . . . . . . . . . . . . . . . . . . . . . $ 56,730 $ 181,041

$ 14,779

$(195,820) $

56,730

F-95

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, 2017

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $

— $1,080,590

$727,364

$

(478) $1,807,476

Expenses:

Cost of sales . . . . . . . . . . . . . . . . . . . . .

—

750,768

477,278

— 1,228,046

Operating, selling, administrative and

general expenses

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

34,790

74,107

228,772

(478)

337,191

Litigation settlement and judgment

expense . . . . . . . . . . . . . . . . . . . . . . .

Management fee expense . . . . . . . . . . . .

—

—

6,591

11,069

—

—

—

(11,069)

6,591

—

Operating (loss) income . . . . . . . . . . . . .

(34,790)

238,055

21,314

11,069

235,648

Other income (expenses):

Interest expense . . . . . . . . . . . . . . . . . .

(169,910)

(3,740)

(35)

Changes in fair value of derivatives

embedded within convertible debt . . . .

35,919

Loss on extinguishment of debt

. . . . . . .

(34,110)

Equity in earnings from real estate

ventures . . . . . . . . . . . . . . . . . . . . . .

—

Equity in earnings in consolidated

subsidiaries . . . . . . . . . . . . . . . . . . . .

200,480

Management fee income . . . . . . . . . . . .

11,069

Other, net . . . . . . . . . . . . . . . . . . . . . . .

Income before provision for income taxes . .

Income tax benefit (expense)

. . . . . . . . .

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

Net income attributed to non-controlling

576

9,234

75,338

84,572

—

—

—

—

—

21,395

—

—

—

—

15,077

—

2,101

— (215,557)

—

(11,069)

1,324

—

251,493

43,998

(215,557)

(73,546)

(210)

—

177,947

43,788

(215,557)

(173,685)

35,919

(34,110)

21,395

—

—

4,001

89,168

1,582

90,750

interest

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

—

—

(6,178)

—

(6,178)

Net income attributed to Vector Group

Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,572 $ 177,947

$ 37,610

$(215,557) $

84,572

Comprehensive income attributed to

non-controlling interest . . . . . . . . . . . . . $

— $

— $ (6,178) $

— $

(6,178)

Comprehensive income attributed to Vector

Group Ltd. . . . . . . . . . . . . . . . . . . . . . . $ 83,246 $ 161,577

$ 37,610

$(199,187) $

83,246

F-96

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

Year Ended December 31, 2019

Subsidiary
Non-
Guarantors
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . $ 166,855 $ 219,173 $ 6,654

Subsidiary
Guarantors

Parent/
Issuer

Consolidated
Vector Group
Ltd.

Consolidating
Adjustments
$(268,611) $ 124,071

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 investments in 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . .
Tax withholdings related to net share settlements of stock option

exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . .
Net (decrease) increase in cash, cash equivalents and restricted

21,879
68,859
(87,766)
8,256
(6,556)
—
—
(235)
(29)
(59,467)
—
—
(126)
—
1,083
(54,102)

—
—
—
—
—
—
—
—
— (2,667)
— (52,529)
— 41,300
—
—
—
9
(380)
(8,276)
— (2,295)
—
—
(24,838)
(3,626)

(484)
1,023
—
8
—
(4,173)

—
—
—
—
—
—
—
—
—
59,467
—
—
—
—
—
59,467

21,879
68,859
(87,766)
8,256
(9,223)
(52,529)
41,300
(719)
994
—
17
(380)
(12,575)
(2,295)
1,083
(23,099)

230,000
(9,297)
(292,390)

—
(505)
(820)
— 243,688
— (239,526)
1,225
—
— (215,728)
—
—

—
—
(209)
—
—
58,242
(52,883)
—
(286)

230,000
—
(9,802)
—
— (293,419)
—
243,688
— (239,526)
—
—
— (238,249)
(286)
—

(59,467)
268,611

(238,249)
—

(5,415)
—
(315,351)

—
—
(211,666)

—
(216)
4,648

—
—
209,144

(5,415)
(216)
(313,225)

(13,536)
cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash, beginning of period . . . .
93,000
Cash, cash equivalents and restricted cash, end of period . . . . . . . . $ 272,282 $ 27,730 $ 79,464

(202,598)
474,880

3,881
23,849

— (212,253)
—
591,729
— $ 379,476

$

F-97

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

Year Ended December 31, 2018

Subsidiary
Non-
Guarantors
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . $ 188,568 $ 204,638 $ 36,719

Subsidiary
Guarantors

Parent/
Issuer

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 investments in real estate ventures . . . . . . . . .
Increase in cash surrender value of life insurance policies . . . . . .
Decrease in restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . . . . .
Cash acquired in purchase of subsidiaries . . . . . . . . . . . . . . . . .
Purchase of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of notes receivable . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Pay downs of investment securities . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (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 . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . .
Net increase (decrease) in cash, cash equivalents and restricted

14,673
24,719
(34,445)
19,487
(415)
—
—
(280)
6
—
(17,224)
9
—
—
—
— (10,000)
—
(4,599)

—
3,955
—
—
—
—
—
—
—
—
— (9,728)
— 54,233
—
(484)
—
520
—
(450)
— (10,000)
—
654
(404)
67
(13,061)
— (2,583)
—
—
18,728
(10,599)

20,000
(22)
—
1,611
28,110

325,000
(9,400)
(26,750)

—
—
—
—
(308)
(21,631)
—
— 307,023
—
— (310,551)
16,424
10,800
—
(72,085)
— (176,006)
—
—
— (2,521)
(58,490)

(190,365)

(225,367)
—
63,483

(3,043)
cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96,043
Cash, cash equivalents and restricted cash, beginning of period . . . .
Cash, cash equivalents and restricted cash, end of period . . . . . . . . $ 474,880 $ 23,849 $ 93,000

280,161
194,719

3,674
20,175

F-98

Consolidated
Vector Group
Ltd.

Consolidating
Adjustments
$(248,091) $ 181,834

—
—
—
—
—
—
—
—
—
—
27,224
—
—
—
(20,000)
—
—
—
7,224

18,628
24,719
(34,445)
19,487
(415)
(9,728)
54,233
(764)
526
(450)
—
9
654
(10,404)
67
(17,682)
(2,583)
1,611
43,463

325,000
—
(9,400)
—
(28,689)
20,000
—
307,023
— (310,551)
—
—
— (225,367)
(2,521)
—
55,495
240,867

(27,224)
248,091

280,792
—
310,937
—
— $ 591,729

$

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

Year Ended December 31, 2017

Subsidiary
Non-
Guarantors
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . $ 177,259 $ 171,122 $ 59,202
Cash flows from investing activities:

Subsidiary
Guarantors

Parent/
Issuer

Consolidated
Vector Group
Ltd.

Consolidating
Adjustments
$(275,997) $ 131,586

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 investments in real estate ventures . . . . . . . . .
Increase in cash surrender value of life insurance policies . . . . . .
Decrease in restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . . . . .
Purchase of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
. . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash, cash equivalents and restricted

28,761
101,097
(132,654)
500
(31,650)
—
—
(318)
227
(20,000)
—
—
(38,458)
(35)
—
2,633
(89,897)

(484)
1,783

—
—
—
—
—
—
466
—
—
(860)
— (38,807)
— 61,718
—
240
— (1,633)
—
76
— (6,569)
—
—
(16,129)
(3,705)
(619)
—
—
—
(2,193)
(2,330)

28,761
—
—
101,097
— (132,654)
—
966
(32,510)
—
(38,807)
—
61,718
—
(802)
—
2,250
—
(1,633)
20,000
76
—
(6,569)
—
38,458
—
(19,869)
—
(619)
—
2,633
—
(35,962)
58,458

850,000
(835,000)
(19,200)

20,000
21
(1,882)
(323)
—
—
— 157,630
—
— (163,474)
—
—
2,400
36,058
— (182,975)
(93,022)
—
—
— (2,779)
—
—
(60,045)
(168,301)

(211,488)
—
43,230
(172,458)

(20,000)

850,021
— (837,205)
(19,200)
—
157,630
—
— (163,474)
—
—
— (211,488)
(2,779)
—
43,230
—
(183,265)
217,539

(38,458)
275,997

(3,036)
cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash, beginning of period . . . .
99,079
Cash, cash equivalents and restricted cash, end of period . . . . . . . . $ 194,719 $ 20,175 $ 96,043

(85,096)
279,815

491
19,684

(87,641)
—
—
398,578
— $ 310,937

$

F-99

VECTOR GROUP LTD.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)

Description

Year Ended December 31, 2019

Allowances for:

Balance at
Beginning
of Period

Additions
Charged to
Costs and
Expenses

Balance
at End
of Period

Deductions

Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Cash discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax valuation allowance . . . . . . . . . . . . . . . . . . .

Sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

449

317

3,817

6,935

$

246

$

21

$

25,970

25,968

—

4,068

2,525

3,218

674

319

1,292

7,785

Total

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

$11,518

$30,284

$31,732

$10,070

Year Ended December 31, 2018

Allowances for:

Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Cash discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax valuation allowance . . . . . . . . . . . . . . . . . . .

Sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33

365

3,664

5,632

$

429

$

13

$

28,154

28,202

153
4,700(1)

—
3,397

449

317

3,817
6,935

Total

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

$ 9,694

$33,436

$31,612

$11,518

Year Ended December 31, 2017

Allowances for:

Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Cash discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax valuation allowance . . . . . . . . . . . . . . . . . . .

Sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

88

273

4,439

6,558

$

63

$

118

$

27,685

27,593

—

3,070

775

3,996

33

365

3,664

5,632

Total

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

$11,358

$30,818

$32,482

$ 9,694

(1)

Includes $2,525 of adjustments related to Topic 606 adoption.

F-100

Independent Accountants:

Transfer Agent and Registrar:

Corporate Officers:

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

Corporate Governance:

The Company timely submitted to
the New York Stock Exchange a
Section 303A(12)(a) CEO
Certification without qualification
in 2019. In 2020, 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.

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

Ronald J. Bernstein
Non-Executive Chairman
of the Board of Managers
of Liggett Vector Brands LLC
and Senior Advisor to Liggett
Group LLC

Stanley S. Arkin3, 4
Stanley S. Arkin PLLC
and Chairman of The Arkin
Group LLC

Henry C. Beinstein2, 4
Partner,
Gagnon Securities LLC

Paul V. Carlucci2, 3
Private Investor

Jean E. Sharpe2, 3, 4
Private Investor

Barry Watkins4
CEO of Clairvoyant Media
Strategies and Senior Advisor,
Madison Square Garden
Company

1 Executive Committee
2 Audit Committee
3 Compensation and Human

Capital Committee

4 Corporate Governance and
Nominating Committee