Document


 

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

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

For The Quarterly Period Ended September 30, 2016
 

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

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

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

 

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

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

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

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

At November 8, 2016, Vector Group Ltd. had 127,839,497 shares of common stock outstanding.

 



VECTOR GROUP LTD.

FORM 10-Q

TABLE OF CONTENTS

 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Vector Group Ltd. Condensed Consolidated Financial Statements (Unaudited):
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
 
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and September 30, 2015
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and September 30, 2015
 
 
Condensed Consolidated Statements of Stockholders' Deficiency for the nine months ended September 30, 2016
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and September 30, 2015
 
 
Notes to Condensed Consolidated Financial Statements
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
SIGNATURE


1
VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

 
September 30,
2016
 
December 31,
2015
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
445,874

 
$
240,368

Investment securities available for sale
175,653

 
181,976

Accounts receivable - trade, net
23,371

 
23,889

Inventories
87,622

 
86,516

Income taxes receivable, net
7,287

 
2,841

Restricted assets
4,749

 
9,195

Other current assets
39,169

 
38,954

Total current assets
783,725

 
583,739

Property, plant and equipment, net
77,887

 
75,632

Investments in real estate, net
23,630

 
23,318

Long-term investments
54,005

 
62,726

Investments in real estate ventures
211,825

 
217,168

Restricted assets
8,134

 
12,303

Goodwill and other intangible assets, net
261,919

 
263,959

Prepaid pension costs
21,628

 
20,650

Other assets
21,977

 
21,120

Total assets
$
1,464,730

 
$
1,280,615

LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
 
 
 
Current liabilities:
 
 
 
   Current portion of notes payable and long-term debt
$
16,280

 
$
8,919

 Current payments due under the Master Settlement Agreement
82,759

 
29,241

   Current portion of employee benefits
914

 
915

Income taxes payable, net
—

 
96

Litigation accruals
3,539

 
22,904

Other current liabilities
113,865

 
154,217

Total current liabilities
217,357

 
216,292

Notes payable, long-term debt and other obligations, less current portion
1,121,433

 
856,108

Fair value of derivatives embedded within convertible debt
120,820

 
144,042

Non-current employee benefits
55,451

 
55,055

Deferred income taxes, net
89,557

 
79,429

Payments due under the Master Settlement Agreement
22,257

 
20,094

Litigation accruals
23,225

 
24,718

Other liabilities
13,227

 
7,038

Total liabilities
1,663,327

 
1,402,776

Commitments and contingencies (Note 7)

 

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

 
—

Common stock, par value $0.10 per share, 250,000,000 shares authorized,127,839,497 and 123,792,329 shares issued and outstanding
12,784

 
12,379

Accumulated deficit
(287,060
)
 
(210,113
)
Accumulated other comprehensive loss
(6,856
)
 
(8,313
)
Total Vector Group Ltd. stockholders' deficiency
(281,132
)
 
(206,047
)
Non-controlling interest
82,535

 
83,886

Total stockholders' deficiency
(198,597
)
 
(122,161
)
Total liabilities and stockholders' deficiency
$
1,464,730

 
$
1,280,615


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

2


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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
   Tobacco*
$
274,164

 
$
264,170

 
$
750,677

 
$
747,145

   Real estate
184,936

 
185,563

 
527,448

 
478,841

   E-Cigarettes
4

 
201

 
52

 
881

          Total Revenues
459,104

 
449,934

 
1,278,177

 
1,226,867

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 Cost of sales:
 
 
 
 
 
 
 
   Tobacco*
186,343

 
174,418

 
491,688

 
506,315

   Real estate
117,089

 
121,078

 
331,784

 
309,306

   E-Cigarettes
10

 
421

 
23

 
1,518

       Total cost of sales
303,442

 
295,917

 
823,495

 
817,139

 
 
 
 
 
 
 
 
Operating, selling, administrative and general expenses
86,298

 
79,352

 
250,048

 
233,449

Litigation settlement and judgment expense
—

 
3,750

 
2,350

 
5,843

Restructuring charges
—

 
1,548

 
41

 
1,548

Operating income
69,364

 
69,367

 
202,243

 
168,888

 
 
 
 
 
 
 
 
Other income (expenses):
 
 
 
 
 
 
 
Interest expense
(37,365
)
 
(32,898
)
 
(104,454
)
 
(96,405
)
Change in fair value of derivatives embedded within convertible debt
6,112

 
7,044

 
23,222

 
18,760

Equity in earnings (losses) from real estate ventures
1,022

 
(916
)
 
3,328

 
1,278

Equity in losses from investments
(1,526
)
 
(1,103
)
 
(2,108
)
 
(2,654
)
Gain (loss) on sale of investment securities available for sale
142

 
(821
)
 
848

 
12,018

Impairment of investment securities available for sale
(54
)
 
(12,211
)
 
(4,916
)
 
(12,211
)
Other, net
1,328

 
1,342

 
2,956

 
5,100

Income before provision for income taxes
39,023

 
29,804

 
121,119

 
94,774

Income tax expense
13,316

 
13,694

 
46,682

 
37,739

 
 
 
 
 
 
 
 
Net income
25,707

 
16,110

 
74,437

 
57,035

 
 
 
 
 
 
 
 
Net income attributed to non-controlling interest
(2,532
)
 
(3,644
)
 
(7,909
)
 
(5,741
)
 
 
 
 
 
 
 
 
Net income attributed to Vector Group Ltd.
$
23,175

 
$
12,466

 
$
66,528

 
$
51,294

 
 
 
 
 
 
 
 
Per basic common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common share attributed to Vector Group Ltd.
$
0.18

 
$
0.10

 
$
0.52

 
$
0.40

 
 
 
 
 
 
 
 
Per diluted common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common share attributed to Vector Group Ltd.
$
0.18

 
$
0.10

 
$
0.52

 
$
0.40

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.38

 
$
0.36

 
$
1.14

 
$
1.09

                                      

* Revenues and cost of sales include federal excise taxes of $116,024, $112,773, $313,731 and $319,044, respectively.


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

3



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
Unaudited
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
Net income
$
25,707

 
$
16,110

 
$
74,437

 
$
57,035

 
 
 
 
 
 
 
 
Net unrealized gains (losses) on investment securities available for sale:
 
 
 
 
 
 
 
Change in net unrealized gains (losses)
2,501

 
(33,796
)
 
(2,953
)
 
(17,379
)
Net unrealized (gains) losses reclassified into net income
(88
)
 
13,032

 
4,068

 
193

Net unrealized gains (losses) on investment securities available for sale
2,413

 
(20,764
)
 
1,115

 
(17,186
)
 
 
 
 
 


 
 
Net unrealized gains on long-term investments accounted for under the equity method:
 
 
 
 
 
 
 
Change in net unrealized gains
—

 
—

 
—

 
1,190

Net unrealized losses reclassified into net income
—

 
—

 
—

 
1,624

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

 
—

 
—

 
2,814

 
 
 
 
 
 
 
 
Net change in forward contracts
9

 
15

 
27

 
47

 
 
 
 
 
 
 
 
Net change in pension-related amounts
 
 
 
 
 
 
 
Net loss arising during the year
—

 
—

 
—

 
1,607

Amortization of loss
445

 
229

 
1,335

 
750

Net change in pension-related amounts
445

 
229

 
1,335

 
2,357

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
2,867

 
(20,520
)
 
2,477

 
(11,968
)
 
 
 
 
 
 
 
 
Income tax effect on:
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on investment securities
(1,033
)
 
1,728

 
1,212

 
(4,875
)
Net unrealized (gains) losses reclassified into net income on investment securities
36

 
(5,389
)
 
(1,672
)
 
(80
)
Change in unrealized gains on long-term investments accounted for under the equity method
—

 
—

 
—

 
(484
)
Net unrealized gains reclassified into net income on long-term investments accounted for under the equity method
—

 
—

 
—

 
(672
)
    Forward contracts
(4
)
 
(6
)
 
(11
)
 
(19
)
    Pension-related amounts
(183
)
 
(95
)
 
(549
)
 
(975
)
Income tax provision on other comprehensive income (loss)
(1,184
)
 
(3,762
)
 
(1,020
)
 
(7,105
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
1,683

 
(24,282
)
 
1,457

 
(19,073
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
27,390

 
(8,172
)
 
75,894

 
37,962

 
 
 
 
 
 
 
 
Comprehensive income attributed to non-controlling interest
(2,532
)
 
(3,644
)
 
(7,909
)
 
(5,741
)
Comprehensive income (loss) attributed to Vector Group Ltd.
$
24,858

 
$
(11,816
)
 
$
67,985

 
$
32,221


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

4


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


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

 
$
12,379

 
$
—

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

 
$
(122,161
)
Net income
—

 
—

 
—

 
66,528

 
—

 
7,909

 
74,437

Total other comprehensive income
—

 
—

 
—

 
—

 
1,457

 
—

 
1,457

Total comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
75,894

Distributions and dividends on common stock
—

 
—

 
(6,323
)
 
(142,866
)
 
—

 
—

 
(149,189
)
Restricted stock grant
50,000

 
5

 
(5
)
 
—

 
—

 
—

 
—

Surrender of shares in connection with restricted stock vesting
(87,561
)
 
(8
)
 
(1,960
)
 
—

 
—

 
—

 
(1,968
)
Effect of stock dividend
6,087,035

 
609

 
—

 
(609
)
 
—

 
—

 
—

Cancellation of shares under share lending agreement
(2,034,212
)
 
(204
)
 
204

 
—

 
—

 
—

 
—

Exercise of stock options
31,906

 
3

 
395

 
—

 
—

 
—

 
398

Tax benefit of options exercised
—

 
—

 
412

 
—

 
—

 
—

 
412

Stock-based compensation
—

 
—

 
7,277

 
—

 
—

 
—

 
7,277

Contributions from non-controlling interest
—

 
—

 
—

 
—

 
—

 
248

 
248

Distributions to non-controlling interest
—

 
—

 
—

 
—

 
—

 
(9,508
)
 
(9,508
)
Balance as of September 30, 2016
127,839,497

 
$
12,784

 
$
—

 
$
(287,060
)
 
$
(6,856
)
 
$
82,535

 
$
(198,597
)


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

5


VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Unaudited

 
Nine Months Ended
 
Nine Months Ended
 
September 30,
2016
 
September 30,
2015
Net cash provided by operating activities
$
121,443

 
$
140,018

Cash flows from investing activities:
 
 
 
Sale of investment securities
81,235

 
161,029

Maturities of investment securities
4,343

 
2,653

Purchase of investment securities
(90,106
)
 
(162,845
)
Proceeds from sale or liquidation of long-term investments
1,000

 
1,288

Purchase of long-term investments
(50
)
 
(10,000
)
Investments in real estate ventures
(23,358
)
 
(43,280
)
Distributions from investments in real estate ventures
23,041

 
11,205

Increase in cash surrender value of life insurance policies
(451
)
 
(1,225
)
Decrease (increase) in restricted assets
8,615

 
(6,872
)
Issuance of notes receivable
—

 
(4,410
)
Proceeds from sale of fixed assets
45

 
3

Capital expenditures
(19,157
)
 
(7,859
)
Repayments of notes receivable
4,410

 
4,000

Pay downs of investment securities
7,842

 
5,743

Proceeds from sale of preferred securities
—

 
1,000

Investments in real estate, net
(130
)
 
(12,512
)
Net cash used in investing activities
(2,721
)
 
(62,082
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
243,620

 
1,519

Deferred financing costs
(6,600
)
 
(624
)
Repayments of debt
(4,698
)
 
(4,968
)
Borrowings under revolver
104,826

 
130,691

Repayments on revolver
(94,644
)
 
(146,655
)
Dividends and distributions on common stock
(147,270
)
 
(139,430
)
Contributions from non-controlling interest
248

 
—

Distributions to non-controlling interest
(9,508
)
 
(564
)
Proceeds from exercise of Vector options
398

 
1,321

Tax benefit of options exercised
412

 
756

Net cash provided by (used in) financing activities
86,784

 
(157,954
)
Net increase (decrease) in cash and cash equivalents
205,506

 
(80,018
)
Cash and cash equivalents, beginning of period
240,368

 
326,365

Cash and cash equivalents, end of period
$
445,874

 
$
246,347


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

6
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)
Basis of Presentation:

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


7
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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

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

 
$
(30,141
)
 
$
21,120

Total assets
 
$
1,310,756

 
$
(30,141
)
 
$
1,280,615

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

 
$
(30,141
)
 
$
856,108

Total liabilities
 
1,432,917

 
(30,141
)
 
1,402,776

Total stockholders' deficiency
 
(122,161
)
 
—

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

 
$
(30,141
)
 
$
1,280,615

 
 
 
 
 
 
 

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

8
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2015
 
As Previously Reported
 
Revision
 
As Revised
 
As Previously Reported
 
Revision
 
As Revised
 
 
 
 
 
 
 
 
 
 
 
 
Operating, selling, administrative and general expenses
$
79,114

 
$
238

 
$
79,352

 
$
232,737

 
$
712

 
$
233,449

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
69,605

 
(238
)
 
69,367

 
169,600

 
(712
)
 
168,888

 
 
 
 
 
 
 
 
 
 
 
 
Equity in losses from investments
(579
)
 
(524
)
 
(1,103
)
 
(2,273
)
 
(381
)
 
(2,654
)
 
 
 
 
 
 
 
 
 
 
 
 
Other, net
133

 
1,209

 
1,342

 
3,554

 
1,546

 
5,100

 
 
 
 
 
 
 
 
 
 
 
 
Income before provision for income taxes
29,357

 
447

 
29,804

 
94,321

 
453

 
94,774

Income tax expense
13,508

 
186

 
13,694

 
37,551

 
188

 
37,739

Net income
15,849

 
261

 
16,110

 
56,770

 
265

 
57,035

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributed to Vector Group Ltd.
12,205

 
261

 
12,466

 
51,029

 
265

 
51,294

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax
(23,890
)
 
(392
)
 
(24,282
)
 
(24,672
)
 
5,599

 
(19,073
)
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
(8,041
)
 
(131
)
 
(8,172
)
 
32,098

 
5,864

 
37,962

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income attributed to Vector Group Ltd.
$
(11,685
)
 
$
(131
)
 
$
(11,816
)
 
$
26,357

 
$
5,864

 
$
32,221

 
 
 
 
 
 
 
 
 
 
 
 

(b)
Distributions and Dividends on Common Stock:

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

(c)
Revenue Recognition:

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

9
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Property management fees and rental commissions earned are recorded as revenue when the related services are performed and the earnings process is complete.

(d)
Earnings Per Share (“EPS”):

Information concerning the Company's common stock has been adjusted to give retroactive effect to the 5% stock dividend paid to Company stockholders on September 29, 2016. All per share amounts and references to share amounts have been updated to reflect the retrospective effect of the stock dividends.

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income attributed to Vector Group Ltd.
$
23,175

 
$
12,466

 
$
66,528

 
$
51,294

Income attributed to participating securities
(750
)
 
(367
)
 
(2,167
)
 
(1,518
)
Net income available to common shares attributed to Vector Group Ltd.
$
22,425

 
$
12,099

 
$
64,361

 
$
49,776



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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Weighted-average shares for basic EPS
124,066,347

 
123,924,385

 
123,999,345

 
123,543,001

Plus incremental shares related to stock options and non-vested restricted stock
211,903

 
141,031

 
214,225

 
183,852

Weighted-average shares for diluted EPS
124,278,250

 
124,065,416

 
124,213,570

 
123,726,853


The following were outstanding during the three and nine months ended September 30, 2016 and 2015, but were not included in the computation of diluted EPS because the effect was anti-dilutive.

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
  Weighted-average number of shares issuable upon
  conversion of debt
26,140,250

 
26,140,251

 
26,140,250

 
26,446,112

  Weighted-average conversion price
$
18.70

 
$
18.70

 
$
18.70

 
$
18.60




10
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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

The Company has estimated the fair 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. At September 30, 2016, the range of estimated fair values of the Company's embedded derivatives was between $119,621 and $121,299. The Company recorded the fair value of its embedded derivatives at the approximate midpoint of the range at $120,820 as of September 30, 2016. At December 31, 2015, the range of estimated fair values of the Company's embedded derivatives was between $143,422 and $144,660. The Company recorded the fair value of its embedded derivatives at the midpoint of the range at $144,042 as of December 31, 2015. The estimated fair value of the Company's embedded derivatives could change significantly based on future market conditions. (See Note 6.)

(f)
Investment in Real Estate Ventures:

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

(g)
Other, Net:

Other, net consisted of:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Interest and dividend income
$
1,489

 
$
1,510

 
$
4,265

 
$
5,045

Gain on long-term investment
190

 
137

 
190

 
361

Provision for loss on real estate held for sale
—

 
(229
)
 
—

 
(229
)
Loss on sale of assets
—

 
(75
)
 
—

 
(75
)
Impairment of long-term investments
—

 
—

 
(1,203
)
 
—

Other expense
(351
)
 
(1
)
 
(296
)
 
(2
)
Other, net
$
1,328

 
$
1,342

 
$
2,956

 
$
5,100



11
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(h)
Other Current Liabilities:
Other current liabilities consisted of:
 
September 30, 2016
 
December 31, 2015
Accounts payable
$
13,441

 
$
19,639

Accrued promotional expenses
16,763

 
24,816

Accrued excise and payroll taxes payable, net
3,792

 
26,556

Accrued interest
18,850

 
28,147

Commissions payable
8,949

 
11,008

Accrued salary and benefits
27,401

 
22,774

Other current liabilities
24,669

 
21,277

Total other current liabilities
$
113,865

 
$
154,217



(i)
Goodwill and Other Intangible Assets, Net:

The components of “Goodwill and other intangible assets, net” were as follows:
 
 
September 30,
2016
 
December 31,
2015
Goodwill
 
$
70,406

 
$
70,791

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

 
107,511

Trademark - Douglas Elliman
 
80,000

 
80,000

 
 
 
 
 
Intangibles with a finite life, net
 
4,002

 
5,657

 
 
 
 
 
  Total goodwill and other intangible assets, net
 
$
261,919

 
$
263,959


(j)
Commitments:

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


(k)
New Accounting Pronouncements:

In October 2016, the FASB issued ASU 2016-17, Interests Held through Related Parties That Are under Common Control (“ASU 2016-17”). ASU 2016-17 modifies existing guidance with respect to how a decision maker that holds an indirect interest in a VIE through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under ASU 2016-17, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. As a result of ASU 2016-17, in certain cases, previous consolidation conclusions may change. ASU 2016-17 is effective for the Company's fiscal year beginning January 1, 2017 with retrospective

12
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


application to January 1, 2016. The Company is currently assessing the impact the adoption of ASU 2016-17 will have on the Company’s condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice on how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. ASU 2016-15 also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. ASU 2016-15 is effective for the Company's fiscal year beginning January 1, 2018. Early adoption is permitted. The standard requires application using a retrospective transition method. The Company is currently assessing the impact the adoption of ASU 2016-15 will have on the Company’s condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 modifies U.S. GAAP by requiring the following, among others: (1) all excess tax benefits and tax deficiencies are to be recognized as income tax expense or benefit on the income statement (excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period); (2) excess tax benefits are to be classified along with other income tax cash flows as an operating activity in the statement of cash flows; (3) in the area of forfeitures, an entity can still follow the current U.S. GAAP practice of making an entity-wide accounting policy election to estimate the number of awards that are expected to vest or may instead account for forfeitures when they occur; and (4) classification as a financing activity in the statement of cash flows of cash paid by an employer to the taxing authorities when directly withholding shares for tax withholding purposes. ASU 2016-09 is effective for the Company's fiscal year beginning January 1, 2017, including interim periods. Early application is permitted. The Company is currently assessing the impact the adoption of ASU 2016-09 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09, instead, the amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. ASU 2016-08 will have the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09. The Company is currently evaluating the method and impact the adoption of ASU 2016-08 and ASU 2014-09 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 will be effective for the Company’s fiscal year beginning January 1, 2017 and subsequent interim periods. The adoption of ASU 2016-07 is not expected to have a material effect on the Company’s condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force) (“ASU 2016-06”). ASU 2016-06 clarifies the requirement for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under ASU 2016-06 is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments in ASU 2016-06 are effective for the Company's fiscal year beginning January 1, 2017, including interim periods. The Company is currently evaluating the method and impact the adoption of ASU 2016-06 will have on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term of the lease. Accounting for lessors remains largely unchanged from current U.S. GAAP. ASU 2016-02 will be effective for the Company’s fiscal year beginning January 1, 2019 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on the Company's condensed consolidated financial statements.


13
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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

In May 2014, FASB issued ASU 2014-9, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-9”). ASU 2014-9 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. As amended by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date the new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning subsequent to December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period presented or with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method and it has not determined the impact of the new standard on the Company's condensed consolidated financial statements.

2.
INVENTORIES

Inventories consist of:
 
September 30,
2016
 
December 31,
2015
Leaf tobacco
$
45,564

 
$
49,856

Other raw materials
4,150

 
3,578

Work-in-process
422

 
789

Finished goods
65,200

 
61,493

E-Cigarettes
66

 
80

Inventories at current cost
115,402

 
115,796

LIFO adjustments
(27,780
)
 
(29,280
)
 
$
87,622

 
$
86,516


All of the Company's inventories at September 30, 2016 and December 31, 2015 are reported under the LIFO method. The $27,780 LIFO adjustment as of September 30, 2016 decreases the current cost of inventories by $18,363 for Leaf tobacco, $643 for Other raw materials, $33 for Work-in-process, $8,736 for Finished goods and $5 for E-Cigarettes. The $29,280 LIFO adjustment as of December 31, 2015 decreased the current cost of inventories by $19,863 for Leaf tobacco, $643 for Other raw materials, $33 for Work-in-Process, $8,736 for Finished goods and $5 for E-Cigarettes.

Liggett enters into purchase commitments with third party providers for leaf tobacco that will be used entirely for future production. The future quantities of leaf tobacco and prices are established at the date of the commitments. At September 30, 2016, Liggett had tobacco purchase commitments of approximately $16,906. Liggett has a single source supply agreement for reduced ignition propensity cigarette paper through 2019.

Each period, the Company capitalizes in inventory that portion of its MSA liability that relates to cigarettes shipped to public warehouses but not sold. The amount of capitalized MSA cost in “Finished goods” inventory was $16,428 and $15,796 at September 30, 2016 and December 31, 2015, respectively. Federal excise tax in inventory was $26,531 and $23,455 at September 30, 2016 and December 31, 2015.

14
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited




3.
INVESTMENT SECURITIES AVAILABLE FOR SALE

The components of investment securities available for sale at September 30, 2016 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable equity securities
$
38,113

 
$
19,835

 
$
—

 
$
57,948

Mutual funds invested in fixed income securities
20,405

 
262

 
—

 
20,667

Marketable debt securities
96,212

 
826

 
—

 
97,038

Total investment securities available for sale
$
154,730

 
$
20,923

 
$
—

 
$
175,653


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

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

 
$
19,833

 
$
(62
)
 
$
67,273

Mutual funds invested in fixed income securities
20,126

 
—

 
(15
)
 
20,111

Marketable debt securities
94,540

 
52

 
—

 
94,592

Total investment securities available for sale
$
162,168

 
$
19,885

 
$
(77
)
 
$
181,976



The table below summarizes the maturity dates of marketable debt securities at September 30, 2016.

Investment Type:
Market Value
 
Under 1 Year
 
1 Year up to 5 Years
 
More than 5 Years
U.S. Government securities
$
30,985

 
$
—

 
$
30,985

 
$
—

Corporate securities
35,669

 
3,366

 
31,871

 
432

U.S. mortgage-backed securities
8,293

 
—

 
819

 
7,474

Commercial mortgage-backed securities
1,776

 
—

 
—

 
1,776

U.S. asset-backed securities
891

 
—

 
891

 
—

Commercial paper
19,424

 
19,424

 
—

 
—

Total marketable debt securities by maturity dates
$
97,038

 
$
22,790

 
$
64,566

 
$
9,682



15
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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

 
In loss position for
 
 
 
 
 
Less than 12 months
 
12 months or more
 
 
 
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Total Fair Value
 
Total Unrealized Losses
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities
$
5,938

 
$
(62
)
 
$
—

 
$
—

 
$
5,938

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

 
(15
)
 
—

 
—

 
10,053

 
(15
)
 
$
15,991

 
$
(77
)
 
$
—

 
$
—

 
$
15,991

 
$
(77
)

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

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Gross realized gains on sales
$
224

 
$
129

 
$
1,157

 
$
13,601

Gross realized losses on sales
(82
)
 
(950
)
 
(309
)
 
(1,583
)
Gains (losses) on sale of investment securities available for sale
$
142

 
$
(821
)
 
$
848

 
$
12,018

 
 
 
 
 
 
 
 
Gross realized losses on other-than-temporary impairments
$
(54
)
 
$
(12,211
)
 
$
(4,916
)
 
$
(12,211
)
 

 

 

 


The Company recorded an “Other-than-temporary impairment” charge of $54 and $4,916 during the three and nine months ended September 30, 2016. The Company recorded an “Other-than-temporary impairment” charge of $12,211 during the three and nine months ended September 30, 2015. The largest component of the charge for the nine months ended September 30, 2016 and 2015 was $4,772 and $6,895, respectively, related to an investment in the common stock of Morgans Hotel Group Co., a company where Vector's President and Chief Executive Officer also serves as Chairman of the Board of Directors.
Although management generally does not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing the Company's investment securities portfolio, management may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements.
Proceeds from investment securities sales totaled $81,235 and $161,029 and proceeds from early redemptions by issuers totaled $12,185 and $8,396 in the nine months ended September 30, 2016 and 2015, respectively, mainly from sales of Corporate securities and U.S. Government securities.

16
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


4.
LONG-TERM INVESTMENTS

Long-term investments consisted of the following:
 
September 30, 2016
 
December 31, 2015
Investments accounted at cost
$
35,476

 
$
41,231

Investments accounted for under the equity method
18,529

 
21,495

 
$
54,005

 
$
62,726


(a) Cost-Method Investments:

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

 
September 30, 2016
 
December 31, 2015
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Investment partnerships
$
34,975

 
$
39,300

 
$
40,730

 
$
44,217

Real estate partnership
501

 
511

 
501

 
552

 
$
35,476

 
$
39,811

 
$
41,231

 
$
44,769



The principal business of the investment partnerships is investing in investment securities and real estate. The estimated fair value of the investment partnerships was provided by the partnerships based on the indicated market values of the underlying assets or investment portfolio. The investments in these investment partnerships are illiquid and the ultimate realization of these investments is subject to the performance of the underlying partnership and its management by the general partners. In the future, the Company may invest in other investments, including limited partnerships, real estate investments, equity securities, debt securities, derivatives and certificates of deposit, depending on risk factors and potential rates of return.
If it is determined that an other-than-temporary decline in fair value exists in long-term investments, the Company records an impairment charge with respect to such investment in its consolidated statements of operations. The Company will continue to perform additional assessments to determine the impact, if any, on the Company’s condensed consolidated financial statements. Thus, future impairment charges may occur.
The Company has accounted for these investments using the cost method of accounting because the investments did not meet the requirements for equity method accounting.
The Company received cash distributions of $1,000 and $543 from the Company's investments in long-term investments under the cost method for the nine months ended September 30, 2016 and 2015, respectively. The Company invested $10,000 in a reinsurance company and three investment funds during the nine months ended September 30, 2015.
The long-term investments are carried on the consolidated balance sheet at cost. The fair value determination disclosed above
would be classified as Level 3 under fair value hierarchy disclosed in Note 11 if such assets were recorded on the consolidated balance sheet at fair value. The fair value determinations disclosed above were based on company assumptions, and information obtained from the partnerships based on the indicated market values of the underlying assets of the investment portfolio.


17
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



(b) Equity-Method Investments:

Long-term investments accounted for under the equity method consisted of the following:
 
September 30,
2016
 
December 31, 2015
Indian Creek Investors LP
$
5,004

 
$
4,989

Boyar Value Fund
7,368

 
7,302

Ladenburg Thalmann Financial Services Inc.
6,157

 
9,204

Castle Brands, Inc.
—

 
—

 
$
18,529

 
$
21,495



The Company's investments accounted for under the equity method include the following: Indian Creek Investors LP (“Indian Creek”), Boyar Value Fund (“Boyar”), LTS and Castle. At September 30, 2016, the Company's ownership percentages in Indian Creek, Boyar, LTS and Castle were 20.07%, 31.18%, 7.75% and 7.89%, respectively. The Company accounted for its Indian Creek and Boyar interests as equity-method investments because the Company's ownership percentage meets the threshold for equity-method accounting. The Company accounted for its LTS and Castle interests as equity-method investments because, in accordance with U.S. GAAP, the Company has the ability to exercise significant influence over their operating and financial policies.
The principal business of Indian Creek is investing in investment securities. Fair value approximates carrying value. The estimated fair value of the investment partnership was provided by the partnership based on the indicated market values of the underlying assets or investment portfolio. The investment in the investment partnership is illiquid and the ultimate realization of the investment is subject to the performance of the underlying partnership and its management by the general partners.

The Company's investments under the equity method include an investment in Boyar. The value of the investment based on the quoted market price as of September 30, 2016 was $7,368, equal to its carrying value. Ladenburg Thalmann Fund Management, LLC, an indirect subsidiary of LTS, is the manager of Boyar.

At September 30, 2016, the aggregate values of the LTS and Castle investments based on the quoted market price were $32,781 and $11,024, respectively.
The Company received cash distributions of $834 and $2,052 from the Company's investments in long-term investments under the equity method for the nine months ended September 30, 2016 and 2015, respectively. The Company recognized equity in losses from investments under the equity method of $1,526 and $2,108 for the three and nine months ended September 30, 2016, respectively. The Company recognized equity in losses from investments under the equity method of $1,103 and $2,654 for the three and nine months ended September 30, 2015, respectively. The Company has suspended its recognition of equity in losses from Castle to the extent such losses exceed its basis.
If it is determined that an other-than-temporary decline in fair value exists in long-term investments, the Company records an impairment charge with respect to such investment in its consolidated statements of operations. The Company will continue to perform additional assessments to determine the impact, if any, on the Company’s condensed consolidated financial statements. Thus, future impairment charges may occur.


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

18
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Investments in real estate ventures.  New Valley also holds equity investments in various real estate projects domestically and internationally. The components of “Investments in real estate ventures” were as follows:
 
September 30,
2016
 
December 31,
2015
10 Madison Square Park (1107 Broadway)
$
1,596

 
$
11,391

The Marquand (11 East 68th Street)
9,310

 
13,900

11 Beach Street
13,989

 
13,209

20 Times Square (701 Seventh Avenue)
19,886

 
14,985

111 Murray Street
25,176

 
25,567

160 Leroy Street
4,547

 
3,952

215 Chrystie Street
5,856

 
5,592

The Dutch (25-19 43rd Avenue)
1,157

 
1,077

1 QPS Tower (23-10 Queens Plaza South)
17,224

 
16,177

87 Park (8701 Collins Avenue)
11,313

 
8,658

125 Greenwich Street
9,865

 
9,750

West Hollywood Edition (9040 Sunset Boulevard)
13,549

 
10,510

76 Eleventh Avenue
19,379

 
17,967

Monad Terrace
7,924

 
6,608

Takanasee
5,169

 
4,680

Condominium and Mixed Use Development
165,940

 
164,023

 
 
 
 
Maryland Portfolio
—

 
—

ST Portfolio
9,122

 
15,754

Apartment Buildings
9,122

 
15,754

 
 
 
 
Park Lane Hotel
20,620

 
19,697

Hotel Taiwana
7,322

 
7,069

Coral Beach and Tennis Club
3,401

 
3,159

Hotels
31,343

 
29,925

 
 
 
 
The Plaza at Harmon Meadow
3,461

 
5,449

Commercial
3,461

 
5,449

 
 
 
 
Other
1,959

 
2,017

 
 
 
 
Investments in real estate ventures
$
211,825

 
$
217,168

 
Condominium and Mixed-Use Development:
Condominium and mixed-use development investments range in ownership percentage from 3.1% to 49.5%. New Valley recorded net equity in earnings from real estate ventures of $1,568 and $3,347 for the three and nine months ended September 30, 2016 from its condominium and mixed-used developments. For the three months ended September 30, 2016 equity in earnings from real estate related to $2,410 in equity earnings from New Valley's proportionate share of the sale of condominium units at 10 Madison Square Park offset by equity in losses of $842 from the other condominiums and mixed-use development projects. For the nine months ended September 30, 2016 equity in earnings from real estate was related to $6,621 in equity earnings from New Valley's proportionate share of the sale of condominium units at 10 Madison Square Park offset by equity losses of $986 at

19
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


the Marquand, $243 at 11 Beach Street, $378 at 111 Murray Street, $176 at 215 Chrystie Street, $175 at 1 QPS Tower, $347 at 87 Park, $435 at West Hollywood Edition, $465 at Monad Terrace and $69 equity in losses from other condominiums and mixed-use development projects. New Valley recorded equity in earnings from real estate ventures of $248 and $923 for the three and nine months ended September 30, 2015. The Company recorded $1,900 of equity in earnings related to its proportionate share of the Marquand’s equity earnings from the sale of five of its units, $236 of equity in earnings from Chelsea Eleven for a distribution of excess amounts held back in 2012 for final expenses of the investment and $20 equity in earnings from other condominium and mixed-use development projects offset by losses of $78 at 10 Madison Square Park, $400 at 11 Beach Street, $490 at 87 Park and $265 at 125 Greenwich Street for the nine months ended September 30, 2015.
In July 2016, New Valley entered into a newly created joint venture related to the 20 Times Square project. The joint venture is a variable interest entity, however, New Valley is not the primary beneficiary. New Valley accounts for its interest in the joint venture under the equity method of accounting and has combined this investment with the existing 20 Times Square venture carrying balance.
In August 2016, New Valley entered into a newly created joint venture related to the 87 Park project. The joint venture is a variable interest entity, however, New Valley is not the primary beneficiary. New Valley accounts for its interest in the joint venture under the equity method of accounting and has combined this investment with the existing 87 Park venture carrying balance.
During the nine months ended September 30, 2016, New Valley made capital contributions totaling $20,353 related to ventures where New Valley previously held an investment, primarily at 20 Times Square, 160 Leroy Street, West Hollywood Edition, 87 Park, Takanasee and Monad Terrace. During the nine months ended September 30, 2016, New Valley did not make certain capital contributions to Monad Terrace. This resulted in a change in ownership percentage from 31.3% to 24.3%. For other ventures where New Valley previously held an investment, New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners. New Valley's direct investment percentage for these ventures did not change. During the nine months ended September 30, 2015, New Valley made capital contributions totaling $35,776 primarily related to 10 Madison Square West, 1 QPS Tower, 125 Greenwich Street, 76 Eleventh Avenue and Monad Terrace. New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners. New Valley's investment percentages did not change.
During the nine months ended September 30, 2016, New Valley received distributions of $29,894 related to 10 Madison Square West, the Marquand, West Hollywood Edition, 111 Murray Street and income from marketing fees paid by 125 Greenwich Street. During the nine months ended September 30, 2015, New Valley received distributions of $11,441 from a return of capital from 111 Murray Street and its investment in Chelsea Eleven, which sold its last unit in 2012, for excess amounts held back in 2012 for final expenses of the investment.
New Valley's maximum exposure to loss, net of non-controlling interest, as a result of its investments in condominium and mixed-use developments was $143,899 at September 30, 2016.

New Valley capitalized $8,111 of interest expense into the carrying value of its ventures whose projects were currently under development during the nine months ended September 30, 2016.

Douglas Elliman has been engaged by the developers as the sole broker or the co-broker for several of the real estate development projects that New Valley owns an interest in through its joint venture investments. Douglas Elliman had gross commissions of approximately $5,118 and  $13,197 for the three and nine months ended September 30, 2016 from these projects.

20
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



Apartment Buildings:
Apartment building investments range in ownership percentage from 7.6% to 16.3%. New Valley recorded equity in earnings from real estate ventures of $43 and $2,189 for the three and nine months ended September 30, 2016, related to the ST Portfolio and Maryland Portfolio. In the fourth quarter of 2015, ST Portfolio sold one (Highgrove) of its two remaining Class A multi-family buildings. New Valley recorded equity in losses from real estate ventures of $72 and equity in earnings of $1,730 for the three and nine months ended September 30, 2015, related to the ST Portfolio. In the second quarter of 2015, ST Portfolio sold one (Phoenix) of its three remaining Class A multi-family buildings. New Valley received distributions of $8,821 during the nine months ended September 30, 2016, related to ST Portfolio and Maryland Portfolio. New Valley received distributions of $1,989 during the nine months ended September 30, 2015, primarily related to the Maryland Portfolio. New Valley has suspended its recognition of equity losses in Maryland Portfolio to the extent such losses exceed its basis. New Valley's maximum exposure to loss as a result of its investment in apartment buildings was $9,122 at September 30, 2016.

Hotels:
Hotel investments range in ownership percentage from 5.2% to 49.0%. New Valley recorded equity in losses from real estate ventures of $743 and $1,587 for the three and nine months ended September 30, 2016, related to hotel operations. New Valley recorded equity in losses from real estate ventures of $1,323 and $2,330 for the three and nine months ended September 30, 2015. New Valley made capital contributions totaling $3,005 for the nine months ended September 30, 2016, related to the Park Lane Hotel and Coral Beach and Tennis Club. New Valley made capital contributions totaling $2,277 for the nine months ended September 30, 2015, related to the Park Lane Hotel and Coral Beach and Tennis Club. New Valley's maximum exposure to loss as a result of its investments in hotels was $31,343 at September 30, 2016.

Commercial:
New Valley recorded equity in losses from real estate ventures of $81 and $1,613 for the three and nine months ended September 30, 2016, related to shopping center rental operations. New Valley recorded equity in earnings from real estate ventures of $20 and $47 for the three and nine months ended September 30, 2015, related to shopping center rental operations. New Valley received distributions totaling $375 for the nine months ended September 30, 2016, related to Harmon Meadow. New Valley received distributions of $340 for the nine months ended September 30, 2015, related to Harmon Meadow. New Valley's maximum exposure to loss as a result of its investments in commercial ventures was $3,461 at September 30, 2016.

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

Investments in Real Estate, net:
The components of “Investments in real estate, net” were as follows:
 
September 30,
2016
 
December 31,
2015
Escena, net
$
10,897

 
$
10,716

Sagaponack
12,733

 
12,602

            Investments in real estate, net
$
23,630

 
$
23,318


Escena.  The assets of “Escena, net” were as follows:

21
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
September 30,
2016
 
December 31,
2015
Land and land improvements
$
8,908

 
$
8,907

Building and building improvements
1,878

 
1,875

Other
2,028

 
1,923

 
12,814

 
12,705

Less accumulated depreciation
(1,917
)
 
(1,989
)
 
$
10,897

 
$
10,716


New Valley recorded operating losses of $803 and $779 for the three months ended September 30, 2016 and 2015, respectively, from Escena. New Valley recorded operating losses of $594 and $227 for the nine months ended September 30, 2016 and 2015, respectively, from Escena.

Investment in Sagaponack. In April 2015, New Valley invested $12,502 in a residential real estate project located in Sagaponack, NY. The project is wholly owned and the balances of the project are included in the condensed consolidated financial statements of the Company. As of September 30, 2016, the assets of Sagaponack consisted of land and land improvements of $12,733.

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

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

 
September 30,
2016
 
December 31,
2015
Vector:
 
 
 
7.75% Senior Secured Notes due 2021, including premium of $14,675 and $8,014
$
849,675

 
$
608,014

7.5% Variable Interest Senior Convertible Notes due 2019, net of unamortized discount of $115,479 and $132,119*
114,521

 
97,881

5.5% Variable Interest Senior Convertible Debentures due 2020, net of unamortized discount of $75,153 and $86,136*
183,597

 
172,614

Liggett:
 
 
 
Revolving credit facility
13,591

 
3,213

Term loan under credit facility
3,073

 
3,269

Equipment loans
5,136

 
9,716

Other
641

 
461

Notes payable, long-term debt and other obligations
1,170,234

 
895,168

Less:
 
 
 
Debt issuance costs
(32,521
)
 
(30,141
)
Total notes payable, long-term debt and other obligations
1,137,713

 
865,027

Less:
 
 
 
Current maturities
(16,280
)
 
(8,919
)
Amount due after one year
$
1,121,433

 
$
856,108

______________________
* The fair value of the derivatives embedded within the 7.5% Variable Interest Senior Convertible Notes ($57,901 at September 30, 2016 and $72,083 at December 31, 2015, respectively) and the 5.5% Variable Interest Senior Convertible Debentures ($62,919 at September 30, 2016 and $71,959 at December 31, 2015, respectively), is separately classified as a derivative liability in the condensed consolidated balance sheets.



22
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


7.75% Senior Secured Notes due 2021 - Vector:

The Company has outstanding $835,000 principal amount of its 7.75% Senior Secured Notes due 2021 that are guaranteed subject to certain customary automatic release provisions on a joint and several basis by all of the 100% owned domestic subsidiaries of the Company that are engaged in the conduct of its tobacco businesses.
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 (“Consolidated EBITDA”), as defined in the indenture, for the most recently ended four full quarters is less than $75,000. The indenture also restricts the incurrence of debt if 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.
At September 30, 2016, management believed that the Company was in compliance with all covenants under the indentures of the 7.75% Senior Secured Notes due 2021.
On May 9, 2016, the Company completed the sale of an additional $235,000 principal amount of its 7.75% Senior Secured Notes due 2021 for a price of 103.50% in a private offering to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933 (the “Securities Act”). The Company received net proceeds of approximately $236,900 after deducting underwriting discounts, commissions, fees and offering expenses. The net proceeds will be used for general corporate purposes, including for additional investments in real estate and in the Company's cigarette business. The Company will amortize the deferred costs and debt premium related to the additional Senior Secured Notes over the estimated remaining life of the debt.
In August 2016, the Company completed an offer to exchange the 7.75% Senior Secured Notes issued in May 2016 for an equal amount of newly issued 7.75% Senior Secured Notes due 2021. The new 7.75% Senior Secured Notes have substantially the same terms as the original notes, except that the new 7.75% Senior Secured Notes have been registered under the Securities Act.

6.75% Variable Interest Senior Convertible Note due 2015 - Vector:

On February 3, 2015, the holder of the 6.75% Variable Interest Senior Convertible Note due 2015, converted the remaining $25,000 principal balance of the $50,000 Note into 2,455,877 of the Company's common shares. The debt conversion resulted in a reduction of debt and an increase to equity in the amount of $25,000.

Share Lending Agreement

In connection with the offering of its 2019 Convertible Notes in November 2012, the Company lent Jefferies & Company (“Jefferies”), the underwriter for the offering, shares of the Company’s common stock under the Share Lending Agreement. 3,715,802 shares were outstanding as of December 31, 2015. Jefferies is entitled to offer and sell such shares and use the sale to facilitate the establishment of a hedge position by investors in the notes and will receive all proceeds from the common stock offerings and lending transactions under the Share Lending Agreement. The Company received a nominal lending fee of $0.10 per share for each share of common stock that the Company lent pursuant to the Share Lending Agreement.
The Share Lending Agreement requires that the shares borrowed be returned upon the maturity of the related debt, January 2019, or earlier, including the redemption of the notes or the conversion of the notes to shares of common stock pursuant to the terms of the indenture governing the notes. Borrowed shares are issued and outstanding for corporate law purposes and, accordingly, the holders of the borrowed shares will have all of the rights of a holder of the Company’s outstanding shares. However, because the share borrower must return to the Company all borrowed shares (or identical shares), the borrowed shares are not considered outstanding for purposes of computing and reporting the Company’s earnings per share in accordance with U.S. GAAP. Jefferies agreed to pay to the Company an amount equal to any dividends or other distributions that the Company pays on the borrowed shares.
The Company received a nominal fee for the loaned shares and determined the fair value of the Share Lending Agreement was $3,204 at the date of issuance based on the present value of the future cash flows attributed to an estimated reduction in stated interest due to the presence of the Share Lending Agreement. The $3,204 fair value was recognized as a debt financing charge and amortized to interest expense over the term of the notes. In September 2016, 2,135,923 shares were returned but no cash was

23
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


exchanged. As of September 30, 2016, 1,579,879 shares were outstanding on the Share Lending Agreement and had a fair value of $34,015. The issuance costs associated with the Share Lending Agreement were presented on the balance sheet as a direct deduction from the face amount of the related debt. The unamortized amount of these issuance costs was $2,278 and $2,607 at September 30, 2016 and December 31, 2015, respectively.

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

As of September 30, 2016, a total of $16,664 was outstanding under the revolving and term loan portions of the credit facility. Availability, as determined under the facility, was approximately $40,200 based on eligible collateral at September 30, 2016.

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

The conversion rates for all convertible debt outstanding as of September 30, 2016 and December 31, 2015, are summarized below:
 
September 30, 2016
 
December 31, 2015
 
Conversion Price
 
Shares per $1,000
 
Conversion Price
 
Shares per $1,000