| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
Gross realized gains on sales | | | | | $ | 4 | | | $ | 1 | |
Gross realized losses on sales | | | | | (184) | | | (1) | |
Net losses recognized on debt securities available for sale | | | | | $ | (180) | | | $ | — | |
| | | | | | | |
Impairment expense | | | | | $ | (44) | | | $ | (1,165) | |
| | | | | | | |
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.
(b) Equity Securities at Fair Value:
The following is a summary of unrealized and realized net gains and losses recognized in net income on equity securities at fair value during the three months ended March 31, 2023 and 2022, respectively:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
Net gains (losses) recognized on equity securities | | | | | $ | 218 | | | $ | (1,874) | |
Less: Net gains recognized on equity securities sold | | | | | 116 | | | 293 | |
Net unrealized gains (losses) recognized on equity securities still held at the reporting date | | | | | $ | 102 | | | $ | (2,167) | |
| | | | | | | |
The Company’s investments in mutual funds that invest in debt securities are classified as Level 1 under the fair value hierarchy disclosed in Note 9. Their fair values are based on quoted prices for identical assets in active markets or inputs that
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
are based upon quoted prices for similar instruments in active markets. The Company has unfunded commitments of $514 related to long-term investment securities at fair value as of March 31, 2023.
The Company received no cash distributions for the three months ended March 31, 2023 and $202 of cash distributions for the three months ended March 31, 2022. The Company classified all cash distributions as investing cash inflows.
(c) Equity-Method Investments:
Equity-method investments consisted of the following:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Mutual fund and hedge funds | $ | 15,882 | | | $ | 16,040 | |
| | | |
| | | |
At March 31, 2023, the Company’s ownership percentages in the mutual fund and hedge funds accounted for under the equity method ranged from 6.45% to 38.51%. The Company’s ownership percentage in these investments meets the threshold for equity-method accounting.
Equity in losses from investments were:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
Mutual fund and hedge funds | | | | | $ | (159) | | | $ | (2,242) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(d) 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 various limited liability companies at March 31, 2023 and December 31, 2022, respectively. The total carrying value of these investments was $2,755 as of March 31, 2023 and $2,755 as of December 31, 2022, and was included in “Other assets” on the condensed consolidated balance sheets. No impairment or other adjustments related to observable price changes in orderly transactions for identical or similar investments were identified for the three months ended March 31, 2023 and 2022, respectively.
5. NEW VALLEY LLC
Investments in real estate ventures:
The components of “Investments in real estate ventures” were as follows:
| | | | | | | | | | | | | | | | | |
| Range of Ownership (1) | | March 31, 2023 | | December 31, 2022 |
Condominium and Mixed Use Development | 4.1% - 77.8% | | $ | 98,140 | | | $ | 93,350 | |
Apartment Buildings | 15.0% - 50.0% | | 8,770 | | | 9,910 | |
Hotels | 0.4% - 49.0% | | 586 | | | 2,510 | |
Commercial | 1.6% - 49.0% | | 15,859 | | | 15,347 | |
| | | | | |
Investments in real estate ventures | | | $ | 123,355 | | | $ | 121,117 | |
_____________________________
(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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Contributions:
The components of New Valley’s contributions to its investments in real estate ventures were as follows:
| | | | | | | | | | | |
| Three Months Ended |
| March 31, |
| 2023 | | 2022 |
Condominium and Mixed Use Development | $ | 2,862 | | | $ | 369 | |
Apartment Buildings | 58 | | | — | |
Hotels | — | | | 49 | |
Commercial | — | | | 8,070 | |
| | | |
Total contributions | $ | 2,920 | | | $ | 8,488 | |
For 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 three months ended March 31, 2023 and 2022. New Valley’s direct investment percentage for these ventures did not significantly change.
Distributions:
The components of distributions received by New Valley from its investments in real estate ventures were as follows:
| | | | | | | | | | | |
| Three Months Ended |
| March 31, |
| 2023 | | 2022 |
Condominium and Mixed Use Development | $ | — | | | $ | 900 | |
Apartment Buildings | — | | | 1,368 | |
| | | |
Commercial | 70 | | | 218 | |
Other | — | | | 1,557 | |
Total distributions | $ | 70 | | | $ | 4,043 | |
Of the distributions received by New Valley from its investment in real estate ventures, $70 and $733 were from distributions of earnings for the three months ended March 31, 2023 and 2022, respectively, and $3,310 were a return of capital for the three months ended March 31, 2022. Distributions from earnings are included in cash from operations in the condensed consolidated statements of cash flows, while distributions from return of capital are included in cash flows from investing activities in the condensed consolidated statements of cash flows.
Equity in Earnings (losses) from Real Estate Ventures:
New Valley recognized equity in losses from real estate ventures as follows:
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | | | | 2023 | | 2022 | |
Condominium and Mixed Use Development | | | | | $ | 646 | | | $ | (1,698) | | |
Apartment Buildings | | | | | (1,199) | | | (309) | | |
Hotels | | | | | (1,924) | | | (757) | | |
Commercial | | | | | 584 | | | 372 | | |
Other | | | | | — | | | 515 | | |
Equity in losses from real estate ventures | | | | | $ | (1,893) | | | $ | (1,877) | | |
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The Company recorded impairment expense of $1,202 for the three months ended March 31, 2023. The expense related to one hotel venture. As a result of the Company recording impairment charges on certain of its investments in real estate ventures, the impaired real estate venture was recorded at fair value as of the period when the impairment charge was recorded. The impaired real estate venture was 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 the Three Months Ended March 31, 2023:
In January 2023, New Valley invested $700 for an approximate 27% interest in 353 6th LLC. The joint venture plans to develop a condominium complex. The venture is a variable interest entity (“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 353 6th LLC was $707 at March 31, 2023.
VIE Consideration:
The Company has determined that the entities in the real restate ventures were VIEs but New Valley was not the primary beneficiary. Therefore, New Valley’s investment in such real estate ventures has been accounted for under the equity method of accounting.
Maximum Exposure to Loss:
New Valley’s maximum exposure to loss from its investments in real estate ventures consisted of the net carrying value of the venture adjusted for any future capital commitments and/or guarantee arrangements. The maximum exposure to loss was as follows:
| | | | | |
| March 31, 2023 |
Condominium and Mixed Use Development | $ | 98,140 | |
Apartment Buildings | 8,770 | |
Hotels | 586 | |
Commercial | 15,859 | |
| |
Total maximum exposure to loss | $ | 123,355 | |
New Valley capitalized $1,056 and $3,716 of interest costs into the carrying value of its ventures whose projects were currently under development for the three months ended March 31, 2023 and 2022, respectively.
Investments in Real Estate, net:
Escena. New Valley recorded operating income of $1,239 for the three months ended March 31, 2022 from Escena. Escena is a master planned community, golf course, and club house in Palm Springs, California. In April 2022, New Valley sold Escena.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
6. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consisted of:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Vector: | | | |
5.75% Senior Secured Notes due 2029 | $ | 875,000 | | | $ | 875,000 | |
| | | |
10.5% Senior Notes due 2026, net of unamortized discount of $2,092 and $2,209 | 533,383 | | | 539,926 | |
| | | |
Liggett: | | | |
Revolving credit agreement | — | | | 22,035 | |
| | | |
Equipment loans | 30 | | | 37 | |
| | | |
Notes payable, long-term debt and other obligations | 1,408,413 | | | 1,436,998 | |
Less: | | | |
Debt issuance costs | (23,549) | | | (24,672) | |
Total notes payable, long-term debt and other obligations | 1,384,864 | | | 1,412,326 | |
Less: | | | |
Current maturities | (30) | | | (22,065) | |
Amount due after one year | $ | 1,384,834 | | | $ | 1,390,261 | |
5.75% Senior Secured Notes due 2029 — Vector:
As of March 31, 2023, the Company was in compliance with all debt covenants related to its 5.75% Senior Secured Notes due 2029.
10.5% Senior Notes due 2026 — Vector:
In March 2023, the Company repurchased in the market $6,660 in aggregate principal amount of its 10.5% Senior Notes outstanding and recorded a loss of $141 associated with the repurchase. In April 2023, the Company repurchased in the market $1,692 in aggregate principal amount of its 10.5% Senior Notes outstanding and recorded a loss of $40 associated with the repurchase. The 10.5% Senior Notes that were repurchased have been retired.
As of March 31, 2023, the Company was in compliance with all debt covenants related to its 10.5% Senior Notes due 2026.
Revolving Credit Agreement — Liggett:
On May 8, 2023, Liggett, 100 Maple LLC (“Maple”) and Vector Tobacco entered into Amendment No. 5 to the Third Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as agent and lender. The existing credit agreement was amended to replace LIBOR with the Secured Overnight Financing Rate (“SOFR”) as the applicable reference rate and to reduce the unused line fee. Following the amendment, loans under the Credit Agreement will bear interest at a rate equal to, at the borrower’s option, (a) the base rate (which is the highest of (i) 0%, (ii) the federal funds rate plus 0.50%, (iii) the prime rate of Wells Fargo or (iv) Term SOFR for a one month interest period), (b) Term SOFR for the applicable interest period plus 2.25% or (c) Daily Simple SOFR plus 2.25%. The amendment also reduced the unused line fee applicable to the average undrawn commitments to 0.25%, regardless of the amount borrowed under the facility.
As of March 31, 2023, there was no outstanding balance due under the Credit Agreement. Availability, as determined under the Credit Agreement, was approximately $84,500 based on eligible collateral at March 31, 2023. As of March 31, 2023, Liggett, Maple, and Vector Tobacco were in compliance with all debt covenants under the Credit Agreement.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Non-Cash Interest Expense — Vector:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
Amortization of debt discount, net | | | | | $ | 117 | | | $ | 105 | |
Amortization of debt issuance costs | | | | | 1,068 | | | 998 | |
Loss on repurchase of 10.5% Senior Notes | | | | | 108 | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | $ | 1,293 | | | $ | 1,103 | |
Fair Value of Notes Payable and Long-Term Debt:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Carrying | | Fair | | Carrying | | Fair |
| Value | | Value | | Value | | Value |
5.75% Senior Secured Notes due 2029 | $ | 875,000 | | | $ | 778,654 | | | $ | 875,000 | | | $ | 758,993 | |
10.5% Senior Notes due 2026 | 533,383 | | | 537,408 | | | 539,926 | | | 537,202 | |
| | | | | | | |
Liggett and other | 30 | | | 30 | | | 22,072 | | | 22,072 | |
Notes payable and long-term debt | $ | 1,408,413 | | | $ | 1,316,092 | | | $ | 1,436,998 | | | $ | 1,318,267 | |
| | | | | | | |
Notes payable and long-term debt are recorded on the condensed consolidated balance sheets at amortized cost. The fair value determinations disclosed above would be classified as Level 2 under the fair value hierarchy disclosed in Note 9 if such liabilities were recorded on the condensed consolidated balance sheets 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. The Company used a derived price based upon quoted market prices and trade activity as of March 31, 2023 to determine the fair value of its publicly-traded notes and debentures. The carrying value of the revolving Credit Agreement is equal to 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.
7. 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 three months ended March 31, 2023 and 2022, Liggett incurred tobacco product liability legal expenses and costs totaling $2,173 and $1,645, respectively. Legal defense costs are expensed as incurred.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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 March 31, 2023, other than the bond regarding the Mississippi litigation (described below), there are no other litigation bonds posted.
In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies to all Florida tobacco litigation in the aggregate and establishes individual bond caps in amounts that vary depending on the number of judgments in effect at a given time. The maximum amount of any such bond for an appeal in the Florida state courts will be no greater than $5,000. In several cases, plaintiffs challenged the constitutionality of the bond cap statute, but to date the courts have upheld the constitutionality of the statute. It is possible that the Company’s consolidated financial position, results of operations, and cash flows could be materially adversely affected by an unfavorable outcome of such challenges.
Accounting Policy. The Company and its subsidiaries record provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as discussed in this Note 7: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the condensed 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. 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. 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 March 31, 2023, there were 56 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:
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
| | | | | | | | |
State | | Number of Cases |
Massachusetts | | 16 |
Florida | | 14 |
Illinois | | 10 |
Hawaii | | 5 |
Nevada | | 4 |
New Mexico | | 3 |
Louisiana | | 2 |
South Carolina | | 1 |
California | | 1 |
The plaintiffs’ allegations of liability in cases in which individuals seek recovery for injuries allegedly caused by cigarette smoking are based on various theories of recovery, including negligence, gross negligence, breach of special duty, strict liability, fraud, concealment, misrepresentation, design defect, failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, indemnity, violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.
Defenses raised in Individual Actions include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, lack of design defect, statute of limitations, statute of repose, 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.
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 were affirmed on appeal and satisfied by the defendants. Many were overturned on appeal. As of March 31, 2023, 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 faces the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, under certain circumstances, Liggett may have to pay more than its proportionate share of any bonding or judgment related amounts. Except as discussed in this Note 7, 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, except as discussed herein and, in most of the remaining 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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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 to be paid in installments over 14 years starting in February 2015. The Company’s future payments will be approximately $4,000 per annum through 2028, including an annual cost of living increase that began in 2021. In exchange, the claims of these plaintiffs were dismissed with prejudice against the Company and Liggett.
Liggett subsequently entered into two separate settlement agreements with a total of 152 Engle progeny plaintiffs where Liggett paid a total of $23,150. On an individual basis, Liggett settled an additional 210 Engle progeny cases for approximately $8,240 in the aggregate.
As of March 31, 2023, 17 Engle progeny cases 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 March 31, 2023, Liggett paid in the aggregate $40,111, including interest and attorneys’ fees, to satisfy the judgments in the following Engle progeny cases: Lukacs, Campbell, Douglas, Clay, Tullo, Ward, Rizzuto, Lambert, Buchanan and Santoro.
Liggett Only Cases
There are currently three cases where Liggett is the sole defendant: Cowart and Watson are Individual Actions and Forbing is an Engle progeny case. It is possible that cases where Liggett is the only defendant could increase as a result of the remaining Engle progeny cases and newly filed Individual Actions.
Upcoming Trials
As of March 31, 2023, there was one Engle progeny case (Stein) and nine Individual Actions (Bennett, Geist, Grace, Lopez, H., Martinez, Manious, McMakin, Mier and Silva) scheduled for trial through March 31, 2024, where Liggett is a named defendant. Trial dates are subject to change and additional cases could be set for trial during this time.
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 June 2017, after the Court of Appeals (Maryland’s highest court) ruled that joinder of tobacco and asbestos cases may be possible in certain circumstances and then remanded the case, the trial court dismissed all synergy cases against the tobacco company defendants, including Liggett, without prejudice. Plaintiffs may seek appellate review or file new cases against the tobacco companies.
In December 2022, the Mayor and City Council of Baltimore sued Liggett and others, claiming, among other things, that defendants’ failure to use biodegradable filters on their cigarette products resulted in littering by smokers of the city’s streets, sidewalks, beaches, parks, lawns and waterways, which in turn resulted in contamination of the soil and water, increased costs of clean-up and disposal of this litter, as well as the reduction of property values and tourism to the city. Plaintiffs seek compensatory damages, punitive damages, penalties, fines, disgorgement of profits and equitable relief.
Class Actions
As of March 31, 2023, 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.
In November 1997, in Young v. American Tobacco Co., a purported class action was brought on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves cigarette smokers, allege they were exposed to and suffered injury from secondhand smoke from cigarettes. The plaintiffs seek an unspecified amount of compensatory and punitive damages. The case has been stayed since March 2016 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 brought on behalf of plaintiff and all West Virginia residents who allegedly have claims arising from their exposure to cigarette smoke and asbestos fibers and seeks compensatory and punitive damages. The case has been stayed since December 2000 as a result of bankruptcy petitions filed by three co-defendants.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Plaintiffs’ allegations of liability in class action cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of deceptive trade practice laws and consumer protection statutes and claims under the federal and state anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief.
Defenses raised in these cases include, among others, lack of proximate cause, individual issues predominate, assumption of the risk, comparative fault and/or contributory negligence, statute of limitations and federal preemption.
Health Care Cost Recovery Actions
As of March 31, 2023, one Health Care Cost Recovery Action was pending against Liggett 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 have asserted equitable claims that the tobacco industry was “unjustly enriched” by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Department of Justice Lawsuit
In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover, 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.
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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
As a result of the MSA, the Settling States released Liggett and Vector Tobacco from:
•all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and
•all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business.
The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of PMs. Among other things, the MSA prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco advertising and promotion; limits each PM to one tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits PMs from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits PMs from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities.
The MSA also requires PMs to affirm corporate principles to comply with the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf of PMs. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.
Under the payment provisions of the MSA, PMs are required to make annual payments of $9,000,000 (subject to applicable adjustments, offsets and reductions including a “Non-Participating Manufacturers Adjustment” or “NPM Adjustment”). These annual payments are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint, obligations 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 5.7% of the total cigarettes sold in the United States in the first three months of 2023. If Liggett’s or Vector Tobacco’s market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, must pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year. On December 29, 2022, Liggett and Vector Tobacco pre-paid $268,250 of their approximate $285,000 2022 MSA obligation. The remaining balance of $16,780 was paid in April 2023.
Certain MSA Disputes
NPM Adjustment. Liggett and Vector Tobacco contend that they are entitled to an NPM Adjustment for 2003-2022. 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 - 2022, 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. Since then, the PMs have settled the NPM Adjustment dispute with 39 states representing approximately 80% of the MSA allocable share.
The 2004 NPM Adjustment arbitration commenced in 2016, with the arbitration panel eventually finding three states liable for the NPM Adjustment. Two of these states have since filed motions in applicable state courts and with the arbitration
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
panels challenging these determinations and several issues remain to be resolved by the arbitration panels that will affect the final amount of the 2004 NPM Adjustment. Individual state hearings with respect to the NPM Adjustments for 2005 - 2007 are ongoing.
As a result of the settlements described above, Liggett and Vector Tobacco reduced cost of sales for the three months ended March 31, 2023 and 2022 by $3,585 and $4,781 respectively. Liggett and Vector Tobacco may be entitled to further adjustments. As of March 31, 2023, Liggett and Vector Tobacco had accrued approximately $9,200 related to the disputed amounts withheld from the non-settling states for 2005 - 2010, which may be subject to payment, with interest, if Liggett and Vector Tobacco lose the disputes for those years.
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. In November 2022, Minnesota advised Liggett that the settlement agreement had terminated pursuant to its terms and that statutory fee-in-lieu of settlement payments will be collected from wholesalers distributing Liggett’s products in Minnesota. 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 in 2022 through the duration of the agreement subject to an inflation adjustment.
Mississippi Litigation. 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 among Liggett, Mississippi and other states (the “1996 Agreement”) alleging that Liggett owes Mississippi at least $27,000 in compensatory damages and interest. In April 2017, the Chancery Court ruled, over Liggett’s objections, that the 1996 Agreement should be enforced as Mississippi claims and referred the matter first to arbitration and then to a Special Master for further proceedings to determine the amount of damages, if any, to be awarded. In April 2021, following confirmation of the final arbitration award, the parties stipulated that the unpaid principal (exclusive of interest) purportedly due from Liggett to Mississippi pursuant to the 1996 Agreement was approximately $16,700, subject to Liggett’s right to litigate and/or appeal the enforceability of the 1996 Agreement (and all issues other than the calculation of the principal amount allegedly due).
In September 2019, the Special Master held a hearing regarding Mississippi’s claim for pre- and post-judgment interest. In August 2021, the Special Master issued a final report with proposed findings and recommendations that pre-judgment interest, in the amount of approximately $18,800, is due from Liggett from April 2005 - August 3, 2021. In April 2022, the Mississippi Chancery Court affirmed the Special Master’s findings and a final judgment was entered by the court on June 1, 2022. Additional interest amounts will accrue if the judgment is not overturned on appeal. Liggett continues to assert 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. In June 2022, Liggett appealed the final judgment and posted a bond of $24,000. Briefing on the appeal is underway.
Liggett may be required to make additional payments to Mississippi and/or Texas which could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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 Liggett may not be able to meet those requirements. An unfavorable outcome of a pending smoking-related case could encourage the commencement of additional litigation. Except as discussed in this Note 7, management is unable to estimate the loss or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not provided any amounts in its condensed consolidated financial statements for unfavorable outcomes.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state and federal governments. There have been a number of restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional litigation or legislation.
It is possible that the Company’s consolidated financial position, results of operations and cash flows could be materially adversely affected by an unfavorable outcome in any of the smoking-related litigation.
The activity in the Company’s accruals for the MSA and tobacco litigation for the three months ended March 31, 2023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current Liabilities | | Non-Current Liabilities |
| Payments due under Master Settlement Agreement | | Litigation Accruals | | Total | | Payments due under Master Settlement Agreement | | Litigation Accruals | | Total |
| | | | | | | | | | | |
Balance as of January 1, 2023 | $ | 14,838 | | | $ | 296 | | | $ | 15,134 | | | $ | 11,116 | | | $ | 16,117 | | | $ | 27,233 | |
Expenses | 67,027 | | | 270 | | | 67,297 | | | — | | | — | | | — | |
NPM Settlement adjustment | — | | | — | | | — | | | (311) | | | — | | | (311) | |
Change in MSA obligations capitalized as inventory | 195 | | | — | | | 195 | | | — | | | — | | | — | |
Payments | — | | | (435) | | | (435) | | | — | | | — | | | — | |
Reclassification to/(from) non-current liabilities | 1,635 | | | 3,707 | | | 5,342 | | | (1,635) | | | (3,707) | | | (5,342) | |
Interest on withholding | — | | | 17 | | | 17 | | | — | | | 442 | | | 442 | |
Balance as of March 31, 2023 | $ | 83,695 | | | $ | 3,855 | | | $ | 87,550 | | | $ | 9,170 | | | $ | 12,852 | | | $ | 22,022 | |
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The activity in the Company’s accruals for the MSA and tobacco litigation for the three months ended March 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current Liabilities | | Non-Current Liabilities |
| Payments due under Master Settlement Agreement | | Litigation Accruals | | Total | | Payments due under Master Settlement Agreement | | Litigation Accruals | | Total |
| | | | | | | | | | | |
Balance as of January 1, 2022 | $ | 11,886 | | | $ | 3,918 | | | $ | 15,804 | | | $ | 13,224 | | | $ | 17,680 | | | $ | 30,904 | |
Expenses | 56,199 | | | 72 | | | 56,271 | | | — | | | — | | | — | |
NPM Settlement adjustment | (15) | | | — | | | (15) | | | (2,108) | | | — | | | (2,108) | |
Change in MSA obligations capitalized as inventory | 521 | | | — | | | 521 | | | — | | | — | | | — | |
Payments | | | (3,917) | | | (3,917) | | | — | | | — | | | — | |
Reclassification to/(from) non-current liabilities | — | | | 3,566 | | | 3,566 | | | | | (3,566) | | | (3,566) | |
Interest on withholding | — | | | 124 | | | 124 | | | — | | | 472 | | | 472 | |
Balance as of March 31, 2022 | $ | 68,591 | | | $ | 3,763 | | | $ | 72,354 | | | $ | 11,116 | | | $ | 14,586 | | | $ | 25,702 | |
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 impact on the capital expenditures, results of operations or competitive position of Liggett or Vector Tobacco.
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 trademarks to Philip Morris.
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.
8. INCOME TAXES
The Company’s effective income tax rate is based on expected income, statutory rates, valuation allowances against deferred tax assets, and any tax planning opportunities available to the Company. For interim financial reporting, the Company estimates the annual effective income tax rate based on full year projections and applies the annual effective income tax rate against year-to-date pretax income to record income tax expense, adjusted for discrete items, if any. The Company refines annual estimates as new information becomes available. The Company’s tax rate does not bear a relationship to statutory tax rates due to permanent differences, which are primarily related to nondeductible compensation and state taxes.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The Company’s income tax expense consisted of the following:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
Income before provision for income taxes | | | | | $ | 48,250 | | | $ | 44,764 | |
Income tax expense using estimated annual effective income tax rate | | | | | 13,509 | | | 12,222 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Income tax expense | | | | | $ | 13,509 | | | $ | 12,222 | |
There were no discrete items for the three months ended March 31, 2023 and 2022.
9. INVESTMENTS AND FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities subject to fair value measurements were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of March 31, 2023 |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | |
Money market funds (1) | | $ | 211,828 | | | $ | 211,828 | | | $ | — | | | $ | — | |
| | | | | | | | |
Commercial paper (1) | | 55,173 | | | — | | | 55,173 | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Money market funds securing legal bonds (2) | | 24,000 | | | 24,000 | | | — | | | — | |
| | | | | | | | |
Investment securities at fair value | | | | | | | | |
Equity securities at fair value | | | | | | | | |
Marketable equity securities | | 12,973 | | | 12,973 | | | — | | | — | |
Mutual funds invested in debt securities | | 22,438 | | | 22,438 | | | — | | | — | |
Total equity securities at fair value | | 35,411 | | | 35,411 | | | — | | | — | |
Debt securities available for sale | | | | | | | | |
U.S. government securities | | 788 | | | — | | | 788 | | | — | |
Corporate securities | | 30,593 | | | — | | | 30,593 | | | — | |
U.S. government and federal agency | | 26,235 | | | — | | | 26,235 | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Index-linked U.S. bonds | | 14,008 | | | — | | | 14,008 | | | — | |
| | | | | | | | |
| | | | | | | | |
Total debt securities available for sale | | 71,624 | | | — | | | 71,624 | | | — | |
| | | | | | | | |
Total investment securities at fair value | | 107,035 | | | 35,411 | | | 71,624 | | | — | |
| | | | | | | | |
Long-term investments | | | | | | | | |
Long-term investment securities at fair value (3) | | 29,177 | | | — | | | — | | | — | |
| | | | | | | | |
Total | | $ | 427,213 | | | $ | 271,239 | | | $ | 126,797 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) Amounts included in Cash and cash equivalents on the condensed consolidated balance sheets.
(2) Amounts included in non-current restricted assets on the condensed consolidated balance sheets.
(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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2022 |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | |
Money market funds (1) | | $ | 155,411 | | | $ | 155,411 | | | $ | — | | | $ | — | |
| | | | | | | | |
Commercial paper (1) | | 54,526 | | | — | | | 54,526 | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Money market funds securing legal bonds (2) | | 24,000 | | | 24,000 | | | — | | | — | |
| | | | | | | | |
Investment securities at fair value | | | | | | | | |
Equity securities at fair value | | | | | | | | |
Marketable equity securities | | 12,724 | | | 12,724 | | | — | | | — | |
Mutual funds invested in debt securities | | 22,069 | | | 22,069 | | | — | | | — | |
Total equity securities at fair value | | 34,793 | | | 34,793 | | | — | | | — | |
Debt securities available for sale | | | | | | | | |
U.S. government securities | | 779 | | | — | | | 779 | | | — | |
Corporate securities | | 53,814 | | | — | | | 53,814 | | | — | |
U.S. government and federal agency | | 27,050 | | | — | | | 27,050 | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total debt securities available for sale | | 81,643 | | | — | | | 81,643 | | | — | |
| | | | | | | | |
Total investment securities at fair value | | 116,436 | | | 34,793 | | | 81,643 | | | — | |
| | | | | | | | |
Long-term investments | | | | | | | | |
Long-term investment securities at fair value (3) | | 28,919 | | | — | | | — | | | — | |
| | | | | | | | |
Total | | $ | 379,292 | | | $ | 214,204 | | | $ | 136,169 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) Amounts included in Cash and cash equivalents on the condensed consolidated balance sheets.
(2) Amounts included in non-current restricted assets on the condensed consolidated balance sheets.
(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.
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.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record assets and liabilities at fair value on a nonrecurring basis. Generally, assets and liabilities are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company had no nonrecurring nonfinancial assets subject to fair value measurements as of March 31, 2023 and December 31, 2022, respectively, except for investments in real estate ventures that were impaired as of March 31, 2023 and December 31, 2022.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The Company’s investment in real estate ventures subject to nonrecurring fair value measurements are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using: |
| | Three months ended March 31, 2023 | | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) |
Description | | Impairment Charge | | Total | | | |
| | | | | | | | | | |
Assets: | | | | | | | | | | |
Investments in real estate ventures | | $ | 1,202 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
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 decline in the investment in real estate ventures was attributed to the decline in the projected return on the venture based on the viability of the real estate venture. The $1,202 of impairment charges were included in equity in losses from real estate ventures for the three months ended March 31, 2023.
The Company’s investments in real estate ventures subject to nonrecurring fair value measurements are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using: |
| | Year Ended December 31, 2022 | | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) |
| | Impairment Charge | | Total | | | |
| | | | | | | | | | |
Assets: | | | | | | | | | | |
Investments in real estate ventures | | $ | 490 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
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 decline 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 $490 of impairment charges were included in equity in losses from real estate ventures for the year ended December 31, 2022.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
10. SEGMENT INFORMATION
The Company’s business segments for the three months ended March 31, 2023 and 2022 were Tobacco and Real Estate. 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 for the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Real | | Corporate | | |
| Tobacco | | | | Estate | | and Other | | Total |
| | | | | | | | | |
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Three months ended March 31, 2023 | | | | | | | | | |
Revenues | $ | 334,145 | | | | | $ | — | | | $ | — | | | $ | 334,145 | |
Operating income (loss) | 78,599 | | (1) | | | 62 | | | (4,364) | | | 74,297 | |
Equity in losses from real estate ventures | — | | | | | (1,893) | | | — | | | (1,893) | |
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Depreciation and amortization | 1,377 | | | | | — | | | 315 | | | 1,692 | |
Capital expenditures | 5,983 | | | | | — | | | — | | | 5,983 | |
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Three months ended March 31, 2022 | | | | | | | | | |
Revenues | $ | 309,048 | | | | | $ | 2,994 | | | $ | — | | | $ | 312,042 | |
Operating income (loss) | 77,639 | | (2) | | | 975 | | | (3,488) | | | 75,126 | |
Equity in losses from real estate ventures | — | | | | | (1,877) | | | — | | | (1,877) | |
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Depreciation and amortization | 1,477 | | | | | 60 | | | 313 | | | 1,850 | |
Capital expenditures | 1,208 | | | | | 1 | | | 13 | | | 1,222 | |
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(1) Operating income includes $311 received from a litigation settlement associated with the MSA (which reduced cost of sales) and $270 of litigation settlement and judgment expense.
(2) Operating income includes $2,123 received from a litigation settlement associated with the MSA (which reduced cost of sales) and $72 of litigation settlement and judgment expense.