EX-99.2 15 vgr-123114xex992.htm EXHIBIT 99.2 VGR-12.31.14-EX99.2
Exhibit 99.2

Liggett Group LLC and
Subsidiaries
Consolidated Financial Statements
as of December 31, 2014 and 2013,
and for each of the three years
ended December 31, 2014, 2013 and 2012


Liggett Group LLC and Subsidiaries
Index
December 31, 2014 and 2013

 

 
Page(s)
 
 
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
 
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statement of Member’s Investment for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements for the years ended December 31, 2014, 2013 and 2012
Consolidated Financial Statement Schedule
 
Schedule II — Valuation and Qualifying Accounts


Report of Independent Registered Public Accounting Firm

To the Managers and the
Member of Liggett Group LLC:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Liggett Group LLC and its subsidiaries (the “Company”), a wholly-owned subsidiary of Vector Group, Ltd., at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina
March 4, 2015

1

Liggett Group LLC and Subsidiaries
Consolidated Balance Sheets
December 31, 2014 and 2013
(in thousands of dollars)

 
2014
 
2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
445

 
$
5

Accounts receivable
 
 
 
Trade, less allowances of $374 and $319, respectively
14,933

 
8,649

Due from related parties
2,302

 
3,135

Other
1,382

 
1,046

Inventories
79,209

 
85,223

Income taxes receivable
744

 
4,824

Restricted assets
940

 
818

Deferred income taxes
464

 
467

Other current assets
2,843

 
1,978

    Total current assets
103,262

 
106,145

Property, plant and equipment, net
53,513

 
54,448

Prepaid pension costs
25,032

 
26,080

Restricted assets
10,306

 
9,949

Deferred income taxes
4,986

 
8,770

Other assets
8,412

 
8,083

    Total assets
$
205,511

 
$
213,475

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

2

Liggett Group LLC and Subsidiaries
Consolidated Balance Sheets (continued)
December 31, 2014 and 2013
(in thousands of dollars)
 
2014
 
2013
Liabilities and Member’s Investment
 
 
 
Current liabilities
 
 
 
Current portion of notes payable and long-term debt
$
9,482

 
$
8,569

Revolving credit facility
17,766

 
30,424

Current payments due under the Master Settlement Agreement
18,356

 
16,611

Current portion of pension and post-retirement liabilities
931

 
939

Due to related parties
—

 
5,508

Accounts payable — trade
2,526

 
4,012

Accrued promotional expenses
16,486

 
16,569

Other accrued taxes, principally excise taxes
22,685

 
11,586

Allowance for sales returns
4,390

 
4,290

Litigation accruals
3,149

 
59,310

Deferred income taxes
1,730

 
1,657

Other current liabilities
4,338

 
1,152

   Total current liabilities
101,839

 
160,627

Notes payable and long-term debt, less current portion
8,121

 
12,567

Non-current employee benefits
16,665

 
16,648

Deferred income taxes
3,780

 
3,573

Long-term payments due under the Master Settlement Agreement
24,003

 
25,666

Litigation accruals
25,700

 
27,059

Other long-term liabilities
265

 
—

  Total liabilities
180,373

 
246,140

Commitments and contingencies
 
 
 
Member’s investment
 
 
 
Contributed capital
2,150

 
—

Accumulated other comprehensive loss
(15,062
)
 
(12,763
)
Retained earnings (accumulated deficit)
38,050

 
(19,902
)
Total member’s investment
25,138

 
(32,665
)
     Total liabilities and member's investment
$
205,511

 
$
213,475


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


3

Liggett Group LLC and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2014, 2013 and 2012
(in thousands of dollars)

 
2014
 
2013
 
2012
Revenues *
$
952,133

 
$
968,811

 
$
1,050,226

Expenses
 
 
 
 
 
Cost of goods sold *
690,565

 
715,330

 
817,633

Litigation judgment and settlement charges
2,850

 
88,106

 
1,424

Operating, selling, administrative and general expenses
67,340

 
68,604

 
72,088

Management fees paid to Vector Group Ltd.
9,370

 
9,008

 
8,663

Net loss on sale of assets
12

 
146

 
18

Operating income
181,996

 
87,617

 
150,400

Other income (expense)
 
 
 
 
 
Interest income
4

 
1,982

 
21

Interest expense
(4,241
)
 
(1,716
)
 
(4,421
)
Income before provision for income taxes
177,759

 
87,883

 
146,000

Income tax expense
(70,099
)
 
(32,697
)
 
(55,903
)
Net income
$
107,660

 
$
55,186

 
$
90,097


*
Revenues and cost of goods sold include net federal excise taxes of $364,385, $404,522 and $466,538 for the years ended December 31, 2014, 2013 and 2012, respectively.


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

4

Liggett Group LLC and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2014, 2013 and 2012
(in thousands of dollars)

 
2014
 
2013
 
2012
Net income
$
107,660

 
$
55,186

 
$
90,097

 
 
 
 
 
 
Net change in forward contracts
64

 
63

 
64

 
 
 
 
 
 
Net change in pension-related amounts
 
 
 
 
 
     Net (loss) gain arising during the year
(4,430
)
 
14,200

 
210

     Amortization of loss
659

 
1,402

 
1,462

     Net change in pension-related amount
(3,771
)
 
15,602

 
1,672

 
 
 
 
 
 
Income tax effect on:
 
 
 
 
 
     Forward contracts
(25
)
 
(24
)
 
(24
)
     Pension-related amounts
1,433

 
(5,907
)
 
(622
)
     Income tax benefit (provision) on other comprehensive income
1,408

 
(5,931
)
 
(646
)
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
(2,299
)
 
9,734

 
1,090

 
 
 
 
 
 
Comprehensive income
$
105,361

 
$
64,920

 
$
91,187

 
 
 
 
 
 

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



5

Liggett Group LLC and Subsidiaries
Consolidated Statement of Member’s Investment
Years Ended December 31, 2014, 2013 and 2012
(in thousands of dollars)

 
Contributed
Capital
 
Accumulated
Other
Comprehensive Loss
 
Retained
Earnings (Accumulated deficit)
 
Total
Balance, January 1, 2012
$
10,346

 
$
(23,587
)
 
$
22,769

 
$
9,528

Net income
—

 
—

 
90,097

 
90,097

Change in pension related amounts, net of taxes
—

 
1,050

 
—

 
1,050

Change in fair value of forward contracts, net of taxes
—

 
40

 
—

 
40

Distributions
—

 
—

 
(103,000
)
 
(103,000
)
Balance, December 31, 2012
10,346

 
(22,497
)
 
9,866

 
(2,285
)
Net income
—

 
—

 
55,186

 
55,186

Change in pension related amounts, net of taxes
—

 
9,694

 
—

 
9,694

Change in fair value of forward contracts, net of taxes
—

 
40

 
—

 
40

Distributions
(10,346
)
 
—

 
(84,954
)
 
(95,300
)
Balance, December 31, 2013
—

 
(12,763
)
 
(19,902
)
 
(32,665
)
  Net income
—

 
—

 
107,660

 
107,660

Change in pension related amounts, net of taxes
—

 
(2,338
)
 
—

 
(2,338
)
Change in fair value of forward contracts, net of taxes
—

 
39

 
—

 
39

Distributions
—

 
—

 
(51,000
)
 
(51,000
)
Stock-based compensation
108

 
—

 
—

 
108

  Other
2,042

 
—

 
1,292

 
3,334

Balance, December 31, 2014
$
2,150

 
$
(15,062
)
 
$
38,050

 
$
25,138

The Member's investment is pledged as collateral for Liggett Group LLC’s guarantee of Vector Group, Ltd's debt (see Note 1).
The accompanying notes are an integral part of these consolidated financial statements.


6

Liggett Group LLC and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2014, 2013 and 2012
(in thousands of dollars)

 
2014
 
2013
 
2012
Cash flows from operating activities
 
 
 
 
 
Net income
$
107,660

 
$
55,186

 
$
90,097

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
10,990

 
8,981

 
9,095

Deferred income taxes
(2,798
)
 
(3,296
)
 
109

Loss on sale of assets
12

 
146

 
21

Non-cash stock-based compensation
108

 
—

 
—

Changes in assets and liabilities:
 
 
 
 
 
Trade accounts receivable, net of allowances
(6,284
)
 
2,269

 
13,410

Due (from) to related parties
(1,961
)
 
5,440

 
4,249

Other receivables
(336
)
 
(95
)
 
(211
)
Inventories
6,014

 
10,097

 
10,002

Income taxes
12,353

 
(12,824
)
 
2,916

Other assets
(1,033
)
 
6,626

 
(1,367
)
Accounts payable, trade
(1,488
)
 
905

 
(5,164
)
Accrued expenses
(43,218
)
 
48,331

 
3,173

Payments due under the Master Settlement Agreement
82

 
(36,237
)
 
(15,571
)
Employee benefits
(2,713
)
 
(3,109
)
 
(2,025
)
Other long-term liabilities
265

 
25,198

 
237

Change in book overdraft
2

 
(1,936
)
 
1,913

Net cash provided by operating activities
77,655

 
105,682

 
110,884

Cash flows from investing activities
 
 
 
 
 
Proceeds from sale of property, plant and equipment
4

 
13

 
—

Increase in restricted assets
(479
)
 
(815
)
 
(1,392
)
Increase in cash surrender value of life insurance policies
(266
)
 
(266
)
 
(264
)
Capital expenditures
(9,256
)
 
(9,457
)
 
(8,918
)
Net cash used in investing activities
(9,997
)
 
(10,525
)
 
(10,574
)
The accompanying notes are an integral part of these consolidated financial statements.

7

Liggett Group LLC and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2014, 2013 and 2012
(in thousands of dollars)
 
2014
 
2013
 
2012
Cash flows from financing activities
 
 
 
 
 
Repayments of debt
(43,724
)
 
(7,434
)
 
(18,970
)
Proceeds from issuance of debt
40,164

 
6,580

 
14,015

Deferred finance charges
—

 
—

 
(315
)
Borrowings under revolving credit facility
886,130

 
978,788

 
1,074,050

Repayments under revolving credit facility
(898,788
)
 
(977,794
)
 
(1,066,092
)
Distributions to Vector Group, Ltd.
(51,000
)
 
(95,300
)
 
(103,000
)
Net cash used in financing activities
(67,218
)
 
(95,160
)
 
(100,312
)
Net increase (decrease) in cash and cash equivalents
440

 
(3
)
 
(2
)
Cash and cash equivalents
 
 
 
 
 
Beginning of year
5

 
8

 
10

End of year
$
445

 
$
5

 
$
8

Supplemental disclosures of cash flow information
 
 
 
 
 
Cash payments during the period for
 
 
 
 
 
Interest
$
1,855

 
$
1,671

 
$
1,527

Income taxes
$
—

 
$
—

 
$
175

Tax sharing payments to Vector Group, Ltd.
$
59,000

 
$
49,000

 
$
47,800



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


8

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

1.
Basis of Presentation

Liggett Group LLC (“Liggett” or the “Company”) is a wholly-owned subsidiary of VGR Holding LLC (“VGR”), all of whose membership interests are owned by Vector Group Ltd. (“Vector” or “Parent”). Liggett is principally engaged in the manufacture and sale of discount cigarettes in the United States. Certain management and administrative functions are performed by affiliates (see Note 10).

Liggett Vector Brands LLC ("Liggett Vector Brands"), a company affiliated through common owership, coordinates and executes the sales, marketing, administration and manufacturing efforts along with certain support functions for all of Vector’s tobacco operations. In consideration of the duties performed at Liggett Vector Brands on behalf of the Company, a portion of its sales, marketing, manufacturing, distribution, and administrative expenses have been allocated to Liggett for 2014, 2013, and 2012. As the primary beneficiary of these support functions, the Company has consolidated the balance sheet of Liggett Vector Brands within these financial statements beginning in 2014. The exclusion of the balances from the 2013 statements and years prior is determined to not be material to those years.

Management believes the assumptions underlying the consolidated financial statements are reasonable. However, the consolidated financial statements included herein may not necessarily reflect the Company’s results of operations, financial position, member's investment and cash flows in the future or what its results of operations, financial position, member's investment and cash flows would have been had the Company been a standalone company during the periods presented.

Vector and VGR are holding companies and, as a result, do not have any operating activities that generate revenues or cash flows. Accordingly, Vector relies on distributions from VGR and its other subsidiaries and investments, and VGR relies on distributions from its other subsidiaries, including Liggett, in order to fund its operations and meet its obligations. Vector has certain debt outstanding which requires interest and principal payments over the terms of such debt. Interest and principal to service the debt is expected to be funded by Vector’s cash and cash equivalents, investments, the operations of Vector’s subsidiaries, including Liggett, and proceeds, if any, from Vector’s future financings. During 2014, 2013 and 2012, Liggett made distributions of $51,000, $95,300, and $103,000, respectively, to VGR.

11% Senior Secured Notes due 2015

At December 31, 2012 Vector had $415,000 of principal outstanding of its 11% Senior Secured Notes due 2015 (the “Senior Secured Notes”). The Senior Secured Notes were sold in August 2007 ($165,000), September 2009 ($85,000), April 2010 ($75,000) and December 2010 ($90,000) in private offerings to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933.

The 11% Senior Secured Notes were guaranteed, subject to certain customary automatic release provisions on a joint and several basis by all of the 100% owned domestic subsidiaries of Vector that are engaged in the conduct of Vector’s cigarette businesses, including Liggett. Liggett's consolidated balance sheets, consolidated statements of operations, and consolidated statements of stockholder's equity as of December 31, 2014 and 2013, and for each of the three years in the period ended December 31, 2014, do not reflect any amounts related to these notes.

On January 29, 2013, Vector announced a cash tender offer with respect to any and all of the outstanding $415,000 principal amount of its 11% Senior Secured Notes due 2015. The Company retired $336,315 of the 11% Senior Secured Notes at a premium of 104.292%, plus accrued and unpaid interest on February 12, 2013. The remaining $78,685 of the 11% Senior Secured Notes were called and retired on March 14, 2013 at a redemption price of 103.667% plus accrued and unpaid interest.


9
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





7.75% Senior Secured Notes due 2021

In February 2013, Vector issued $450,000 of its 7.75% Senior Secured Notes due 2021 in a private offering to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. The aggregate net proceeds from the issuance of the 7.75% Senior Secured Notes were approximately $438,250 after deducting offering expenses. Vector used the net proceeds of the issuance for a cash tender offer announced on January 29, 2013, with respect to any and all of its outstanding 11% Senior Secured Notes due 2015.
On April 15, 2014, Vector completed the sale of $150,000 principal amount of its 7.75% Senior Secured Notes due 2021 for a price of 106.750% in a private offering to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. Vector received net proceeds of approximately $158,670 after deducting underwriting discounts, commissions, fees and offering expenses. Vector will amortize the deferred costs and debt premium related to the additional Senior Secured Notes over the estimated life of the debt.
In August 2014, Vector completed an offer to exchange the 7.75% Senior Secured Notes issued in April 2014 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.
The 7.75% Senior Secured Notes are guaranteed, subject to certain customary automatic release provisions on a joint and several basis by all of the 100% owned domestic subsidiaries of Vector that are engaged in the conduct of Vector’s cigarette businesses, including Liggett. Liggett's consolidated balance sheets, consolidated statements of operations, and consolidated statements of stockholder's equity as of December 31, 2014 and 2013, and for each of the three years in the period ended December 31, 2014, December 31, 2013, and December 31, 2012, do not reflect any amounts related to these notes.

Liggett's cash flows from operations may be utilized to fund the interest and debt obligation of the 7.75% Senior Secured Notes via distributions by Liggett to VGR to Vector.

Additional Parent Company Notes

As of December 31, 2014, Vector has debt with a net amount of approximately $268,285 (face amount $513,750) in addition to the 7.75% Senior Secured Notes. This $268,285 is not reflected in Liggett's consolidated financial statements as these obligations are not collateralized by Liggett's assets nor has Liggett guaranteed these obligations. It is anticipated that the majority of the payments on this $268,285 will be funded by Vector's tobacco operations, including those of Liggett.

In addition to the 7.75% Senior Secured Notes, the Company may have to fund certain deferred income tax liabilities of Vector (see Note 6).

General Corporate Expenses

General corporate expense allocations represent costs related to corporate functions such as executive oversight, risk management, information technology, accounting, legal, investor relations, human resources, tax, employee benefits, other services and incentives Vector provides to the Company. The allocations are based on a reasonable estimation of Vector’s overhead expenses based on both specific identification for certain expenses and relative percentage of the Company's revenues and expenses to Vector's total costs. All of these allocations are reflected in management fees paid to Vector in the Company’s consolidated statements of operations of $9,370, $9,008 and $8,663 in 2014, 2013 and 2012, respectively.

The Company and Vector consider these general corporate expense allocations to be a reasonable reflection of the utilization of services provided. The allocations may not, however, reflect the expense the Company would have incurred as a standalone company. Actual costs which may have been incurred if the Company had been a standalone company in 2014, 2013 and 2012 would depend on a number of factors, including how the Company chose to organize itself, what if any functions were outsourced or performed by Company employees and strategic decisions made in areas such as information technology systems and infrastructure.


10
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)







2.
Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Liggett and its wholly-owned subsidiaries, Eve Holdings LLC, 100 Maple LLC ("Maple") and Liggett & Myers Holdings Inc. The Liggett Vector Brands statement of operations has been consolidated for each of the years ending December 31, 2014, 2013, and 2012. The Liggett Vector Brands balance sheet is consolidated as of December 31, 2014 through an out-of-period adjustment to correctly reflect the balances in the current year financial statements. Consolidation of this entity was made through an equity adjustment and did not result in a gain or loss as this transaction represents acquisition of an entity under common control.  Amounts recorded were not material to our 2014 balance sheet. All significant intercompany balances and transactions have been eliminated.

Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Significant estimates subject to material changes in the near term include, inventory valuation, deferred tax assets, allowance for doubtful accounts, promotional accruals, sales returns and allowances, actuarial assumptions of pension and postretirement plans, settlement accruals including Master Settlement Agreement (“MSA”) liabilities, and litigation and defense costs. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the statements of cash flows, cash includes cash on hand, cash on deposit in banks and cash equivalents, comprised of short-term investments which have an original maturity of ninety days or less. Interest on short-term investments is recognized when earned. The carrying value of cash and cash equivalents, restricted assets and short-term loans approximate their fair value. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation (“SIPC”) continue to insure these balances up to $250 for FDIC and $500 SIPC. The carrying amount of bank deposits, including amounts classified as cash and cash equivalents, was approximately $445 and $5 at December 31, 2014 and 2013, respectively. All bank deposits at December 31, 2014 and December 31, 2013 are insured by the FDIC and SIPC up to their respective limits.

Accounts Receivable

Accounts receivable are recorded at their net realizable value. The allowance for doubtful accounts and terms discounts was $373 and $319 at December 31, 2014 and 2013, respectively. In 2014, accounts receivable increased by approximately $6,300 due to timing of shipments in 2014 versus 2013.

Inventories

Inventories are stated at the lower of cost or market with cost determined using the last-in, first-out ("LIFO") method. Although portions of leaf tobacco inventories may not be used or sold within one year because of the time required for aging, they are included in current assets, which is common practice in the cigarette industry. It is not practicable to determine the amount that will not be used or sold within one year. We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand and market conditions.


11
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





Restricted Assets

Restricted assets of $940 and $818 at December 31, 2014 and 2013, respectively, were classified as current assets. This balance consisted primarily of short-term deposits associated with financed equipment. Long-term restricted assets of $10,306 at December 31, 2014 consisted of $4,815 in deposits associated with financed equipment, $5,391 associated with legal bonds posted in connection with ongoing litigation, and $100 associated with a cash account securing a letter of credit. Long-term restricted assets of $9,949 at December 31, 2013 consisted of $4,706 in deposits associated with financed equipment and $5,243 of legal bonds posted in connection with ongoing litigation.

Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets which are twenty years for buildings and generally four to ten years for machinery and equipment.

Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized. The cost and related accumulated depreciation of property, plant and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reflected in operations.

The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted operating cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value of the asset on the basis of discounted cash flow. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. No impairment charges were recorded in 2014, 2013 or 2012.

Other Assets

Included in other current assets are point-of-sale materials of $1,247 and $1,250 as of December 31, 2014 and 2013, respectively. The remaining balances in other current assets of $1,596 and $728 at December 31, 2014 and 2013, respectively, relate to prepaid rent, miscellaneous receivables, other prepaid expenses and deposits.

Other non-current assets include spare parts for property, plant and equipment of $5,668 and $5,510, net of reserves of $1,637 and $1,620, as of December 31, 2014 and 2013, respectively.

Deferred financing charges of $17 and $122 as of December 31, 2014 and 2013, respectively, relate to the Company’s debt agreement with Wells Fargo Bank National Association ("Wells Fargo") and have been recorded as other assets. The Company recognized amortization expense of $105, $105, and $95 in 2014, 2013, and 2012, related to deferred finance charges.

The remaining balances in other non-current assets of $2,727 and $2,451 at December 31, 2014 and 2013, respectively, consist mainly of the cash surrender values of certain life insurance policies.

Revenue Recognition

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 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 in revenues and cost of goods sold.

Since the Company’s 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.

12
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





Shipping and Handling Costs

Shipping and handling costs related to sales transactions are not billed to customers nor recorded as revenues. Shipping and handling costs of $4,508, $4,938 and $5,028 for years ended December 31, 2014, 2013 and 2012, respectively, are recorded in operating, selling, administrative and general expenses.

Advertising Costs

Advertising and related agency costs are expensed as incurred and were $2,782, $3,610 and $4,219 for the years ended December 31, 2014, 2013 and 2012, respectively. These costs are recorded as operating, selling, administrative and general expenses.

Stock Options

The Company, through an affiliate, accounts for stock compensation plans by measuring compensation cost for stock-based payments at fair value. (see Note 11).

Employee Benefits

Liggett has no employees. Employees of Liggett Vector Brands, a consolidated affiliate, perform services for Liggett and associated expenses, including benefits, of such employees are allocated to Liggett. The cost of providing retiree pension benefits, health care and life insurance benefits is actuarially determined and accrued over the service period of the active employee group. The funded status of each defined benefit pension plan, retiree health care and other postretirement benefit plans and postemployment benefit plans is recognized on the balance sheet. The measurement date for determining the funded status of the plans is December 31. (see Note 5).
    
Income Taxes

The Company accounts for income taxes under the liability method and in accordance with the terms of the tax sharing agreement with Vector Group. The Company records deferred taxes for the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes as well as tax credit carryforwards and loss carryforwards. These deferred taxes are measured by applying currently enacted tax rates. A valuation allowance reduces deferred tax assets when it is deemed more likely than not that some portion or all of the deferred tax assets will not be realized. A current tax provision is recorded for income taxes currently payable.

The Company follows authoritative guidance for accounting for uncertainty in income taxes which requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. The guidance requires that a liability created for unrecognized deferred tax benefits shall be presented as a liability and not combined with deferred tax liabilities or assets.

Liggett’s federal income tax provision and related deferred income tax amounts are determined as if the Company filed tax returns on a standalone basis. The Company and its subsidiaries are included in the consolidated federal tax return with Vector and its other U.S. subsidiaries (see Note 6).

Contingencies and Legal Costs

The Company records product liability legal expenses and other litigation costs as operating, selling, administrative and general expenses as those costs are incurred. As discussed in Note 9, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against Liggett.

The Company records provisions in its consolidated financial statements for pending litigation when it is determined that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is

13
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





reasonably possible that an unfavorable outcome in a case may occur, except as disclosed in Note 9, (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases; and therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.

Adverse verdicts have been entered against Liggett in 14 state court Engle progeny cases, and several of these verdicts have been affirmed on appeal. At December 31, 2014, Liggett is a defendant in approximately 320 state court Engle progeny cases. Through December 31, 2014, other than the Lukacs case, the verdicts against Liggett have ranged from $1 to $3,600. In certain cases, the judgments entered have been joint and several with the other defendants. In four of these cases, punitive damages were also awarded for $300, $1,000, $7,600 and $9,500. Our potential range of loss in the six Engle progeny cases currently on appeal is between $0 and $28,195 in the aggregate, plus accrued interest and attorneys' fees. In determining the range of loss, we consider potential settlements as well as future appellate relief. Except as discussed in Note 9, management is unable to estimate the possible loss or range of loss from remaining Engle progeny cases as there are currently multiple defendants in each case and discovery has not occurred or is limited. As a result, the Company lacks information about whether plaintiffs are, in fact Engle, class members (non-class members’ claims are generally time-barred), the relevant smoking history, the nature of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs typically do not specify their demand for damages. Litigation is subject to many uncertainties, and it is possible that the Company’s consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation.
 
Distributions and Dividends

The Company records distributions on its member's investment as dividends in its consolidated statement of member’s investment to the extent of retained earnings. Any amounts exceeding retained earnings are recorded as a reduction of contributed capital.

Comprehensive Income
The Company presents net income and other comprehensive income in two separate, but consecutive, statements. The items are presented before related tax effects with detailed amounts shown for the income tax expense or benefit related to each component of other comprehensive income.

Other comprehensive income is a component of member’s investment and relates to pension related adjustments and the change in the estimated fair value of forward contracts. The Company’s comprehensive income was $105,361, $64,920, and $91,187 for the years ended December 31, 2014, 2013 and 2012, respectively.

The components of accumulated other comprehensive loss, net of taxes, were as follows at December 31:

 
2014
 
2013
Pension-related amounts, net of taxes of $9,127 and $7,696, respectively
$
(15,014
)
 
$
(12,676
)
Forward contract adjustment, net of taxes of $43 and $67, respectively
(48
)
 
(87
)
Accumulated other comprehensive loss
$
(15,062
)
 
$
(12,763
)

Fair Value of Financial Instruments

Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (also referred to as an exit price). The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Fair value measurement of a financial asset or liability is assigned to a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities

14
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or
liabilities
Level 3: Unobservable inputs

The carrying value of cash and cash equivalents and restricted assets reported in the consolidated balance sheets approximate their fair value and are considered level one in the fair value hierarchy.

The carrying amount of borrowings outstanding under the variable rate revolving credit facility and other long-term debt is a reasonable approximation of fair value as determined under Level 2 of the Fair Value Hierarchy, based upon estimated current borrowing rates for loans with similar terms and maturities. The estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values.

 

Fair Value Measurements as of December 31, 2014




Quoted Prices in
Active Markets for
Identical Assets

Significant Other
Observable Inputs

Description

Total

(Level 1)

(Level 2)

Financial assets:

 


 


 


Cash and cash equivalents

$
445


$
445


$
—


Restricted assets

11,246


—


11,246


     Total

$
11,691


$
445


$
11,246


Financial liabilities:










Notes payable and long-term debt

$
35,387


—


$
35,387


     Total

$
35,387


$
—


$
35,387



 
 
Fair Value Measurements as of December 31, 2013
 
 
 
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Description
 
Total
 
(Level 1)
 
(Level 2)
 
Financial assets:
 
 

 
 

 
 

 
Cash and cash equivalents
 
$
5

 
$
5

 
$
—

 
Restricted assets
 
10,767

 
—

 
10,767

 
     Total
 
$
10,772

 
$
5

 
$
10,767

 
Financial liabilities:
 
 
 
 
 
 
 
Notes payable and long-term debt
 
$
51,577

 
—

 
$
51,577

 
     Total
 
$
51,577

 
$
—

 
$
51,577

 

New Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40)-Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance to United States Generally Accepted Accounting Principles ("U.S. GAAP") about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plan, (4) requires

15
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for annual periods beginning after December 15, 2016 and interim periods within those reporting periods. Earlier adoption is permitted. This ASU is not anticipated to have a material impact on the Company's consolidated financial statements and notes to the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU is the result of a convergence project between the FASB and the International Accounting Standards Board. The core principle behind ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering those goods and services. This model involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction prices to the performance obligations in the contract and recognizing revenue when (or as) the entity satisfies the performance obligations. The guidance in the ASU supersedes existing revenue recognition guidance and is effective for annual reporting periods beginning after December 15, 2016 with early application not permitted. The ASU allows two methods of adoption; a full retrospective approach where three years of financial information are presented in accordance with the new standard, and a modified retrospective approach where the ASU is applied as a cumulative effect adjustment as of the date of adoption. The Company is currently evaluating the impact of adopting the new standard but does not anticipate it will have a material impact on the Company's consolidated financial statements or notes to the consolidated financial statements.

In April, 2014, the Financial Accounting Standards Board issued final guidance to change the criteria for reporting discontinued operations while enhancing disclosures in this area (Accounting Standards Update (“ASU”) No. 2014-08). Under the new guidance, only disposals representing a strategic shift, such as a major line of business, a major geographical area or a major equity investment, should be presented as discontinued operations. The guidance will be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The guidance is effective for annual financial statements with fiscal years beginning on or after December 15, 2014 with early adoption permitted for disposals or classifications as held for sale which have not been reported in financial statements previously issued or available for issuance. Liggett will adopt the guidance effective January 1, 2015 and the guidance is not anticipated to have a material impact on the Company's consolidated financial statements and notes to the consolidated financial statements.

In March, 2014, the Emerging Issues Task Force (the “Task Force”) reached a final consensus to amend the accounting guidance for stock compensation tied to performance targets (Issue No. 13-D). The objective of this guidance is to clarify the accounting treatment of certain types of performance conditions in stock-based compensation awards, more specifically, when performance targets can be achieved after the requisite service period. The Task Force concluded that performance criteria subsequent to a service period vesting requirement should be treated as vesting conditions, and as a result, this type of performance condition may delay expense recognition until achievement of the performance target is probable. Issue No. 13-D will be effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015, and early adoption is permitted. The adoption of this guidance is not anticipated to have a material impact on the Company's consolidated financial statements or notes to the consolidated financial statements.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables.

Liggett’s customers are primarily candy and tobacco distributors, the military and large grocery, drug and convenience store chains. Two wholesale customers accounted for 21% and 10% of Liggett's revenues in 2014, two wholesale customers accounted for 19% and 11% of Liggett’s revenues in 2013, and two wholesale customers accounted for 18% and 10% of Liggett's revenues in 2012, respectively. Concentrations of credit risk with respect to trade receivables are generally limited due to the large number of customers, located primarily throughout the United States. Liggett's largest single customer receivable balance represented approximately 13% and 7% of net accounts receivable at December 31, 2014 and 2013, respectively. Ongoing credit evaluations of customers’ financial condition are performed and, generally, no

16
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





security is required. Liggett maintains reserves for potential credit losses and such losses, in the aggregate, have generally not exceeded management’s expectations.

Liggett maintains cash deposits and money market accounts with major banks which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes the risk of loss is minimal.

Subsequent Events

On January 14, 2015, Liggett and 100 Maple, LLC ("Maple") entered into a Third Amended and Restated Credit Agreement (the "Credit Agreement"), dated as of January 14, 2015, with Wells Fargo Bank, National Association ("Wells Fargo"), as agent and lender. The Credit Agreement governs a $60,000 credit facility (the "Credit Facility") that consists of a revolving credit facility of up to $60,000 borrowing capacity (the "Revolver") and a $3,600 term loan (the "Term Loan") that is within the $60,000 commitment under the Credit Facility and reduces the amount available under the Revolver. All borrowings under the Credit Facility (other than the Term Loan) are limited to a borrowing base equal to roughly (1) the lesser of (a) 85% of the net amount of eligible accounts receivable and (b) $10,000 plus (2) the lesser of (a) the sum of (I) 80% of the value of eligible inventory consisting of packaged cigarettes plus (II) the lesser of (x) 60% multiplied by Liggett's eligible cost of eligible inventory consisting of leaf tobacco and (y) 85% of the net orderly liquidation value of eligible inventory consisting of leaf tobacco and (b) $60,000 less (3) certain reserves against accounts receivable, inventory, bank products or other items which Wells Fargo, as agent, may establish from time to time in its permitted discretion. The obligations under the Credit Facility are secured on a first priority basis by all inventories, receivables and certain other personal property of Liggett and Maple, a mortgage on Liggett's manufacturing facility and certain real property of Maple, subject to certain permitted liens. The Credit Facility amended and restated Liggett's existing $50,000 credit facility with Wells Fargo and Maple's existing $3,600 term loan with Wells Fargo. The term of the Credit Facility expires on March 31, 2020. Prime rate loans under the Credit Facility bear interest at a rate equal to the greatest of (i) the Federal Funds rate plus 0.50%, (ii) LIBOR plus 1.0% and (ii) the prime rate of Wells Fargo. LIBOR rate loans under the Credit Facility bear interest at a rate equal to LIBOR plus 2.25%. Monthly principal payments of $25 are due under the Term Loan on the first day of each month with the unpaid principal balance due at maturity on March 31, 2020. The Credit Facility contains customary affirmative and negative covenants, including covenants that limit Liggett’s, Maple’s and their subsidiaries’ ability to incur, create or assume certain indebtedness, to incur or assume certain liens, to purchase, hold or acquire certain investments, to declare or make certain dividends and distributions and to engage in certain mergers, consolidations and asset sales. The Credit Facility also requires the Company to comply with specified financial covenants, including that Liggett's earnings before interest, taxes, depreciation and amortization, as defined under the Credit Facility, on a trailing twelve month basis, shall not be less than $100,000 if Liggett's excess availability, as defined under the Credit Facility, is less than $20,000. The covenants also require that annual capital expenditures, as defined under the Credit Facility (before a maximum carryover amount of $10,000), shall not exceed $20,000 during any fiscal year. The Credit Facility also contains customary events of default.

The Company has evaluated events that occurred subsequent to December 31, 2014, through the financial statement issue date of March 4, 2015, and determined there were no other recordable or reportable subsequent events.



17
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





3.
Inventories

Inventories consist of the following at December 31:

 
2014
 
2013
Leaf tobacco
$
49,948

 
$
49,140

Other raw materials
3,512

 
3,161

Work-in-process
879

 
353

Finished goods
54,561

 
59,661

Inventories at current cost
108,900

 
112,315

LIFO adjustment
(29,691
)
 
(27,092
)
   Inventories, net
$
79,209

 
$
85,223

The Company has a leaf inventory management program whereby, among other things, it is committed to purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of anticipated needs and are at prices, including carrying costs, established at the date of the commitment. Liggett had purchase commitments of approximately $23,988 at December 31, 2014. The Company entered into a single source supply agreement for fire safe cigarette paper through 2015.
Each year, Liggett capitalizes in inventory that portion of its MSA liability related to cigarettes shipped to public warehouses but not sold. The amount of capitalized MSA cost in finished goods inventory was $11,651 and $13,065 at December 31, 2014 and 2013, respectively.
All of the Company's inventories at December 31, 2014 and December 31, 2013 have been reported under the LIFO method.

4.
Property, Plant and Equipment

Property, plant and equipment consists of the following at December 31:

 
2014
 
2013
Land and land improvements
$
1,442

 
$
1,418

Buildings
16,286

 
15,097

Machinery and equipment
136,450

 
124,675

Property, plant and equipment
154,178

 
141,190

Less accumulated depreciation
(100,665
)
 
(86,742
)
Property, plant and equipment, net
$
53,513

 
$
54,448


Depreciation expense for the years ended December 31, 2014, 2013 and 2012 was $10,822, $9,436, and $8,936, respectively. Future machinery and equipment purchase commitments were $3,266 at December 31, 2014.

5.
Employee Benefits Plans

Defined Benefit Plans

Liggett sponsors three defined benefit pension plans (two qualified and one non-qualified) covering virtually all individuals who were employed by Liggett on a full-time basis prior to 1994. Future accruals of benefits under these three defined benefit plans were frozen between 1993 and 1995. These benefit plans provide pension benefits for eligible employees based primarily on their compensation and length of service. Contributions are made to the two qualified pension plans

18
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





in amounts necessary to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The plans’ assets and benefit obligations were measured at December 31, 2014 and 2013, respectively.

During 2014, 2013 and 2012, Vector sponsored the Supplemental Executive Retirement Plan ("SERP") where Vector will pay supplemental retirement benefits to certain key employees, including certain executive officers of Liggett. In January 2006, Vector amended and restated its SERP (the "Amended SERP"), effective January 1, 2005. The amendments to the plan were intended, among other things, to cause the plan to meet the applicable requirements of Section 409A of the Internal Revenue Code. The Amended SERP is intended to be unfunded for tax purposes, and payments under the Amended SERP will be made out of Vector's general assets. Under the Amended SERP, the benefit payable to a participant at his normal retirement date is a lump sum amount which is the actuarial equivalent of a predetermined annual retirement benefit set by Vector's board of directors. Normal retirement date is defined as the January 1 following the attainment by the participant of the latter of age 60 or the completion of eight years of employment following January 1, 2002 with Vector or a subsidiary.

At December 31, 2014, the aggregate lump sum equivalents of the annual retirement benefits payable under the Amended SERP to senior officers at normal retirement dates occurring during 2019-2023 is $6,614. In the case of a participant who becomes disabled prior to his normal retirement date of whose service is terminated without cause, the participant's benefit consists of a pro-rata portion of the full projected retirement benefit to which he would have been entitled had he remained employed through his normal retirement date, as actuarially discounted back to the date of payment. A participant who dies while working for Vector or a subsidiary (and before becoming disabled or attaining his normal retirement date) will be paid an actuarially discounted equivalent of his projected retirement benefit; conversely, a participant who retires beyond his normal retirement date will receive an actuarially increased equivalent of his projected retirement benefit.

Postretirement Medical and Life Plans

The Company provides certain postretirement medical and life insurance benefits to certain employees and retirees. Substantially all manufacturing employees as of December 31, 2014 are eligible for postretirement medical benefits if they reach retirement age while working for Liggett or certain affiliates. Retirees are required to fund 100% of participant medical premiums and, pursuant to union contracts, Liggett reimburses approximately 218 hourly retirees, who retired prior to 1991, for Medicare Part B premiums. In addition, Liggett Vector Brands provides life insurance benefits to approximately 171 active employees and 396 retirees who have reached retirement age and are eligible to receive benefits under one of the Company’s defined benefit pension plans. The Company’s postretirement liabilities are comprised of Medicare Part B and life insurance premiums.

The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the pension plans and other postretirement benefits:


19
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





 
 
 
 
 
Other
 
Pension Benefits
 
Postretirement Benefits
 
2014
 
2013
 
2014
 
2013
Change in benefit obligation
 
 
 
 
 
 
 
Benefit obligation at January 1
$
(119,642
)
 
$
(128,117
)
 
$
(8,899
)
 
$
(10,158
)
Service cost
(350
)
 
(734
)
 
(9
)
 
(16
)
Interest cost
(5,258
)
 
(4,726
)
 
(430
)
 
(417
)
Benefits paid (including expenses)
10,530

 
12,679

 
552

 
559

Actuarial (loss) gain
(2,830
)
 
1,256

 
(245
)
 
1,133

Benefit obligation at December 31
$
(117,550
)
 
$
(119,642
)
 
$
(9,031
)
 
$
(8,899
)
Change in plan assets
 
 
 
 
 
 
 
Fair value of plan assets at January 1
$
137,036

 
$
128,060

 
$
—

 
$
—

Actual return on plan assets
7,162

 
19,482

 
—

 
—

Contributions
349

 
2,173

 
552

 
560

Benefits paid (including expenses)
(10,530
)
 
(12,679
)
 
(552
)
 
(560
)
Fair value of plan assets at December 31
$
134,017

 
$
137,036

 
$
—

 
$
—

Funded status at December 31
$
16,467

 
$
17,394

 
$
(9,031
)
 
$
(8,899
)
Amounts recognized in the balance sheet:
 
 
 
 
 
 
 
Prepaid pension cost
$
25,032

 
$
26,080

 
$
—

 
$
—

Other accrued expenses
(324
)
 
(342
)
 
(607
)
 
(596
)
Non-current employee benefit liabilities
(8,241
)
 
(8,344
)
 
(8,424
)
 
(8,303
)
Net amounts recognized
$
16,467

 
$
17,394

 
$
(9,031
)
 
$
(8,899
)
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Postretirement Benefits
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
Service cost — benefits earned during the period
$
350

 
$
734

 
$
870

 
$
9

 
$
16

 
$
14

Interest cost on projected benefit obligation
5,258

 
4,726

 
5,618

 
430

 
417

 
465

Expected return on assets
(8,518
)
 
(7,914
)
 
(8,145
)
 
—

 
—

 
—

Settlement loss
—

 
243

 
—

 
—

 
—

 
—

Amortization of net loss (gain)
719

 
1,465

 
1,584

 
(60
)
 
(64
)
 
(121
)
Net (income) expense
$
(2,191
)
 
$
(746
)
 
$
(73
)
 
$
379

 
$
369

 
$
358



The following table summarizes amounts in accumulated other comprehensive income (loss) that are expected to be recognized as components of net periodic benefit cost (credit) for the year ending December 31, 2015.

 
Defined
Benefit
Pension
Plans
 
Post -
Retirement
Plans
 
Total
Actuarial loss (gain)
$
785

 
$
(97
)
 
$
688




20
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





As of December 31, 2014, current year accumulated other comprehensive income (loss), before income taxes, consists of the following:

 
Defined
Benefit
Pension
Plans
 
Post-
Retirement
Benefits
 
Total
Prior year accumulated other comprehensive (loss) gain
$
(21,257
)
 
$
886

 
$
(20,371
)
Amortization of gain (loss)
719

 
(60
)
 
659

Net loss arising during the year
(4,186
)
 
(244
)
 
(4,430
)
Current year accumulated other comprehensive (loss) income
$
(24,724
)
 
$
582

 
$
(24,142
)

As of December 31, 2013, current year accumulated other comprehensive income (loss), before income taxes, consist of the following:

 
Defined
Benefit
Pension
Plans
 
Post-
Retirement
Benefits
 
Total
Prior year accumulated other comprehensive loss
$
(35,790
)
 
$
(183
)
 
$
(35,973
)
Amortization of gain (loss)
1,466

 
(64
)
 
1,402

Effect of settlement
243

 
—

 
243

Net gain arising during the year
12,824

 
1,133

 
13,957

Current year accumulated other comprehensive (loss) income
$
(21,257
)
 
$
886

 
$
(20,371
)

As of December 31, 2014, two of the Company’s four defined benefit plans experienced accumulated benefit obligations in excess of plan assets, for which in the aggregate the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $17,596, $17,596 and $0, respectively. As of December 31, 2013, two of the Company’s four defined benefit plans experienced accumulated benefit obligations in excess of plan assets, for which in the aggregate the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $17,586, $17,586 and $0, respectively.

 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Postretirement Benefits
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
Weighted average assumptions:
 
 
 
 
 
 
 
 
 
 
 
Discount rates — benefit obligation
2.75% - 4.00%

 
3.00% - 4.75%

 
3.00% - 4.75%

 
4.25
%
 
5.00
%
 
4.25
%
Discount rates — service cost
3.00% - 4.75%

 
2.25% - 4.00%

 
2.25% - 4.00%

 
5.00
%
 
4.25
%
 
5.00
%
Assumed rates of return on invested assets
6.50
%
 
6.50
%
 
7.00
%
 
—

 
—

 
—

Salary increase assumptions
N/A

 
N/A

 
N/A

 
3.00
%
 
3.00
%
 
3.00
%


Discount rates were determined by a quantitative analysis examining the prevailing prices of high quality bonds to determine an appropriate discount rate for measuring obligations. The aforementioned analyzes the cash flow from each of the Company’s two qualified defined benefit plans as well as a separate analysis of the cash flows from the postretirement medical and life insurance plans sponsored by the Company. The aforementioned analyses then construct a hypothetical bond portfolio whose cash flow from coupons and maturities match the year-by-year, projected benefit cash flow from the respective pension or retiree health plans. The Company uses the lower discount rate derived from the two independent analyses in the computation of the benefit obligation and service cost for each respective retirement liability. The Company

21
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





uses the discount rate derived from the analysis in the computation of the benefit obligation and service cost for all the plans respective retirement liability.

The Company considers input from its external advisors and historical returns in developing its expected rate of return on plan assets. The expected long-term rate of return is the weighted average of the target asset allocation of each individual asset class. The Company’s actual 10-year annual rate of return on its pension plan assets was 6.6%, 7.2%, and 7.5% for the years ended December 31, 2014, 2013 and 2012, respectively, and the Company’s actual five-year annual rate of return on its pension plan assets was 9.8%, 13.6%, and 2.9% for the years ended December 31, 2014, 2013 and 2012, respectively.

Gains and losses resulting from changes in actuarial assumptions and from differences between assumed and actual experience, including, among other items, changes in discount rates and changes in actual returns on plan assets as compared to assumed returns. These gains and losses are only amortized to the extent that they exceed 10% of the greater of Projected Benefit Obligation and the fair value of assets. For the year ended December 31, 2014, Liggett used a 16.02 - year period for its Hourly Plan and a 16.72 - year period for its Salaried Plan to amortize pension fund gains and losses on a straight line basis. Such amounts are reflected in the pension expense calculation beginning the year after the gains or losses occur. The amortization of deferred losses negatively impacts pension expense in the future.

Plan assets are invested employing multiple investment management firms. Managers within each asset class cover a range of investment styles and focus primarily on issue selection as a means to add value. Risk is controlled through a diversification among asset classes, managers, styles and securities. Risk is further controlled both at the manager and asset class level by assigning excess return and tracking error targets. Investment managers are monitored to evaluate performance against these benchmark indices and targets.

Allowable investment types include equity, investment grade fixed income, high yield fixed income, hedge funds and short term investments. The equity fund is comprised of common stocks and mutual funds of large, medium and small companies, which are predominantly U.S. based. The investment grade fixed income fund includes managed funds investing in fixed income securities issued or guaranteed by the U.S. government, or by its respective agencies, mortgage backed securities, including collateralized mortgage obligations, and corporate debt obligations. The high yield fixed income fund includes a fund which invests in non-investment grade corporate debt securities. The hedge funds invest in both equity, including common and preferred stock, and debt obligations, including convertible debentures, of private and public companies. The Company generally utilizes its short term investments, including interest-bearing cash, to pay benefits and to deploy in special situations.

Effective November 29, 2012, the Liggett Employee Benefits Committee revised its target assets allocation to equal 50.0% equity investments, 30.0% investment grade fixed income, 10.0% high yield fixed income, 5.0% alternative investments (including hedge funds and private equity funds) and 5.0% short-term investments, with a rebalancing range of approximately plus or minus 5% around the target asset allocations. 

Liggett’s defined benefit retirement plan allocations at December 31, 2014 and 2013, by asset category, were as follows:

 
Plan Assets
At
December 31,
 
2014
 
2013
Asset category
 
 
 
Equity securities
50
%
 
50
%
Investment grade fixed income securities
29
%
 
28
%
High yield fixed income securities
10
%
 
10
%
Alternative investments
5
%
 
6
%
Short-term investments
6
%
 
6
%
 
100
%
 
100
%


22
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





The defined benefit plans' recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:

 
Fair Value Measurements as of December 31, 2014
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Insurance contracts
$
1,762

 
$
—

 
$
1,762

 
$
—

Amounts in individually managed investment accounts:
 
 
 
 
 
 
 
Cash
8,319

 
8,319

 
—

 
—

U.S. equity securities
42,046

 
42,046

 
—

 
—

Common collective trusts
61,877

 
—

 
61,877

 
—

Investment partnership
20,013

 
—

 
13,189

 
6,824

Total
$
134,017

 
$
50,365

 
$
76,828

 
$
6,824


 
Fair Value Measurements as of December 31, 2013
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Insurance contracts
$
2,396

 
$
—

 
$
2,396

 
$
—

Amounts in individually managed investment accounts:
 
 
 
 
 
 
 
Cash
7,424

 
7,424

 
—

 
—

U.S. equity securities
46,520

 
46,520

 
—

 
—

Common collective trusts
57,912

 
—

 
57,912

 
—

Investment partnership
22,748

 
—

 
13,717

 
9,031

Total
$
137,000

 
$
53,944

 
$
74,025

 
$
9,031


The fair value determination disclosed above of assets as Level 3, under the fair value hierarchy, was determined based on unobservable inputs and were based on company assumptions, and information obtained from the investments based on the indicated market values of the underlying assets of the investment portfolio. The fair value of investments included in Level 1 are based on quoted market prices from the various stock exchanges. The Level 2 investments are based on quoted market prices of similar investments.













23
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





The changes in the fair value of these Level 3 investments as of December 31, 2014 and 2013 were as follows:

 
2014
 
2013
Prior year balance
$
9,031

 
$
23,712

Distributions
(1,018
)
 
(2,669
)
Transfers
(641
)
 
(13,153
)
Contributions
—

 
—

Unrealized gain (loss) on long-term investments
3,403

 
(1,779
)
Realized gain on long-term investments
(3,951
)
 
2,920

Balance as of December 31
$
6,824

 
$
9,031


For 2014 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between 1.53% and 6.29% between 2015 and 2022 and 4.5% after 2022. For 2013 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between 4.25% and 7% between 2014 and 2022 and 4.5% after 2022.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:

 
1%
Increase
 
1%
Decrease
Effect on total of service and interest cost components
$
4

 
$
(4
)
Effect on benefit obligation
$
91

 
$
(85
)

The Company does not currently anticipate that it will be required to make any contributions to comply with ERISA’s minimum funding requirements, for the pension plan year beginning on January 1, 2015 and ending on December 31, 2015. Any additional funding obligation that the Company may have for subsequent years is contingent on several factors and is not reasonably estimable at this time.

Estimated future pension and postretirement medical benefits payments are as follows:

 
Pension
 
Postretirement
Medical
2015
$
10,232

 
$
607

2016
9,843

 
597

2017
9,505

 
598

2018
9,132

 
596

2019
15,324

 
596

2020-2024
37,958

 
2,944


Profit Sharing Plans

Liggett Vector Brands maintains 401(k) plans for substantially all employees which allow eligible employees to invest a percentage of their pre-tax compensation. Liggett Vector Brands is obligated to match a certain portion of employee contributions to the 401(k) plans. Accordingly, Liggett Vector Brands recorded contribution expenses of $1,154, $1,114, and $1,040 for the years ended December 31, 2014, 2013 and 2012, respectively.





24
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





6.
Income Taxes

Liggett's income tax provision and related deferred income tax amounts are determined as if the Company filed tax returns on a standalone basis. The Company and its affiliates, currently are included in the consolidated federal income tax return of its ultimate parent, Vector.

Pursuant to a tax allocation agreement amended in 1999, the amounts provided for as currently payable for federal income taxes are based on the Company’s pre-tax income for financial reporting purposes. The Company expenses and pays Vector Group, Ltd. their portion of the consolidated income tax expense in accordance with the tax allocation agreement.

The amounts provided for income taxes are as follows:

 
2014
 
2013
 
2012
Current
 
 
 
 
 
Federal
$
57,662

 
$
26,910

 
$
43,745

State
15,235

 
9,083

 
12,049

 
$
72,897

 
$
35,993

 
$
55,794

Deferred
 
 
 
 
 
Federal
$
30

 
$
—

 
$
—

State
(2,828
)
 
(3,296
)
 
109

 
$
(2,798
)
 
$
(3,296
)
 
$
109

Total tax provision
$
70,099

 
$
32,697

 
$
55,903


Historically, Liggett has paid Vector Group, Ltd. for its tax liabilities. While these payments have been made to the Vector Group, Ltd., they may not have been formally remitted to the Internal Revenue Service and may still represent a liability at the Vector Group, Ltd. level.

Temporary differences which give rise to a significant portion of deferred tax assets and liabilities are as follows as of December 31:

 
2014
 
2013
 
Deferred Tax
 
Deferred Tax
 
Asset
 
Liability
 
Asset
 
Liability
Sales and product allowances
$
333

 
$
—

 
$
323

 
$
—

Inventories
124

 
1,730

 
133

 
1,657

Property, plant and equipment
—

 
2,806

 
—

 
2,568

Employee benefit plan accruals
1,144

 
974

 
1,022

 
1,005

Tobacco litigation settlements
3,727

 
—

 
7,748

 
—

Forward contracts
6

 
—

 
11

 
—

Other
$
116

 
$
—

 
$
—

 
$
—

   Total deferred tax
$
5,450

 
$
5,510

 
$
9,237

 
$
5,230



25
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





Differences between the amounts provided for income taxes and amounts computed at the federal statutory tax rates are summarized as follows for the years ended December 31:

 
2014
 
2013
 
2012
Income before income taxes
$
177,759

 
$
87,883

 
$
146,000

 
 
 
 
 
 
Federal income tax at statutory rate
$
62,216

 
$
30,758

 
$
51,100

State income taxes, net of federal taxes
8,111

 
3,999

 
6,643

Impact of domestic production deduction
(327
)
 
(2,060
)
 
(1,840
)
Impact of other non-taxable differences
99

 
—

 
—

Income tax expense
$
70,099

 
$
32,697

 
$
55,903


In 2012, the Company recognized $103 of the unrecognized tax benefits as a result of the expiration of statutes of limitations on positions reported on state and local income tax returns for prior years. No amounts related to unrecognized tax benefits were recognized in 2013 or 2014.

In 2013, the Internal Revenue Service concluded an audit of Vector's income tax return for the year ended December 31, 2009. There was no material impact on the Company’s consolidated financial statements as a result of the audit.



26
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





7.
Long-Term Debt

Long-term debt consists of the following at December 31:
 
2014
 
2013
Borrowings under revolving credit facility
$
17,766

 
$
30,424

Term loan under revolving credit facility
3,589

 
3,884

Equipment loans
14,014

 
17,252

 
35,369

 
51,560

Less current maturities
(27,248
)
 
(38,993
)
Amount due after one year
$
8,121

 
$
12,567


The following table sets forth the future principal payment obligations:

Year Ending December 31,
 
 
2015
 
$
27,248

2016
 
4,893

2017
 
1,527

2018
 
1,267

2019
 
434

Thereafter
 
—

 
 
$
35,369


Revolving Credit Facility and Term Loan Under Credit Facility:

At December 31, 2014, Liggett had a $50,000 credit facility with Wells Fargo. The Credit Facility is collateralized by all inventories and receivables of Liggett and a mortgage on its manufacturing facility.

On January 14, 2015, Liggett and Maple, entered into a Credit Agreement, dated as of January 14, 2015, with Wells Fargo Bank, as agent and lender. The Credit Agreement governs a $60,000 credit facility (the “Credit Facility”) that consists of a revolving credit facility of up to $60,000 borrowing capacity (the “Revolver”) and a $3,600 term loan (the “Term Loan”) that is within the $60,000 commitment under the Credit Facility and reduces the amount available under the Revolver. All borrowings under the Credit Facility (other than the Term Loan) are limited to a borrowing base equal to roughly (1) the lesser of (a) 85% of the net amount of eligible accounts receivable and (b) $10,000 plus (2) the lesser of (a) the sum of (I) 80% of the value of eligible inventory consisting of packaged cigarettes plus (II) the lesser of (x) 60% multiplied by Liggett’s eligible cost of eligible inventory consisting of leaf tobacco and (y) 85% of the net orderly liquidation value of eligible inventory consisting of leaf tobacco and (b) $60,000, less (3) certain reserves against accounts receivable, inventory, bank products or other items which Wells Fargo, as agent, may establish from time to time in its permitted discretion.

The obligations under the Credit Facility are secured on a first priority basis by all inventories, receivables and certain other personal property of Liggett and Maple, a mortgage on Liggett’s manufacturing facility and certain real property of Maple, subject to certain permitted liens. The Credit Facility amended and restated Liggett’s existing $50,000 credit facility with Wells Fargo and Maple’s existing $3,540 term loan with Wells Fargo. The term of the Credit Facility expires on March 31, 2020.

Prime rate loans under the Credit Facility bear interest at a rate equal to the greatest of (i) the Federal Funds rate plus 0.50%, (ii) LIBOR plus 1.0% and (ii) the prime rate of Wells Fargo. LIBOR rate loans under the Credit Facility bear interest at a rate equal to LIBOR plus 2.25%. Monthly principal payments of $25 are due under the Term Loan on the first day of each month with the unpaid principal balance due at maturity on March 31, 2020.


27
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





The Credit Facility contains customary affirmative and negative covenants, including covenants that limit Liggett’s, Maple’s and their subsidiaries’ ability to incur, create or assume certain indebtedness, to incur or assume certain liens, to purchase, hold or acquire certain investments, to declare or make certain dividends and distributions and to engage in certain mergers, consolidations and asset sales. The Credit Facility also requires the Company to comply with specified financial covenants, including that Liggett's earnings before interest, taxes, depreciation and amortization, as defined under the Credit Facility, on a trailing twelve month basis, shall not be less than $100,000 if Liggett's excess availability, as defined under the Credit Facility, is less than $20,000. The covenants also require that annual capital expenditures, as defined under the Credit Facility (before a maximum carryover amount of $10,000), shall not exceed $20,000 during any fiscal year. The Credit Facility also contains customary events of default.

The Credit Facility permits the guaranty of the 7.75% Senior Secured Notes due 2021 by each of Liggett and Maple and the pledging of certain assets of Liggett and Maple on a subordinated basis to secure their guarantees. The credit facility also grants to Wells Fargo a blanket lien on all the assets of Liggett and Maple, excluding any equipment pledged to current or future purchase money or other financiers of such equipment and excluding any real property, other than the Mebane Property and other real property to the extent its value is in excess of $5,000. Wells Fargo, Liggett, Maple and the collateral agent for the holders of our 7.75% senior secured notes have entered into an intercreditor agreement, pursuant to which the liens of the collateral agent on the Liggett and Maple assets will be subordinated to the liens of Wells Fargo on the Liggett and Maple assets.

As of December 31, 2014, a total of $21,356 was outstanding under the revolving and term loan portions of the credit facility. Availability as determined under the facility was approximately $28,644 based on eligible collateral at December 31,2014.

Fair Value of Notes Payable and Long-Term Debt:
 
December 31, 2014
 
December 31, 2013
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Notes payable and long-term debt
$
35,369

 
 
$
35,387

 
 
$
51,560
 
 
$
51,577
 

Notes payable and long-term debt are carried on the balance sheet at amortized cost. The fair value determination disclosed above would be classified as Level 2 under the fair value hierarchy disclosed in Note 2 if such liabilities were recorded on the consolidated balance sheet at fair value. The estimated fair value of the Company's notes payable and long-term debt has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value and, accordingly, the estimate presented herein are not necessarily indicative of the amount that could be realized in a current market exchange.

Equipment Loans

In 2012, Liggett refinanced $4,452 of debt related to equipment purchased in 2010.  The refinanced debt had a weighted average interest rate of 5.89% and an average remaining term of 43 months. The new debt carries an interest rate of 5.96% and a term of 36 months. Total monthly installments are $135. Liggett purchased equipment for $5,040 and entered into four financing agreements for a total of $5,040 related to the equipment purchase. The weighted average interest rate of the outstanding debt is 5.26% per annum and the interest rate on the various notes ranges between 4.72% and 5.56% and is payable in installments of 36 to 48 months.

In 2013, Liggett entered into two financing agreements for a total of $6,580 related to the purchase of equipment. The weighted average interest rate of the outstanding debt is 4.66% per annum and the interest rates on the two notes are 3.28% and 4.99%. Total monthly installments are approximately $181.

In 2014, Liggett entered into three financing agreements for a total of $5,115 related to the purchase of equipment. The weighted average interest rate of the outstanding debt is 5.02% per annum and the interest rates on the three notes are from 4.98% to 5.04%. Total monthly installments are approximately $95. Liggett also refinanced $2,843 of debt related to equipment purchased in 2011. The refinanced debt had an interest rate of 5.63% and a remaining term of 21 months. The new debt carries an interest rate of 4.99% and a term of 36 months.

28
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)






At December 31, 2014 and 2013, the Company had $14,014 and $17,252, respectively, outstanding under these equipment loans and capital leases.

All equipment loans described above are collateralized by the equipment they finance.

8.
Leases

At December 31, 2014, the Company has operating and capital leases for building space, vehicles and computer equipment. The future minimum lease payments are as follows:

 
Lease
Commitments
Year Ending December 31,
 
2015
$
2,461

2016
768

2017
626

2018
563

2019
25

Thereafter
—

 
$
4,443


Rental expense for the years ended December 31, 2014, 2013, and 2012, amounted to $3,897, $3,789, and $3,738, respectively.

9.
Commitments and 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”). With the commencement of new cases, the defense costs and the risks relating to the unpredictability of litigation increase. The future financial impact of the risks and expenses of litigation are not quantifiable. For the twelve months ended December 31, 2014 and 2013, Liggett incurred tobacco product liability legal expenses and other litigation costs totaling $9,944 and $9,321, respectively. The 2013 costs exclude a charge of $86,213 associated with the Engle progeny settlement discussed below.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending cases. Management reviews on a quarterly basis with counsel all pending litigation and evaluates 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 some tobacco-related litigation can be significant.

29
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

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. To obtain stays on judgments pending current appeals, Liggett has secured approximately $12,268 in bonds as of February 6, 2015.
In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies to all Engle progeny cases in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. In several cases, plaintiffs have challenged the constitutionality of the bond cap statute, but to date the courts that have addressed the issue have upheld the constitutionality of the statute. It is possible that Liggett's consolidated financial position, results of operations, and cash flows could be materially adversely affected by an unfavorable outcome of such challenges.
Accounting Policy. Liggett and its subsidiaries record provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as disclosed in this Note 9: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.
Cautionary Statement About Engle Progeny Cases. Judgments have been entered against Liggett and other industry defendants in Engle progeny cases. A number of the judgments have been affirmed on appeal and satisfied by the defendants. As of December 31, 2014, 21 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts. Fourteen verdicts were returned in favor of the plaintiffs and seven in favor of Liggett. Excluding the Lukacs case, which was tried in 2002, seven years before the trials of Engle progeny cases commenced, the compensatory verdicts against Liggett have ranged from $1 to $3,600. In certain cases, the judgments entered have been joint and several with other defendants. In four of the cases, punitive damages were awarded against Liggett. Except as discussed in this Note 9 regarding the cases where an adverse verdict was entered against Liggett and that remain on appeal, management is unable to estimate the possible loss or range of loss from the remaining Engle progeny cases as there are currently multiple defendants in each case and, in most cases, discovery has not occurred or is limited. As a result, Liggett lacks information about whether plaintiffs are in fact Engle class members (non-class members' claims are generally time-barred), the relevant smoking history, the nature of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs typically do not specify their demand for damages.
Although Liggett has generally been successful in managing litigation, litigation is subject to uncertainty and significant challenges remain, including with respect to the remaining Engle progeny cases. There can be no assurances that Liggett's past litigation experience will be representative of future results. Judgments have been entered against Liggett in the past, in Individual Actions and Engle progeny cases, and several of those judgments were affirmed on appeal and satisfied by Liggett. It is possible that the consolidated financial position, results of operations and cash flows of Liggett could be materially adversely affected by an unfavorable outcome or settlement of any of the remaining smoking-related litigation. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. Liggett may, however, enter into settlement discussions in particular cases if it believes it is in its best interest to do so, including the remaining Engle progeny cases. As of December 31, 2014, Liggett (and in certain cases Vector), had on an individual basis, settled 155 Engle progeny cases for approximately $1,983 in the aggregate. There were 11 settlements in the fourth quarter of 2014. In October 2013, Liggett announced a settlement of the claims of over 4,900 Engle progeny plaintiffs (see Engle Progeny Settlement below).

30
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

Individual Actions
As of December 31, 2014, there were 47 Individual Actions pending against Liggett and, in certain cases, Vector, 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 Engle progeny cases or the approximately 100 individual cases pending in West Virginia state court as part of a consolidated action. The following table lists the number of Individual Actions, by state, that are pending against Liggett or Vector as of December 31, 2014:

State
 
Number
of Cases
Florida
 
27
New York
 
8
Maryland
 
6
Louisiana
 
2
West Virginia
 
2
Missouri
 
1
Ohio
 
1

The plaintiffs' allegations of liability in cases in which individuals seek recovery for injuries allegedly caused by cigarette smoking are based on various theories of recovery, including negligence, gross negligence, breach of special duty, strict liability, fraud, concealment, misrepresentation, design defect, failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, indemnity, violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.
Defenses raised in Individual Actions include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, lack of design defect, statute of limitations, equitable defenses such as “unclean hands” and lack of benefit, failure to state a claim and federal preemption.
Engle Progeny Cases
Engle Case. In May 1994, Engle was filed against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, “have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking.” In July 1999, after the conclusion of Phase I of the trial, the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues determined by the trial court to be “common” to the causes of action of the plaintiff class. The jury made several findings adverse to the defendants including that defendants' conduct “rose to a level that would permit a potential award or entitlement to punitive damages.” Phase II of the trial was a causation and damages trial for three of the class plaintiffs and a punitive damages trial on a class-wide basis before the same jury that returned the verdict in Phase I. In April 2000, the jury awarded compensatory damages of $12,704 to the three class plaintiffs, to be reduced in proportion to the respective plaintiff’s fault. In July 2000, the jury awarded approximately $145,000,000 in punitive damages, including $790,000 against Liggett.
In May 2003, Florida’s Third District Court of Appeal reversed the trial court and remanded the case with instructions to decertify the class. The judgment in favor of one of the three class plaintiffs, in the amount of $5,831, was overturned as time barred and the court found that Liggett was not liable to the other two class plaintiffs.

31
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages award and held that the class should be decertified prospectively, but determined that the following Phase I findings are entitled to res judicata effect in Engle progeny cases: (i) that smoking causes lung cancer, among other diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants placed cigarettes on the market that were defective and unreasonably dangerous; (iv) that defendants concealed material information knowing that the information was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vi) that defendants sold or supplied cigarettes that were defective; and (vii) that defendants were negligent. The Florida Supreme Court decision also allowed former class members to proceed to trial on individual liability issues (using the above findings) and compensatory and punitive damage issues, provided they filed their individual lawsuits by January 2008. In December 2006, the Florida Supreme Court added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations made by defendants. In October 2007, the United States Supreme Court denied defendants' petition for writ of certiorari.
Pursuant to the Florida Supreme Court’s July 2006 ruling in Engle, which decertified the class on a prospective basis, and affirmed the appellate court’s reversal of the punitive damages award, former class members had until January 2008 in which to file individual lawsuits. As a result, Liggett and Vector, and other cigarette manufacturers, were named defendants in thousands of Engle progeny cases in both federal and state courts in Florida. Although Vector was not named as a defendant in the Engle case, it was named as a defendant in substantially all of the Engle progeny cases where Liggett was named as a defendant.
Engle Progeny Settlement
On October 23, 2013, Liggett and Vector entered into a settlement with approximately 4,900 Engle progeny plaintiffs and their counsel. Pursuant to the terms of the settlement, Liggett agreed to pay a total of approximately $110,000 with approximately $61,600 paid in a lump sum and the balance to be paid in installments over 14 years. In exchange, the claims of over 4,900 plaintiffs were dismissed with prejudice against Liggett and Vector. In 2013 Liggett recorded a charge of $86,213 in connection with the settlement. Of this amount, $25,213 is related to certain payments discounted to their present value because the timing and amounts of such payments are fixed and determinable. The present value of the installment payments was computed using an 11% annual discount rate. The installment payments total approximately $48,000 on an undiscounted basis. Liggett's future payments will be approximately $3,500, per annum through 2028, with a cost of living increase beginning in 2021.
Notwithstanding the comprehensive nature of the Engle Progeny Settlement, approximately 320 plaintiffs' claims remain outstanding. Therefore, Liggett and Vector may still be subject to periodic adverse judgments which could have a material adverse affect on Liggett's consolidated financial position, results of operations and cash flows.

32
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)


As of December 31, 2014, the following Engle progeny cases have resulted in judgments against Liggett:
Date
 
Case Name
 
County
 
Net Compensatory
Damages (as adjusted) (1)
 
Punitive Damages
 
Status
June 2002
 
Lukacs v. R.J. Reynolds
 
Miami-Dade
 
$12,418
 
$0
 
Liggett satisfied the judgment and the case is concluded.
August 2009
 
Campbell v. R.J. Reynolds
 
Escambia
 
$156
 
$0
 
Liggett satisfied the judgment and the case is concluded.
March 2010
 
Douglas v. R.J. Reynolds
 
Hillsborough
 
$1,350
 
$0
 
Liggett satisfied the judgment and the case is concluded.
April 2010
 
Clay v. R.J. Reynolds
 
Escambia
 
$349
 
$1,000
 
Liggett satisfied the judgment and the case is concluded.
April 2010
 
Putney v. R.J. Reynolds
 
Broward
 
$3,008
 
$0
 
On June 12, 2013, the Fourth District Court of Appeal reversed and remanded the case for further proceedings. Plaintiff filed a motion for rehearing which was denied. Both sides sought discretionary review from the Florida Supreme Court. The appeal is stayed pending the outcome of the Hess appeal.
April 2011
 
Tullo v. R.J. Reynolds
 
Palm Beach
 
$225
 
$0
 
Affirmed by the Fourth District Court of Appeal. Discretionary review from the Florida Supreme Court was denied. Liggett satisfied the judgment and the case is concluded, other than an issue with respect to the calculation of interest on the judgment and the amount of costs owed by Liggett.
January 2012
 
Ward v. R.J. Reynolds
 
Escambia
 
$1
 
$0
 
Liggett satisfied the merits judgment and other than an issue regarding attorneys' fees, the case is concluded.
May 2012
 
Calloway v. R.J. Reynolds
 
Broward
 
$1,947
 
$7,600
 
A joint and several judgment for $16,100 was entered against R.J. Reynolds, Philip Morris, Lorillard and Liggett. On appeal to the Fourth District Court of Appeal.
December 2012
 
Buchanan v. R.J. Reynolds
 
Leon
 
$2,035
 
$0
 
A joint and several judgment for $5,500 was entered against Liggett and Philip Morris. Judgment was affirmed by the First District Court of Appeal, but the court certified an issue of conflict with another case. The defendants sought discretionary review by the Florida Supreme Court. The appeal is stayed pending the outcome of the Hess appeal.
May 2013
 
Cohen v. R.J. Reynolds
 
Palm Beach
 
$205
 
$0
 
Defendants' motion seeking a new trial was granted by the trial court. Plaintiff appealed to the Fourth District Court of Appeal.
August 2013
 
Rizzuto v. R.J. Reynolds
 
Hernando
 
$3,479
 
$0
 
Liggett settled its portion of the judgment for $1,500 and the case is concluded as to Liggett.
August 2014
 
Irimi v. R.J. Reynolds
 
Broward
 
$0
 
$0
 
Judgment was entered against Liggett for $31. In January 2015, the trial court granted defendants' motion for a new trial. Plaintiff moved for reconsideration.
October 2014
 
Lambert v. R.J. Reynolds
 
Pinellas
 
$3,600
 
$9,500
 
A final judgment was entered against Liggett for $13,100. Liggett will appeal.
November 2014
 
Boatright v. R.J. Reynolds
 
Polk
 
$0
 
$300
 
In November 2014, the jury awarded compensatory damages in the amount of $15,000 with 15% fault apportioned to plaintiff and 85% to Philip Morris.  The jury further assessed punitive damages against Philip Morris for $19,700 and Liggett for $300.  Post-trial motions were denied. A joint and several judgment was entered in the amount of $12,750 on the compensatory damages. An additional $300 in punitive damages was awarded against Liggett. On appeal to the Second District Court of Appeal.

Total Damages Awarded:
$28,773
 
$18,400
 
 
Amounts paid or compromised:
$(17,978)
 
$(1,000)
 
 
Damages remaining on Appeal:
$10,795
 
$17,400
 
 
(1) Compensatory damages are adjusted to reflect the jury's allocation of comparative fault. The amounts listed above do not include attorneys' fees or statutory interest.


33
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

Through December 31, 2014, Liggett paid $20,312, including interest and legal fees, to satisfy the judgments in seven Engle progeny cases (Lukacs, Campbell, Douglas, Clay, Tullo, Ward, and Rizzuto).

Liggett's potential range of loss in the Putney, Calloway, Buchanan, Cohen, Lambert and Boatright cases is between $0 and $28,195 in the aggregate, plus accrued interest and legal fees. In determining the range of loss, Liggett considers potential settlements as well as future appellate relief. Except as disclosed elsewhere in this Note 9, Liggett is unable to determine a range of loss related to the remaining Engle progeny cases. No amounts have been expensed or accrued in the accompanying consolidated financial statements for the cases described above. However, as cases proceed through the appellate process, Liggett will consider accruals on a case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.
Appeals of Engle Progeny Judgments. In December 2010, in the Martin case, a state court case against R.J. Reynolds, the First District Court of Appeal held that the trial court correctly construed the Florida Supreme Court’s 2006 decision in Engle in instructing the jury on the preclusive effect of the Phase I Engle findings. In July 2011, the Florida Supreme Court declined to review the First District Court of Appeal’s decision. In March 2012, the United States Supreme Court declined to review the Martin case, along with the Campbell case and two other Engle progeny cases. The Martin decision has led to additional adverse rulings by other state appellate courts.
In Jimmie Lee Brown, a state court case against R.J. Reynolds, the trial court tried the case in two phases. In the first phase, the jury determined that the smoker was addicted to cigarettes that contained nicotine and that his addiction was a legal cause of his death, thereby establishing he was an Engle class member. In the second phase, the jury determined whether the plaintiff established legal cause and damages with regard to each of the underlying claims. The jury found in favor of plaintiff in both phases. In September 2011, the Fourth District Court of Appeal affirmed the judgment entered in plaintiff’s favor and approved the trial court’s procedure of bifurcating the trial. The Fourth District Court of Appeal agreed with Martin that individual post-Engle plaintiffs need not prove conduct elements as part of their burden of proof, but disagreed with Martin to the extent that the First District Court of Appeal only required a finding that the smoker was a class member to establish legal causation as to addiction and the underlying claims. The Fourth District Court of Appeal held that in addition to establishing class membership, Engle progeny plaintiffs must also establish legal causation and damages as to each claim asserted. In so finding, the Fourth District Court of Appeal’s decision in Jimmie Lee Brown is in conflict with Martin. 
In the Rey case, a state court case, the trial court entered final summary judgment on all claims in favor of Vector, Liggett and Lorillard based on what has been referred to in the Engle progeny litigation as the "Liggett Rule." The Liggett Rule stands for the proposition that a manufacturer cannot have liability to a smoker under any asserted claim if the smoker did not use a product manufactured by that particular defendant. The Liggett Rule is based on the entry of final judgment in favor of Liggett/Brooke Group in Engle on all of the claims asserted against them by class representatives Mary Farnan and Angie Della Vecchia, even though the Florida Supreme Court upheld, as res judicata, the generic finding that Liggett/Brooke Group engaged in a conspiracy to commit fraud by concealment. In September 2011, the Third District Court of Appeal affirmed in part and reversed in part holding that the defendants were entitled to summary judgment on all claims asserted against them other than the claim for civil conspiracy. Defendants’ further appellate efforts were unsuccessful.
In March 2012, in Douglas, the Second District Court of Appeal issued a decision affirming the judgment of the trial court in favor of the plaintiff and upholding the use of the Engle jury findings but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings violates defendants’ federal due process rights. In March 2013, the Florida Supreme Court affirmed the use of Engle jury findings and determined that there is no violation of the defendants’ due process rights. This was the first time the Florida Supreme Court addressed the merits of an Engle progeny case. In October 2013, the United States Supreme Court declined to review the decision and Liggett satisfied the judgment. To date, the United States Supreme Court has declined to review any decisions in Engle progeny cases.

In Hess, a case pending in Broward County, the jury returned a verdict finding that decedent relied to his detriment on an omission by the defendant before May 5, 1982 (twelve years prior to the filing of the Engle Complaint). Defendant moved for judgment as a matter of law on plaintiff’s fraudulent concealment claim on the basis that the claim was barred by Florida’s statute of repose. The trial court denied the motion and was reversed by the Fourth District Court of Appeal, which held that any Engle progeny claim for a fraud committed before May 5, 1982 is barred. This decision conflicts with decisions from other district courts of appeal and is before the Florida Supreme Court pursuant to its conflict jurisdiction.  Oral argument occurred on April 30, 2014. A decision is pending.

34
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

Liggett Only Cases.  There are currently five cases pending where Liggett is the only remaining defendant. These cases consist of three Individual Actions and two Engle progeny cases. In one of the Individual Actions, Hausrath (NY state court), plaintiff moved to restore the case to the active docket calendar after it was removed by the court. The motion was granted. There has been no recent activity in the other two Individual Actions. Trial in Lambert, an Engle progeny case, concluded on October 3, 2014 and resulted in a jury verdict against Liggett. Post trial motions were denied and final judgment was entered against Liggett for $13,100. Liggett will appeal. The other Engle progeny case is not currently set for trial. Cases where Liggett is the only defendant could increase as a result of the remaining Engle progeny cases.
Class Actions
As of December 31, 2014, there were four actions pending for which either a class had been certified or plaintiffs were seeking class certification where Liggett is a named defendant, including one alleged price fixing case. Other cigarette manufacturers are also named in these actions.
Plaintiffs’ allegations of liability in class action cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of deceptive trade practice laws and consumer protection statutes and claims under the federal and state anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief.
Defenses raised in these cases include, among others, lack of proximate cause, individual issues predominate, assumption of the risk, comparative fault and/or contributory negligence, statute of limitations and federal preemption.
In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves cigarette smokers, allege they were exposed to secondhand smoke from cigarettes that were manufactured by the defendants, including Liggett, and suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. No class certification hearing has been held. In 2013, plaintiffs’ filed a motion to stay the case. The defendants did not oppose and the stay was entered by the court.
In February 1998, in Parsons v. AC & S Inc., a class was commenced on behalf of all West Virginia residents who allegedly have personal injury claims arising from exposure to cigarette smoke and asbestos fibers. The complaint seeks to recover $1,000 in compensatory and punitive damages individually and unspecified compensatory and punitive damages for the class. The case is stayed due to the December 2000 bankruptcy of three of the defendants.
In February 2000, in Smith v. Philip Morris, a case pending in Kansas, a class was commenced against cigarette manufacturers alleging they conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs seek to recover an unspecified amount in actual and punitive damages. Class certification was granted in November 2001. In January 2012, the trial court heard oral argument on defendants’ motions for summary judgment and in March 2012, the court granted the motions and dismissed plaintiffs’ claims with prejudice. In July 2014, the court of appeals affirmed the lower court’s decision. On August 18, 2014, plaintiffs filed a petition for review with the Kansas Supreme Court.
Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases), a West Virginia state court consolidated approximately 750 individual smoker actions that were pending prior to 2001 for trial of certain common issues. In January 2002, the court severed Liggett from the trial of the consolidated action. After two mistrials, on May 15, 2013, the jury rejected all but one of the plaintiffs’ claims, finding for the plaintiffs on the claim that ventilated filter cigarettes sold between 1964 and 1969 should have included instructions on how to use them. The issue of damages was reserved for further proceedings that have not yet been scheduled. The court entered judgment in October 2013, dismissing all claims lost by the plaintiffs. The judgment was affirmed on appeal. The defendants did not appeal the verdict in favor of the plaintiffs on the “failure to instruct” claim which impacted less than 30 plaintiffs. A hearing was scheduled for February 26, 2015 to address the remaining ventilated filter claim. If the case were to proceed against Liggett, it is estimated that Liggett could be a defendant in approximately 100 of the individual cases.
Class action suits have been filed in a number of states against cigarette manufacturers, alleging, among other things, that use of the terms “lights” and “ultra lights” constitutes unfair and deceptive trade practices. In December 2008, the United States Supreme Court, in Altria Group v. Good, ruled that the Federal Cigarette Labeling and Advertising Act did not preempt the state law claims asserted by the plaintiffs and that they could proceed with their claims under the Maine Unfair Trade Practices Act. The Good decision resulted in the filing of additional “lights” class action cases in other

35
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

states against other cigarette manufacturers. Although Liggett was not a defendant in the Good case, and is not currently a defendant in any other “lights” class actions, an adverse ruling or commencement of additional “lights” related class actions could have a material adverse effect on Liggett.
In addition to the cases described above, numerous class actions remain certified against other cigarette manufacturers. Adverse decisions in these cases could have a material adverse affect on Liggett’s sales volume, operating income and cash flows.
Health Care Cost Recovery Actions
As of December 31, 2014, there was one remaining Health Care Cost Recovery Action pending against Liggett, Crow Creek Sioux Tribe v. American Tobacco Company, a South Dakota case filed in 1997, where the plaintiff seeks to recover damages based on various theories of recovery as a result of alleged sales of tobacco products to minors. The case is inactive. Other cigarette manufacturers are also named as defendants.
The claims asserted in health care cost recovery actions vary, but can include the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, breach of special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under RICO. Although no specific damage amounts are typically pleaded, it is possible that requested damages might be in the billions of dollars. In these cases, plaintiffs typically assert equitable claims that the tobacco industry was “unjustly enriched” by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Department of Justice Lawsuit
In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover an unspecified amount of health care costs paid and to be paid by the federal government for lung cancer, heart disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of defendants, to restrain defendants and co-conspirators from engaging in alleged fraud and other allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of their unlawful conduct. Claims were asserted under RICO.
In August 2006, the trial court entered a Final Judgment against each of the cigarette manufacturing defendants, except Liggett. In May 2009, the United States Court of Appeals for the District of Columbia affirmed most of the district court’s decision. The United States Supreme Court denied review. As a result, the cigarette manufacturing defendants, other than Liggett, are now subject to the trial court’s Final Judgment which ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States’ public and that misrepresents or suppresses information concerning cigarettes”; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights,” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “lights” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure of defendants’ public document websites and the production of all documents produced to the government or produced in any future court or administrative action concerning smoking and health; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedules as defendants now follow in disclosing such data to the Federal Trade Commission for a period of ten years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette business within the United States; and (ix) payment of the government’s costs in bringing the action. In June 2014, the court approved a consent agreement between the defendants and the Department of Justice regarding the "corrective statements" to be issued by the defendants.

36
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

The implementation of the "corrective statements" is uncertain as the defendants are appealing the specific language of the statements.
It is unclear what impact, if any, the Final Judgment will have on the cigarette industry as a whole. To the extent that the Final Judgment leads to a decline in industry-wide shipments of cigarettes in the United States or otherwise results in restrictions that adversely affect the industry, Liggett’s sales volume, operating income and cash flows could be materially adversely affected.
Upcoming Trials
As of December 31, 2014, there were 13 Engle progeny cases scheduled for trial through December 31, 2015, where Liggett (and in many cases, Vector) is a named defendant. Trial dates are, however, subject to change.
MSA and Other State Settlement Agreements
In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related litigation with 45 states and territories. The settlements released Liggett from all smoking-related claims made by those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the “Original Participating Manufacturers” or “OPMs”) and Liggett (together with any other tobacco product manufacturer that becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”) (the OPMs and SPMs are hereinafter referred to jointly as the “Participating Manufacturers”) entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Mariana Islands (collectively, the “Settling States”) to settle the asserted and unasserted health care cost recovery and certain other claims of the Settling States. The MSA received final judicial approval in each Settling State.
As a result of the MSA, the Settling States released Liggett from:
•all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and
•all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business.
The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco advertising and promotion; limits each Participating Manufacturer to one tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits Participating Manufacturers from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits Participating Manufacturers from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities.
The MSA also requires Participating Manufacturers to affirm corporate principles to comply with the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf of Participating Manufacturers. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.
Under the payment provisions of the MSA, the Participating Manufacturers are required to make annual payments of $9,000,000 (subject to applicable adjustments, offsets and reductions). These annual payments are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint, obligation of each Participating Manufacturer and are not the responsibility of any parent or affiliate of a Participating Manufacturer.

37
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

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. Liggett's domestic shipments accounted for 2.7% of the total cigarettes sold in the United States in 2014. If Liggett’s market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett 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 31, 2014, Liggett paid $80,000 of their estimated 2014 MSA obligation.
Certain MSA Disputes
NPM Adjustment.  In March 2006, an economic consulting firm selected pursuant to the MSA determined that the MSA was a “significant factor contributing to” the loss of market share of Participating Manufacturers, to non-participating manufacturers, for 2003. This is known as the “NPM Adjustment.” The economic consulting firm subsequently rendered the same decision with respect to 2004 and 2005. In March 2009, a different economic consulting firm made the same determination for 2006. As a result, the manufacturers are entitled to potential NPM Adjustments to each of their 2003 - 2006 MSA payments. The Participating Manufacturers are also entitled to potential NPM Adjustments to their 2007 - 2013 payments pursuant to agreements entered into between the OPMs and the Settling States under which the OPMs agreed to make certain payments for the benefit of the Settling States, in exchange for which the Settling States stipulated that the MSA was a “significant factor contributing to” the loss of market share of Participating Manufacturers for each of those years. A Settling State that has diligently enforced its qualifying escrow statute in the year in question may be able to avoid allocation of the NPM Adjustment to the payments made by the manufacturers for the benefit of that Settling State.
For 2003 - 2013, Liggett, as applicable, disputed that they owed the Settling States the NPM Adjustments as calculated by the MSA's independent auditor. As permitted by the MSA, Liggett withheld payment or paid into a disputed payment account the amounts associated with these NPM Adjustments.
Notwithstanding provisions in the MSA requiring arbitration, litigation was filed in 49 Settling States involving the application of the NPM Adjustment for 2003 and whether it was to be determined through litigation or arbitration. These actions related to the potential NPM Adjustment for 2003, which the independent auditor under the MSA previously determined to be as much as $1,200,000 for all Participating Manufacturers. All but one of the 48 courts that decided the issue ruled that the 2003 NPM Adjustment dispute was arbitrable.
In response to a proposal from the OPMs and many of the SPMs, 45 of the Settling States, representing approximately 90% of the allocable share of the Settling States, entered into an agreement providing for a nationwide arbitration of the dispute with respect to the NPM Adjustment for 2003. In exchange, the OPMs and SPMs agreed to a 20% reduction in amounts recovered for the NPM Adjustment for 2003. In June 2010, the three person arbitration panel was selected. In November 2011, the Participating Manufacturers advised the arbitration panel that they were not contesting diligent enforcement of 16 Settling States for 2003. Substantive hearings commenced in April 2012 and were completed in June 2013.
In December 2012, the Participating Manufacturers entered into a “term sheet” with 20 Settling States setting out terms for settlement of the NPM Adjustment for 2003 - 2012 and addressing the NPM Adjustment with respect to those states for future years. Certain of the non-settling states objected to the settlement. In March 2013, the arbitration panel entered a Stipulated Partial Settlement and Award which, among other things, overruled the objections of the non-settling states and directed the independent auditor to implement certain terms of the term sheet effective with the 2013 MSA payments. In May 2013, two additional states joined the settlement and in June 2014, another two states joined the settlement. Several non-settling states are attempting to vacate the settlement award by filing state court actions. In Idaho, a trial court denied that state’s motion to vacate, and the state appealed that denial. In Colorado, a trial court also denied that state’s motion to vacate; Colorado did not appeal. Although certain terms of the settlement were implemented by the independent auditor on April 15, 2013, no assurance can be given as to the ultimate outcome of the non-settling states’ challenges.
As a result of the settlement, in the first nine months of 2013, Liggett recognized income of $6,466. Liggett received credits of $1,587 in April 2014 from these settling states related to the 2013 NPM Adjustment. The remaining NPM Adjustment accrual of $24,003 at December 31, 2014 relates to the disputed amounts Liggett withheld from the non-settling states for 2004 - 2010, which may be subject to payment, with interest, if Liggett loses the disputes for those years. Approximately $23,524 currently remains in the disputed payments accounts relating to the 2011, 2012 and 2013 NPM Adjustment dispute with the non-settling states.

38
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

In September 2013, the panel issued its decisions with respect to the 15 states that did not enter into the Stipulated Partial Settlement and Award, finding that six states did not diligently enforce their MSA escrow statutes in 2003. As a result of this ruling Liggett recognized income of $5,987 including interest, in the third quarter of 2013. All six of the states that were found to be non-diligent filed motions in state court seeking to vacate or reduce the amount of the arbitration award. In Pennsylvania, the trial court rejected the state’s motion to vacate the award, but granted its motion to reduce the award. As a result, in April 2014, Liggett received a credit in the amount of $6,441 for the 2003 NPM Adjustment (as calculated by the independent auditor). Liggett subsequently reimbursed the six states 20% of that credit pursuant to the agreement discussed above, bringing its net recovery to $5,152, which is approximately $1,315 lower than the amount to which Liggett believes it is entitled. Subsequent to the April 15, 2014 MSA payment date, a state court in Missouri issued a ruling similar to the ruling in Pennsylvania. As such, Liggett’s 2003 NPM Adjustment credit could be reduced by an additional $521. In June 2014, Kentucky and Indiana agreed to settle the dispute. As a result, Liggett recognized income of approximately $1,344 in the second quarter of 2014. The Participating Manufacturers, including Liggett, appealed the Pennsylvania and Missouri decisions. If Liggett is unsuccessful in its appeals or if other states are successful with respect to any such motions, the amount of the 2003 NPM Adjustment and any interest or earnings to which Liggett is entitled could be lower than the amounts described above and Liggett would be obligated to pay the difference.

Disputes over the NPM Adjustments for 2004-2013 remain to be arbitrated with the states that have not joined the settlement.
"Gross" v. "Net" Calculations.  In October 2004, the independent auditor notified all Participating Manufacturers that their payment obligations under the MSA, dating from the agreement’s execution in late 1998, had been re-calculated using “net” units, rather than “gross” units (which had been used since 1999). Liggett objected to this retroactive change and disputed the change in methodology.
In December 2012, the parties arbitrated the dispute. In February 2013, the arbitrators ruled that the independent auditor was precluded from recalculating Liggett’s 1.645% grandfathered market share ("GFMS") exemption. The arbitrators further ruled that, for purposes of calculating Liggett’s payment obligations, Liggett’s market share, calculated on a net basis, should be increased by a factor of 1.25%. Liggett filed a motion seeking correction of the part of the arbitrators’ decision that would require the 1.25% increase in Liggett’s market share. The states objected to Liggett’s motion.
In October, 2014, the panel issued a Corrected Final Award that eliminated the 1.25% adjustment increase. The panel further determined that the independent auditor shall compute Liggett’s market share for all years after 2000 on a “net” basis, but, adjust that computation to approximate “gross” market share by using actual returned product data for each year. Liggett plans to work with the independent auditor to determine the amount owed for years 2001 - 2013, consistent with the Corrected Final Award. Liggett has accrued $8,500 for this matter.
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 each of these four states’ settlements with United States Tobacco Company, Liggett’s payment obligations to those 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 or around 2003, the Attorneys General for Florida, Mississippi and Texas advised Liggett that they believed that Liggett had failed to make certain required payments under the respective settlement agreements with these states. In 2010, Liggett settled with Florida and agreed to pay $1,200 and to make further annual payments of $250 for a period of 21 years, starting in March 2011, with the payments from year 12 forward being subject to an inflation adjustment. These payments are in lieu of any other payments allegedly due to Florida. In 2012, Mississippi provided Liggett with a 60-day notice that the state intended to pursue its remedies if Liggett did not cure the alleged defaults. Liggett responded to Mississippi’s letter denying the existence of any defaults. There can be no assurance that Liggett will be able to resolve the matters with Texas and Mississippi or that Liggett will not be

39
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

required to make additional payments which could adversely affect Liggett’s consolidated financial position, results of operations and cash flows.
Cautionary Statement.  Management is not able to reasonably predict the outcome of the litigation pending or threatened against Liggett or Vector. Litigation is subject to many uncertainties. Liggett has been found liable in several Engle progeny cases and in Individual Actions, several of which were affirmed on appeal and satisfied by Liggett. It is possible that other cases could be decided unfavorably against Liggett and that Liggett will be unsuccessful on appeal. Liggett may attempt to settle particular cases if it believes it is in its best interest to do so.
Management cannot predict the cash requirements related to any future defense costs, settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. An unfavorable outcome of a pending smoking-related case could encourage the commencement of additional litigation. Except as discussed in this Note 9, management is unable to estimate the loss or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not provided any amounts in its consolidated financial statements for unfavorable outcomes.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state and federal governments. There have been a number of restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional litigation or legislation.
It is possible that Liggett’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 Liggett's accruals for the MSA and tobacco litigation for the twelve months ended December 31, 2014 were as follows:
 
Current Liabilities
 
Non-Current Liabilities
 
Payments due under Master Settlement Agreement
 
 Litigation Accruals
 
Total
 
Payments due under Master Settlement Agreement
 
 Litigation Accruals
 
Total
Balance at January 1, 2014
$
16,611

 
$
59,310

 
$
75,921

 
$
25,666

 
$
27,059

 
$
52,725

Expenses
90,590

 
2,849

 
93,439

 
—

 
—

 
—

NPM settlement adjustment
—

 
—

 
—

 
(1,344
)
 
—

 
(1,344
)
Change in MSA obligations capitalized as inventory
(1,414
)
 
—

 
(1,414
)
 
—

 
—

 
—

Payments
(87,750
)
 
(62,878
)
 
(150,628
)
 
—

 
—

 
—

Reclassification (to) from non-current liabilities
319

 
3,575

 
3,894

 
(319
)
 
(3,575
)
 
(3,894
)
Interest on withholding
—

 
293

 
293

 
—

 
2,216

 
2,216

Balance at December 31, 2014
$
18,356

 
$
3,149

 
$
21,505

 
$
24,003

 
$
25,700

 
$
49,703


40
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)

The activity in Liggett's accruals for the MSA and tobacco litigation for the twelve months ended December 31, 2013 were as follows:
 
Current Liabilities
 
Non-Current Liabilities
 
Payments due under Master Settlement Agreement
 
 Litigation Accruals
 
Total
 
Payments due under Master Settlement Agreement
 
 Litigation Accruals
 
Total
Balance at January 1, 2013
$
31,677

 
$
1,470

 
$
33,147

 
$
46,837

 
$
1,861

 
$
48,698

Expenses
109,392

 
63,293

 
172,685

 
—

 
25,220

 
25,220

MSA settlements and arbitration
(4,002
)
 
—

 
(4,002
)
 
(14,348
)
 
—

 
(14,348
)
Change in MSA obligations capitalized as inventory
504

 
—

 
504

 
—

 
—

 
—

Payments
(127,783
)
 
(6,070
)
 
(133,853
)
 
—

 
—

 
—

Reclassification (to) from non-current liabilities
6,823

 
223

 
7,046

 
(6,823
)
 
(223
)
 
(7,046
)
Interest on withholding
—

 
394

 
394

 
—

 
201

 
201

Balance at December 31, 2013
$
16,611

 
$
59,310

 
$
75,921

 
$
25,666

 
$
27,059

 
$
52,725

Other Matters
Liggett’s management are unaware of any material environmental conditions affecting their existing facilities. Liggett’s management believe that current operations are conducted in material compliance with all environmental laws and regulations and other laws and regulations governing cigarette manufacturers. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material affect on the capital expenditures, results of operations or competitive position of Liggett.
Liggett Vector Brands entered into an agreement with a subsidiary of the American Wholesale Marketers Association to support a program to permit certain tobacco distributors to secure, on reasonable terms, tax stamp bonds required by state and local governments for the distribution of cigarettes. The agreement expires in February 2016. Under the agreement, Liggett Vector Brands has agreed to pay a portion of losses incurred by the surety under the bond program, with a maximum loss exposure of $500. In 2013, Liggett paid $83 for obligations under this program. Liggett believes the fair value of Liggett Vector Brands’ remaining obligation under the agreement was immaterial at December 31, 2014.
There may be several other proceedings, lawsuits and claims pending against Liggett and certain of its consolidated subsidiaries unrelated to tobacco or tobacco product liability. Management is of the opinion that the liabilities, if any, ultimately resulting from such other proceedings, lawsuits and claims should not materially affect Liggett’s financial position, results of operations or cash flows.

10.
Related Party Transactions

Liggett is a party to an agreement with Vector to provide various management and administrative services to Liggett in consideration for an annual management fee of $900 paid in monthly installments and annual overhead reimbursements of $864 paid in monthly installments. The charges for services under this agreement amounted to $1,764 in each of 2014, 2013 and 2012.

In addition, Liggett has entered into an annually renewable Corporate Services Agreement with VGR wherein VGR agreed to provide corporate services to Liggett at an annual fee paid in monthly installments. Corporate services provided by VGR under this agreement include the provision of administrative services related to Liggett’s participation in its parent company’s multi-employer benefit plan, external publication of financial results, preparation of consolidated financial statements and tax returns and such other administrative and managerial services as may be reasonably requested

41
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)





by Liggett. The charges for services rendered under the agreement amounted to $7,606 in 2014, $7,244 in 2013 and $6,899 in 2012.

On January 1, 2011, Liggett entered into an updated manufacturing agreement with Vector Tobacco, an affiliate under common ownership, that will terminate on December 31, 2015, with subsequent automatic renewal for successive one year terms unless terminated by either party. Pricing is set forth in the agreement based on previously determined standard costs, and invoices are sent to Vector Tobacco on a weekly basis under the agreement. In 2014, 2013 and 2012, Liggett manufactured approximately 1.5, 1.0 and 0.8 billion cigarettes of Vector Tobacco brands respectively, and realized $97,371, $62,062 and $52,298, respectively, in net receipts from these sales and $1,962, $1,232 and $997, respectively, in profits from the agreement.

As of December 31, 2014 and 2013, Liggett has a net receivable from Vector Tobacco totaling $1,539 and $3,135, respectively. This overall net receivable position is related primarily to the manufacturing agreement between Liggett and Vector Tobacco.

The remaining related party net receivable balance of $763 at December 31, 2014 relates primarily to transactions with Liggett's affiliates, Zoom E-Cigs LLC (“Zoom”) and VGR. The remaining net payable of $5,508 at December 31, 2013 relates primarily to transactions with Liggett Vector Brands.

Liggett is party to a tax sharing agreement with Vector and certain other entities pursuant to which Liggett will pay taxes on an estimated basis to Vector as if it were filing a separate company tax return, except that the agreement effectively limits the ability of Liggett to carry back losses for refunds. Liggett is entitled to recoup overpayments in a given year out of future payments due under the agreement and is required to fund underpayments. Liggett paid $59,000 and $49,000, and $47,800 to Vector under this tax sharing agreement in 2014, 2013 and 2012, respectively. At December 31, 2014, and 2013, Liggett had a receivable balance related to tax payments to VGR, of $744 and $4,824, respectively, shown as income taxes receivable on the balance sheet.

On February 28, 2014 Liggett entered into an intercompany loan agreement with Vector. Under the terms of the loan agreement, Vector loaned Liggett $35,000 to facilitate Liggett’s approximate initial $59,200 payment into the Engle Qualified Settlement Fund (“Engle QSF”) in accordance with the settlement dated October 23, 2013, and further described in Note 9. Liggett repaid the $35,000, along with $612 in interest calculated at a per annum rate of 11%, to VGR. Liggett made this approximate $59,200 payment to the Engle QSF on February 28, 2014.

Liggett Vector Brands coordinates and executes the sales, marketing and manufacturing efforts along with certain support functions for all of Vector’s tobacco operations. In conjunction with the duties performed at Liggett Vector Brands, a portion of sales, marketing, manufacturing, distribution, and administrative expenses have been allocated to Liggett. During 2014, 2013 and 2012, Liggett expensed $75,569, $72,537 and $73,591, respectively, for the services provided by Liggett Vector Brands. The expenses have been classified as selling, general and administrative of $47,620, $45,920 and $47,165 for the years ended December 31, 2014, 2013 and 2012, respectively, and cost of goods sold of $27,949, $26,617 and $26,426 for the years ended December 31, 2014, 2013 and 2012, respectively.

Related party net (payables)/receivables consisted of the following current balances as of December 31, 2014 and 2013.
 
2014
 
2013
Due from Vector Tobacco
$
1,539

 
$
3,135

Due from Zoom
497

 
—

Due to VGR
266

 
—

Due (to)/from Liggett Vector Brands
—

 
(5,508
)
 
$
2,302

 
$
(2,373
)





42
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
(in thousands of dollars)






11.
Stock Compensation

The Company’s Parent, Vector, offers stock option plans. All employees of Vector and its subsidiaries are eligible to receive grants under such plans. Information concerning Vector's common stock has been adjusted to give effect to the 5% stock dividends paid to Vector stockholders on September 26, 2014, September 27, 2013 and September 28, 2012, respectively.

There were no option grants under Vector’s stock compensation plans to Liggett Vector Brands employees during 2014, 2013 or 2012. Awards of options to employees under the Vector’s stock compensation plans generally vest over periods ranging from four to five years and have a term of ten years from the date of grant.

In October 2013, the President and Chief Executive Officer, of Liggett and Liggett Vector Brands was awarded a restricted stock grant of 28,875 shares of Vector's common stock pursuant to the Amended and Restated 1999 Long-term Incentive Plan. The shares will vest on the earlier of March 15, 2019, contingent upon performance-based targets being achieved, or October 31, 2020, if the performance-based targets are not achieved. He will receive dividends on the restricted shares as paid. In the event that his employment with Company is terminated for any reason other than his death, his disability or a change of control (as defined in this Restricted Share Agreement) of the Company, any remaining balance of the shares not previously vested will be forfeited by him. The fair market value of the restricted shares on the date of grant was $458 and is being amortized over the vesting period as a charge to compensation expense for Liggett Vector Brands.

Liggett Vector Brands had non-cash stock compensation expense of $108, $34 and $22 for the years ended December 31, 2014, 2013, and 2012, respectively. These amounts are expense allocations only and do not represent a rollforward of option balances. These amounts have been recorded in operating, selling, administrative, and general expense in the Company’s consolidated statement of operations.

As of December 31, 2014, Liggett Vector Brands had employees with options for 110,030 shares of Vector’s common stock.

43

Liggett Group LLC and Subsidiaries
Schedule II — Valuation and Qualifying Accounts
(dollars in thousands)

 
Balance at
Beginning
of Period
 
Additions
Charged
to Costs and
Expenses
 
Deductions
 
Balance
at End of
Period
Description
 
 
 
 
 
 
 
Year ended December 31, 2014
 
 
 
 
 
 
 
Allowance for:
 
 
 
 
 
 
 
Doubtful accounts
$
110

 
$
26

 
$
106

 
$
30

Cash discounts
209

 
21,247

 
21,112

 
344

Sales returns
4,290

 
3,235

 
3,135

 
4,390

   Total
$
4,609

 
$
24,508

 
$
24,353

 
$
4,764

Year ended December 31, 2013
 
 
 
 
 
 
 
Allowance for:
 
 
 
 
 
 
 
Doubtful accounts
$
314

 
$
120

 
$
324

 
$
110

Cash discounts
252

 
22,555

 
22,598

 
209

Sales returns
4,000

 
3,858

 
3,568

 
4,290

   Total
$
4,566

 
$
26,533

 
$
26,490

 
$
4,609

Year ended December 31, 2012
 
 
 
 
 
 
 
Allowance for:
 
 
 
 
 
 
 
Doubtful accounts
$
304

 
$
10

 
$
—

 
$
314

Cash discounts
561

 
24,561

 
24,870

 
252

Sales returns
4,000

 
3,151

 
3,151

 
4,000

   Total
$
4,865

 
$
27,722

 
$
28,021

 
$
4,566


44