Exhibit 99.2
 Liggett Group LLC and 
Subsidiaries  Consolidated Financial Statements  As of December 31, 2008 and 2007  and for each of the three years  ended December 31, 2008, 2007 and 2006




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Liggett Group LLC and Subsidiaries  Index  December 31, 2008 and 2007
 Page(s)Report of Independent Registered Public Accounting Firm
    
    
    1Consolidated Financial StatementsConsolidated Balance Sheets
    
    
    2-3Consolidated Statements of Operations
    
    
    4Consolidated Statement of Members Investment
    
    
    5Consolidated Statements of Cash Flows
    
    
    6-7Notes to Consolidated Financial Statements
    
    
    8-43Consolidated Financial Statement ScheduleSchedule II  Valuation and Qualifying Accounts
    
    
    44




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##### 



Report of Independent Registered Public Accounting Firm
 
   /s/
PricewaterhouseCoopers LLP
 
 1




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##### 



Liggett Group LLC and Subsidiaries  Consolidated Balance Sheets  December 31, 2008 and 2007
 (in thousands of dollars)
    
    2008
    
    
    2007AssetsCurrent assetsCash and cash equivalents
    
    $
    977
    
    
    $
    641Accounts receivableTrade, less allowances of $240 and $107, respectively
    
    
    9,070
    
    
    
    2,726Related parties
    
    
    12,233
    
    
    
    7,548Other
    
    
    674
    
    
    
    284Inventories
    
    
    87,771
    
    
    
    82,427Restricted assets
    
    
    2,652
    
    
    
    Deferred taxes
    
    
    746
    
    
    
    333Other current assets
    
    
    1,162
    
    
    
    1,786Total current assets
    
    
    115,285
    
    
    
    95,745Property, plant and equipment, net
    
    
    42,642
    
    
    
    43,976Prepaid pension costs
    
    
    2,901
    
    
    
    42,084Restricted assets
    
    
    2,580
    
    
    
    4,765Due from related parties
    
    
    1,335
    
    
    
    1,093Deferred taxes
    
    
    870
    
    
    
    883Other assets
    
    
    12,824
    
    
    
    12,361Total assets
    
    $
    178,437
    
    
    $
    200,907
  2




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##### 



Liggett Group LLC and Subsidiaries  Consolidated Balance Sheets  December 31, 2008 and 2007
 (in thousands of dollars, except share amounts)
    
    2008
    
    
    2007Liabilities and Members InvestmentCurrent liabilitiesCurrent portion of long-term debt
    
    $
    3,944
    
    
    $
    4,419Revolving credit facility
    
    
    19,515
    
    
    
    14,782Current portion of pension plans and post-retirement
    
    
    1,050
    
    
    
    1,100Accounts payable  trade
    
    
    3,610
    
    
    
    4,497Accrued promotional expenses
    
    
    9,542
    
    
    
    8,562Income taxes payable
    
    
    11,838
    
    
    
    12,096Other accrued taxes, principally excise taxes
    
    
    6,990
    
    
    
    5,315Estimated allowance for sales returns
    
    
    3,000
    
    
    
    2,600Settlement accruals
    
    
    18,577
    
    
    
    9,781Deferred taxes
    
    
    10,892
    
    
    
    3,739Other current liabilities
    
    
    3,108
    
    
    
    2,781Total current liabilities
    
    
    92,066
    
    
    
    69,672Long-term debt, less current portion
    
    
    11,653
    
    
    
    13,064Non-current employee benefits
    
    
    23,178
    
    
    
    14,336Deferred income taxes
    
    
    884
    
    
    
    11,321Other long-term liabilities
    
    
    12,829
    
    
    
    8,160Total liabilities
    
    
    140,610
    
    
    
    116,553Commitments and contingencies (Note 11)Members InvestmentContributed capital
    
    
    67,088
    
    
    
    69,453Accumulated other comprehensive (loss) income
    
    
    (29,261
    )
    
    
    3,528Retained earnings
    
    
    
    
    
    
    11,373Total members investment
    
    
    37,827
    
    
    
    84,354$
    178,437
    
    
    $
    200,907
  3




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##### 



Liggett Group LLC and Subsidiaries  Consolidated Statements of Operations  Years Ended December 31, 2008, 2007, and 2006
 (in thousands of dollars)
    
    2008
    
    
    2007
    
    
    2006Revenues *
    
    $
    529,091
    
    
    $
    515,979
    
    
    $
    472,764ExpensesCost of goods sold
    
    
    326,682
    
    
    
    325,276
    
    
    
    302,746Operating, selling, administrative and general expenses
    
    
    51,147
    
    
    
    50,555
    
    
    
    44,632Management fees paid to Vector Group Ltd.
    
    
    7,439
    
    
    
    7,169
    
    
    
    6,912Net gain on sale of assets
    
    
    (335
    )
    
    
    (443
    )
    
    
    (2,217
    )Restructuring and impairment charges
    
    
    (35
    )
    
    
    (78
    )
    
    
    208Operating income
    
    
    144,193
    
    
    
    133,500
    
    
    
    120,483Other income (expenses)Interest income
    
    
    848
    
    
    
    1,334
    
    
    
    964Interest expense
    
    
    (1,595
    )
    
    
    (1,075
    )
    
    
    (1,411
    )Income before income taxes
    
    
    143,446
    
    
    
    133,759
    
    
    
    120,036Income tax provision
    
    
    (55,074
    )
    
    
    (49,749
    )
    
    
    (36,597
    )Net income
    
    $
    88,372
    
    
    $
    84,010
    
    
    $
    83,439
 
 *
    
    Revenues and cost of goods sold include excise taxes of $145,958, $152,588, and $147,992 for the years endedDecember 31, 2008, 2007, and 2006, respectively.  4




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##### 



Liggett Group LLC and Subsidiaries  Consolidated Statement of Members Investment  Years Ended December 31, 2008, 2007, and 2006
 AccumulatedOther
    
    
    RetainedContributed
    
    
    Comprehensive
    
    
    Earnings/(in thousands of dollars, except share data)
    
    Capital
    
    
    Income (Loss)
    
    
    (Deficit)
    
    
    TotalBalance at January 1, 2006
    
    $
    69,453
    
    
    $
    (11,621
    )
    
    $
    
    
    
    $
    57,832Net income
    
    
    
    
    
    
    
    
    
    
    83,439
    
    
    
    83,439Change in accumulated minimum pension liability, net of taxes
    
    
    
    
    
    
    9,828
    
    
    
    
    
    
    
    9,828Change in fair value of forward contracts, net of taxes
    
    
    
    
    
    
    254
    
    
    
    
    
    
    
    254Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,521Adoption of
SFAS No. 158
    
    
    
    
    
    
    (5,831
    )
    
    
    
    
    
    
    (5,831
    )Distributions
    
    
    
    
    
    
    
    
    
    
    (79,533
    )
    
    
    (79,533
    )Balance at December 31, 2006
    
    
    69,453
    
    
    
    (7,370
    )
    
    
    3,906
    
    
    
    65,989Net income
    
    
    
    
    
    
    
    
    
    
    84,010
    
    
    
    84,010Pension related minimum liability adjustments, net of taxes
    
    
    
    
    
    
    10,877
    
    
    
    
    
    
    
    10,877Change in fair value of forward contracts, net of taxes
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    21Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,908Other
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )Distributions
    
    
    
    
    
    
    
    
    
    
    (76,533
    )
    
    
    (76,533
    )Balance at December 31, 2007
    
    
    69,453
    
    
    
    3,528
    
    
    
    11,373
    
    
    
    84,354Net income
    
    
    
    
    
    
    
    
    
    
    88,372
    
    
    
    88,372Change in pension related amounts, net of taxes
    
    
    
    
    
    
    (32,813
    )
    
    
    
    
    
    
    (32,813
    )Change in fair value of forward contracts, net of taxes
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    35Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,594Adoption of SFAS No. 158 measurement date
    
    
    
    
    
    
    (11
    )
    
    
    740
    
    
    
    729Distributions
    
    
    (2,365
    )
    
    
    
    
    
    
    (100,485
    )
    
    
    (102,850
    )Balance at December 31, 2008
    
    $
    67,088
    
    
    $
    (29,261
    )
    
    $
    
    
    
    $
    37,827
   5




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Liggett Group LLC and Subsidiaries  Consolidated Statements of Cash Flows  Years Ended December 31, 2008, 2007, and 2006
 (in thousands of dollars)
    
    2008
    
    
    2007
    
    
    2006Cash flows from operating activitiesNet income
    
    $
    88,372
    
    
    $
    84,010
    
    
    $
    83,439Adjustments to reconcile net income to net cash provided by
operating activitiesDepreciation and amortization
    
    
    6,766
    
    
    
    7,129
    
    
    
    6,838Deferred income taxes
    
    
    (3,684
    )
    
    
    4,027
    
    
    
    853Gain on sale of assets
    
    
    (335
    )
    
    
    (443
    )
    
    
    (2,217
    )Restructuring charges, changes in estimates
    
    
    (35
    )
    
    
    (78
    )
    
    
    208Cash payments on restructuring liabilities
    
    
    (88
    )
    
    
    (148
    )
    
    
    (1,028
    )Changes in assets and liabilitiesTrade accounts receivable
    
    
    (6,344
    )
    
    
    12,015
    
    
    
    (3,080
    )Related party receivable
    
    
    (4,927
    )
    
    
    4,670
    
    
    
    1,568Other receivables
    
    
    (390
    )
    
    
    541
    
    
    
    (399
    )Inventories
    
    
    (5,344
    )
    
    
    311
    
    
    
    (20,306
    )Income taxes payable
    
    
    (258
    )
    
    
    5,850
    
    
    
    (9,225
    )Other assets
    
    
    (1,145
    )
    
    
    (1,040
    )
    
    
    47Accounts payable, trade
    
    
    (1,085
    )
    
    
    (105
    )
    
    
    1,202Accrued expenses
    
    
    12,301
    
    
    
    (38,160
    )
    
    
    17,119Employee benefits
    
    
    15,893
    
    
    
    (9,950
    )
    
    
    (5,803
    )Other long-term liabilities
    
    
    4,669
    
    
    
    4,238
    
    
    
    3,076Change in book overdraft
    
    
    198
    
    
    
    (179
    )
    
    
    759Net cash provided by operating activities
    
    
    104,564
    
    
    
    72,688
    
    
    
    73,051Cash flows from investing activitiesProceeds from sale of property, plant and equipment
    
    
    404
    
    
    
    926
    
    
    
    2,496Decrease (increase) in restricted assets
    
    
    1,054
    
    
    
    47
    
    
    
    (1,585
    )Increase in cash surrender value of life insurance policies
    
    
    (230
    )
    
    
    (251
    )
    
    
    (218
    )Capital expenditures
    
    
    (5,453
    )
    
    
    (3,878
    )
    
    
    (8,818
    )Net cash used in investing activities
    
    
    (4,225
    )
    
    
    (3,156
    )
    
    
    (8,125
    )
  6




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Liggett Group LLC and Subsidiaries  Consolidated Statements of Cash Flows (continued)  Years Ended December 31, 2008, 2007, and 2006
 (in thousands of dollars)
    
    2008
    
    
    2007
    
    
    2006Cash flows from financing activitiesRepayments of debt
    
    
    (4,631
    )
    
    
    (4,752
    )
    
    
    (8,573
    )Proceeds from the issuance of debt
    
    
    2,745
    
    
    
    9,576
    
    
    
    7,922Deferred finance charges
    
    
    
    
    
    
    (79
    )
    
    
    (100
    )Borrowings under revolving credit facility
    
    
    531,251
    
    
    
    537,791
    
    
    
    514,739Repayments under revolving credit facility
    
    
    (526,518
    )
    
    
    (534,995
    )
    
    
    (502,753
    )Distributions
    
    
    (102,850
    )
    
    
    (76,533
    )
    
    
    (79,533
    )Net cash used in financing activities
    
    
    (100,003
    )
    
    
    (68,992
    )
    
    
    (68,298
    )Net increase (decrease) in cash and cash equivalents
    
    
    336
    
    
    
    540
    
    
    
    (3,372
    )Cash and cash equivalentsBeginning of year
    
    
    641
    
    
    
    101
    
    
    
    3,473End of year
    
    $
    977
    
    
    $
    641
    
    
    $
    101Supplemental disclosures of cash flow informationCash payments during the period forInterest
    
    $
    1,595
    
    
    $
    999
    
    
    $
    1,330Income taxes
    
    $
    39
    
    
    $
    457
    
    
    $
    1,158Tax sharing payments to Parent
    
    $
    39,100
    
    
    $
    47,190
    
    
    $
    46,275
 Supplemental schedule of non-cash investing and financing activities
 
    
    Liggett recorded other comprehensive loss of ($32,813) (net
of tax) in 2008 and of $10,877
(net of tax) and $9,828 (net of tax) in other comprehensive income during 2007 and 2006,
respectively, in relation to certain of its pension plans (Note 6). In 2008, 2007 and
2006, Liggett recorded $35 (net of taxes), $21 (net of taxes) and $254 (net of taxes),
respectively, in comprehensive income in relation to the change in fair value of forward
contracts.
  7




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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 1.
    
    Basis of Presentation
     11% Senior Secured Notes due 2015
 
  8




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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 Additional Parent Company Notes
   General Corporate Expenses
   2.
    
    Summary of Significant Accounting Policies
 Principles of Consolidation
  Estimates and Assumptions
  9




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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
  Cash and Cash Equivalents
  Accounts Receivable
  Inventories
  Restricted Assets
  Property, Plant and Equipment
    10




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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
  Other Assets
     Revenue Recognition
  Shipping and Handling Fees and Costs
  Advertising Costs
  11




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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 Research and Development Costs
  Stock-Based Compensation
  Employee Benefits
   Reclassifications
  Income Taxes
    12




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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 Legal Costs
   Distributions and Dividends on Common Stock
  Comprehensive Income
   2008
    
    
    2007Forward contracts adjustment, net of taxes of $189
and $215, respectively
    
    $
    (289
    )
    
    $
    (324
    )Pension-related amounts, net of taxes of $17,939 and
$2,389, respectively
    
    
    (28,972
    )
    
    
    3,852Accumulated other comprehensive income (loss)
    
    $
    (29,261
    )
    
    $
    3,528
  Fair Value of Financial Instruments
  13




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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
  December 31,
    
    
    December 31,2008
    
    
    2007Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    977
    
    
    $
    977
    
    
    $
    641
    
    
    $
    641Restricted assets
    
    
    5,232
    
    
    
    5,232
    
    
    
    4,765
    
    
    
    4,765Financial liabilitiesNotes payable and long-term debt
    
    
    35,112
    
    
    
    35,553
    
    
    
    32,265
    
    
    
    31,956
 14




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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 New Accounting Pronouncements
    15




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 3.
    
    Concentrations of Credit Risk
   4.
    
    Inventories
  2008
    
    
    2007Leaf tobacco
    
    $
    48,252
    
    
    $
    41,380Other raw materials
    
    
    5,128
    
    
    
    4,847Work-in-process
    
    
    311
    
    
    
    649Finished goods
    
    
    42,023
    
    
    
    41,115Inventories at current cost
    
    
    95,714
    
    
    
    87,991LIFO adjustment
    
    
    (7,943
    )
    
    
    (5,564
    )$
    87,771
    
    
    $
    82,427
    16




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 5.
    
    Property, Plant and Equipment
  2008
    
    
    2007Land and land improvements
    
    $
    1,418
    
    
    $
    1,418Buildings
    
    
    13,747
    
    
    
    13,747Construction-in-progress
    
    
    731
    
    
    
    1,151Machinery and equipment
    
    
    77,876
    
    
    
    74,812Property, plant and equipment
    
    
    93,772
    
    
    
    91,128Less accumulated depreciation
    
    
    (51,130
    )
    
    
    (47,152
    )Property, plant and equipment, net
    
    $
    42,642
    
    
    $
    43,976
    6.
    
    Employee Benefits Plans
 Defined Benefit Plans
  Postretirement Medical and Life Plans
  17




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 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 450 hourly retirees, who
retired prior to 1991, for Medicare Part B premiums. In addition, an affiliate provides life
insurance benefits to approximately 225 active employees and 500 retirees who reach
retirement age and are eligible to receive benefits under one of the Companys defined
benefit pension plans. The Companys postretirement liabilities are comprised of Medicare
Part B and life insurance premiumsComputation of Defined Benefit and Postretirement Benefit Plan LiabilitiesOn September 29, 2006, SFAS No. 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans was issued. SFAS No. 158 requires, among other things, the
recognition of the funded status of each defined pension benefit plan, retiree health care
and other postretirement benefit plans and postemployment benefit plans on the Companys
consolidated balance sheet. Each overfunded plan is recognized as an asset and each
underfunded plan is recognized as a liability. The initial impact of the standard due to
unrecognized prior service costs or credit and net actuarial gains or losses as well as
subsequent changes in the funded status is recognized as a component of accumulated
comprehensive income (loss) in the Companys consolidated statement of members investment.
Additional minimum pension liabilities (AML) and related intangible assets are also
derecognized upon the adoption of SFAS No. 158, which requires initial application for fiscal
years ending after December 15, 2006.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 ended December 31, 2009.
 DefinedBenefit
    
    Post -Pension
    
    RetirementPlan
    
    Plans
    
    TotalActuarial loss (gain)
    
    $
    2,136
    
    
    $
    (163
    )
    
    $
    1,973
  18




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 OtherPension Benefits
    
    
    Postretirement Benefits(in thousands of dollars)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Change in benefit obligationBenefit obligation at January 1
    
    $
    (133,179
    )
    
    $
    (141,415
    )
    
    $
    (9,836
    )
    
    $
    (10,295
    )Adjustments due to adoption of FAS 158
measurement date provisions:Service and interest cost during gap period
    
    
    (2,080
    )
    
    
    N/A
    
    
    
    (151
    )
    
    
    N/AGap period cash flow
    
    
    3,191
    
    
    
    N/A
    
    
    
    194
    
    
    
    N/AService cost
    
    
    (458
    )
    
    
    (439
    )
    
    
    (14
    )
    
    
    (18
    )Interest cost
    
    
    (7,862
    )
    
    
    (7,832
    )
    
    
    (591
    )
    
    
    (591
    )Benefits paid
    
    
    12,583
    
    
    
    12,990
    
    
    
    642
    
    
    
    770Time contractual termination benefits
    
    
    
    
    
    
    (632
    )
    
    
    
    
    
    
    Actuarial gain
    
    
    3,955
    
    
    
    4,149
    
    
    
    1,013
    
    
    
    298Benefit obligation at December 31
    
    $
    (123,850
    )
    
    $
    (133,179
    )
    
    $
    (8,743
    )
    
    $
    (9,836
    )Change in plan assetsFair value of plan assets at January 1
    
    $
    169,465
    
    
    $
    157,499
    
    
    $
    
    
    
    $
    Adjustments due to adoption of FAS 158
measurement date provisions:Gap period cash flow
    
    
    (3,278
    )
    
    
    
    
    
    
    
    
    
    
    Actual return on plan assets
    
    
    (42,810
    )
    
    
    24,597
    
    
    
    
    
    
    
    Contributions
    
    
    472
    
    
    
    359
    
    
    
    643
    
    
    
    770Benefits paid
    
    
    (12,583
    )
    
    
    (12,990
    )
    
    
    (643
    )
    
    
    (770
    )Fair value of plan assets at December 31
    
    $
    111,266
    
    
    $
    169,465
    
    
    $
    
    
    
    $
    Funded status at December 31
    
    $
    (12,584
    )
    
    $
    36,286
    
    
    $
    (8,743
    )
    
    $
    (9,836
    )Amounts recognized in the balance sheet:Prepaid pension cost
    
    $
    2,901
    
    
    $
    42,084
    
    
    $
    
    
    
    $
    Other accrued expenses
    
    
    (379
    )
    
    
    (530
    )
    
    
    (701
    )
    
    
    (768
    )Non-current employee benefit liabilities
    
    
    (15,106
    )
    
    
    (5,268
    )
    
    
    (8,042
    )
    
    
    (9,068
    )Net amounts recognized
    
    $
    (12,584
    )
    
    $
    36,286
    
    
    $
    (8,743
    )
    
    $
    (9,836
    )
 OtherPension Benefits
    
    Postretirement Benefits2008
    
    2007
    
    2006
    
    2008
    
    2007
    
    2006Actuarial assumptionsDiscount rates  benefit obligation
    
    
    6.75
    %
    
    
    6.25
    %
    
    
    5.85
    %
    
    
    6.75
    %
    
    
    6.25
    %
    
    
    5.85
    %Discount rates  service cost
    
    
    6.25
    %
    
    
    5.85
    %
    
    
    5.68
    %
    
    
    6.25
    %
    
    
    5.85
    %
    
    
    5.68
    %Assumed rates of return on invested assets
    
    
    7.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    
    
    
    
    
    
    
    
    Salary increase assumptions
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.00
    %
 OtherPension Benefits
    
    
    Postretirement Benefits2008
    
    
    2007
    
    
    2006
    
    
    2008
    
    
    2007
    
    
    2006Service cost  benefits earned during the period
    
    $
    808
    
    
    $
    789
    *
    
    $
    768
    
    
    $
    15
    
    
    $
    18
    
    
    $
    20Interest cost on projected benefit obligation
    
    
    7,862
    
    
    
    7,832
    
    
    
    8,043
    
    
    
    591
    
    
    
    591
    
    
    
    598Expected return on assets
    
    
    (12,145
    )
    
    
    (12,726
    )
    
    
    (12,590
    )
    
    
    
    
    
    
    
    
    
    
    Time contractual termination benefits
    
    
    
    
    
    
    632
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of net loss (gain)
    
    
    101
    
    
    
    743
    
    
    
    1,486
    
    
    
    (180
    )
    
    
    (105
    )
    
    
    (12
    )Net (income) expense
    
    $
    (3,374
    )
    
    $
    (2,730
    )
    
    $
    (2,293
    )
    
    $
    426
    
    
    $
    504
    
    
    $
    606
 
 *
    
    $350 of this service cost amount represents the expected administrative expenses of the salaried and hourly pension plans. 19




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 As of December 31, 2008, current year accumulated other
comprehensive income (loss), before income
taxes, consist of the following:
 DefinedBenefit
    
    
    Post-Pension
    
    
    RetirementPlans
    
    
    Benefits
    
    
    TotalPrior year accumulated other comprehensive income (loss)
    
    $
    5,187
    
    
    $
    1,054
    
    
    $
    6,241Amortization of gain (loss)
    
    
    126
    
    
    
    (224
    )
    
    
    (98
    )Net gain (loss) arising during the year
    
    
    (53,687
    )
    
    
    1,013
    
    
    
    (52,674
    )Current year accumulated other comprehensive income (loss)
    
    $
    (48,374
    )
    
    $
    1,843
    
    
    $
    (46,531
    )
 As of December 31, 2008, there was $48,374 of items not yet recognized as a component of net
periodic pension cost, which consisted of future pension costs associated with the
amortization of net losses.As of December 31, 2008, there was $1,843 of items not yet recognized as a component of net
periodic postretirement benefit, which consisted of future benefits associated with the
amortization of net gains.As of December 31, 2008, three of the Companys four defined benefit plans experienced
accumulated benefit obligations in excess of plan assets, for which the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets were $105,677,
$105,677 and $57,723, respectively. As of December 31, 2007, two of the Companys four
defined benefit plans experienced accumulated benefit obligations in excess of plan assets,
for which the projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $32,485, $32,485 and $0, respectively.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 under
SFAS No. 87, Employers Accounting for Pensions and SFAS No. 106, Employers Accounting
for Postretirement Benefits Other Than Pensions. The aforementioned analysis 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 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 2.5%, 6.7% and
8.2% for the years ended
 20




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 December 31, 2008, 2007 and 2006, respectively, and the Companys
actual five-year annual rate of return on its pension plan assets was 1.2%, 11.3% and 7.6%
for the years ended December 31, 2008, 2007 and 2006, respectively.Gains and losses result 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, 2008,
Liggett used a 7.95-year period for its Hourly Plan and a 4.56-year period for its Salaried
Plan to amortize pension fund gains and losses on a straight line basis. Such amounts are
reflected in the pension expense calculation beginning the year after the gains or losses
occur. The amortization of deferred losses negatively impacts pension expense in the future.Plan assets are invested employing multiple investment management firms. Managers within each
asset class cover a range of investment styles and focus primarily on issue selection as a
means to add value. Risk is controlled through a diversification among asset classes,
managers, styles and securities. Risk is further controlled both at the manager and asset
class level by assigning excess return and tracking error targets. Investment managers are
monitored to evaluate performance against these benchmark indices and targets.Allowable investment types include equity, investment grade fixed income, high yield fixed
income, hedge funds and short term investments. The equity fund is comprised of common stocks
and mutual funds of large, medium and small companies, which are predominantly U.S. based.
The investment grade fixed income fund includes managed funds investing in fixed income
securities issued or guaranteed by the U.S. government, or by its respective agencies,
mortgage backed securities, including collateralized mortgage obligations, and corporate debt
obligations. The high yield fixed income fund includes a fund which invests in non-investment
grade corporate debt securities. The hedge funds invest in both equity, including common and
preferred stock, and debt obligations, including convertible debentures, of private and
public companies. The Company generally utilizes its short term investments, including
interest-bearing cash, to pay benefits and to deploy in special situations.The target asset allocation percentage in 2007 was 50% equity investments, 20% investment
grade fixed income, 7% high yield fixed income, 15% alternative investments (including hedge
funds and private equity funds) and 8% short-term investments, with a rebalancing range of
approximately plus or minus 5% around the target asset allocations. In 2008, the Liggett
Employee Benefits Committee temporarily suspended its target asset allocation percentages due
to the volatility in the financial markets. Even though such allocation percentages were
suspended,
investment manager performance versus their respective benchmarks was still monitored on a
regular basis.
 21




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 Liggetts defined benefit retirement plan allocations at December 31, 2008 and 2007, by asset
category, were as follows:
 Plan AssetsatDecember 31,(in thousands of dollars)
    
    2008
    
    2007Asset categoryEquity securities
    
    
    44
    %
    
    
    52
    %Investment grade fixed income securities
    
    
    26
    %
    
    
    18
    %High yield fixed income securities
    
    
    5
    %
    
    
    8
    %Alternative investments
    
    
    8
    %
    
    
    13
    %Short-term investments
    
    
    17
    %
    
    
    9
    %100
    %
    
    
    100
    %
 For 2008 measurement purposes, annual increases in Medicare Part B trends were assumed to
equal rates between 0.0% and 6.6% between 2008 and 2017 and 4.5% after 2018. For 2008
measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates
between 0.9% and 4.5% between 2007 and 2016 and 5.0% after 2017.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%
    
    1%Increase
    
    DecreaseEffect on total of service and interest cost components
    
    $
    12
    
    
    $
    (11
    )Effect on benefit obligation
    
    $
    176
    
    
    $
    (163
    )
 To comply with ERISAs minimum funding requirements, the Company does not currently
anticipate that it will be required to make any funding to the pension plans for the pension
plan year beginning on January 1, 2009 and ending on December 31, 2009. 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:
 PostretirementPension
    
    Medical2009
    
    $
    12,727
    
    
    $
    7012010
    
    
    13,993
    
    
    
    6852011
    
    
    12,137
    
    
    
    6792012
    
    
    13,469
    
    
    
    6782013
    
    
    11,401
    
    
    
    6892014 - 2018
    
    
    55,692
    
    
    
    3,410
 Profit Sharing PlansLiggett Vector Brands maintains 401(k) plans for substantially all employees which allow
eligible employees to invest a percentage of their pre-tax compensation and allocated to
Liggett contribution expenses of $957, $731 and $975 for the years ended December 31, 2008,
2007 and 2006, respectively.
 22




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 7.
    
    Income TaxesLiggetts operations are included in the consolidated federal income tax return of its
indirect 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. Accordingly, federal deferred income taxes which
would normally be reflected in the accompanying consolidated financial statements are
presented by Vector. The Company expenses and pays Vector their portion of the consolidated
income tax expense in accordance with the tax allocation agreement.The amounts provided for income taxes are as follows:
 2008
    
    
    2007
    
    
    2006CurrentFederal
    
    $
    46,583
    
    
    $
    43,486
    
    
    $
    27,977State
    
    
    10,263
    
    
    
    2,990
    
    
    
    7,767DeferredFederal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    (1,772
    )
    
    
    3,273
    
    
    
    853Total tax provision
    
    $
    55,074
    
    
    $
    49,749
    
    
    $
    36,597
 Historically, Liggett has paid Vector on a quarterly basis for its tax liabilities. While
these payments have been made to the parent they may not have been formally remitted to the
Internal Revenue Service and may still represent a liability at the Vector level. The
largest Vector deferred tax liability at December 31, 2008 consists of approximately $75,000
related to the Philip Morris brand transaction which originated in 1998 and 1999. Liggett
may be required to fund future tax obligations that exist at the Vector level.Temporary differences which give rise to a significant portion of deferred tax assets and
liabilities are as follows:
 2008
    
    
    2007Deferred Tax
    
    
    Deferred TaxAsset
    
    
    Liability
    
    
    Asset
    
    
    LiabilitySales and product allowances
    
    $
    206
    
    
    $
    
    
    
    $
    193
    
    
    $
    Inventories
    
    
    93
    
    
    
    1,370
    
    
    
    91
    
    
    
    1,369Property, plant and equipment
    
    
    
    
    
    
    1,289
    
    
    
    
    
    
    
    1,282Employee benefit plan accruals
    
    
    1,282
    
    
    
    
    
    
    
    893
    
    
    
    1,686
 23




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 2008
    
    
    2007Deferred Tax
    
    
    Deferred Tax(in thousands of dollars)
    
    Asset
    
    
    Liability
    
    
    Asset
    
    
    LiabilityTobacco litigation settlements
    
    
    
    
    
    
    764
    
    
    
    
    
    
    
    2,370Forward contracts
    
    
    35
    
    
    
    
    
    
    
    39
    
    
    
    Deferral on Philip Morris Brands
Transaction
    
    
    
    
    
    
    8,353
    
    
    
    
    
    
    
    8,353Total deferred tax
    
    $
    1,616
    
    
    $
    11,776
    
    
    $
    1,216
    
    
    $
    15,060
 Differences between the amounts provided for income taxes and amounts computed at the federal
statutory tax rates are summarized as follows:
 2008
    
    
    2007
    
    
    2006Income before income taxes
    
    $
    143,446
    
    
    $
    133,759
    
    
    $
    120,036Federal income tax at statutory rate
    
    
    50,206
    
    
    
    46,817
    
    
    
    42,013State income taxes, net of federal tax benefit
    
    
    5,519
    
    
    
    6,303
    
    
    
    5,604Impact of IRS audit settlement and other
    
    
    (651
    )
    
    
    (3,371
    )
    
    
    (11,020
    )Income tax expense
    
    $
    55,074
    
    
    $
    49,749
    
    
    $
    36,597
 As a result of a settlement with the Internal Revenue Service, Liggett reduced, during 2006,
the excess portion ($11,500) of a previously established reserve in its consolidated
financial statements, which resulted in a decrease in such amount in reported income tax
expense in the consolidated statement of operations. This transaction related to where
Liggett contributed three of its premium cigarette brands to Trademarks LLC, a newly-formed
limited liability company. In such transaction, Philip Morris acquired an option to purchase
the remaining interest in Trademarks for a 90-day period commencing in December 2008, and
Vector has an option to require Philip Morris to purchase the remaining interest for a 90-day
period commencing in March 2010. Philip Morris exercised its option to purchase the remaining
interest in Trademarks on February 19, 2009. Vector anticipates it will pay approximately
$75,500 in taxes on this transaction in 2009.As of January 1, 2007, the Company adopted the provisions of FIN 48, Accounting for
Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109). The Company did
not recognize
any adjustment in the liability for unrecognized tax benefits as a result of the adoption of
FIN 48 that impacted the January 1, 2007 accumulated deficit.
 24




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 The following table summarizes the activity related to the unrecognized tax benefits:
 Balance at January 1, 2007
    
    $
    6,805Additions based on tax positions related to current year
    
    
    Additions based on tax positions related to prior years
    
    
    720Reductions based on tax positions related to prior years
    
    
    (95
    )Settlements
    
    
    Expirations of the statute of limitations
    
    
    (3,227
    )Balance at December 31, 2007
    
    
    4,203Additions based on tax positions related to current year
    
    
    Additions based on tax positions related to prior years
    
    
    186Reductions based on tax positions related to prior years
    
    
    Settlements
    
    
    Expirations of the statute of limitations
    
    
    (1,686
    )Balance at December 31, 2008
    
    $
    2,703
 In the event the unrecognized tax benefits of $2,703 at December 31, 2008 were recognized,
such recognition would impact the annual effective tax rate. During 2008, the accrual for
potential penalties and interest related to these unrecognized tax benefits was reduced by
$1,500, and in total, as of December 31, 2008, a liability for potential penalties and
interest of $929 has been recorded. The Company classifies all tax-related interest and
penalties as income tax expense.It is reasonably possible the Company may recognize up to
approximately $2,000 of currently
unrecognized tax benefits over the next 12 months, pertaining primarily to expiration of
statutes of limitations of positions reported on U.S. and state and local income tax returns.
The Company files U.S. and state and local income tax returns in jurisdictions with varying
statutes of limitations.
 8.
    
    Long-Term DebtLong-term debt consists of the following:
 2008
    
    
    2007Borrowings outstanding under revolving credit facility
    
    $
    19,515
    
    
    $
    14,782Term loan outstanding under revolving credit facility
    
    
    7,290
    
    
    
    7,823Equipment loans
    
    
    8,307
    
    
    
    9,66035,112
    
    
    
    32,265Less current portion
    
    
    (23,459
    )
    
    
    (19,201
    )Amount due after one year
    
    $
    11,653
    
    
    $
    13,064
 25




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 The following table sets forth the future principal payment obligations:
 Year
Ending December 31,2009
    
    $
    23,4592010
    
    
    2,5972011
    
    
    2,2572012
    
    
    6,4372013
    
    
    362$
    35,112
 Revolving Credit FacilityThe Company has a $50,000 credit facility with Wachovia Bank, N.A. (Wachovia) under which
$19,515 was outstanding at December 31, 2008. Availability as determined under the facility
was $16,460 based on eligible collateral at December 31, 2008. The facility is collateralized
by all inventories and receivables of the Company and a mortgage on the Companys
manufacturing facility. The facility requires the Companys compliance with certain financial
and other covenants including a restriction on the Companys ability to pay cash dividends
unless the Companys borrowing availability, as defined, under the facility for the 30-day
period prior to the payment of the dividend, and after giving effect to the dividend, is at
least $5,000 and no event of default has occurred under the agreement, including the
Companys compliance with the covenants in the credit facility.The term of the Wachovia facility expires on March 8, 2012, subject to automatic renewal for
additional one-year periods unless a notice of termination is given by Wachovia or the
Company at least 60 days prior to such date or the anniversary of such date. Prime rate loans
under the facility bear interest at a rate equal to the prime rate of Wachovia with
Eurodollar rate loans bearing interest at a rate of 2.0% above Wachovias adjusted Eurodollar
rate. The facility contains covenants that provide that the Companys earnings before
interest, taxes, depreciation and amortization, as defined under the facility, on a trailing
twelve month basis, shall not be less than $100,000 if the Companys excess availability, as
defined, under the facility, is less than $20,000. The covenants also require that annual
capital expenditures, as defined under the facility (before a maximum carryover amount of
$2,500), shall not exceed $10,000 during any fiscal year.In August 2007, Wachovia made an $8,000 term loan to 100 Maple LLC (Maple), a subsidiary of
the Company, within the commitment under the existing credit facility. The $8,000 term loan
is collateralized by the existing collateral securing the credit facility, and is also
collateralized by a lien on certain real property (the Mebane Property) owned by Maple. The
Mebane Property also secures the other obligations of the Company under the credit facility.
The $8,000 term loan did not increase the $50,000 borrowing amount of the credit facility,
but did increase the outstanding amounts under the credit facility by the amount of the term
loan and proportionately reduces the maximum borrowing availability under the facility.In August 2007, Liggett and Wachovia amended the credit facility to permit the guaranty of
the Senior Secured Notes described in Note 1 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 was amended to grant to Wachovia 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. In connection with
the amendment, Wachovia, Liggett,
 26




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 Maple and the collateral agent for the holders of Vectors Senior Secured Notes entered into
an inter-creditor agreement, pursuant to which the liens of the collateral agent on the
Liggett and Maple assets will be subordinated to the liens of Wachovia on the Liggett and
Maple assets.Equipment LoansIn October 2005, Liggett purchased equipment for $4,441 through a financing agreement payable
in 24 installments of $112 and then 24 installments of $90. Interest is calculated at 4.89%.
Liggett was required to provide a security deposit equal to 25% of the funded amount or
$1,110.In December 2005, Liggett purchased equipment for $2,273 through a financing agreement
payable in 24 installments of $58 and then 24 installments of $46. Interest is calculated at
5.05%. Liggett was required to provide a security deposit equal to 25% of the funded amount
or $568.In August 2006, Liggett purchased equipment for $7,922 through a financing agreement payable
in 30 installments of $191 and then 30 installments of $103. Interest is calculated at
5.15%. Liggett was required to provide a security deposit equal to 20% of the funded amount
or $1,584.In May 2007, Liggett purchased equipment for $1,576 through a financing agreement, payable in
60 installments of $32. Interest is calculated at 7.99% per annum.In August 2008, Liggett purchased equipment for $2,745 through a financing agreement, payable
in 60 installments of $53. Interest is calculated at 5.94% per annum. Liggett was required to
provide a security deposit equal to approximately 15% of the funded amount or $428.At December 31, 2008 and 2007, the Company had approximately $8,307 and $9,660 outstanding
under these equipment loans.All equipment loans are collateralized by the equipment they finance.See Note 1 for fair value of debt at December 31, 2008.
 9.
    
    Operating LeasesAt December 31, 2008, the Company has operating leases for building space, vehicles and
computer equipment. The future minimum lease payments are as follows:
 LeaseCommitmentsYear Ending December 312009
    
    
    2622010
    
    
    1482011
    
    
    822012
    
    
    14$
    506
 27




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 (in thousands of dollars)
 In addition to the above scheduled future minimum lease payments, Liggett expects to receive
approximately $2,700 in allocated lease expense over the next five years and thereafter from
Liggett Vector Brands, a wholly-owned subsidiary of VGR.Rental expense for the years ended December 31, 2008, 2007, and 2006 amounted to
approximately $1,969, $1,865, and $1,940, respectively.
 10.
    
    Stock CompensationThe Companys parent, Vector, offers stock option plans. As of December 31, 2008, there were
approximately 5,175,000 shares available for issuance under Vectors Amended and Restated
1999 Long-Term Incentive Plan (the 1999 Plan). All employees of Vectors subsidiaries are
eligible to receive grants under such plans. Although Liggett has no employees it received
an allocation from Liggett Vector Brands of $387, $395, and $547 for the years ended December
31, 2008, 2007, and 2006, respectively. These amounts are expense allocations only and do not
represent a rollforward of option balances. These amounts have been recorded in selling,
general and administrative cost in the Companys consolidated statement of operations. As of
December 31, 2008 Liggett Vector Brands has employees with 718,949 options outstanding.The fair value of option grants is estimated at the date of grant using the Black-Scholes
option pricing model. The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly subjective
assumptions including expected stock price characteristics which are significantly different
from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models do not necessarily provide a
reliable single measure of the fair value of stock-based compensation awards.The assumptions used under the Black-Scholes option pricing model in computing fair value of
options are based on the expected option life considering both the contractual term of the
option and expected employee exercise behavior, the interest rate associated with U.S.
Treasury issues with a remaining term equal to the expected option life and the expected
volatility of Vectors common stock over the expected term of the option. There were no
option grants during 2008 or 2007. The assumptions used by Vector for the year ended
December 31, 2006 were as follows:
 2006Risk-free interest rate
    
    4.9% - 5.0%Expected volatility
    
    38.17% - 40.52%Dividend yield
    
    9.96% - 10.03%Expected holding period
    
    6 - 6.75 yearsWeighted average fair value
    
    $2.14 - $2.50
 In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted
stock grant of 57,881 shares of Vectors common stock pursuant to the 1999 Plan. Pursuant to
his restricted share agreement, one-fourth of the shares vested on November 1, 2006, with an
additional one-fourth vesting on each of the three succeeding one-year anniversaries of the
first
 28




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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 vesting date through November 1, 2009. In the event his employment with Vector is terminated
for any reason other than his death, his disability or a change of control (as defined in his
restricted share agreement) of Vector, any remaining balance of the shares not previously
vested will be forfeited by him. Vector recorded deferred compensation of $1,018 representing
the fair market value of the restricted shares on the date of grant. Liggett recorded an
expense of $229 associated with the grant for each of the years ended December 31, 2008, 2007
and 2006, respectively, for Liggetts portion of this expense. These amounts have been
recorded in selling, general and administrative cost in the Companys consolidated statement
of operations.11.
    
    Commitments and ContingenciesTobacco-Related Litigation:OverviewSince 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. New cases continue to be commenced
against Liggett and other cigarette manufacturers. The cases generally fall into the following
categories: (i) smoking and health cases alleging personal injury brought on behalf of
individual plaintiffs (Individual Actions); (ii) smoking and health purporting to be brought
on behalf of a class of individual plaintiffs cases primarily alleging personal injury or
seeking court-supervised programs for ongoing medical monitoring as well as cases alleging the
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); (iii) health care cost recovery actions
brought by various foreign and domestic governmental entities (Governmental Actions); and
(iv) health care cost recovery actions brought by third-party payors including insurance
companies, union health and welfare trust funds, asbestos manufacturers and others
(Third-Party Payor Actions). As new cases are commenced, the costs associated with defending
these cases and the risks relating to the inherent unpredictability of litigation continue to
increase. The future financial impact of the risks and expenses of litigation and the effects
of the tobacco litigation settlements discussed below are not quantifiable at this time. For
the years ended December 31, 2008, 2007 and 2006, Liggett incurred legal expenses and other
litigation costs totaling approximately $8,800, $7,800 and $4,465, respectively.Liggett records provisions in their consolidated financial statements for pending litigation when
they determine that an unfavorable outcome is probable and the amount of loss can be
reasonably estimated. At the present time, while it is reasonably possible that an unfavorable
outcome in a case may occur, except as discussed elsewhere in this note: (i) management has
concluded that it is not probable that a loss has been incurred in any of the pending
tobacco-related cases; (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 (iii) accordingly, management has not provided any amounts in the consolidated
financial statements for unfavorable outcomes, if any.Individual ActionsAs of December 31, 2008, there were 36 individual cases pending against Liggett where
one or more individual plaintiffs allege injury resulting from cigarette smoking,
addiction to cigarette smoking or exposure to secondary smoke and seek compensatory and,
in some cases, punitive damages. In
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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 addition, there were approximately 2,680 Engleprogeny cases (defined below) pending against
Liggett in state and federal courts in Florida, and approximately 100 individual cases pending
in West Virginia state court as part of a consolidated action. The following table lists the
number of individual cases by state that are pending against Liggett or its affiliates as of
December 31, 2008 (excluding Engleprogeny cases and the cases consolidated in West Virginia):
 NumberState
    
    of CasesFlorida
    
    
    12New York
    
    
    10Louisiana
    
    
    5Maryland
    
    
    2Mississippi
    
    
    2West Virginia
    
    
    2District of Columbia
    
    
    1Missouri
    
    
    1Ohio
    
    
    1
 There are currently five cases pending where Liggett is the only tobacco company defendant. In
April 2004, in Davis v. Liggett Group,a Florida state court jury awarded compensatory damages
of $540 against Liggett, plus interest. In addition, the court awarded plaintiffs counsel
legal fees of $752. Liggett appealed both the compensatory and the legal fee awards. In
October 2007, the compensatory award was affirmed by the Fourth District Court of Appeal. In
March 2008, the Fourth District Court of Appeal reversed and remanded the legal fee award for
further proceedings in the trial court. The Company accrued approximately $2,300 for the Davis
case at December 31, 2008. In Ferlanti v. Liggett Group,
an alleged Engleprogeny case, the trial commenced in February 2009. This case was originally filed by plaintiff in 2003 as an individual case.
Trial originally commenced in 2008 and, after three days, the court declared a mistrial. Since
that time, plaintiff amended her complaint to assert her status as a decertified Engleclass
member. The Engleprogeny cases are discussed below. The other three individual actions, where
Liggett is the only tobacco company defendant, are dormant.The plaintiffs allegations of liability in those 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 and 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 by defendants in individual cases include lack of proximate cause, assumption of
the risk, comparative fault and/or contributory negligence, lack of design defect, statute of
limitations,
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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 equitable defenses such as unclean hands and lack of benefit, failure to state a claim and
federal preemption.In addition to the award against Liggett in Davis(described above), jury awards have also been
returned against other cigarette manufacturers in recent years. The awards in these individual
actions, often in excess of millions of dollars, are for both compensatory and punitive
damages. There are several significant jury awards against other cigarette manufacturers which
are currently on appeal.Engle Progeny Cases. In 2000, a jury in Engle v. R.J. Reynolds Tobacco Co.rendered a
$145,000,000 punitive damages verdict in favor of a Florida Class against certain cigarette
manufacturers, including Liggett. 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 one year from January 11, 2007
in which to file individual lawsuits. In addition, some individuals who filed suit prior to
January 11, 2007, and who claim they meet the conditions in Engle, are attempting to avail
themselves of the Engleruling. Lawsuits by individuals requesting the benefit of the Engle
ruling, whether filed before or after the January 11, 2007 deadline, are referred to as the
Engleprogeny cases. Liggett has been named in approximately 2,680 Engleprogeny cases in
both state and federal courts in Florida. Other cigarette manufacturers have also been named as
defendants in most of these cases. These cases include approximately 9,620 plaintiffs, although
duplicate cases were filed in federal and state court on behalf of approximately 660
plaintiffs. The number of cases will likely increase as the courts may require multi-plaintiff
cases to be severed into individual cases. The total number of plaintiffs may also increase as
a result of attempts by existing plaintiffs to add additional parties. For further information
on the Englecase, see Class Actions  EngleCase, below.Class ActionsAs of December 31, 2008, there were seven actions pending for which either a class had been
certified or plaintiffs were seeking class certification, where Liggett is a named defendant,
including two alleged price fixing cases. Other cigarette manufacturers are also named in
these actions. Many of these actions purport to constitute statewide class actions and were
filed after May 1996 when the United States Court of Appeals for the Fifth Circuit, in Castano
v. American Tobacco Co., Inc., reversed a federal district courts certification of a
purported nationwide class action on behalf of persons who were allegedly addicted to
tobacco products.Engle Case. In May 1994, Englewas 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.
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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 In May 2003, Floridas Third District Court of Appeal reversed the trial court and remanded the
case with instructions to decertify the class. The judgment in favor of one of the three class
plaintiffs, in the
amount of $5,831, was overturned as time barred and the court found that Liggett was not liable
to the other two class plaintiffs.In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages
award and held that the class should be decertified prospectively, but preserved several of the
trial courts Phase I findings, including that: (i) smoking causes lung cancer, among other
diseases; (ii) nicotine in cigarettes is addictive; (iii) defendants placed cigarettes on the
market that were defective and unreasonably dangerous; (iv) defendants concealed material
information; (v) all defendants sold or supplied cigarettes that were defective; and (vi) all
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 file their individual lawsuits within one year from
January 11, 2007, the date of the courts mandate. In December 2006, the Florida Supreme Court
added the finding that defendants sold or supplied cigarettes that, at the time of sale or
supply, did not conform to the representations made by defendants. As a result of the decision,
approximately 9,620 former Engleclass members filed suit against Liggett as well as other
cigarette manufacturers.In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco
Co.,awarded $37,500 in compensatory damages, jointly and severally, in a case involving
Liggett and two other cigarette manufacturers, which amount was subsequently reduced by the
court. The jury found Liggett 50% responsible for the damages incurred by the plaintiff. The
Lukacscase was the first case to be tried as an individual Engleprogeny case. In October
2008, plaintiff withdrew her request for punitive damages. In November 2008, the court entered
final judgment in the amount of $24,835 (for which Liggett is 50% responsible), plus interest
from June 2002 which as of December 31, 2008, was in excess of $13,000. The defendants appealed
the final judgment and may be required to post a bond. In addition, plaintiff filed a motion
seeking an award of attorneys fees from Liggett based on plaintiffs prior proposal for
settlement. All proceedings relating to the motions for attorneys fees are stayed pending a
final resolution of appellate proceedings.Other Class Actions. Smith v. Philip Morris(Kansas) and Romero v. Philip Morris(New Mexico)
are actions in which plaintiffs allege that cigarette manufacturers conspired to fix cigarette
prices in violation of antitrust laws. Class certification was granted in Smith in November
2001. Discovery is ongoing. Class certification was granted in Romero in April 2003 and was
affirmed by the New Mexico Supreme Court in February 2005. In June 2006, the trial court granted
defendants motion for summary judgment. Plaintiffs appealed to the New Mexico Court of Appeals
and, in November 2008, the appellate court upheld the decision as to Liggett, but reversed as to
certain other defendants. In West Virginia, a jury verdict in a purported medical monitoring
class action was entered in favor of all tobacco company defendants other than Liggett (Liggett
was previously severed from the trial). There has been no further activity in this case.Class action suits have been filed in a number of states against cigarette manufacturers,
alleging, among other things, that use of the terms light and ultra light constitutes
unfair and deceptive trade practices, among other things. One such suit, Schwab v. Philip
Morris,pending in federal court in New York since 2004, sought to create a nationwide class
of light cigarette smokers. In September 2006, the United States District Court for the
Eastern District of New York certified the class. In April 2008, the United States Court of
Appeals for the Second Circuit decertified the class. The case was returned to the trial court
for further proceedings. There has been no further activity.
 32




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 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, are alleged to have been exposed to secondhand smoke
from
cigarettes which were manufactured by the defendants, and who suffered injury as a result of
that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and
punitive damages. In October 2004, the trial court stayed this case pending the outcome of the
appeal in Scott v. American Tobacco Co.(see description below).In June 1998, in Cleary v. Philip Morris,a putative class action was brought in Illinois state
court on behalf of persons who were allegedly injured by: (i) defendants purported conspiracy
to conceal material facts regarding the addictive nature of nicotine; (ii) defendants alleged
acts of targeting their advertising and marketing to minors; and (iii) defendants claimed
breach of the publics right to defendants compliance with laws prohibiting the distribution
of cigarettes to minors. Plaintiffs request that defendants be required to disgorge all
profits unjustly received through their sale of cigarettes to plaintiffs and the class, which
in no event will be greater than $75 per class member, inclusive of punitive damages, interest
and costs. In July 2006, the plaintiffs filed a motion for class certification. A class
certification hearing occurred in September 2007 and the parties are awaiting a decision.
Merits discovery is stayed pending a ruling by the court. A status conference is scheduled for
October 2009.In April 2001, in Brown v. American Tobacco Co.,a California state court granted in part
plaintiffs motion for class certification and certified a class comprised of adult residents
of California who smoked at least one of defendants cigarettes during the applicable time
period and who were exposed to defendants marketing and advertising activities in
California. In March 2005, the court granted defendants motion to decertify the class based
on a recent change in California law. In October 2006, the plaintiffs filed a petition for
review with the California Supreme Court, which was granted in November 2006. Oral argument is
scheduled for March 3, 2009.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. The consolidation was affirmed on appeal by
the West Virginia Supreme Court. In February 2008, the United States Supreme Court denied
defendants petition for writ of certiorari asking the Court to review the trial plan. It is
estimated that Liggett could be a defendant in approximately 100 of the cases. In February
2008, the court granted defendants motion to stay all proceedings pending review by the
United States Supreme Court in Altria Group Inc. v. Good, where the Supreme Court was asked to
determine whether certain state law claims are preempted by federal law.In December 2008, the
Supreme Court, in 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. This ruling may result in additional class
action cases in other states. Although Liggett is not a party in the Goodcase, an adverse
ruling or commencement of additional lights related class actions could have a material
adverse effect on the Company.Class certification motions are pending in a number of other cases and a number of orders
denying class certification are on appeal. In addition to the cases described above, numerous
class actions remain certified against other cigarette manufacturers, including Scott.In that
case, a Louisiana jury returned a $591,000 verdict (subsequently reduced by the court to
$263,500 plus interest from June
 33




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 2004) against other cigarette manufacturers to fund medical
monitoring or smoking cessation programs for members of the class. The case is on appeal.Governmental ActionsAs of December 31, 2008, there were two Governmental Actions pending against Liggett, only one
of which is active. The claims asserted in health care cost recovery actions vary. In these
cases, the governmental entities 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. Other claims made by some but not all
plaintiffs 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.In City of St. Louis v. American Tobacco Company, a case pending in Missouri state court since
December 1998, the City of St. Louis and approximately 40 hospitals seek recovery of costs
expended by the hospitals on behalf of patients who suffer, or have suffered, from illnesses
allegedly resulting from the use of cigarettes. In June 2005, the court granted defendants
motion for summary judgment as to claims for damages which accrued prior to November 16, 1993.
The claims for damages which accrued after November 16, 1993 are pending. Discovery is
ongoing. In September 2008, the court heard argument on motions for summary judgment filed by
the parties. A decision is pending. Trial is currently scheduled to commence in January 2010.DOJ Case.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. The action asserted claims under three federal statutes,
the Medical Care Recovery Act (MCRA), the Medicare Secondary Payer provisions of the Social
Security Act (MSP) and RICO. In September 2000, the court dismissed the governments claims
based on MCRA and MSP.In August 2006, the trial court entered a Final Judgment and Remedial Order against each of the
cigarette manufacturing defendants, except Liggett. The Final Judgment, among other things,
enjoined the non-Liggett defendants from using lights, low tar, ultra lights, mild, or
natural descriptors, or conveying any other express or implied health messages in connection
with the marketing or sale of cigarettes, domestically and internationally. The Final Judgment
was stayed pending appeal. Although this case has been concluded as to Liggett, it is unclear
what impact, if any, the Final Judgment will have on the cigarette industry as a whole. The
decision is currently on appeal by all parties other than Liggett. 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.
 34




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 Third-Party Payor Actions
 As of December 31, 2008, there were two Third-Party Payor Actions pending against Liggett and
other cigarette manufacturers. Third-Party Payor Actions typically have been filed by
insurance companies, union health and welfare trust funds, asbestos manufacturers and others.
In Third-Party Payor Actions, plaintiffs seek damages for funding of corrective public
education campaigns relating to issues of smoking and health; funding for clinical smoking
cessation programs; disgorgement of
profits from sales of cigarettes; restitution; treble damages; and attorneys fees. Although no
specific amounts are provided, it is possible that requested damages against cigarette
manufacturers in these cases might be in the billions of dollars.Several federal circuit courts of appeals and state appellate courts have ruled that Third-Party
Payors do not have standing to bring lawsuits against cigarette manufacturers, relying
primarily on grounds that plaintiffs claims were too remote. The United States Supreme Court
has refused to consider plaintiffs appeals from the cases decided by five federal circuit
courts of appeals.In June 2005, the Jerusalem District Court in Israel added Liggett as a defendant in an action
commenced in 1998 by the largest private insurer in that country, General Health Services,
against the major United States cigarette manufacturers. The plaintiff seeks to recover the
past and future value of the total expenditures for health care services provided to residents
of Israel resulting from tobacco related diseases, court ordered interest for past
expenditures from the date of filing the statement of claim, increased and/or punitive and/or
exemplary damages and costs. The court ruled that, although Liggett had not sold product in
Israel since at least 1978, it might still have liability for cigarettes sold prior to that
time. Motions filed by defendants are pending before the Israel Supreme Court seeking appeal
from a lower courts decision granting leave to plaintiff for foreign service of process.In May 2008, in National Committee to Preserve Social Security and Medicare v. Philip Morris
USA,a case pending in the United States District Court for the Eastern District of New York,
plaintiffs commenced an action to recover twice the amount paid by Medicare for the health care
services provided to Medicare beneficiaries to treat diseases allegedly attributable to smoking
defendants cigarettes from May 21, 2002 to the present, for which treatment defendants
allegedly were required to make payment under MSP. Defendants Motion to Dismiss and
plaintiffs Motion for Partial Summary Judgment were filed in July 2008. A hearing on the
motions was held in November 2008 and the parties are awaiting a decision.Upcoming TrialsThere are currently approximately 50 individual actions in Florida that may be set for trial in
2009. Liggett and, in all but one of these cases, other cigarette manufacturers are named as
defendants. These cases are all Engleprogeny cases. In the case where Liggett is the sole
defendant, trial is scheduled for February 2009. In addition, a trial has been scheduled for
April 2009 in a non-Engleindividual action in Florida and for October 2009 in an individual
action in Missouri, both, where Liggett and other cigarette manufacturers are named as
defendants. Trial dates are subject to change.MSA and Other State Settlement AgreementsIn 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
 35




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 claims within those states and territories, including claims for health care
cost reimbursement and claims concerning sales of cigarettes to minors.In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the Original
Participating Manufacturers or OPMs) and Liggett (together with any other tobacco product
manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs)
(the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers)
entered into the 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.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.
According to data from Management Science Associates, Inc., domestic shipments by Liggett
accounted for approximately 2.0%, 2.2% and 2.2% of the total cigarettes shipped in the United
States in 2006, 2007 and 2008 respectively. 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
 36




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for
that year. In April 2007, Liggett paid $34,545 for their 2006 MSA obligations and in April
2008, paid $33,495 for their 2007 MSA obligations, having prepaid $32,000 of that amount in
December 2007. Liggett has expensed $44,572 for its estimated MSA obligations for 2008 as part
of cost of goods sold, net of $1,109 credit realized in 2008 as a result of the over estimation
of its liability of MSA expense in 2007. In December 2008, Liggett prepaid $32,000 of their
estimated 2008 MSA obligations and
expects to pay a further approximately $8,700 in April 2009, after withholding certain disputed
amounts.Under the payment provisions of the MSA, the Participating Manufacturers are required to pay a
base annual amount of $9,000,000 in 2009 and each year thereafter (subject to applicable
adjustments, offsets and reductions). These annual payments are allocated based on unit volume
of domestic cigarette shipments. The payment obligations under the MSA are the several, and not
joint, obligations of each Participating Manufacturer and are not the responsibility of any
parent or affiliate of a Participating Manufacturer.Certain MSA DisputesIn 2005, the independent auditor under the MSA calculated that Liggett owed $28,668 for
its 2004 sales. In April 2005, Liggett paid $11,678 and disputed the balance, as permitted by
the MSA. Liggett subsequently paid $9,304 of the disputed amount, although Liggett continues to
dispute that this amount is owed. This $9,304 relates to an adjustment to its 2003 payment
obligation claimed by Liggett for the market share loss to non-participating manufacturers,
which is known as the NPM Adjustment. At December 31, 2008, included in Other assets on
Liggetts consolidated balance sheet, was a noncurrent receivable of $6,513 relating to such
amount. The remaining balance in dispute of $7,686 is comprised of $5,318 claimed for a 2004
NPM Adjustment and $2,368 relating to the independent auditors retroactive change from gross
to net units in calculating MSA payments, which Liggett contends is improper, as discussed
below. From their April 2006 payment, Liggett withheld approximately $1,600 claimed for the
2005 NPM Adjustment and $2,612 relating to the retroactive change from gross to net units.
Liggett withheld approximately $3,700 from its April 2007 payments related to the 2006 NPM
Adjustment and approximately $3,000 relating to the retroactive change from gross to net
units. From its April 2008 payment, Liggett withheld approximately $4,000 for the 2007 NPM
Adjustment and approximately $3,300 relating to the retroactive change from gross to net
units.The following amounts have not been expensed in the accompanying consolidated financial
statements as they relate to Liggetts claim for an NPM adjustment: $6,513 for 2003, $3,789 for
2004 and $800 for 2005.NPM Adjustment.In March 2006, an economic consulting firm selected pursuant to the MSA
rendered its final and non-appealable decision that the MSA was a significant factor
contributing to the loss of market share of Participating Manufacturers for 2003. The economic
consulting firm subsequently rendered the same decision with respect to 2004 and 2005. As a
result, the manufacturers are entitled to potential NPM Adjustments to their 2003, 2004 and
2005 MSA payments. A Settling State that has diligently enforced its qualifying escrow statute
in the year in question may be able to avoid application of the NPM Adjustment to the payments
made by the manufacturers for the benefit of that state or territory.Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation has
been filed in 49 Settling States over the issue of whether the application of the NPM
Adjustment for 2003 is to be determined through litigation or arbitration. These actions relate
to the potential NPM Adjustment
 37




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 for 2003, which the independent auditor under the MSA
previously determined to be as much as $1,200,000 for all Participating Manufacturers. To
date, all 48 courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute
is arbitrable and 44 of those decisions are final. In response to a proposal from each of the
OPMs and many of the SPMs, 45 of the Settling States have entered into an agreement providing
for a nationwide arbitration of the dispute with respect to the NPM Adjustment for 2003. The
agreement provides for selection of the arbitration panel
beginning October 1, 2009 and that the parties and the arbitrators will thereafter establish
the schedule and procedures for the arbitration. The agreement also provides for a partial
liability reduction for the potential 2003 NPM adjustment of up to 20% for Settling States that
entered into the agreement by January 30, 2009. It is anticipated that the arbitration will
begin in 2010. There can be no assurance that Liggett will receive any adjustment as a result
of these proceedings.Gross v. Net Calculations.In October 2004, the independent auditor notified Liggett and all
other Participating Manufacturers that their payment obligations under the MSA, dating from the
agreements execution in late 1998, had been recalculated using net unit amounts, rather than
gross unit amounts (which had been used since 1999). The change in the method of calculation
could, among other things, require additional MSA payments by Liggett of approximately $25,200,
including interest, for 2001 through 2008, and require additional amounts in future periods
because the proposed change from gross to net units would serve to lower Liggetts market
share exemption under the MSA.Liggett has objected to this retroactive change and has disputed the change in methodology.
Liggett contends that the retroactive change from using gross to net unit amounts is
impermissible for several reasons, including:
 
    
    use of net unit amounts is not required by the MSA (as reflected by, among
other things, the use of gross unit amounts through 2005);
    
    such a change is not authorized without the consent of affected parties to
the MSA;
    
    the MSA provides for four-year time limitation periods for revisiting
calculations and determinations, which precludes recalculating Liggetts 1997
Market Share (and thus, Liggetts market share exemption); and
    
    Liggett and others have relied upon the calculations based on gross unit
amounts since 1998.
 No amounts have been expensed or accrued in the accompanying consolidated financial statements
for any potential liability relating to the gross versus net dispute.Litigation Challenging the MSA.In litigation pending in federal court in New York, certain
importers of cigarettes allege that the MSA and certain related New York statutes violate
federal antitrust and constitutional law. The district court granted New Yorks motion to
dismiss the complaint for failure to state a claim. On appeal, the United States Court of
Appeals for the Second Circuit held that if all of the allegations of the complaint were
assumed to be true, plaintiffs had stated a claim for relief on antitrust grounds. On remand to
the district court, in September 2004, the court denied plaintiffs motion to preliminarily
enjoin the MSA and certain related New York statutes, but the court issued a preliminary
injunction against an amendment to the allocable share provision of the New York escrow
statute. In November 2008, the district court granted New Yorks motion for summary judgment,
dismissing all claims brought by the plaintiffs, and dissolving the preliminary injunction.
 38




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 Additionally, in another proceeding pending in federal court in New York, plaintiffs seek to
enjoin the statutes enacted by New York and other states in connection with the MSA on the
grounds that the statutes violate the Commerce Clause of the United States Constitution and
federal antitrust laws. In September 2005, the United States Court of Appeals for the Second
Circuit held that if all of the
allegations of the complaint were assumed to be true, plaintiffs had stated a claim for relief
and that the New York federal court had jurisdiction over the other defendant states. In
October 2006, the United States Supreme Court denied the petition of the attorneys general for
writ of certiorari. Similar challenges to the MSA and MSA-related state statutes are pending in
Kentucky, Arkansas, Kansas, Louisiana, Tennessee and Oklahoma. Liggett and the other cigarette
manufacturers are not defendants in these cases.In October 2008, Vibo Corporation, Inc., d/b/a General Tobacco (Vibo) commenced litigation in
the United States District Court for the Western District of Kentucky against each of the
Settling States and certain Participating Manufacturers. Vibo alleged, among other things,
that the market share exemptions (i.e.: grandfathered shares) provided to certain SPMs under
the MSA, including Liggett, violate federal antitrust and constitutional law. On December 8,
2008, the court dismissed the complaint. On December 11, 2008, Vibo filed a declaratory
judgment action in state court in California seeking a determination that the Amended Adherence
Agreement it executed in November 2007 is consistent with the MSA and that the MSAs most
favored nation provisions are not triggered by the agreement. This matter is pending.
Litigation challenging the validity of the MSA, including claims that the MSA violates
antitrust laws, has not been successful to date.Other State Settlements.The MSA replaces 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. Liggetts agreements with these states remain in full force and effect, and Liggett
made various payments to these states during 1996, 1997 and 1998 under the agreements. 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 had been 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, in order to resolve any potential issues with Minnesota as to
Liggetts ongoing economic settlement obligations, Liggett negotiated a $100 a year payment to
Minnesota, to be paid any year cigarettes manufactured by Liggett are sold in that state.In 2004, the Attorneys General for Florida, Mississippi and Texas advised Liggett that they
believed that Liggett had failed to make all required payments under the respective settlement
agreements with these states for the period 1998 through 2003 and that additional payments may
be due for 2004 and subsequent years. In 2004, Florida and Mississippi proposed settlements to
Liggett in the total amount of approximately $20,000 for the period 1998 though 2003.
Subsequent discussions did not result in a resolution of the issues. Liggett believes the
states allegations are without merit, based, among other things, on the language of the most
favored nation provisions of the settlement agreements.
 39




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 Except for $2,500 accrued at December 31, 2008, in connection with the foregoing matters,
no other amounts have been accrued in the accompanying condensed consolidated financial
statements for any additional amounts that may be payable by Liggett under the settlement
agreements with Florida, Mississippi and Texas. There can be no assurance that Liggett will
resolve these matters or
that Liggett will not be required to make additional material payments, which payments
could adversely affect the Companys consolidated financial position, results of operations or
cash flows.Management is not able to predict the outcome of the litigation pending or threatened against
Liggett. Litigation is subject to many uncertainties. For example, in addition to $540
awarded in the Daviscase, plus legal fees, in June 2002, the jury in the Lukacscase, an
individual case brought under the third phase of the Englecase, awarded compensatory damages
against Liggett and two other defendants and found Liggett 50% responsible for the damages. In
November 2008, the court entered final judgment in favor of the plaintiff for $24,835, plus
interest from June 11, 2002 which, as of December 31, 2008, exceeded $13,000. It is possible
that additional cases could be decided unfavorably against Liggett. As a result of the Engle
decision, approximately 9,620 former Engleclass members commenced suit against Liggett and
other cigarette manufacturers. Liggett may enter into discussions in an attempt to settle
particular cases, if it believes it is appropriate 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 and
health case could encourage the commencement of additional similar litigation, or could lead to
multiple adverse decisions in the Engleprogeny cases. Management is unable to make a
reasonable estimate with respect to the amount or range of loss that could result from an
unfavorable outcome of the cases pending against Liggett or the costs of defending such cases
and as a result has not provided any amounts in its condensed consolidated financial statements
for unfavorable outcomes. The complaints filed in these cases rarely detail alleged damages.
Typically, the claims set forth in an individuals complaint against the tobacco industry seek
money damages in an amount to be determined by a jury, plus punitive damages and costs.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 similar litigation or legislation.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 of the
smoking-related litigation.Liggetts management is 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 effect on the capital expenditures,
results of operations or competitive position of Liggett.
 40




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 Other Litigation:In October 2005, Lorillard Tobacco Company advised Liggett that it believed that certain styles
of Liggetts Grand Prix brand cigarettes created a likelihood of confusion among consumers with
Lorillards Newport cigarette brand because of similarities in packaging. In December 2006,
Lorillard commenced an action in the United States District Court for the Middle District of
North Carolina seeking, among other things: an injunction against Liggetts sale of certain
brand styles of Grand Prix; an order directing the recall of the relevant brand styles; an
accounting of profits for the relevant brand styles; treble damages; and interest, attorneys
fees and costs. In January 2008, the parties resolved the litigation.Other Matters:There may be several other proceedings, lawsuits and claims pending against Liggett
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 the Companys financial position, results of operations or cash
flows.12.
    
    Related Party TransactionsLiggett is a party to an agreement dated February 26, 1991, as amended June 30, 2001, 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 2008, 2007 and 2006.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 by Liggett. The charges for services
rendered under the agreement amounted to $5,675 in 2008, $5,405 in 2007 and $5,148 in 2006.Liggett leased equipment from a subsidiary of Vector during 2006 for $50 per month. The
total charge for this lease was $500 for the year ended December 31, 2006 which was recorded
in cost of goods sold.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.
 41




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006   (in thousands of dollars)
 Liggett and Vector Tobacco Inc. (Vector Tobacco), a company affiliated by common ownership,
are parties to a services agreement whereby Liggett provides advisory, administrative, and
other services as requested by Vector Tobacco. Under the terms of the agreement, Liggett is
reimbursed by Vector Tobacco for costs incurred. In total, during 2008, 2007, and 2006,
Liggett
received approximately $0, $0, and $156, respectively, for items such as machinery and
equipment, rent and utilities, certain raw materials, marketing costs and advisory and
administrative services from Vector Tobacco.On January 1, 2004 Liggett entered into a manufacturing agreement with Vector Tobacco whereby
Liggett agreed to provide handling, storage, manufacturing, preparation, record-keeping,
remittance of federal excise tax payments, processing of returns and other services relating
to the manufacture of Vector Tobacco brands. The Agreement expired December 31, 2005, but is
automatically renewed for a successive one-year term unless otherwise terminated by either
party. Pricing is set forth in the Agreement based on previously determined standard costs
and invoices are sent to Vector Tobacco monthly. In 2008, 2007 and 2006, Liggett
manufactured approximately 1.1, 1.2 and 1.3 billion units of Vector Tobacco brands
respectively, and realized $34,577, $32,845 and $38,529, respectively, in net receipts from
these sales and $1,158, $1,028 and $1,190, respectively, in profit from the Agreement.As of December 31, 2008 and 2007, Liggett has a receivable from Vector Tobacco totaling
$4,361 and $3,250, respectively. This overall net receivable position is relating to the
manufacturing agreement between Liggett and Vector Tobacco in 2008 and 2007.The remaining related party net receivable balances of $9,207 and $5,390 at December 31, 2008
and 2007, respectively, relate primarily to transactions with Liggetts affiliate, Liggett
Vector Brands.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 2008, 2007 and 2006, Liggett expensed $55,602, $53,346 and $51,344, respectively, for
services provided by Liggett Vector Brands of which $(35), $(78) and $(116), respectively,
related to restructuring costs. The remaining expenses have been classified as selling,
general and administrative ($31,612, $30,771 and $28,516 for the years ended December 31,
2008, 2007 and 2006, respectively) and cost of goods sold ($24,025, $22,653 and $22,944 for
the years ended December 31, 2008, 2007 and 2006, respectively).
 42




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
 13.
    
    Restructuring
 AssetImpairment,Severance
    
    
    Contractand
    
    
    Termination,(in thousands of dollars)
    
    Benefits
    
    
    and Exit Costs
    
    
    TotalsBalance at December 31, 2005
    
    
    646
    
    
    
    1,262
    
    
    
    1,908Change in Estimate
    
    
    (93
    )
    
    
    (23
    )
    
    
    (116
    )Utilized in 2006
    
    
    (553
    )
    
    
    (475
    )
    
    
    (1,028
    )Balance at December 31, 2006
    
    
    
    
    
    
    764
    
    
    
    764Change in Estimate
    
    
    
    
    
    
    (78
    )
    
    
    (78
    )Utilized in 2007
    
    
    
    
    
    
    (148
    )
    
    
    (148
    )Balance at December 31, 2007
    
    $
    
    
    
    $
    538
    
    
    $
    538Change in Estimate
    
    
    
    
    
    
    (35
    )
    
    
    (35
    )Utilized in 2008
    
    
    
    
    
    
    (88
    )
    
    
    (88
    )Balance at December 31, 2008
    
    $
    
    
    
    $
    415
    
    
    $
    415
 Liggett Vector Brands RestructuringsDuring April 2004, Liggett Vector Brands adopted a restructuring plan in its continuing
effort to adjust the cost structure of the business and improve operating efficiency. As part
of the plan, Liggett Vector Brands eliminated 83 positions and consolidated operations,
subletting its New York office space and relocating several employees.On October 6, 2004, Vector announced an additional plan to further restructure the operations
of Liggett Vector Brands, its sales, marketing and distribution agent for its Liggett and
Vector Tobacco subsidiaries. Liggett Vector Brands has realigned its sales force and adjusted
its business model to more efficiently serve its chain and independent accounts nationwide.
Liggett Vector Brands is seeking to expand the portfolio of private and control label partner
brands by utilizing a pricing strategy that offers long-term list price stability for
customers. In connection with the restructuring, the Company eliminated approximately 330
full-time positions and 135 part-time positions as of December 15, 2004.
 43




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##### 



Schedule II  Valuation and Qualifying Accounts
 AdditionsChargedBalance
    
    
    To
    
    
    
    
    
    
    Balanceat
    
    
    Costs
    
    
    
    
    
    
    atBeginning
    
    
    and
    
    
    
    
    
    
    End ofof Period
    
    
    Expenses
    
    
    Deductions
    
    
    PeriodDescriptionYear ended December 31, 2008Allowance for:Doubtful accounts
    
    $
    46
    
    
    $
    
    
    
    $
    
    
    
    $
    46Cash discounts
    
    
    61
    
    
    
    12,980
    
    
    
    12,847
    
    
    
    194Sales returns
    
    
    2,600
    
    
    
    2,087
    
    
    
    1,687
    
    
    
    3,000Total
    
    $
    2,707
    
    
    $
    15,067
    
    
    $
    14,534
    
    
    $
    3,240Year ended December 31, 2007Allowance for:Doubtful accounts
    
    $
    50
    
    
    $
    13
    
    
    $
    17
    
    
    $
    46Cash discounts
    
    
    529
    
    
    
    16,015
    
    
    
    16,483
    
    
    
    61Sales returns
    
    
    2,557
    
    
    
    1,380
    
    
    
    1,337
    
    
    
    2,600Total
    
    $
    3,136
    
    
    $
    17,408
    
    
    $
    17,837
    
    
    $
    2,707Year ended December 31, 2006Allowance for:Doubtful accounts
    
    $
    100
    
    
    $
    65
    
    
    $
    115
    
    
    $
    50Cash discounts
    
    
    329
    
    
    
    18,995
    
    
    
    18,795
    
    
    
    529Sales returns
    
    
    3,596
    
    
    
    398
    
    
    
    1,437
    
    
    
    2,557Total
    
    $
    4,025
    
    
    $
    19,458
    
    
    $
    20,347
    
    
    $
    3,136
 44