Exhibit 99.2
 Liggett Group LLC and Subsidiaries
Consolidated Financial Statements
as of December 31, 2009 and 2008,
and for each of the three years
ended December 31, 2009, 2008 and 2007




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##### 



Liggett Group LLC and Subsidiaries
Index
December 31, 2009 and 2008
 Page(s)Report of Independent Registered Public Accounting Firm
    
    
    1Consolidated Financial StatementsConsolidated Balance Sheets as of December 31, 2009 and 2008
    
    
    23Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
    
    
    4Consolidated Statement of Members Investment
    
    
    5Consolidated Statements of Cash Flows
    
    
    67Notes to Consolidated Financial Statements
    
    
    844Consolidated Financial Statement ScheduleSchedule II  Valuation and Qualifying Accounts
    
    
    45




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##### 



Report of Independent Registered Public Accounting Firm
 
    
 1




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##### 



Liggett Group LLC and Subsidiaries
Consolidated Balance Sheets
December 31, 2009 and 2008
 (in thousands of dollars)
    
    2009
    
    
    2008AssetsCurrent assetsCash and cash equivalents
    
    $
    9
    
    
    $
    977Accounts receivableTrade, less allowances of $336 and $240, respectively
    
    
    7,480
    
    
    
    9,070Related parties
    
    
    10,905
    
    
    
    12,233Other
    
    
    980
    
    
    
    674Inventories
    
    
    92,703
    
    
    
    87,771Restricted assets
    
    
    3,138
    
    
    
    2,652Tax
receivable from parent
    
    
    26,147
    
    
    
    Deferred taxes
    
    
    573
    
    
    
    746Other current assets
    
    
    1,080
    
    
    
    1,162Total current assets
    
    
    143,015
    
    
    
    115,285Property, plant and equipment, net
    
    
    37,916
    
    
    
    42,642Prepaid pension costs
    
    
    8,994
    
    
    
    2,901Restricted assets
    
    
    2,012
    
    
    
    2,580Due from related parties
    
    
    1,254
    
    
    
    1,335Deferred taxes
    
    
    975
    
    
    
    870Other assets
    
    
    13,091
    
    
    
    12,824Total assets
    
    $
    207,257
    
    
    $
    178,437
  2




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##### 



Liggett Group LLC and Subsidiaries
Consolidated Balance Sheets (continued)
December 31, 2009 and 2008
 (in thousands of dollars)
    
    2009
    
    
    2008Liabilities and Members InvestmentCurrent liabilitiesCurrent portion of long-term debt
    
    $
    2,551
    
    
    $
    3,944Revolving credit facility
    
    
    17,382
    
    
    
    19,515Current portion of pension and post-retirement liabilities
    
    
    1,029
    
    
    
    1,050Accounts payable  trade
    
    
    2,462
    
    
    
    3,610Accrued promotional expenses
    
    
    12,099
    
    
    
    9,542Income taxes payable
    
    
    266
    
    
    
    11,838Other accrued taxes, principally excise taxes
    
    
    24,088
    
    
    
    6,990Estimated allowance for sales returns
    
    
    3,330
    
    
    
    3,000Settlement accruals
    
    
    16,080
    
    
    
    18,577Deferred taxes
    
    
    767
    
    
    
    10,892Other current liabilities
    
    
    1,379
    
    
    
    3,108Total current liabilities
    
    
    81,433
    
    
    
    92,066Long-term debt, less current portion
    
    
    9,056
    
    
    
    11,653Non-current employee benefits
    
    
    19,804
    
    
    
    23,178Deferred income taxes
    
    
    1,387
    
    
    
    884Other long-term liabilities
    
    
    19,424
    
    
    
    12,829Total liabilities
    
    
    131,104
    
    
    
    140,610Commitments and contingencies (Note 10)Members InvestmentContributed capital
    
    
    67,088
    
    
    
    67,088Accumulated
other comprehensive loss
    
    
    (21,749
    )
    
    
    (29,261
    )Retained earnings
    
    
    30,814
    
    
    
    Total members investment
    
    
    76,153
    
    
    
    37,827$
    207,257
    
    
    $
    178,437
  3




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##### 



Liggett Group LLC and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008, and 2007
 (in thousands of dollars)
    
    2009
    
    
    2008
    
    
    2007Revenues *
    
    $
    762,208
    
    
    $
    529,091
    
    
    $
    515,979ExpensesCost of goods sold
    
    
    563,773
    
    
    
    326,682
    
    
    
    325,276Operating, selling, administrative and
general expenses
    
    
    52,827
    
    
    
    51,147
    
    
    
    50,555Management fees paid to Vector Group Ltd.
    
    
    7,723
    
    
    
    7,439
    
    
    
    7,169Net (gain)/loss on sale of assets
    
    
    128
    
    
    
    (335
    )
    
    
    (443
    )Gain on sale of trademarks
    
    
    (5,000
    )
    
    
    
    
    
    
    Restructuring and impairment charges
    
    
    
    
    
    
    (35
    )
    
    
    (78
    )Operating income
    
    
    142,757
    
    
    
    144,193
    
    
    
    133,500Other income (expenses)Interest income
    
    
    102
    
    
    
    848
    
    
    
    1,334Interest expense
    
    
    (802
    )
    
    
    (1,595
    )
    
    
    (1,075
    )Income before income taxes
    
    
    142,057
    
    
    
    143,446
    
    
    
    133,759Income tax provision
    
    
    (52,643
    )
    
    
    (55,074
    )
    
    
    (49,749
    )Net income
    
    $
    89,414
    
    
    $
    88,372
    
    
    $
    84,010
 
 *
    
    Revenues and cost of goods sold include excise taxes of $325,407, $145,958, and $152,588 for the years ended
December 31, 2009, 2008, and 2007, respectively.  4




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##### 



Liggett Group LLC and Subsidiaries
Consolidated Statement of Members Investment
Years Ended December 31, 2009, 2008, and 2007
 AccumulatedOtherContributed
    
    
    Comprehensive
    
    
    Retained(in thousands of dollars)
    
    Capital
    
    
    Income (Loss)
    
    

Earnings
    
    
    TotalBalance at January 1, 2007
    
    $
    69,453
    
    
    $
    (7,370
    )
    
    $
    3,906
    
    
    $
    65,989Net income
    
    
    
    
    
    
    
    
    
    
    84,010
    
    
    
    84,010Pension related minimum liability adjustments, net of taxes
    
    
    
    
    
    
    10,877
    
    
    
    
    
    
    
    10,817Change 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
    )
    
    
    
    
    
    
    37,827Net income
    
    
    
    
    
    
    
    
    
    
    89,414
    
    
    
    89,414Change in pension related amounts, net of taxes
    
    
    
    
    
    
    7,476
    
    
    
    
    
    
    
    7,476Change in fair value of forward contracts, net of taxes
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    36Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,926Distributions
    
    
    
    
    
    
    
    
    
    
    (58,600
    )
    
    
    (58,600
    )Balance at December 31, 2009
    
    $
    67,088
    
    
    $
    (21,749
    )
    
    $
    30,814
    
    
    $
    76,153
   5




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##### 



Liggett Group LLC and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008, and 2007
 (in thousands of dollars)
    
    2009
    
    
    2008
    
    
    2007Cash flows from operating activitiesNet income
    
    $
    89,414
    
    
    $
    88,372
    
    
    $
    84,010Adjustments to reconcile net income to net cash provided by
operating activitiesDepreciation and amortization
    
    
    7,170
    
    
    
    6,766
    
    
    
    7,129Deferred income taxes
    
    
    (9,554
    )
    
    
    (3,684
    )
    
    
    4,027(Gain)/Loss on sale of assets
    
    
    127
    
    
    
    (335
    )
    
    
    (443
    )Restructuring charges, changes in estimates
    
    
    
    
    
    
    (35
    )
    
    
    (78
    )Cash payments on restructuring liabilities
    
    
    (110
    )
    
    
    (88
    )
    
    
    (148
    )Changes in assets and liabilitiesTrade accounts receivable
    
    
    1,590
    
    
    
    (6,344
    )
    
    
    12,015Related party receivable
    
    
    1,409
    
    
    
    (4,927
    )
    
    
    4,670Other receivables
    
    
    (306
    )
    
    
    (390
    )
    
    
    541Inventories
    
    
    (4,932
    )
    
    
    (5,344
    )
    
    
    311Income taxes payable
    
    
    (37,719
    )
    
    
    (258
    )
    
    
    5,850Other assets
    
    
    (1,537
    )
    
    
    (1,145
    )
    
    
    (1,040
    )Accounts payable, trade
    
    
    (1,085
    )
    
    
    (1,085
    )
    
    
    (105
    )Accrued expenses
    
    
    15,869
    
    
    
    12,301
    
    
    
    (38,160
    )Employee benefits
    
    
    (2,012
    )
    
    
    15,893
    
    
    
    (9,950
    )Other long-term liabilities
    
    
    6,595
    
    
    
    4,669
    
    
    
    4,238Change in book overdraft
    
    
    (63
    )
    
    
    198
    
    
    
    (179
    )Net cash provided by operating activities
    
    
    64,856
    
    
    
    104,564
    
    
    
    72,688Cash flows from investing activitiesProceeds from sale of property, plant and equipment
    
    
    70
    
    
    
    404
    
    
    
    926Decrease in restricted assets
    
    
    1,678
    
    
    
    1,054
    
    
    
    47Increase in cash surrender value of life insurance policies
    
    
    (256
    )
    
    
    (230
    )
    
    
    (251
    )Capital expenditures
    
    
    (2,593
    )
    
    
    (5,453
    )
    
    
    (3,878
    )Net cash used in investing activities
    
    
    (1,101
    )
    
    
    (4,225
    )
    
    
    (3,156
    )
  6




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##### 



Liggett Group LLC and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2009, 2008, and 2007
 (in thousands of dollars)
    
    2009
    
    
    2008
    
    
    2007Cash flows from financing activitiesRepayments of debt
    
    
    (3,990
    )
    
    
    (4,631
    )
    
    
    (4,752
    )Proceeds from the issuance of debt
    
    
    
    
    
    
    2,745
    
    
    
    9,576Deferred finance charges
    
    
    
    
    
    
    
    
    
    
    (79
    )Borrowings under revolving credit facility
    
    
    749,476
    
    
    
    531,251
    
    
    
    537,791Repayments under revolving credit facility
    
    
    (751,609
    )
    
    
    (526,518
    )
    
    
    (534,995
    )Distributions to Parent
    
    
    (58,600
    )
    
    
    (102,850
    )
    
    
    (76,533
    )Net cash used in financing activities
    
    
    (64,723
    )
    
    
    (100,003
    )
    
    
    (68,992
    )Net increase (decrease) in cash and cash equivalents
    
    
    (968
    )
    
    
    336
    
    
    
    540Cash and cash equivalentsBeginning of year
    
    
    977
    
    
    
    641
    
    
    
    101End of year
    
    $
    9
    
    
    $
    977
    
    
    $
    641Supplemental disclosures of cash flow informationCash payments during the period forInterest
    
    $
    804
    
    
    $
    1,595
    
    
    $
    999Income taxes
    
    $
    420
    
    
    $
    39
    
    
    $
    457Tax sharing payments to Parent
    
    $
    104,050
    
    
    $
    39,100
    
    
    $
    457
 Supplemental schedule of non-cash investing and financing activities
 
    
    Liggett recorded other comprehensive loss of $32,813 (net of tax) in 2008 and other comprehensive income of $7,476
(net of tax) and $10,877 (net of tax) during 2009 and 2007,
respectively, in relation to certain of its pension plans (Note 6). In 2009, 2008 and
2007, Liggett recorded $36 (net of taxes), $35 (net of taxes) and $21 (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, 2009, 2008 and 2007
 (in thousands of dollars)
 1.
    
    Basis of Presentation
 Liggett Group LLC (Liggett or the Company) is a wholly-owned subsidiary of VGR Holding
LLC (VGR), all of whose membership interests are owned by Vector Group Ltd. (Vector or
Parent). Liggett is engaged primarily in the manufacture and sale of discount cigarettes,
principally in the United States. Certain management and administrative functions are
performed by affiliates (Notes 12 and 13).Management believes the assumptions underlying the consolidated financial statements are
reasonable. However, the consolidated financial statements included herein may not
necessarily reflect the Companys results of operations, financial position and cash flows in
the future or what its results of operations, financial position and cash flows would have
been had the Company been a stand-alone company during the periods presented. All
significant intercompany accounts and transactions have been eliminated in consolidation.Liggett Vector Brands Inc. (Liggett Vector Brands), a company related through common
ownership, coordinates and executes the sales, marketing, administration 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 its sales,
marketing, manufacturing, distribution, and administrative expenses have been allocated to
Liggett.Vector and VGR are holding companies and as a result do not have any operating activities
that generate revenues or cash flows. Accordingly, Vector relies on distributions from VGR
and its other subsidiaries and investments and VGR relies on distributions from its other
subsidiaries, including Liggett, in order to fund its operations and meet its obligations.
Vector has certain debt outstanding which will require interest and principal payments over
the terms of such debt. Interest and principal to service the debt is expected to be funded
by Vectors cash and cash equivalents, investments, the operations of Vectors subsidiaries,
including Liggett, and proceeds, if any, from Vectors future financings. During 2009, 2008
and 2007, Liggett made distributions of $58,600, $102,850 and $76,533, respectively, to VGR.11% Senior Secured Notes due 2015In August 2007, Vector sold $165,000 of its 11% Senior Secured Notes due 2015 (the
Senior Secured Notes) in a private offering to qualified institutional investors in
accordance with Rule 144A of the Securities Act of 1933. On May 28, 2008, Vector completed an
offer to exchange the Senior Secured Notes for an equal amount of newly issued 11% Senior
Secured Notes due 2015. The new Senior Secured Notes have substantially the same terms as
the original notes, except that the new Senior Secured Notes have been registered under the
Securities Act.In September 2009, Vector sold an additional $85,000 principal amount of the Senior Secured
Notes at 94% of face value in a private offering to qualified institutional investors in
accordance with Rule 144A of the Securities Act of 1933.The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several
basis by all of the wholly-owned domestic subsidiaries of Vector that are engaged in the
conduct of Vectors cigarette businesses, including Liggett. Also, Liggetts guarantee on the
Senior Secured Notes is collateralized by a pledge of Liggetts capital stock. Liggetts
consolidated balance sheet, statement of operations and statement of members investment as
of December 31, 2009 do not reflect any amounts related to these Notes as the debt is not
acquisition related.
 8




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 The Senior Secured Notes are due with a lump sum payment of $250,000 in 2015. It is
anticipated that the majority of these payments, as well as interest thereon, will be funded
by Liggetts operations.Additional Parent Company NotesAs of December 31, 2009, Vector has debt with a net amount of approximately $74,437 (face amount $267,530) in
addition to the principal amount of Senior Secured Notes previously discussed. These notes are not
reflected in Liggetts consolidated financial statements because they are not
collateralized by Liggetts assets and Liggett has not guaranteed these obligations. It is
anticipated that the majority of the payments on these notes will be funded by Liggetts
operations.In addition to the Senior Secured Notes and these notes, the Company may have to fund certain tax
liabilities of Vector (Note 6).General Corporate ExpensesGeneral corporate expense allocations represent costs related to corporate functions such as
executive oversight, risk management, information technology, accounting, legal, investor
relations, human resources, tax, other services and employee benefits and incentives Vector
provides to the Company. The allocations are based on a reasonable estimation of Vectors
overhead expenses based on the relative specific identification and the relative percentage
of the Companys revenues and headcount to Vectors total cost. All of these allocations are
reflected in management fees paid to Vector in the Companys consolidated statements of
operations of $7,723, $7,439 and $7,169 in 2009, 2008 and 2007, respectively.The Company and Vector considered these general corporate expense allocations to be a
reasonable reflection of the utilization of services provided. The allocations may not,
however, reflect the expense the Company would have incurred as a stand-alone company.
Actual costs which may have been incurred if the Company had been a stand-alone company in
2007, 2008 and 2009 would depend on a number of factors, including how the Company chose to
organize itself, what if any functions were outsourced or performed by Company employees and
strategic decisions made in areas such as information technology systems and infrastructure.
However, the Company currently does not believe the difference between the cost allocations
from Vector and the costs the Company would have incurred on a stand-alone basis would have a
material impact on the Companys statements of operations, balance sheets or statements of
cash flows for 2007, 2008, and 2009.
 2.
    
    Summary of Significant Accounting Policies
 Principles of ConsolidationThe consolidated financial statements include the accounts of Liggett and its wholly-owned
subsidiaries, Eve Holdings Inc., 100 Maple LLC and Liggett & Myers Holdings Inc. All
significant intercompany balances and transactions have been eliminated.Estimates and AssumptionsThe preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
December 31, 2009 and 2008 and the reported amounts of revenues and expenses during the three
years ended
 9




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 December 31, 2009, 2008 and 2007, respectively. Significant estimates subject to material changes in
the near term include restructuring and impairment charges, inventory valuation, deferred tax
assets, allowance for doubtful accounts, promotional accruals, sales returns and allowances,
actuarial assumptions of pension plans, settlement accruals including Master Settlement
Agreement (MSA) liabilities, and litigation and defense costs. Actual results could differ
from those estimates.Cash and Cash EquivalentsFor purposes of the statements of cash flows, cash includes cash on hand, cash on deposit in
banks and cash equivalents, comprised of short-term investments which have an original
maturity of 90 days or less. The carrying value of cash and cash equivalents, restricted
assets and short-term loans approximate their fair value. The Company places its cash and
cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation
(FDIC) and Securities Investor Protection Corporation (SIPC) insure these balances, up to
$250 and $500, respectively. The carrying amount of bank deposits, including amounts
classified as cash and cash equivalents, were approximately $9 and $977 at December 31, 2009
and 2008, respectively. All bank deposits at December 31, 2009 and approximately $350 at
December 31, 2008 are insured by the FDIC. The remaining net balance of approximately $627
at December 31, 2008, was uninsured and uncollateralized.Accounts ReceivableAccounts receivable-trade are recorded at their net realizable value. The allowance for
doubtful accounts and cash discounts was $336 and $240 at December 31, 2009 and 2008,
respectively.InventoriesTobacco inventories are stated at the lower of cost or market with cost determined using the
last-in, first-out method. Although portions of leaf tobacco inventories may not be used or
sold within one year because of the time required for aging, they are included in current
assets, which is common practice in the cigarette industry. It is not practicable to
determine the amount that will not be used or sold within one year.Restricted AssetsRestricted assets of $3,138 at December 31, 2009 were classified as current assets. This
balance consisted of legal bonds posted in connection with ongoing litigation. Long-term
restricted assets of $2,012 at December 31, 2009 consisted of deposits associated with
financed equipment. Restricted assets of $2,652 at December 31, 2008 were classified as
current assets. This balance consisted of cash collateral for bonds posted in connection with
the appeal filed in an individual smoker case in 2005 and deposits associated with financed
equipment. Long-term restricted assets of $2,580 at December 31, 2008 consisted of deposits
associated with financed equipment.Property, Plant and EquipmentProperty, plant and equipment are stated at cost and depreciated using the straight-line
method over the estimated useful lives of the respective assets which are 20 years for
buildings and four to ten years for machinery and equipment.Expenditures for repairs and maintenance are charged to expense as incurred. The costs of
major renewals and betterments are capitalized. The cost and related accumulated
depreciation of
 10




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 property, plant and equipment are removed from the accounts upon retirement or other
disposition and any resulting gain or loss is reflected in operations.The Company reviews long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of an asset may not be recoverable.
Accordingly, when indicators of impairment are present, the Company evaluates the carrying
value of property, plant and equipment against their related future undiscounted cash flows.
If the carrying value is greater than such cash flows, then impairment is deemed to exist.
The amount of any impairment is determined by comparing the long-lived assets carrying value
against its fair value, which is determined using discounted future cash flows.Other AssetsIncluded in other current assets are point-of-sale materials of $304 and $635 as of December
31, 2009 and 2008, respectively. The remaining balances of $776 and $527 at December 31,
2009 and 2008, respectively, relate to prepaid expenses and deposits.Other non-current assets include spare parts for property, plant and equipment of $4,744 and
$4,685, net of reserves of $1,139 and $1,060, as of December 31, 2009 and 2008, respectively.Deferred financing charges of $104 and $152 as of December 31, 2009 and 2008, respectively,
relate to the Companys debt agreement with Wachovia Bank, N.A. and have been recorded as
other assets. The Company recognized amortization expense of $48 in 2009, $48 in 2008, and
$47 in 2007 related to deferred finance chargesThe remaining balances of $8,243 and $7,987 at December 31, 2009 and 2008, respectively,
relate primarily to other receivables, and pre-paids.Revenue RecognitionRevenues from sales are recognized upon the shipment of finished goods when title and risk of
loss have passed to the customer, there is persuasive evidence of an arrangement, the sale
price is determinable and collectibility is reasonably assured. The Company provides an
allowance for expected sales returns, net of any related inventory cost recoveries. Certain
sales incentives, including buydowns, are classified as reductions of net sales. The Company
includes federal excise taxes in revenues and cost of goods sold. Such revenues and cost of
goods sold totaled $325,407, $145,958 and $152,588 for the years ended December 31, 2009,
2008 and 2007, respectively. The large increase in 2009 was due to the $6.17 per carton
increase implemented on April 1, 2009. Since the Companys line of business is tobacco, the
Companys financial position and its results of operations and cash flows have been and could
continue to be materially adversely affected by significant unit sales volume declines,
litigation and defense costs, increased tobacco costs or reductions in the selling price of
cigarettes in the near term.Shipping and Handling Fees and CostsShipping and handling fees related to sales transactions are not billed to customers nor
recorded as sales revenue. Shipping and handling costs, which were $3,487, $3,914 and $4,083
for 2009, 2008 and 2007, respectively, are recorded in selling, general and administrative
expenses.
 11




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 Advertising CostsAdvertising and related agency costs are expensed as incurred and were $3,145, $3,255 and
$3,045 for the years ended December 31, 2009, 2008 and 2007, respectively. These costs are
recorded as selling, general and administrative expenses.Research and Development CostsResearch and development costs are expensed as incurred, and were $981, $1,028 and $952 for
the years ended December 31, 2009, 2008 and 2007, respectively.Stock-Based CompensationThe Company through an affiliate, accounts for stock compensation plans by measuring
compensation cost for share-based payments at fair value.Employee BenefitsThe Company sponsors a postretirement benefit plan and records an actuarially determined
liability and charges operations for the estimated cost of postretirement benefits for
current employees of Liggett Vector Brands and retirees.The cost of providing retiree pension benefits, health care and life insurance benefits is
actuarially determined and accrued over the service period of the active employee group. The
funded status of each defined benefit pension plan, retiree health care and other
postretirement benefit plans and postemployment benefit plans is recognized on the balance
sheet. The measurement date for determining the funded status of the plans is December 31,
2009 and 2008. (See Note 6.)Income TaxesThe Company recognizes the financial statement impact of a tax position when it is more
likely than not that the position will be sustained upon examination. If the tax position
meets the more-likely-than-not recognition threshold, the tax effect is recognized at the
largest amount of the benefit that is greater than 50% likely of being realized upon ultimate
settlement. Any liabilities created for unrecognized deferred tax benefits are presented as a
liability and not combined with deferred tax liabilities or assets.Deferred taxes reflect the impact of temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and the amounts recognized for tax
purposes as well as tax credit carryforwards and loss carryforwards. These deferred taxes
are measured by applying currently enacted tax rates. A valuation allowance reduces deferred
tax assets when it is deemed more likely than not that future taxable income will be
insufficient to realize some portion or all of the deferred tax assets.Liggetts U.S. income tax provision and related deferred income tax amounts are determined as
if the Company filed tax returns on a standalone basis. The Companys entities currently
join in the filing of a consolidated U.S. tax return with Vector and its other U.S.
subsidiaries.ContingenciesThe Company records product liability legal expenses and other litigation costs as selling,
general and administrative expenses as those costs are incurred. As discussed in Note 10,
legal proceedings covering a wide range of matters are pending or threatened in various
jurisdictions against Liggett.
 12




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 The Company records provisions in its consolidated financial statements for pending
litigation when it is determined that an unfavorable outcome is probable and the amount of
loss can be reasonably estimated. At the present time, while it is reasonably possible
that an unfavorable outcome in a case may occur,
(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 in 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, unless specified in Note
10. Legal defense costs are expensed as incurred. Litigation is subject to many
uncertainties, and it is possible that the Companys consolidated financial position, results
of operations or cash flows could be materially adversely affected by an unfavorable outcome
in any such smoking-related litigation.Distributions and Dividends on Common StockThe Company records distributions on its common stock as dividends in its consolidated
statement of members investment to the extent of retained earnings. Any amounts exceeding
retained earnings are recorded as a reduction to contributed capital.Comprehensive IncomeOther comprehensive income is a component of members investment and relates to pension
related adjustments and the change in the estimated fair value of forward contracts. The
Companys comprehensive income was $96,926, $55,594 and $94,908 for the years ended December
31, 2009, 2008 and 2007, respectively.The components of accumulated other comprehensive income (loss), net of taxes, were as
follows at December 31:
 2009
    
    
    2008Forward contracts adjustment, net of taxes of $165
and $189, respectively
    
    $
    (253
    )
    
    $
    (289
    )Pension-related amounts, net of taxes of $13,038 and
$17,939, respectively
    
    
    (21,496
    )
    
    
    (28,972
    )Accumulated other comprehensive income (loss)
    
    $
    (21,749
    )
    
    $
    (29,261
    )
 This forward contract relates to a prior contract no longer open at December 31, 2009 and
2008, respectively. It is being amortized over the life of the fixed asset originally
associated with the contract.Fair Value of Financial InstrumentsThe carrying amount of borrowings outstanding under the variable rate revolving credit
facility and other long-term debt is a reasonable estimate of fair value, based upon
estimated current borrowing rates for loans with similar terms and maturities. The estimates
presented herein are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair values.
 13




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 December 31,
    
    December 31,2009
    
    2008Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    9
    
    
    $
    9
    
    
    $
    977
    
    
    $
    977Restricted assets
    
    
    5,150
    
    
    
    5,150
    
    
    
    5,232
    
    
    
    5,232Financial liabilitiesNotes payable and long-term debt
    
    
    28,989
    
    
    
    29,225
    
    
    
    35,112
    
    
    
    35,553
 14




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 New Accounting PronouncementsIn June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (the Codification). The Codification is the single source of
authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related
literature. The Codification eliminates the GAAP hierarchy contained in Statement of
Financial Accounting Standard and establishes one level of authoritative GAAP. All other
literature is considered non-authoritative. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. In
response, the Company has used plain English or included the references to the Codification,
as appropriate, in these consolidated financial statements.In January 2008, the FASB issued new accounting guidance on fair value measurement. The
guidance does not require any new fair value measurements but provides a definition of fair
value, establishes a framework for measuring fair value, and expands disclosure about fair
value measurements. On January 1, 2009, the Company adopted the guidance as it relates to
nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair
value in the financial statements on at least an annual basis. The guidance defines fair
value, establishes a framework for measuring fair value in accounting principles generally
accepted in the United States of America (GAAP), and expands disclosures about fair value
measurements. The provisions of this standard apply to other accounting pronouncements that
require or permit fair value measurements and are to be applied prospectively with limited
exceptions. The adoption of the guidance did not have a material impact on the Companys consolidated financial statements.In April 2009, the FASB issued a staff position providing additional guidance that clarifies
the methodology used to determine fair value when there is no active market or where the
price inputs being used represent distressed sales. The staff position guidance reaffirms the
objective of fair value measurement, as stated in the original guidance which is to reflect
how much an asset would be sold for in an orderly transaction. It also reaffirms the need to
use judgment to determine if a formerly active market has become inactive, as well as to
determine fair values when markets have become inactive. The adoption of the staff position
guidance had no impact on the Companys consolidated financial statements.On January 1, 2009, the FASBs revised guidance on business combinations became effective.
The revision is intended to simplify existing guidance and converge rulemaking under U.S.
GAAP with international accounting rules. The adoption of this standard did not have a
material impact on the Companys consolidated financial statements.On January 1, 2009, the FASBs amended guidance on determining whether instruments granted in
share-based payment transactions are participating securities became effective for the
Company. The amended guidance states that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The adoption of the amended guidance had no impact on the
Companys consolidated financial statements.In April 2009, the FASB issued authoritative guidance on the methodology for determining
whether an other-than-temporary impairment exists for debt securities and the amount of the
impairment to be recorded in earnings through increased consistency in the timing of
impairment recognition and
 15




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 enhanced disclosures related to the credit and noncredit components of impaired debt
securities that are not expected to be sold. In addition, increased disclosures are required
for both debt and equity securities regarding expected cash flows, credit losses, and an
aging of securities with unrealized losses. The adoption of the guidance did not have an
impact on the consolidated financial statements.In December 2008, the FASB issued authoritative guidance on employers disclosures about plan
assets of a defined benefit pension or other postretirement plan. The objective of the
guidance is to provide users of financial statements with an understanding of how investment
allocation decisions are made, the major categories of plan assets held by the plans, the
inputs and valuation techniques used to measure the fair value of plan assets, significant
concentration of risk within the companys plan assets, and for fair value measurements
determined using significant unobservable inputs a reconciliation of changes between the
beginning and ending balances. The Company adopted the new disclosure requirements in the
2009 annual reporting period.In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for
transfers of financial assets. The guidance requires additional disclosures for transfers of
financial assets and changes the requirements for derecognizing financial assets. The
Company will adopt these Statements for annual reporting periods beginning on
January 1, 2010. The Company is currently assessing the impact, if any, of the amended
guidance on its consolidated financial statements.In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for
the consolidation of variable interest entities. The amended guidance eliminates exceptions
to consolidating qualifying special purpose entities, contains new criteria for determining
the primary beneficiary, and increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable interest entity. This guidance
also contains a new requirement that any term, transaction, or arrangement that does not have
a substantive effect on an entitys status as a variable interest entity, a companys power
over a variable interest entity, or a companys obligation to absorb losses or its right to
receive benefits of an entity must be disregarded. The elimination of the qualifying
special-purpose entity concept and its consolidation exception means more entities will be
subject to consolidation assessments and reassessments. The Company will adopt these
statements for annual reporting periods beginning on January 1, 2010. The Company
is currently assessing the impact, if any, the amended guidance on its consolidated
financial statements.In May 2009, the FASB issued guidance which establishes general standards of: 1) the period
after the balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in the
financial statements; 2)
 16




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements; and 3) the disclosures that an
entity should make about events or transactions that occurred after the balance sheet date.
The adoption of this guidance did not impact the Companys consolidated financial
statements.In January 2010, the FASB issued authoritative guidance intended to improve disclosure about
fair value measurements. The guidance requires entities to disclose significant transfers in
and out of fair value hierarchy levels and the reasons for the transfers and to present
information about purchases, sales, issuances, and settlements separately in the
reconciliation of fair value measurements using significant unobservable inputs (Level 3).
Additionally, the guidance clarifies that a reporting entity should provide fair value
measurements for each class of assets and liabilities and disclose the inputs and valuation
techniques used for fair value measurements using significant other observable inputs (Level
2) and significant unobservable inputs (Level 3). This guidance is effective for interim and
annual periods beginning after December 15, 2009 except for the disclosure about purchases,
sales, issuances and settlements in the Level 3 reconciliation, which will be effective for
interim and annual periods beginning after December 15, 2010. As this guidance provides only disclosure requirements, the adoption of
this standard will not impact the Companys consolidated financial statements.Concentrations of Credit RiskFinancial instruments which potentially subject the Company to concentrations of credit risk
consist principally of trade receivables.Liggetts customers are primarily candy and tobacco distributors, the military and large
grocery, drug and convenience store chains. Excluding related parties, one customer
accounted for approximately 9.0%, 10.0% and 9.9% of Liggetts revenues in 2009, 2008 and
2007, respectively, and accounts receivable of approximately $722 and $3,169 at December
31, 2009 and 2008, respectively. Sales to this customer were primarily in the private
label discount segment. Concentrations of credit risk with respect to trade receivables
are generally limited due to the large number of customers, located primarily throughout
the United States, comprising Liggetts customer base. Ongoing credit evaluations of
customers financial condition are performed and, generally, no collateral is required.
Liggett maintains reserves for potential credit losses and such losses, in the
aggregate, have generally not exceeded managements expectations.
 3.
    
    InventoriesInventories consist of the following at December 31:
 2009
    
    
    2008Leaf tobacco
    
    $
    48,613
    
    
    $
    48,252Other raw materials
    
    
    3,497
    
    
    
    5,128Work-in-process
    
    
    2,388
    
    
    
    311Finished goods
    
    
    53,826
    
    
    
    42,023Inventories at current cost
    
    
    108,324
    
    
    
    95,714LIFO adjustment
    
    
    (15,621
    )
    
    
    (7,943
    )$
    92,703
    
    
    $
    87,771
 17




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 The Company has a leaf inventory management program whereby, among other things, it is
committed to purchase certain quantities of leaf tobacco. The purchase commitments are for
quantities not in excess of anticipated requirements and are at prices, including carrying
costs, established at the date of the commitment. Liggett had leaf tobacco purchase
commitments of approximately $12,963 at December 31, 2009. During 2007, the Company entered
into a single source supply agreement for fire safe cigarette paper through 2012.
 The Company capitalizes the incremental prepaid cost of the Master Settlement Agreement in
ending inventory. The prepaid cost of MSA was $11,909 and $13,893 at December 31, 2009 and
2008, respectively. MSA expense was increased by $598 in 2009 for 2008 and
reduced by $1,109 in 2008 for
2007 as a result of a change in estimate to the MSA assessment.
 4.
    
    Property, Plant and Equipment
 Property, plant and equipment consists of the following at December 31:
 2009
    
    
    2008Land and land improvements
    
    $
    1,418
    
    
    $
    1,418Buildings
    
    
    13,722
    
    
    
    13,747Construction-in-progress
    
    
    923
    
    
    
    731Machinery and equipment
    
    
    79,789
    
    
    
    77,876Property, plant and equipment
    
    
    95,852
    
    
    
    93,772Less accumulated depreciation
    
    
    (57,936
    )
    
    
    (51,130
    )Property, plant and equipment, net
    
    $
    37,916
    
    
    $
    42,642
 Depreciation expense for the years ended December 31, 2009, 2008, and 2007 was $7,122,
$6,718, and $7,080, respectively. Future machinery and equipment purchase commitments were
$9,077 at December 31, 2009.
 5.
    
    Employee Benefits Plans
 Defined Benefit Plans
 Liggett sponsors three defined benefit pension plans (two qualified and one non-qualified)
covering virtually all individuals who were employed by Liggett on a full-time basis prior to
1994. Future accruals of benefits under these three defined benefit plans were frozen between
1993 and 1995. These benefit plans provide pension benefits for eligible employees based
primarily on their compensation and length of service. Contributions are made to the pension
plans in amounts necessary to meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. The plans assets and benefit obligations were
measured at December 31, 2009 and 2008.
 18




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 Postretirement Medical and Life Plans
 The Company provides certain postretirement medical and life insurance benefits to certain
employees. Substantially all manufacturing employees as of December 31, 2009 are eligible for
postretirement medical benefits if they reach retirement age while working for Liggett or
certain affiliates. Retirees are required to fund 100% of participant medical premiums and,
pursuant to union contracts, Liggett reimburses approximately 400 hourly retirees, who
retired prior to 1991, for Medicare Part B premiums. In addition, an affiliate provides life
insurance benefits to approximately 215 active employees and 475 retirees who reach
retirement age and are eligible to receive benefits under one of the Companys defined
benefit pension plans. The Companys postretirement liabilities are comprised of Medicare
Part B and life insurance premiums.
 Computation of Defined Benefit and Postretirement Benefit Plan Liabilities
 The funded status of each defined pension benefit plan, retiree health care and other
postretirement benefit plans and postemployment benefit plans is recognized 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.
 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, 2010.
 DefinedBenefit
    
    Post -Pension
    
    RetirementPlan
    
    Plans
    
    TotalActuarial loss (gain)
    
    $
    1,358
    
    
    $
    (130
    )
    
    $
    1,228
 19




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 The following provides a reconciliation of benefit obligations, plan assets and the funded
status of the pension plans and other postretirement benefits:
 OtherPension Benefits
    
    
    Postretirement Benefits2009
    
    
    2008
    
    
    2009
    
    
    2008Change in benefit obligationBenefit obligation at January 1
    
    $
    (123,850
    )
    
    $
    (133,179
    )
    
    $
    (8,743
    )
    
    $
    (9,836
    )Adjustments due to adoption of FAS 158
measurement date
provisions:Service and interest cost during gap period
    
    
    
    
    
    
    (2,080
    )
    
    
    
    
    
    
    (151
    )Gap period cash flow
    
    
    
    
    
    
    3,191
    
    
    
    
    
    
    
    194Service cost
    
    
    (838
    )
    
    
    (458
    )
    
    
    (15
    )
    
    
    (14
    )Interest cost
    
    
    (7,895
    )
    
    
    (7,862
    )
    
    
    (567
    )
    
    
    (591
    )Benefits paid (including expenses)
    
    
    12,551
    
    
    
    12,583
    
    
    
    596
    
    
    
    642Time contractual termination benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Actuarial gain/(loss)
    
    
    (7,568
    )
    
    
    3,955
    
    
    
    (677
    )
    
    
    1,013Benefit obligation at December 31
    
    $
    (127,600
    )
    
    $
    (123,850
    )
    
    $
    (9,406
    )
    
    $
    (8,743
    )Change in plan assetsFair value of plan assets at January 1
    
    $
    111,266
    
    
    $
    169,465
    
    
    $
    
    
    
    $
    Adjustments due to adoption of FAS 158 measurement
date provisions:Gap period cash flow
    
    
    
    
    
    
    (3,278
    )
    
    
    
    
    
    
    Actual return on plan assets
    
    
    26,087
    
    
    
    (42,810
    )
    
    
    
    
    
    
    Contributions
    
    
    365
    
    
    
    472
    
    
    
    596
    
    
    
    643Benefits paid (including expenses)
    
    
    (12,551
    )
    
    
    (12,583
    )
    
    
    (596
    )
    
    
    (643
    )Fair value of plan assets at December 31
    
    $
    125,167
    
    
    $
    111,266
    
    
    $
    
    
    
    $
    Funded status at December 31
    
    $
    (2,433
    )
    
    $
    (12,584
    )
    
    $
    (9,406
    )
    
    $
    (8,743
    )Amounts recognized in the balance sheet:Prepaid pension cost
    
    $
    8,994
    
    
    $
    2,901
    
    
    $
    
    
    
    $
    Other accrued expenses
    
    
    (357
    )
    
    
    (379
    )
    
    
    (680
    )
    
    
    (701
    )Non-current employee benefit liabilities
    
    
    (11,070
    )
    
    
    (15,106
    )
    
    
    (8,726
    )
    
    
    (8,042
    )Net amounts recognized
    
    $
    (2,434
    )
    
    $
    (12,584
    )
    
    $
    (9,406
    )
    
    $
    (8,743
    )
 OtherPension Benefits
    
    
    Postretirement Benefits2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007Actuarial assumptionsDiscount rates  benefit obligation
    
    
    5.75
    %
    
    
    6.75
    %
    
    
    6.25
    %
    
    
    5.75
    %
    
    
    6.75
    %
    
    
    6.25
    %Discount rates  service cost
    
    
    6.75
    %
    
    
    6.25
    %
    
    
    5.85
    %
    
    
    6.75
    %
    
    
    6.25
    %
    
    
    5.85
    %Assumed rates of return on invested assets
    
    
    7.50
    %
    
    
    7.50
    %
    
    
    8.50
    %
    
    
    
    
    
    
    
    
    
    
    Salary increase assumptions
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.00
    %
 OtherPension Benefits
    
    
    Postretirement Benefits2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007Service cost  benefits earned during the period
    
    $
    838
    
    
    $
    808
    
    
    $
    789
    
    *
    $
    15
    
    
    $
    15
    
    
    $
    18Interest cost on projected benefit obligation
    
    
    7,895
    
    
    
    7,862
    
    
    
    7,832
    
    
    
    567
    
    
    
    591
    
    
    
    591Expected return on assets
    
    
    (7,817
    )
    
    
    (12,145
    )
    
    
    (12,726
    )
    
    
    
    
    
    
    
    
    
    
    Time contractual termination benefits
    
    
    
    
    
    
    
    
    
    
    632
    
    
    
    
    
    
    
    
    
    
    
    
 20




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 OtherPension Benefits
    
    
    Postretirement Benefits2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007Amortization of net loss (gain)
    
    
    2,136
    
    
    
    101
    
    
    
    743
    
    
    
    (163
    )
    
    
    (180
    )
    
    
    (105
    )Net (income) expense
    
    $
    3,052
    
    
    $
    (3,374
    )
    
    $
    (2,730
    )
    
    $
    419
    
    
    $
    426
    
    
    $
    504
 
 *
    
    $350 of this service cost amount represents
the expected administrative expenses of the salaried and hourly pension plans. As of December 31, 2009, 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)
    
    $
    (48,374
    )
    
    $
    1,843
    
    
    $
    (46,531
    )Amortization of gain (loss)
    
    
    2,136
    
    
    
    (163
    )
    
    
    1,973Net gain (loss) arising during the year
    
    
    10,702
    
    
    
    (773
    )
    
    
    9,929Current year accumulated other comprehensive income (loss)
    
    $
    (35,536
    )
    
    $
    907
    
    
    $
    (34,629
    )
 As of December 31, 2009, there was $35,536 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, 2009, there was $907 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, 2009, 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 $90,216,
$90,216 and $64,385, respectively. 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.
 Discount rates were determined by a quantitative analysis examining the prevailing prices of
high quality bonds to determine an appropriate discount rate for measuring obligations. The
aforementioned analysis analyzes the cash flow from each of the Companys 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 3.0%, 2.5% and
6.7% for the years ended December 31, 2009, 2008 and 2007, respectively, and the Companys
actual five-year annual rate
 21




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 of return on its pension plan assets was 3.5%, 1.2% and 11.3%
for the years ended December 31, 2009, 2008 and 2007, 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, 2009,
Liggett used a 16.14-year period for its Hourly Plan and a 18.11-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.
 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.
 22




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 
 Liggetts defined benefit retirement plan allocations at December 31, 2009 and 2008, by asset
category, were as follows:
 Plan AssetsAtDecember 31,2009
    
    2008Asset categoryEquity securities
    
    
    50
    %
    
    
    44
    %Investment grade fixed income securities
    
    
    26
    %
    
    
    26
    %High yield fixed income securities
    
    
    2
    %
    
    
    5
    %Alternative investments
    
    
    8
    %
    
    
    8
    %Short-term investments
    
    
    14
    %
    
    
    17
    %100
    %
    
    
    100
    %
 The defined benefit plans recurring financial assets and liabilities subject to fair value
measurements and the necessary disclosures are as follows:
  Fair Value Measurements as of December 31, 2009Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Insurance contracts
    
    $
    2,684
    
    
    $
    
    
    
    $
    2,684
    
    
    $
    Amounts in individually
managed investment accounts:Cash, mutual funds and common stock
    
    
    71,726
    
    
    
    71,726
    
    
    
    
    
    
    
    Common collective trusts
    
    
    40,210
    
    
    
    
    
    
    
    38,752
    
    
    
    1,458Investment partnership
    
    
    10,182
    
    
    
    
    
    
    
    
    
    
    
    10,182Total
    
    $
    124,802
    
    
    $
    71,726
    
    
    $
    41,436
    
    
    $
    11,640
 Fair Value Measurements as of December 31, 2008Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Insurance contracts
    
    $
    2,280
    
    
    $
    
    
    
    $
    2,280
    
    
    $
    Amounts in individually
managed investment accounts:Cash, mutual funds and common stock
    
    
    58,634
    
    
    
    58,634
    
    
    
    
    
    
    
    Common collective trusts
    
    
    39,273
    
    
    
    
    
    
    
    33,735
    
    
    
    5,538Investment partnership
    
    
    9,747
    
    
    
    
    
    
    
    
    
    
    
    9,747Total
    
    $
    109,934
    
    
    $
    58,634
    
    
    $
    36,015
    
    
    $
    15,285
 The fair value determination disclosed above of assets as Level 3 under the fair value
hierarchy was determined based on unobservable inputs and were based on company assumptions,
and information obtained from the investments based on the indicated market values of the
underlying assets of the investment portfolio.
 The changes in the fair value of these Level 3 investments as of December 31, 2009 and 2008
were as follows:
 December 31, 2009
    
    
    December 31, 2008Prior year balance
    
    $
    15,285
    
    
    $
    34,637Distributions
    
    
    (8,978
    )
    
    
    (12,700
    )Unrealized loss on long-term Investments
    
    
    3,913
    
    
    
    (8,307
    )Realized gain on long-term
Investments
    
    
    1,420
    
    
    
    1,655Balance as of December 31, 2008
    
    $
    11,640
    
    
    $
    15,285
 For 2009 measurement purposes, annual increases in Medicare Part B trends were assumed to
equal rates between (7.2%) and 24.7% between 2009 and 2018 and 4.5% after 2019. 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.
 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
    
    $
    9
    
    
    $
    (9
    )Effect on benefit obligation
    
    $
    164
    
    
    $
    (151
    )
 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, 2010 and ending on
December 31, 2010. 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
    
    Medical2010
    
    $
    12,370
    
    
    $
    6802011
    
    
    13,706
    
    
    
    7562012
    
    
    11,635
    
    
    
    7032013
    
    
    11,274
    
    
    
    6872014
    
    
    15,422
    
    
    
    6742015  2019
    
    
    48,386
    
    
    
    3,347
 Profit Sharing Plans
 Liggett Vector Brands maintains 401(k) plans for substantially all employees which allow
eligible employees to invest a percentage of their pre-tax compensation. Liggett Vector
Brands is
 23




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 obligated to match a certain portion of employee contributions to the 401(k) plan.
Accordingly, Liggett Vector Brands allocated to Liggett contribution expenses of $979, $957
and $731 for the years ended December 31, 2009, 2008 and 2007, respectively.
 6. Income Taxes
 Liggett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 its portion of the consolidated
income tax expense in accordance with the tax allocation agreement.
 The amounts provided for income taxes are as follows:
 2009
    
    
    2008
    
    
    2007CurrentFederal
    
    $
    43,160
    
    
    $
    46,583
    
    
    $
    43,486State
    
    
    19,235
    
    
    
    10,263
    
    
    
    2,990DeferredFederal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    (9,752
    )
    
    
    (1,772
    )
    
    
    3,273Total tax provision
    
    $
    52,643
    
    
    $
    55,074
    
    
    $
    49,749
 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 consisted of approximately $75,500
related to the Philip Morris brand transaction which originated in 1998 and 1999 and which
was fully paid in 2009. 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:
 2009
    
    
    2008Deferred Tax
    
    
    Deferred TaxAsset
    
    
    Liability
    
    
    Asset
    
    
    LiabilitySales and product allowances
    
    $
    266
    
    
    $
    
    
    
    $
    206
    
    
    $
    Inventories
    
    
    112
    
    
    
    767
    
    
    
    93
    
    
    
    1,370Property, plant and equipment
    
    
    
    
    
    
    1,333
    
    
    
    
    
    
    
    1,289Employee benefit plan accruals
    
    
    977
    
    
    
    54
    
    
    
    1,282
    
    
    
    Tobacco litigation settlements
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    764Forward contracts
    
    
    30
    
    
    
    
    
    
    
    35
    
    
    
    Deferral on Philip Morris Brands
Transaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,353Total deferred tax
    
    $
    1,548
    
    
    $
    2,154
    
    
    $
    1,616
    
    
    $
    11,776
 24




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 Differences between the amounts provided for income taxes and amounts computed at the
federal statutory tax rates are summarized as follows:
 2009
    
    
    2008
    
    
    2007Income before income taxes
    
    $
    142,057
    
    
    $
    143,446
    
    
    $
    133,759Federal income tax at statutory rate
    
    
    49,720
    
    
    
    50,206
    
    
    
    46,817State income taxes, net of federal tax benefit
    
    
    6,164
    
    
    
    5,519
    
    
    
    6,303Impact of IRS audit settlement and other
    
    
    (3,241
    )
    
    
    (651
    )
    
    
    (3,371
    )Income tax expense
    
    $
    52,643
    
    
    $
    55,074
    
    
    $
    49,749
 In 1998 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. Philip Morris exercised its option to purchase the remaining interest in Trademarks on
February 19, 2009. Vector paid approximately $75,500 in taxes on this transaction in 2009.
 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
    
    
    2,703Additions based on tax positions related to current year
    
    
    Additions based on tax positions related to prior years
    
    
    378Reductions based on tax positions related to prior years
    
    
    (550
    )Settlements
    
    
    (419
    )Expirations of the statute of limitations
    
    
    (1,833
    )Balance at December 31, 2009
    
    $
    279
 In the event the unrecognized tax benefits of $279 at December 31, 2009 were recognized, such
recognition would impact the annual effective tax rate. During 2009, the accrual for
potential
 25




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 
 penalties and interest related to these unrecognized tax benefits was reduced by
$2,383, and in total, as of December 31, 2009, a liability for potential penalties and
interest of $142 has been recorded. The Company classifies all tax-related interest and
penalties as income tax expense.
 The Company believes it is reasonably possible that none of the currently unrecognized tax
benefits will be recognized 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.
 7. Long-Term Debt
 Long-term debt consists of the following:
 2009
    
    
    2008Borrowings outstanding under revolving credit facility
    
    $
    17,382
    
    
    $
    19,515Term loan outstanding under revolving credit facility
    
    
    6,755
    
    
    
    7,290Equipment loans
    
    
    4,852
    
    
    
    8,30728,989
    
    
    
    35,112Less current portion
    
    
    (19,933
    )
    
    
    (23,459
    )Amount due after one year
    
    $
    9,056
    
    
    $
    11,653
 The following table sets forth the future principal payment obligations:
 Year Ending December 31,2010
    
    $
    19,9332011
    
    
    2,2562012
    
    
    1,2822013
    
    
    8952014
    
    
    533Thereafter
    
    
    4,090$
    28,989
 Revolving Credit Facility
 The Company has a $50,000 credit facility with Wachovia Bank, N.A. (Wachovia) under which
$17,382 was outstanding at December 31, 2009. Availability as determined under the facility
was $18,594 based on eligible collateral at December 31, 2009. 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
 26




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 
 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, 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 Loans
 In 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. This loan was retired and the security deposit was returned to Liggett during 2009.
 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. This loan was retired and the security deposit was returned to Liggett during 2009.
 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.
 27




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 
 At December 31, 2009 and 2008, the Company had approximately $4,852 and $8,307 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, 2009.
 8. Operating Leases
 At December 31, 2009, the Company has operating leases for building space, vehicles and
computer equipment. The future minimum lease payments are as follows:
 LeaseYear Ending December 31
    
    Commitments2010
    
    
    6162011
    
    
    5282012
    
    
    3192013
    
    
    1252014
    
    
    124$
    1,712
 In addition to the above scheduled future minimum lease payments, Liggett expects to receive
approximately $2,542 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, 2009, 2008, and 2007 amounted to
approximately $1,852, $1,969, and $1,865, respectively.
 9. Stock Compensation
 The Companys parent, Vector, offers stock option plans. As of December 31, 2009, there were
approximately 3,783,653 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 of non-cash stock compensation from Liggett Vector Brands of $355, $387, and $395
for the years ended December 31, 2009, 2008, and 2007, 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, 2009 Liggett Vector Brands has employees with
639,688 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
 28




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 
 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 2009,
2008 or 2007 to employees of Liggett Vector Brands.
 In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted
stock grant of 60,775 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 vesting date through November 1, 2009. 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 $196, $229 and $229 associated with the grant for each of the years
ended December 31, 2009, 2008 and 2007, 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.
 10. Commitments and Contingencies
 Tobacco-Related Litigation:
 Overview
 Since 1954, Liggett and other United States cigarette manufacturers have been named as defendants
in numerous direct, third-party and purported class actions predicated on the theory that
cigarette manufacturers should be liable for damages alleged to have been caused by cigarette
smoking or by exposure to secondary smoke from cigarettes. 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 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 plaintiffs and
non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly
caused by cigarette smoking and/or disgorgement of profits (Health Care Cost Recovery
Actions). 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, 2009, 2008 and 2007, Liggett incurred legal expenses and other litigation costs
totaling approximately $6,000, $8,800 and $7,800, respectively.
 Litigation is subject to uncertainty and it is possible that there could be adverse developments in
pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or
other
 29




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 
 litigation could encourage the commencement of additional litigation. Damages claimed in
some tobacco-related or other litigation are or can be significant.
 Although Liggett has been able to obtain required bonds or relief from bonding requirements in
order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been
appealed, there remains a risk that such relief may not be obtainable in all cases. This risk
has been reduced given that 43 states now limit the dollar amount of bonds or
require no bond at all. Liggett has secured approximately $3,130 in bonds as of December 31,
2009, although $2,000 of the bonds were subsequently released.
 Liggett records provisions in its consolidated financial statements for pending litigation when it determines that an unfavorable outcome is probable and the amount of loss can be
reasonably estimated. At the present time, while it is reasonably possible that an unfavorable
outcome in a case may occur: (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, therefore, management has not provided any amounts in the consolidated financial
statements for unfavorable outcomes, if any. Liggett believes, and has been so advised by
counsel, that it has valid defenses to the litigation pending against it, as well as valid
bases for appeal of adverse verdicts. All such cases are, and will continue to be vigorously
defended. However, Liggett may enter into settlement discussions in particular cases if it
believes it is in the best interest of the Company to do so.
 Individual Actions
 As of December 31, 2009, there were 41 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 addition, there were approximately 7,160 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, 2009 (excluding
Engleprogeny cases and the cases consolidated in West Virginia):
 NumberState
    
    of CasesFlorida
    
    
    15New York
    
    
    9Maryland
    
    
    8Louisiana
    
    
    5West Virginia
    
    
    2Missouri
    
    
    1Ohio
    
    
    1
 Liggett Only Cases.There are currently five cases pending where Liggett is the only tobacco
company defendant. Cases where Liggett is the only defendant could increase substantially as a
result of the Engleprogeny cases. In July 2009, in Davis v. Liggett Group,a Florida state
trial court jury awarded awarded approximately $1,650 in legal fees, inclusive of interest and
costs, which has been paid by Liggett. In Ferlanti v. Liggett Group, an Engleprogeny case, in
February 2009, a Florida state court jury awarded compensatory damages of $1,200 against
Liggett, but found that the plaintiff was 40% at fault. Therefore, plaintiff was awarded $720
in compensatory damages plus $96
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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 in expenses. Punitive damages were not awarded. Liggett
appealed the award. In May 2009, the court granted plaintiffs motion for an award of
attorneys fees but the amount has not yet been determined. In Hausrath v. Philip Morris, a
case pending in New York state court, plaintiffs recently dismissed all defendants other than
Liggett. 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 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, equitable defenses such as unclean hands and lack of benefit, failure to state
a claim and federal preemption.
 In addition to the awards against Liggett in Davisand Ferlanti,, jury awards in individual
cases have also been returned against other cigarette manufacturers in recent years. The
awards in these individual actions, often in excess of millions of dollars, may be for both
compensatory and punitive damages. There are several significant jury awards against other
cigarette manufacturers which are currently on appeal and several awards which are final and
have been paid.
 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 7,160 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 8,585 plaintiffs,
approximately 3,860 of whom have claims pending in federal court. Duplicate cases were filed in
federal and state court on behalf of approximately 660 plaintiffs. The majority of the cases
pending in federal court are stayed pending the outcome of an appeal to the United States Court
of Appeals for the Eleventh Circuit of several district court orders in which it was found that
the Florida Supreme Courts decision in Englewas unconstitutional. The number of Engleprogeny
cases will likely increase as the courts may require multi-plaintiff cases to be severed into
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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 individual cases. The total number of plaintiffs may also increase as a result of attempts by
existing plaintiffs to add additional parties.
 As of December 31, 2009, 42 alleged Engleprogeny cases where Liggett is currently named as a
defendant, were scheduled for trial in 2010. As of December 31, 2009, ten Engleprogeny cases
have been tried resulting in eight plaintiff verdicts and two defense verdicts. In one of these
cases, the Campbell case,the jury awarded $7,800 in compensatory damages against all
defendents, $156 of which was awarded against Liggett. For further information on the Engle
case and on Engleprogeny cases, including a description of the Lukacscase, see Class Actions
  EngleCase, below.
 Class Actions
 As of December 31, 2009, 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.
 Plaintiffs allegations of liability in class action cases are based on various theories of
recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation,
design defect, failure to warn, nuisance, breach of express and implied warranties, breach of
special duty, conspiracy, concert of action, violation of deceptive trade practice laws and
consumer protection statutes and claims under the federal and state anti-racketeering
statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory
and punitive damages, treble/multiple damages and other statutory damages and penalties,
creation of medical monitoring and smoking cessation funds, disgorgement of profits, and
injunctive and equitable relief. Defenses raised in these cases include, among others, lack of
proximate cause, individual issues predominate, assumption of the risk, comparative fault
and/or contributory negligence, statutes of limitations and preemption by the Federal
Cigarette Labeling and Advertising Act.
 Defenses raised in individual cases include lack of proximate cause, individual issues predominate,
assumption of the risk, comparative fault and/or contributory negligence, statute of
limitations, and federal preemption
 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, 2009, 2008 and 2007
 (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 knowing that the information was false or misleading or failed to disclose a
material fact concerning the health effects or addictive nature of smoking; (v) defendants
agreed to conceal or omit information regarding the
health effects of cigarettes or their addictive nature with the intention that smokers would
rely on the information to their detriment; (vi) defendants sold or supplied cigarettes that
were defective; and (vii) 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 filed their
individual lawsuits by January 2008. In December 2006, the Florida Supreme Court added the
finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did
not conform to the representations made by defendants. As a result of the decision,
approximately 8,585 former Engleclass members have cases pending against Liggett as well as
other cigarette manufacturers.
 Three federal district courts (in the Merlob, Brownand Burrcases) have ruled that the findings
in the Phase I of the Engleproceedings cannot be used to satisfy elements of plaintiffs
claims, and two of those rulings (Brownand Burr, which has since been dismissed for lack of
prosecution) were certified by the trial court for interlocutory review. The certification was
granted by the United States Court of Appeals for the Eleventh Circuit and oral argument was
held in January 2010. A decision is pending. Engleprogeny cases pending in the federal
district courts in the Middle District of Florida have been stayed pending interlocutory
review by the Eleventh Circuit. Several state trial court judges have issued contrary rulings
that allowed plaintiffs to use the Englefindings to establish elements of their claims and
required certain defenses to be stricken.
 Lukacs Case.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, but was
tried almost five years prior to the Florida Supreme Courts final decision in Engle. 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, 2009, was in excess of
$15,000 (for which Liggett is 50% responsible). Defendants filed a notice of appeal in December
2008. Oral argument is scheduled for March 1, 2010. 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 motion for attorneys fees are stayed pending a final resolution of
appellate proceedings.
 In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that
applies to all Engleprogeny lawsuits in the aggregate and establishes individual bond caps for
individual Engleprogeny cases in amounts that vary depending on the number of judgments in
effect at a given time. The legislation, which became effective in June 2009. applies to
judgments entered after the effective date and remains in effect until December 31, 2012.
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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 
 Other Class Actions.In Smith v. Philip Morris,a Kansas state court case filed in February
2000, plaintiffs allege that cigarette manufacturers conspired to fix cigarette prices in
violation of antitrust laws. Plaintiffs seek to recover an unspecified amount in actual and
punitive damages. Class certification was granted in Smith in November 2001. Discovery is
ongoing.
 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 [McLaughlin]
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. In December 2008, the
United States Supreme court, in Altria Group v. Good, ruled that the Federal cigarette Labeling
and Advertising Act did not preempt the state law claims asserted by the plaintiffs and that
they could proceed with their claims under the Maine Unfair Trade Practices Act. This ruling
has resulted in the filing of additional lights class action cases in other states. Although
Liggett is not a defendant in the Goodcase, an adverse ruling or commencement of additional
lights related class actions could have a material adverse effect on the Company.
 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 discussion 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 seek disgorgement of all profits unjustly received through
defendants sale of cigarettes to plaintiffs and the class. In March 2009, plaintiffs filed a
third amended complaint adding, among other things, allegations regarding defendants sale of
light cigarettes. In September 2009, the court granted summary judgment to all defendants
other than Philip Morris as to the lights claims. In November 2009, plaintiffs filed a
revised motion for class certification which was denied by the court in February 2010.
Defendants moved for summary judgment on plaintiffs youth marketing claims, which was granted
by the court. In February 2010, the court denied plaintiffs motion for class certification,
but allowed plaintiffs an opportunity to reinstate the motion as to the conspiring claim if a
new class representative is identified.
 In April 2001, in Brown v. Philip Morris USA,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 June 2009, the California Supreme Court reversed and
remanded the case to the trial court for further proceedings regarding whether the class
representatives have, or can, demonstrate standing. In August 2009, the California Supreme
Court denied defendants rehearing petition and issued its
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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 mandate. In September 2009,
plaintiffs advised the court that they intend to seek reconsideration of the courts previous
order finding that plaintiffs allegations regarding lights cigarettes were preempted by
federal law, in light of the recent United States Supreme Court decision in Altria Group v.
Good.
 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 which is scheduled for June 2010. If the
case were to proceed against Liggett, it is estimated that Liggett could be a defendant in
approximately 100 of the individual cases.
 Class 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 2004) against other cigarette manufacturers to fund medical
monitoring or smoking cessation programs for members of the class. Oral argument on the appeal
occurred in September 2009. A decision is pending.
 Health Care Cost Recovery Actions
 As of December 31, 2009, there were three Health Care Cost Recovery Actions pending against
Liggett. Other cigarette manufacturers are also named in these matters. The claims asserted in
health care cost recovery actions vary. Although, typically, no specific damage amounts are
pled, it is possible that requested damages might be in the billions of dollars. In these
cases, plaintiffs typically assert equitable claims that the tobacco industry was unjustly
enriched by their payment of health care costs allegedly attributable to smoking and seek
reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive
damages, multiple damages and other statutory damages and penalties, injunctions prohibiting
alleged marketing and sales to minors, disclosure of research, disgorgement of profits,
funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of
attorney and expert witness fees.
 Other claims asserted 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.
 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. Claims were asserted under RICO.
 In August 2006, the trial court entered a Final Judgment and Remedial Order against each of the
cigarette manufacturing defendants, except Liggett. In May 2009, the United States Court of
Appeals for the District of Columbia affirmed most of the district courts decision. Both the
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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 government and all defendants, other than Liggett, have filed petitions for writ of certiorari
to the United States Supreme Court. In its petition for writ of certiorari, the govement is
seeking reinstatement of its claims for remedies, including disgorgement of industry profits.
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. 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.
 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
2009, the defendants filed a motion for partial summary judgment on the plaintiffs claims for
future damages and for fraud. In December 2009, the defendants filed motions for summary
judgment based upon other things, plaintiffs failure to prove unreimbursed costs and
plaintiffs failure to show fact of injury or damage. These motions are pending before the
court. Trial is scheduled to commence January 10, 2011.
 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 Medicare Secondary Payer provisions of the Social
Security Act. Defendants Motion to Dismiss and plaintiffs Motion for Partial Summary
Judgment were filed in July 2008 and, in March 2009, the court granted the defendants motion
and dismissed the case. Plaintiffs appealed the decision. In September 2009, defendants filed
a motion for summary disposition of the appeal and for a stay of the briefing schedule. The
stay was granted. In January 2010, the Second Circuit of Appeals referred the motion for
summary affirmance to the Merits Panel and ordered briefing on the motion.
 Upcoming Trials
 In addition to the June 2010 trial in the City of St. Louiscase discussed above, as of
December 31, 2009, there were currently approximately 42 Engleprogeny that are scheduled for
trial in 2010.
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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 Liggett and other cigarette manufacturers are currently named as defendants in
each of these cases. Trial dates are subject to change.
 MSA and Other State Settlement Agreements
 In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related
litigation with 45 states and territories. The settlements released Liggett from all
smoking-related claims 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.
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Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 
 Under the payment provisions of the MSA, the Participating Manufacturers are required to make
annual payments of $9,000,000 (subject to applicable adjustments, offsets, and reductions).
These annual payments are allocated based on unit volume of domestic cigarette shipments. The
payment obligations under the MSA are the several, and not joint, obligation of each
Participating Manufacturer and are not the responsibility of any parent or affiliate of a
Participating Manufacturer.
 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 2.2%, 2.2% and 2.3% of the total cigarettes shipped in the United
States in 2007, 2008 and 2009 respectively. If Liggetts market share exceeds its respective
market share exemption in a given year, then on April 15 of the following year, Liggett must
pay on
each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year.
Liggett paid $33,495 for its 2007 MSA obligations, and paid $39,760 for its 2008 MSA
obligations. Liggett has expensed $58,662 for its estimated MSA obligations for 2009 as part of
cost of goods sold. In December 2009, Liggett prepaid $40,000 of its estimated 2009 MSA
obligations. Additional amounts may be due for 2009 but will not be determined by the
Independent Auditor until April 2010.
 Certain MSA Disputes
 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 to non-participating
manufacturers for 2003. This is known as the NPM Adjustment. The economic consulting firm
subsequently rendered the same decision with respect to 2004, 2005 and 2006. As a result, the
manufacturers are entitled to potential NPM Adjustments to their 2003, 2004, 2005 and 2006 MSA
payments. The Participating Manufacturers are also entitled to potential NPM Adjustments to
their 2007, 2008 and 2009 payments pursuant to an agreement entered into in June 2009 between
the OPMs and the Settleing States under which the OPMs agreed to make certain payments for the
benefit of the Settling States, in exchange for which the Settling States stipulated that the
MSA was a significant factor contributing to the loss of market share of Participating
Manufacturers in 2007, 2008 and 2009. 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 Settling State.
 For 2003 through 2009, Liggett disputed that they owe the Settling States the NPM
Adjustments as calculated by the Independent Auditor. As permitted by the MSA, Liggett has
withheld payment associated with these NPM Adjustment amounts. The total amount withheld or
paid into a disputed payment account by Liggett for 2003 through 2009 is $20,321. In 2003,
Liggett paid the NPM adjustment amount of $9,304 to the Settling States although the Company
continues to dispute this amount. At December 31, 2009, included in Other assets on the
Companys consolidated balance sheet was a noncurrent receivable of $6,513 relating to such
payment.
 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.
 Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation was
filed in 49 Settling States over the issue of whether the application of the NPM Adjustment for
2003 is to be
 38




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 determined through litigation or arbitration. These actions relate to the
potential NPM Adjustment for 2003, which the independent auditor under the MSA previously
determined to be as much as $1,200,000 for all Participating Manufacturers. All but one of the
48 courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute is
arbitrable. All 47 of those decisions are final and non-appealable. One court, the Montana
Supreme Court, ruled that Montanas claim of diligent enforcement must be litigated. This
decision has been appealed. 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 November 1, 2009 and that the parties and the
arbitrators will thereafter establish the schedule and procedures for the arbitration. Because
states representing more than 80% of the allocable share signed the agreement, signing states
will receive a 20% reduction of any potential 2003 NPM adjustment. It is
anticipated that the arbitration will commence 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).
 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.
 The change in the method of calculation could, among other things, result in at least
approximately $9,500, plus interest, of additional MSA payments for prior years, plus interest, by
Liggett because the proposed change from gross to net units would serve to lower Liggetts
market share exemption under the MSA. The Company currently estimates that future MSA payments
would be approximately $2,250 higher per year if the method of calculation is changed. 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 Freedom Holdings inc. v. Cuomo,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. In January 2009, the district court granted New Yorks motion for summary judgment,
dismissing all claims brought by the plaintiffs, and
 39




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 dissolving the preliminary injunction.
Plaintiffs appealed the decision. Oral argument on the appeal occurred in December 2009. A
decision is pending.
 In Grand River Enterprises Six Nations, Ltd. v. King, 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. On remand, the trial court held that
plaintiffs are unlikely to succeed on the merits. Discovery is pending. 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. Litigation challenging the validity
of the MSA, including claims that the MSA violates antitrust laws, has not been successful to
date.
 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. In January 2009,
the court issued a memorandum opinion and order granting the defendants motions and dismissing
Vibos lawsuit. On January 5, 2010, the court entered judgment in favor of the defendants. On
January 13, 2010, Vibo appealed to the United States Court of Appeals, Sixth Circuit. Briefing
is underway.
 In December 2008,Vibo filed a second lawsuit, seeking declaratory relief under the MSA, in
California state court against California and certain cigarette manufacturers, including
Liggett, seeking a determination that the proposed amendment to Vibos agreement to join the
MSA, under which it would no longer have to make certain MSA payments, did not trigger the
MSAs most favored nation provision. In March 2009, the OPMs and SPMs each filed motions for
summary judgment. In July 2009, the trial court granted the OPMs and SPMs motions for summary
judgment. In September 2009, Vibo filed a notice of appeal which they voluntarily withdrew in
January 2010.
 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 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
 40




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##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 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. 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. 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. During 2009, Liggett reversed a previously
recorded accrual of $2,500 with respect to this matter.
 Cautionary Statement.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, and $816 awarded in the Ferlanti
case, 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, 2009, exceeded $15,000. Recently, Liggett was found liable in an
Engleprogeny case and its portion of the total award is $156. It is possible that additional
cases could be decided unfavorably against Liggett. As a result of the Engledecision,
approximately 8,585 former Engleclass members have claims pending against Liggett and other
cigarette manufacturers. Liggett may enter into discussions in an attempt to settle particular
cases, if it believes it is in its best interests 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 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
 41




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 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.
 Other Matters:
 In December 2009, a complaint was filed against Liggett in Alabama state court by the estate of
a deceased woman who died in 2007 in a house fire allegedly caused by the ignition of contents
of the house by a Liggett product. Plaintiff is suing under the Alabama Extended Manufacturers
Liability Doctrine and for breach of warranty and negligence. The plaintiff seeks both
punitive and compensatory damages.
 There may be several other proceedings, lawsuits and claims pending against the 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.
 11. Related Party Transactions
 Liggett 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 2009, 2008 and 2007.
 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 $5,959 in 2009, $5,675 in 2008 and $5,405 in 2007.
 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
 42




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 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.
 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 2009, 2008 and 2007, Liggett
manufactured approximately
1.2, 1.1 and 1.2 billion units of Vector Tobacco brands respectively, and realized $67,161,
$34,577 and $32,845, respectively, in net receipts from these sales and $1,349, $1,158 and
$1,028, respectively, in profit from the Agreement.
 As of December 31, 2009 and 2008, Liggett has a receivable from Vector Tobacco totaling
$6,304 and $4,361, respectively. This overall net receivable position is related to the
manufacturing agreement between Liggett and Vector Tobacco in 2009 and 2008.
 The remaining related party net receivable balances of $5,855 and $9,207 at December 31, 2009
and 2008, 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 2009, 2008 and 2007, Liggett expensed $55,549, $55,602 and $53,346, respectively, for
services provided by Liggett Vector Brands of which $(35) and $(78) related to restructuring
costs in 2008 and 2007, respectively. The remaining expenses have been classified as
selling, general and administrative ($31,553, $31,612 and $30,771 for the years ended
December 31, 2009, 2008 and 2007, respectively) and cost of goods sold ($23,996, $24,025 and
$22,653 for the years ended December 31, 2009, 2008 and 2007, respectively).
 12. Restructuring
 AssetImpairment,Severance
    
    
    Contractand
    
    
    Termination,Benefits
    
    
    and Exit Costs
    
    
    TotalsBalance 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
    )
 43




---



##### 



Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
 (in thousands of dollars)
 AssetImpairment,Severance
    
    
    Contractand
    
    
    Termination,Benefits
    
    
    and Exit Costs
    
    
    TotalsBalance at December 31, 2008
    
    $
    
    
    
    $
    415
    
    
    $
    415Utilized in 2009
    
    
    
    
    
    
    (110
    )
    
    
    (110
    )Balance at December 31, 2009
    
    $
    
    
    
    $
    305
    
    
    $
    305
 Liggett Vector Brands Restructurings
 During 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.
 13. Subsequent Events
 The Company has evaluated events that occurred subsequent to December 31, 2009, through the
financial statement issue date of March 1, 2010 and determined that there were no recordable
or reportable subsequent events.
 44




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##### 



Schedule II  Valuation and Qualifying Accounts
 AdditionsChargedBalance
    
    
    toat
    
    
    Costs
    
    
    
    
    
    
    BalanceBeginning
    
    
    and
    
    
    
    
    
    
    at End ofof Period
    
    
    Expenses
    
    
    Deductions
    
    
    PeriodDescriptionYear ended December 31, 2009Allowance for:Doubtful accounts
    
    $
    46
    
    
    $
    105
    
    
    $
    1
    
    
    $
    150Cash discounts
    
    
    194
    
    
    
    17,347
    
    
    
    17,355
    
    
    
    186Sales returns
    
    
    3,000
    
    
    
    2,997
    
    
    
    2,667
    
    
    
    3,330Total
    
    $
    3,240
    
    
    $
    20,449
    
    
    $
    20,023
    
    
    $
    3,666Year ended December 31, 2008Allowance for:Doubtful accounts
    
    $
    46
    
    
    $
    
    
    
    $
    
    
    
    $
    46Cash discounts
    
    
    61
    
    
    
    12,980
    
    
    
    12,847
    
    
    
    194Sales returns
    
    
    2,600
    
    
    
    2,355
    
    
    
    1,955
    
    
    
    3,000Total
    
    $
    2,707
    
    
    $
    15,335
    
    
    $
    14,802
    
    
    $
    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
    
    
    $
    2,707
 45