##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934  For The Quarterly Period Ended March 31, 2010
 
 VECTOR GROUP LTD.
  Delaware
    
    1-5759
    
    65-0949535(State or other jurisdiction of incorporation
    
    Commission File Number
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 100 S.E. Second Street
Miami, Florida 33131
305/579-8000
 
 þ o
 o o
  þ Large accelerated filer
    
    o Accelerated filer
    
    o Non-accelerated filer
    
    o Smaller reporting company(Do not check if a smaller reporting company)
 o þ




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##### 



VECTOR GROUP LTD.
 FORM 10-Q
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Vector Group Ltd. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of March 31, 2010 and
December 31, 2009
    
    
    2Condensed Consolidated Statements of Operations for the three months ended
March 31, 2010 and March 31, 2009
    
    
    3Condensed Consolidated Statement of Stockholders Equity for the three months ended
March 31, 2010
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2010 and March 31, 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    35Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    48Item 4. Controls and Procedures
    
    
    48PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    50Item 1A. Risk Factors
    
    
    50Item 6. Exhibits
    
    
    50SIGNATURE
    
    
    51EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
  - 1 -




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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETS:Current assets:Cash and cash equivalents
    
    $
    202,957
    
    
    $
    209,454Investment securities available for sale
    
    
    61,615
    
    
    
    51,743Accounts receivable  trade
    
    
    7,154
    
    
    
    8,098Inventories
    
    
    101,613
    
    
    
    98,486Deferred income taxes
    
    
    16,409
    
    
    
    14,154Restricted assets
    
    
    1,378
    
    
    
    3,138Other current assets
    
    
    3,478
    
    
    
    4,135Total current assets
    
    
    394,604
    
    
    
    389,208Property, plant and equipment, net
    
    
    43,821
    
    
    
    42,986Investment in Escena, net
    
    
    13,488
    
    
    
    13,244Long-term investments accounted for at cost
    
    
    50,323
    
    
    
    50,323Investments in non-consolidated real estate businesses
    
    
    51,809
    
    
    
    49,566Restricted assets
    
    
    5,166
    
    
    
    4,835Deferred income taxes
    
    
    38,580
    
    
    
    39,838Intangible asset
    
    
    107,511
    
    
    
    107,511Prepaid pension costs
    
    
    9,237
    
    
    
    8,994Other assets
    
    
    28,541
    
    
    
    29,037Total assets
    
    $
    743,080
    
    
    $
    735,542LIABILITIES AND STOCKHOLDERS DEFICIENCY:Current liabilities:Current portion of notes payable and long-term debt
    
    $
    29,787
    
    
    $
    21,889Current portion of employee benefits
    
    
    1,029
    
    
    
    1,029Accounts payable
    
    
    4,819
    
    
    
    4,355Accrued promotional expenses
    
    
    10,687
    
    
    
    12,745Income taxes payable, net
    
    
    19,193
    
    
    
    19,924Accrued excise and payroll taxes payable, net
    
    
    14,812
    
    
    
    24,093Settlement accruals
    
    
    42,247
    
    
    
    18,803Deferred income taxes
    
    
    22,283
    
    
    
    17,254Accrued interest
    
    
    6,967
    
    
    
    13,840Other current liabilities
    
    
    11,250
    
    
    
    15,076Total current liabilities
    
    
    163,074
    
    
    
    149,008Notes payable, long-term debt and other obligations, less current portion
    
    
    335,064
    
    
    
    334,920Fair value of derivatives embedded within convertible debt
    
    
    155,729
    
    
    
    153,016Non-current employee benefits
    
    
    34,598
    
    
    
    34,247Deferred income taxes
    
    
    44,286
    
    
    
    45,120Other liabilities
    
    
    23,692
    
    
    
    23,913Total liabilities
    
    
    756,443
    
    
    
    740,224Commitments and contingenciesStockholders deficiency:Preferred stock, par value $1.00 per share, 10,000,000 shares authorized
    
    
    
    
    
    
    Common stock, par value $0.10 per share, 150,000,000 shares authorized,
74,520,642 and 74,510,595 shares issued and 71,272,731 and
and 71,262,684 shares outstanding
    
    
    7,127
    
    
    
    7,126Additional paid-in capital
    
    
    
    
    
    
    15,928Accumulated deficit
    
    
    (461
    )
    
    
    Accumulated other comprehensive loss
    
    
    (7,172
    )
    
    
    (14,879
    )Less: 3,247,911 shares of common stock in treasury, at cost
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders deficiency
    
    
    (13,363
    )
    
    
    (4,682
    )Total liabilities and stockholders deficiency
    
    $
    743,080
    
    
    $
    735,542
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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2010
    
    
    March 31, 2009Revenues*
    
    $
    222,087
    
    
    $
    121,216Expenses:Cost of goods sold*
    
    
    169,911
    
    
    
    72,526Operating, selling, administrative and general expenses
    
    
    21,158
    
    
    
    21,530Gain on brand transaction
    
    
    
    
    
    
    (5,000
    )Restructuring charges
    
    
    
    
    
    
    1,000Operating income
    
    
    31,018
    
    
    
    31,160Other income (expenses):Interest and dividend income
    
    
    65
    
    
    
    150Interest expense
    
    
    (18,805
    )
    
    
    (16,074
    )Change in fair value of derivatives embedded within
convertible debt
    
    
    (2,714
    )
    
    
    (303
    )Impairment charges on investments
    
    
    
    
    
    
    (8,500
    )Equity income (loss) from non-consolidated real
estate businesses
    
    
    4,571
    
    
    
    (995
    )Gain on the sale of investment securities available for sale
    
    
    4,664
    
    
    
    Other, net
    
    
    61
    
    
    
    Income before provision for income taxes
    
    
    18,860
    
    
    
    5,438Income tax expense
    
    
    6,922
    
    
    
    2,338Net income
    
    $
    11,938
    
    
    $
    3,100Per basic common share:Net income applicable to common shares
    
    $
    0.17
    
    
    $
    0.04Per diluted common share:Net income applicable to common shares
    
    $
    0.15
    
    
    $
    0.04Cash distributions and dividends declared per share
    
    $
    0.40
    
    
    $
    0.38
 
 *
    
    Revenues and Cost of goods sold include excise taxes of $111,193 and $33,712,
respectively. 
 - 3 -




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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
( Dollars in Thousands, Except Share Amounts )  Unaudited
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock


    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    TreasuryShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Stock
    
    
    TotalBalance, December 31, 2009
    
    
    71,262,684
    
    
    $
    7,126
    
    
    $
    15,928
    
    
    $
    
    
    
    $
    (14,879
    )
    
    $
    (12,857
    )
    
    $
    (4,682
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,938
    
    
    
    
    
    
    
    
    
    
    
    11,938Pension-related minimum liability adjustments,
net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    
    
    
    
    486Forward contract adjustments, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Change in
net unrealized gain on investment securities, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,983
    
    
    
    
    
    
    
    9,983Net
unrealized gains reclassified into net income,
net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,771
    )
    
    
    
    
    
    
    (2,771
    )Net unrealized gain on investment securities,
net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,212
    
    
    
    
    
    
    
    7,212Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,645Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,963Distributions and dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (16,755
    )
    
    
    (12,399
    )
    
    
    
    
    
    
    
    
    
    
    (29,154
    )Exercise of stock options
    
    
    10,047
    
    
    
    1
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    689Balance, March 31, 2010
    
    
    71,272,731
    
    
    $
    7,127
    
    
    $
    
    
    
    $
    (461
    )
    
    $
    (7,172
    )
    
    $
    (12,857
    )
    
    $
    (13,363
    )
 
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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2010
    
    
    March 31, 2009Net cash provided by operating activities
    
    $
    13,163
    
    
    $
    21,088Cash flows from investing activities:Sale or maturity of investment securities
    
    
    6,933
    
    
    
    Proceeds from sale or liquidation of long-term investments
    
    
    
    
    
    
    908Investments in non-consolidated real estate businesses
    
    
    (605
    )
    
    
    Distributions from non-consolidated real estate businesses
    
    
    2,154
    
    
    
    1,182Increase in cash surrender value of life insurance policies
    
    
    (536
    )
    
    
    (356
    )(Increase) decrease in non-current restricted assets
    
    
    (331
    )
    
    
    452Proceeds from sale of fixed assets
    
    
    3
    
    
    
    Capital expenditures
    
    
    (3,795
    )
    
    
    (803
    )Net cash provided by investing activities
    
    
    3,823
    
    
    
    1,383Cash flows from financing activities:Proceeds from debt issuance
    
    
    2,112
    
    
    
    10Repayments of debt
    
    
    (1,168
    )
    
    
    (1,604
    )Borrowings under revolver
    
    
    216,456
    
    
    
    123,724Repayments on revolver
    
    
    (210,997
    )
    
    
    (123,291
    )Dividends and distributions on common stock
    
    
    (30,024
    )
    
    
    (30,076
    )Proceeds from exercise of Vector options and warrants
    
    
    138
    
    
    
    10Net cash used in financing activities
    
    
    (23,483
    )
    
    
    (31,227
    )Net decrease in cash and cash equivalents
    
    
    (6,497
    )
    
    
    (8,756
    )Cash and cash equivalents, beginning of period
    
    
    209,454
    
    
    
    211,105Cash and cash equivalents, end of period
    
    $
    202,957
    
    
    $
    202,349
 
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##### Table of Contents



VECTOR GROUP LTD.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Dollars in Thousands, Except Per Share Amounts)
 Unaudited
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
     Distributions and Dividends on Common Stock:
  Earnings Per Share
   Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2010
    
    
    March 31, 2009Net income
    
    $
    11,938
    
    
    $
    3,100Income attributable to
participating securities
    
    
    (263
    )
    
    
    (142
    )Net income available to
common stockholders
    
    $
    11,675
    
    
    $
    2,958
 6




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2010
    
    
    March 31, 2009Net income
    
    $
    11,938
    
    
    $
    3,100Income attributable
to 6.75% Variable Interest Senior
Convertible Exchange Notes
    
    
    (257
    )
    
    
    Income attributable to
participating securities
    
    
    (263
    )
    
    
    (142
    )Net income available to
common stockholders
    
    $
    11,418
    
    
    $
    2,958
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2010
    
    
    March 31, 2009Weighted-average shares for basic EPS
    
    
    70,722,468
    
    
    
    69,093,052Plus incremental shares related to
stock options
    
    
    147,798
    
    
    
    17,015Plus incremental shares related to
convertible debt
    
    
    6,617,278
    
    
    
    Weighted-average shares for fully diluted EPS
    
    
    77,487,544
    
    
    
    69,110,067
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2010
    
    
    March 31, 2009Number of stock options
    
    
    509,442
    
    
    
    663,997Weighted-average exercise price
    
    $
    18.14
    
    
    $
    17.44Weighted-average shares of non-
vested restricted stock
    
    
    15,440
    
    
    
    221,880Weighted-average expense per share
    
    $
    17.11
    
    
    $
    16.30Weighted-average number of shares
issuable upon conversion of debt
    
    
    9,709,561
    
    
    
    13,579,184Weighted-average conversion price
    
    $
    16.48
    
    
    $
    16.34
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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Comprehensive Income
  Fair Value of Derivatives Embedded within Convertible Debt
  New Accounting Pronouncements
    8




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
  2. INVENTORIES
  March 31,
    
    
    December 31,2010
    
    
    2009Leaf tobacco
    
    $
    47,023
    
    
    $
    48,942Other raw materials
    
    
    3,916
    
    
    
    3,497Work-in-process
    
    
    398
    
    
    
    2,388Finished goods
    
    
    67,126
    
    
    
    59,293Inventories at current cost
    
    
    118,463
    
    
    
    114,120LIFO adjustments
    
    
    (16,850
    )
    
    
    (15,635
    )$
    101,613
    
    
    $
    98,485
   3. LONG-TERM INVESTMENTS
  March 31, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueInvestment partnerships
    
    $
    49,486
    
    
    $
    69,699
    
    
    $
    49,486
    
    
    $
    68,679Real estate partnership
    
    
    837
    
    
    
    1,259
    
    
    
    837
    
    
    
    1,261$
    50,323
    
    
    $
    70,958
    
    
    $
    50,323
    
    
    $
    69,940
 4. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
  9




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 March 31,
    
    
    December 31,2010
    
    
    2009Vector:11% Senior Secured Notes due 2015, net of unamortized
discount of $4,655 and $4,849
    
    $
    245,345
    
    
    $
    245,1516.75% Variable Interest Senior Convertible Note due
2014, net of unamortized discount of $39,491 and $39,755*
    
    
    10,509
    
    
    
    10,2456.75% Variable Interest Senior Convertible Exchange Notes
due 2014, net of unamortized discount of $68,702 and
$69,749*
    
    
    38,828
    
    
    
    37,7813.875% Variable Interest Senior Convertible Debentures due
2026, net of unamortized discount of $83,455 and $83,589*
    
    
    26,545
    
    
    
    26,411Liggett:Revolving credit facility
    
    
    22,841
    
    
    
    17,382Term loan under credit facility
    
    
    6,622
    
    
    
    6,755Equipment loans
    
    
    6,073
    
    
    
    4,852V.T. Aviation:Note payable
    
    
    3,520
    
    
    
    3,882VGR Aviation:Note payable
    
    
    3,595
    
    
    
    3,687Other
    
    
    973
    
    
    
    663Total notes payable, long-term debt and other obligations
    
    
    364,851
    
    
    
    356,809Less:Current maturities
    
    
    (29,787
    )
    
    
    (21,889
    )Amount due after one year
    
    $
    335,064
    
    
    $
    334,920
 
 *
    
    The fair value of the derivatives embedded within the 6.75% Variable Interest
Convertible Note ($22,352 at March 31, 2010 and $23,890 at December 31, 2009,
respectively), the 6.75% Variable Interest Senior Convertible Exchange Notes
($42,373 at March 31, 2010 and $47,552 at December 31, 2009, respectively), and the
3.875% Variable Interest Senior Convertible Debentures ($91,004 at March 31, 2010
and $81,574 at December 31, 2009, respectively) is            separately classified as
a derivative liability in the condensed consolidated balance sheets. Revolving Credit Facility  Liggett
  11% Senior Secured Notes due 2015  Vector
   10




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
  Non-cash Interest Expense  Vector
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2010
    
    
    March 31, 2009Amortization of debt discount
    
    $
    1,638
    
    
    $
    2,681Amortization of deferred finance costs
    
    
    1,002
    
    
    
    954$
    2,640
    
    
    $
    3,635
 Fair Value of Notes Payable and Long-term Debt:
 March 31, 2010
    
    December 31, 2009Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueNotes payable andlong-term debt
    
    $
    364,851
    
    
    $
    604,437
    
    
    $
    356,809
    
    
    $
    573,439
 5. CONTINGENCIES
 Tobacco-Related Litigation :
 Overview
  11




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
    Individual Actions
 Engle Engle
 NumberState
    
    of CasesFlorida
    
    
    15New York
    
    
    9Louisiana
    
    
    5West Virginia
    
    
    2Maryland
    
    
    2Missouri
    
    
    1Ohio
    
    
    1
 Liggett Only Cases. Engle in Ferlanti v. Liggett Group Hausrath v. Philip Morris
 12




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
   Ferlanti Engle
 Engle Progeny Cases Engle v. R.J. Reynolds Tobacco Co. Engle Engle Engle Engle Engle Engle Engle Engle
 Lukacs Engle
 Date of Verdict
    
    Case Name
    
    County
    
    Verdict Against LiggettAugust 2009
    
    Campbell, et al. v. R.J. Reynolds
    
    Escambia
    
    $
    156March 2010
    
    Douglas v. R.J. Reynolds
    
    Hillsborough
    
    $
    1,350April 2010
    
    Clay v. R.J. Reynolds
    
    Escambia
    
    $349 plus $1,000 in punitive damagesApril 2010
    
    Putney v. R.J. Reynolds
    
    Broward
    
    $
    3,017
 13




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Engle Engle Engle Lukacs Engle
 Class Actions
 Castano v.
American Tobacco Co.
   Engle Case Engle
  res judicata Engle
 14




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 writ of
certiorari Engle Engle
 Merlob, Brown Burr Engle Brown Burr) Burr Engle Engle
 Lukacs Case Lukacs v. R.J.
Reynolds Tobacco Co., Lukacs Engle Engle
 per curiam
 Engle Engle
 Other Class Actions. Smith v. Philip Morris,
 Schwab [McLaughlin]
v. Philip Morris, Altria Group v. Good
 15




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Good
 Young v. American Tobacco Co., Scott v. American Tobacco Co.
 Cleary v. Philip Morris,
 Brown v. Philip Morris USA, Altria Group v. Good
 In Re: Tobacco Litigation (Personal Injury Cases)
 Scott.
 16




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Health Care Cost Recovery Actions
 As of March 31, 2010, there were three active Health Care Cost Recovery Actions pending against
Liggett. Other cigarette manufacturers are also named in these cases. 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. In
February 2010, the government and all defendants, other than Liggett, filed petitions for writs
of certiorarito the United States Supreme Court. In the governments petition, it 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 allegedly accrued after November 16, 1993 are
pending. Discovery is ongoing. In September 2009, the defendants filed a motion for partial
summary judgment on the plaintiffs claims for future damages and for fraud. In December 2009,
the defendants filed motions for summary judgment based upon, among 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
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 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 damages equal to twice the amount paid by Medicare
for the smoking-related health care services provided from May 21, 2002 to the present, for
which treatment defendants allegedly were required to make payment under the Medicare
Secondary Payer provisions of the Social Security Act. In July 2008, defendants filed a
motion to dismiss plaintiffs claims and plaintiffs filed a motion for partial summary
judgment. In March 2009, the court granted the defendants motion and dismissed the case. In
May 2009, plaintiffs noticed an appeal. 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 Court of Appeals referred the motion for summary
affirmance to the Merits Panel and ordered briefing on the motion.
 Upcoming Trials
 In addition to the January 2011 trial in the City of St. Louiscase discussed above, as of
April 30, 2010, there were 38 Engleprogeny cases that are scheduled for trial in 2010 and
2011. The Company and/or Liggett and other cigarette manufacturers are currently named as
defendants in each of these cases. Cases against other cigarette manufacturers are also
currently scheduled for trial in 2010 and 2011. 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 made by those states and territories, including claims for health care
cost reimbursement and claims concerning sales of cigarettes to minors.
 In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the Original
Participating Manufacturers or OPMs) and Liggett (together with any other tobacco product
manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs)
(the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers)
entered into the Master Settlement Agreement (the MSA) with 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern
Mariana Islands (collectively, the Settling States) to settle the asserted and unasserted
health care cost recovery and certain other claims of the Settling States. The MSA received
final judicial approval in each Settling State.
  
    
    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
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in
all tobacco advertising and promotion; limits each Participating Manufacturer to one tobacco
brand name sponsorship during any 12-month period; bans all outdoor advertising, with certain
limited exceptions; prohibits payments for tobacco product placement in various media; bans
gift offers based on the purchase of tobacco products without sufficient proof that the
intended recipient is an adult; prohibits Participating Manufacturers from licensing third
parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits
Participating Manufacturers from using as a tobacco product brand name any nationally
recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups
or individual celebrities.
 The MSA also requires Participating Manufacturers to affirm corporate principles to comply with
the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying
activities conducted on behalf of Participating Manufacturers. In addition, the MSA provides
for the appointment of an independent auditor to calculate and determine the amounts of
payments owed pursuant to the MSA.
 Under the payment provisions of the MSA, the Participating Manufacturers are required to make
annual payments of $9,000,000 (subject to applicable adjustments, offsets and reductions).
These annual payments are allocated based on unit volume of domestic cigarette shipments. The
payment obligations under the MSA are the several, and not joint, obligation of each
Participating Manufacturer and are not the responsibility of any parent or affiliate of a
Participating Manufacturer.
 Liggett has no payment obligations under the MSA except to the extent its market share exceeds
a market share exemption of approximately 1.65% of total cigarettes sold in the United States.
Vector Tobacco has no payment obligations under the MSA except to the extent its market share
exceeds a market share exemption of approximately 0.28% of total cigarettes sold in the United
States. According to data from Management Science Associates, Inc., domestic shipments by
Liggett and Vector Tobacco accounted for approximately 2.7% of the total cigarettes shipped in
the United States in 2009. If Liggetts or Vector Tobaccos market share exceeds their
respective market share exemption in a given year, then on April 15 of the following year,
Liggett and/or Vector Tobacco, as the case may be, must pay on each excess unit an amount equal
(on a per-unit basis) to that due from the OPMs for that year. Liggett and Vector Tobacco paid
$54,435 for their 2009 MSA obligations.
 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 Settling States under which the OPMs agreed to make certain payments for the
benefit of the Settling States, in exchange for which the Settling States stipulated that the
MSA was a significant factor contributing to the loss of market share of Participating
Manufacturers 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 and Vector Tobacco disputed that they owe the Settling
States the NPM Adjustments as calculated by the Independent Auditor. As permitted by the MSA,
Liggett and Vector Tobacco have withheld payment associated with these NPM Adjustment amounts.
The total amount withheld or paid into a disputed payment account by Liggett and Vector Tobacco
for 2003 through 2009 is $29,236. In 2003, Liggett and Vector Tobacco paid the NPM adjustment
amount of $9,345 to the Settling States although both companies continue to dispute this
amount. At March 31, 2010, included in Other assets on the Companys condensed consolidated
balance sheet was a noncurrent receivable of $6,542 relating to such payment.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 The following amounts have not been expensed by the Company as they relate to Liggett and
Vector Tobaccos NPM Adjustment claims for 2003 through 2009: $6,542 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 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 the OPMs and many of the SPMs, 45 of
the Settling States, representing approximately 90% of the allocable share of the Settling
States, entered into an agreement providing for a nationwide arbitration of the dispute with
respect to the NPM Adjustment for 2003. 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 or Vector Tobacco 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 objected to this retroactive change and disputed the change in methodology. Liggett
contends that the retroactive change from 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 result in Liggett owing, at a minimum,
approximately $9,500, plus interest, of additional MSA payments for prior years, because the
proposed change from gross to net units would serve to lower Liggetts market share
exemption under the MSA. The Company estimates that future MSA payments would be at least
approximately $2,250 higher if the method of calculation is changed. No amounts have been
expensed or accrued in the accompanying condensed consolidated financial statements for any
potential liability relating to the gross versus net dispute. There can be no assurance
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.
 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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 In January 2009, the district court granted New Yorks motion for summary judgment, dismissing
all claims brought by the plaintiffs, and 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, including Liggett and Vector Tobacco.
Vibo alleged, among other things, that the market share exemptions (i.e., grandfathered shares)
provided to certain SPMs under the MSA, including Liggett and Vector Tobacco, violate federal
antitrust and constitutional law. In January 2009, the district court dismissed the complaint.
In January 2010, the court entered final judgment in favor of the defendants. Vibo appealed to
the United States Court of Appeals for the Sixth Circuit.
 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 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 required payments under the respective settlement agreements with
these states from 1998 through 2003 and that additional payments may be due for 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, the jury in the Lukacscase, an Engleprogeny case tried in 2002, awarded compensatory damages
against Liggett and two other defendants and found
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 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 2002 which, as of March 31, 2010,
exceeded $15,000. The Lukacsverdict was recently affirmed by the appellate court. Liggett has
been found liable in four other Engleprogeny cases, which are currently on appeal or will be
appealed. As a result of the Engledecision, approximately 8,500 former Engleclass members
have claims pending against the Company and Liggett and other cigarette manufacturers. It is
possible that other cases could be decided unfavorably against Liggett and that Liggett will be
unsuccessful on appeal. Liggett may enter into discussions in an attempt to settle particular
cases if it believes it is in its best interest to do so.
 Management cannot predict the cash requirements related to any future defense costs,
settlements or judgments, including cash required to bond any appeals, and there is a risk that
those requirements will not be able to be met. An unfavorable outcome of a pending smoking and
health case could encourage the commencement of additional similar litigation, or could lead to
multiple adverse decisions in the Engleprogeny cases. Management is unable to make a
reasonable estimate with respect to the amount or range of loss that could result from an
unfavorable outcome of the cases pending against Liggett or the costs of defending such cases
and as a result has not provided any amounts in its condensed consolidated financial statements
for unfavorable outcomes. The complaints filed in these cases rarely detail alleged damages.
Typically, the claims set forth in an individuals complaint against the tobacco industry seek
money damages in an amount to be determined by a jury, plus punitive damages and costs.
 The tobacco industry is subject to a wide range of laws and regulations regarding the
marketing, sale, taxation and use of tobacco products imposed by local, state and federal
governments. There have been a number of restrictive regulatory actions, adverse legislative
and political decisions and other unfavorable developments concerning cigarette smoking and the
tobacco industry. These developments may negatively affect the perception of potential triers
of fact with respect to the tobacco industry, possibly to the detriment of certain pending
litigation, and may prompt the commencement of additional similar litigation or legislation.
 It is possible that the Companys consolidated financial position, results of operations or
cash flows could be materially adversely affected by an unfavorable outcome in any of the
smoking-related litigation.
 Liggetts and Vector Tobaccos management are unaware of any material environmental conditions
affecting their existing facilities. Liggetts and Vector Tobaccos management believe that
current operations are conducted in material compliance with all environmental laws and
regulations and other laws and regulations governing cigarette manufacturers. Compliance with
federal, state and local provisions regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, has not had a material effect on
the capital expenditures, results of operations or competitive position of Liggett or Vector
Tobacco.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 Other Matters:
 In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five
year agreement with a subsidiary of the American Wholesale Marketers Association to support a
program to permit certain tobacco distributors to secure, on reasonable terms, tax stamp bonds
required by state and local governments for the distribution of cigarettes. This agreement has
been extended through February 2014. Under the agreement, Liggett Vector Brands has agreed to
pay a portion of losses, if any, incurred by the surety under the bond program, with a maximum
loss exposure of $500 for Liggett Vector Brands. To secure its potential obligations under the
agreement, Liggett Vector Brands has delivered to the subsidiary of the association a $100
letter of credit and agreed to fund up to an additional $400. Liggett Vector Brands has
incurred no losses to date under this agreement, and the Company believes the fair value of
Liggett Vector Brands obligation under the agreement was immaterial at March 31, 2010.
 In December 2009, a complaint was filed against Liggett in Alabama state court by the estate of
a woman who died, in 2007, in a house fire allegedly caused by the ignition of contents of the
house by a Liggett cigarette. 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. In February 2010, Liggett filed a notice of removal to
federal court. Plaintiff filed a motion for remand. A hearing occurred in March 2010. A
decision is pending.
 There may be several other proceedings, lawsuits and claims pending against the Company and
certain of its consolidated subsidiaries unrelated to tobacco or tobacco product liability.
Management is of the opinion that the liabilities, if any, ultimately resulting from such other
proceedings, lawsuits and claims should not materially affect the Companys financial position,
results of operations or cash flows.
 6.
    
    INCOME TAXES
 The Companys provision for income taxes in interim periods is based on an estimated annual
effective income tax rate derived, in part, from estimated annual pre-tax results from ordinary
operations. The annual effective income tax rate is reviewed and, if necessary, adjusted on a
quarterly basis.
 The Companys income tax expense consisted of the following:
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2010
    
    
    March 31, 2009Income before provision for
income taxes
    
    $
    18,860
    
    
    $
    5,438Income tax expense using estimated
annual effective income tax rate
    
    
    7,422
    
    
    
    2,338Reduction of valuation allowance
    
    
    (500
    )
    
    
    Income tax expense
    
    $
    6,922
    
    
    $
    2,338
 The Company
recorded a benefit of $500 for the three months ended March 31, 2010 resulting from the
reduction of a previously established valuation allowance of a deferred tax asset. The
valuation allowance was reduced for the recognition of state tax net operating losses at Vector
Tobacco Inc. after evaluating the impact of the negative and positive evidence that such asset
would be realized.
 7.
    
    NEW VALLEY LLC
 The components of Investments in non-consolidated real estate businesses were as follows:
 March 31, 2010
    
    
    December 31, 2009Douglas
Elliman Realty, LLC
    
    $
    38,696
    
    
    $
    36,086Aberdeen Townhomes LLC
    
    
    277
    
    
    
    1,248New Valley Oaktree Chelsea Eleven LLC
    
    
    12,836
    
    
    
    12,232Investments in non-consolidated real
estate businesses
    
    $
    51,809
    
    
    $
    49,566
 Residential Brokerage Business.New Valley recorded income of $4,571 and a loss of $1,195
for the three months ended March 31, 2010 and 2009, respectively, associated with Douglas
Elliman Realty, LLC. New Valley received cash distributions from
Douglas Elliman Realty, LLC of
$1,962 and $1,428 for the three months ended March 31, 2010 and
2009, respectively. The summarized financial information of Douglas
Elliman Realty, LLC is as follows:
 March 31, 2010
    
    December 31, 2009Cash
    
    $
    30,836
    
    
    $
    26,920Other current assets
    
    
    7,243
    
    
    
    6,664Property, plant and equipment, net
    
    
    13,525
    
    
    
    13,498Trademarks
    
    
    21,663
    
    
    
    21,663Goodwill
    
    
    38,349
    
    
    
    38,601Other intangible assets, net
    
    
    1,550
    
    
    
    742Other non-current assets
    
    
    2,638
    
    
    
    2,871Notes payable  current
    
    
    519
    
    
    
    776Current portion of notes payable to member - Prudential Real Estate Financial Services
of America, Inc.
    
    
    1,360
    
    
    
    2,487Current portion of notes payable
to member  New Valley
    
    
    1,360
    
    
    
    2,487Other current liabilities
    
    
    18,509
    
    
    
    20,724Notes payable  long term
    
    
    1,132
    
    
    
    2,136Other long-term liabilities
    
    
    9,965
    
    
    
    7,747Members equity
    
    
    82,959
    
    
    
    74,602
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Three Months Ended March 31,2010
    
    
    2009Revenues
    
    $
    76,661
    
    
    $
    48,956Costs and expenses
    
    
    67,175
    
    
    
    50,560Depreciation expense
    
    
    900
    
    
    
    1,199Amortization expense
    
    
    77
    
    
    
    64Other income
    
    
    397
    
    
    
    Interest expense, net
    
    
    278
    
    
    
    691Income tax expense (benefit)
    
    
    271
    
    
    
    (310
    )Net income (loss)
    
    $
    8,357
    
    
    $
    (3,248
    )
 Aberdeen Townhomes LLC.In January 2010, Aberdeen sold one of its four townhomes and the
mortgage of approximately $4,550 was retired. The Company received a preferred return
distribution of approximately $971 in connection with the sale. In addition, $375 from the
sale is being held in escrow until July 2010. Mortgages on the three remaining Aberdeen
townhomes had a balance of approximately $27,400 as of March 31, 2010. These mortgages
matured during 2009 and are in default. Aberdeen is in discussions with the lender related
to the three remaining mortgages which are in default. There can be no assurance that an
agreement will be reached.
 The Companys maximum exposure to loss on its investment in Aberdeen is $277 at March 31,
2010.
 New Valley Oaktree Chelsea Eleven, LLC.A subsidiary of New Valley (New Valley Chelsea) is
operating as an investment vehicle for the Chelsea Eleven LLC (the Chelsea) real estate
development project. Chelsea sold three units during the quarter ended March 31, 2010. As of
the financial statement issue date, sales of 15 of the 54 luxury residential units have
closed.
 As of March 31, 2010, Chelsea had approximately $198,802 of total assets and $117,952 of
total liabilities, excluding amounts owed to New Valley Chelsea (approximately $67,438 at
March 31, 2010).
 The outstanding balance on the $96,000 construction loan was approximately $40,300 at March
31, 2010. The outstanding balance of the $24,000 mezzanine loan plus accrued interest was
approximately $54,600 at March 31, 2010.
 As of March 31, 2010, the Company had lent an additional amount of $822 to New Valley
Oaktree. The Companys maximum exposure to loss on its investment in New Valley Chelsea is
$12,836 at March 31, 2010.
 Investment in Escena:
 The components of the Companys investment in Escena are as follows:
 March 31,
    
    
    December 31,2010
    
    
    2009Land and land improvements
    
    $
    11,112
    
    
    $
    11,126Building and building improvements
    
    
    1,426
    
    
    
    1,154Other
    
    
    1,092
    
    
    
    1,03813,630
    
    
    
    13,318Less accumulated depreciation
    
    
    (142
    )
    
    
    (74
    )$
    13,488
    
    
    $
    13,244
 The Company recorded operating income of approximately $282 for three months ended March 31,
2010 from Escena.
 25




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 8.
    
    INVESTMENTS AND FAIR VALUE MEASUREMENTSThe Companys recurring financial assets and liabilities subject to fair value measurements are as follows:
 Fair Value Measurements as of March 31, 2010Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Money market funds
    
    $
    194,865
    
    
    $
    194,865
    
    
    $
    
    
    
    $
    Certificates of deposit
    
    
    2,766
    
    
    
    
    
    
    
    2,766
    
    
    
    Bonds
    
    
    1,128
    
    
    
    1,128
    
    
    
    
    
    
    
    Investment securities
available for sale
    
    
    61,615
    
    
    
    49,722
    
    
    
    11,893
    
    
    
    Total
    
    $
    260,374
    
    
    $
    245,715
    
    
    $
    14,659
    
    
    $
    Liabilities:Fair value of derivatives
embedded within
convertible debt
    
    $
    155,729
    
    
    $
    
    
    
    $
    
    
    
    $
    155,729
 Fair Value Measurements as of December 31, 2009Quoted Pricesin Active
    
    
    Significant
    
    
    SignificantMarkets for
    
    
    Other
    
    
    UnobservableIdentical
    
    
    Observable
    
    
    InputsAssets
    
    
    Inputs
    
    
    (Level 3)Description
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)Assets:Money market funds
    
    $
    199,423
    
    
    $
    199,423
    
    
    $
    
    
    
    $
    Certificates of deposit
    
    
    2,785
    
    
    
    
    
    
    
    2,785
    
    
    
    Bonds
    
    
    3,128
    
    
    
    3,128
    
    
    
    
    
    
    
    Investment securities
available for sale
    
    
    51,742
    
    
    
    38,706
    
    
    
    13,036
    
    
    
    Total
    
    $
    257,078
    
    
    $
    241,257
    
    
    $
    15,821
    
    
    $
    Liabilities:Fair value of derivatives
embedded within
convertible debt
    
    $
    153,016
    
    
    $
    
    
    
    $
    
    
    
    $
    153,016
 The fair value of investment securities available for sale included in Level 1 are based
on quoted market prices from various stock exchanges. The Level 2 investment securities
available for sale were not registered and do not have direct market quotes.
 The fair value of derivatives embedded within convertible debt were derived using a valuation
model and have been classified as Level 3. The valuation model assumes future dividend
payments by the Company and utilizes interest rates and credit spreads for secured to unsecured
debt, unsecured to subordinated debt and subordinated debt to preferred stock to determine the
fair value of the derivatives embedded within the convertible
 26




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 debt. The changes in fair value of derivatives embedded within convertible debt are presented
on the Condensed Consolidated Statements of Operations.
 In addition to assets and liabilities that are recorded at fair value on a recurring basis, the
Company is required to record assets and liabilities at fair value on a nonrecurring basis.
Generally, assets and liabilities are recorded at fair value on a nonrecurring basis as a
result of impairment charges.
 The Companys nonrecurring nonfinancial assets subject to fair value measurements are as
follows:
 Fair Value Measurements as of March 31, 2009 Using:QuotedPrices inThree
    
    
    
    
    
    
    ActiveMonths Ended
    
    
    
    
    
    
    Markets
    
    
    SignificantMarch 31,
    
    
    
    
    
    
    for
    
    
    Other
    
    
    Significant2009
    
    
    
    
    
    
    Identical
    
    
    Observable
    
    
    UnobservableImpairment
    
    
    
    
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    Charge
    
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Investment in real
estate
    
    $
    5,000
    
    
    $
    12,704
    
    
    $
    
    
    
    $
    
    
    
    $
    12,704Investment in non-
consolidated real
estate businesses
    
    
    3,500
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    3,000Total
    
    $
    8,500
    
    
    $
    15,704
    
    
    $
    
    
    
    $
    
    
    
    $
    15,704
 The Company estimated the fair value of its investment in Escena and non-consolidated real
estate using observable inputs such as market pricing based on recent events, however,
significant judgment was required to select certain inputs from observed market data. The
decrease in the mortgage receivable and the non-consolidated real estate were attributed to the
decline in the New York and California real estate markets due to various factors including
downward pressure on housing prices, the impact of the recent contraction in the subprime and
mortgage markets generally and a large inventory of unsold homes at the same time that sales
volumes were decreasing.
 9.
    
    SEGMENT INFORMATION
 As a result of the suspension of the marketing of low nicotine and
nicotine-free cigarette products by Vector Tobacco and significant
reductions in Vector Tobaccos related research activities, the Company has reevaluated
its operating segments and  combined the Liggett and
Vector Tobacco businesses into a single Tobacco segment. The Companys
significant business segments for the three months ended March 31,
2010 and 2009 were Tobacco and Real Estate. The Tobacco segment
consists of the manufacture and sale of cigarettes and the research
related to reduced risk products. The Real Estate segment includes
the Companys investment in Escena and investments in non-consolidated
real estate businesses. The accounting policies of the segments are
the same as those described in the summary of significant accounting
policies. Prior period information has been recast to conform to the current presentation.
 27




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
  Real
    
    CorporateTobacco
    
    Estate
    
    and Other
    
    TotalThree months ended March 31, 2010Revenues
    
    $
    222,087
    
    
    
    
    
    
    
    
    
    
    $
    222,087Operating income (loss)
    
    
    34,932
    
    
    
    282
    
    
    
    (4,196
    )
    
    
    31,018Equity income on non-consolidated
real estate businesses
    
    
    
    
    
    
    4,571
    
    
    
    
    
    
    
    4,571Identifiable assets
    
    
    406,691
    
    
    
    65,297
    (2)
    
    
    271,092
    
    
    
    743,080Depreciation and amortization
    
    
    2,073
    
    
    
    68
    
    
    
    579
    
    
    
    2,720Capital expenditures
    
    
    3,445
    
    
    
    321
    
    
    
    29
    
    
    
    3,795Three months ended March 31, 2009Revenues
    
    $
    121,216
    
    
    
    
    
    
    
    
    
    
    $
    121,216Operating income (loss)
    
    
    35,625
    (1)
    
    
    
    
    
    
    (4,465
    )
    
    
    31,160Equity loss on non-consolidated
real estate businesses
    
    
    
    
    
    
    (995
    )
    
    
    
    
    
    
    (995
    )Identifiable assets
    
    
    289,951
    
    
    
    56,762
    (2)
    
    
    336,513
    
    
    
    683,226Depreciation and amortization
    
    
    2,013
    
    
    
    
    
    
    
    580
    
    
    
    2,593Capital expenditures
    
    
    803
    
    
    
    
    
    
    
    
    
    
    
    803
 
 (1)
    
    Operating income includes a gain of $5,000 on the Philip Morris
brand transaction completed February 2009 and restructuring expenses of $1,000.(2)
    
    Includes investments accounted for under the equity method of accounting of $51,809 and
$44,058 as of March 31, 2010 and 2009, respectively. 10.
    
    CONDENSED CONSOLIDATING FINANCIAL INFORMATIONThe accompanying condensed consolidating financial information has been
prepared and presented pursuant to Securities and Exchange Commission Regulation S-X, Rule 3-10,
Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being
Registered. Each of the subsidiary guarantors are 100% owned, directly or indirectly, by the
Company, and all guarantees are full and unconditional and joint and several. The Companys
investments in its consolidated subsidiaries are presented under the equity method of accounting.
 28




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING BALANCE SHEETS
 March 31, 2010Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    197,382
    
    
    $
    4,918
    
    
    $
    657
    
    
    $
    
    
    
    $
    202,957Investment securities available for
sale
    
    
    61,615
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,615Accounts receivable  trade
    
    
    
    
    
    
    7,154
    
    
    
    
    
    
    
    
    
    
    
    7,154Intercompany receivables
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    Inventories
    
    
    
    
    
    
    101,613
    
    
    
    
    
    
    
    
    
    
    
    101,613Deferred income taxes
    
    
    13,102
    
    
    
    3,307
    
    
    
    
    
    
    
    
    
    
    
    16,409Income taxes receivable
    
    
    
    
    
    
    17,060
    
    
    
    
    
    
    
    (17,060
    )
    
    
    Restricted assets
    
    
    
    
    
    
    1,378
    
    
    
    
    
    
    
    
    
    
    
    1,378Other current assets
    
    
    906
    
    
    
    2,470
    
    
    
    102
    
    
    
    
    
    
    
    3,478Total current assets
    
    
    273,037
    
    
    
    137,900
    
    
    
    759
    
    
    
    (17,092
    )
    
    
    394,604Property, plant and equipment, net
    
    
    626
    
    
    
    43,195
    
    
    
    
    
    
    
    
    
    
    
    43,821Investment in Escena, net
    
    
    
    
    
    
    
    
    
    
    13,488
    
    
    
    
    
    
    
    13,488Long-term investments accounted
for at cost
    
    
    49,486
    
    
    
    
    
    
    
    837
    
    
    
    
    
    
    
    50,323Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    51,809
    
    
    
    
    
    
    
    51,809Investments in consolidated subsidiaries
    
    
    270,282
    
    
    
    
    
    
    
    
    
    
    
    (270,282
    )
    
    
    Restricted assets
    
    
    2,666
    
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    5,166Deferred income taxes
    
    
    27,801
    
    
    
    109,520
    
    
    
    9,342
    
    
    
    (108,083
    )
    
    
    38,580Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    9,237
    
    
    
    
    
    
    
    
    
    
    
    9,237Other assets
    
    
    14,297
    
    
    
    14,244
    
    
    
    
    
    
    
    
    
    
    
    28,541Total assets
    
    $
    638,195
    
    
    $
    424,107
    
    
    $
    76,235
    
    
    $
    (395,457
    )
    
    $
    743,080LIABILITIES AND STOCKHOLDERS DEFICIENCY:Current liabilities:Current portion of notes
payable and long-term debt
    
    $
    
    
    
    $
    29,787
    
    
    $
    
    
    
    $
    
    
    
    $
    29,787Current portion of employee
benefits
    
    
    
    
    
    
    1,029
    
    
    
    
    
    
    
    
    
    
    
    1,029Accounts payable
    
    
    443
    
    
    
    4,314
    
    
    
    62
    
    
    
    
    
    
    
    4,819Intercompany payables
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    (32
    )
    
    
    Accrued promotional expenses
    
    
    
    
    
    
    10,687
    
    
    
    
    
    
    
    
    
    
    
    10,687Income taxes payable, net
    
    
    1,662
    
    
    
    1,970
    
    
    
    32,621
    
    
    
    (17,060
    )
    
    
    19,193Accrued excise and payroll taxes
payable, net
    
    
    
    
    
    
    14,812
    
    
    
    
    
    
    
    
    
    
    
    14,812Settlement accruals
    
    
    
    
    
    
    42,247
    
    
    
    
    
    
    
    
    
    
    
    42,247Deferred income taxes
    
    
    20,520
    
    
    
    1,763
    
    
    
    
    
    
    
    
    
    
    
    22,283Accrued interest
    
    
    6,967
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,967Other current liabilities
    
    
    3,385
    
    
    
    7,130
    
    
    
    735
    
    
    
    
    
    
    
    11,250Total current liabilities
    
    
    32,977
    
    
    
    113,771
    
    
    
    33,418
    
    
    
    (17,092
    )
    
    
    163,074Notes payable, long-term debt and
other obligations, less current
portion
    
    
    321,227
    
    
    
    13,270
    
    
    
    567
    
    
    
    
    
    
    
    335,064Fair value of derivatives
embedded within convertible debt
    
    
    155,729
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,729Non-current employee benefits
    
    
    13,663
    
    
    
    20,935
    
    
    
    
    
    
    
    
    
    
    
    34,598Deferred income taxes
    
    
    127,676
    
    
    
    24,634
    
    
    
    59
    
    
    
    (108,083
    )
    
    
    44,286Other liabilities
    
    
    286
    
    
    
    22,709
    
    
    
    697
    
    
    
    
    
    
    
    23,692Total liabilities
    
    
    651,558
    
    
    
    195,319
    
    
    
    34,741
    
    
    
    (125,175
    )
    
    
    756,443Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders deficiency
    
    
    (13,363
    )
    
    
    228,788
    
    
    
    41,494
    
    
    
    (270,282
    )
    
    
    (13,363
    )Total liabilities and
stockholders deficiency
    
    $
    638,195
    
    
    $
    424,107
    
    
    $
    76,235
    
    
    $
    (395,457
    )
    
    $
    743,080
 29




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING BALANCE SHEETS
 December 31, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    204,133
    
    
    $
    5,004
    
    
    $
    317
    
    
    $
    
    
    
    $
    209,454Investment securities available for
sale
    
    
    51,743
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,743Accounts receivable  trade
    
    
    
    
    
    
    8,089
    
    
    
    9
    
    
    
    
    
    
    
    8,098Intercompany receivables
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    (43
    )
    
    
    Inventories
    
    
    
    
    
    
    98,485
    
    
    
    1
    
    
    
    
    
    
    
    98,486Deferred income taxes
    
    
    11,240
    
    
    
    2,914
    
    
    
    
    
    
    
    
    
    
    
    14,154Income taxes receivable
    
    
    
    
    
    
    26,086
    
    
    
    
    
    
    
    (26,086
    )
    
    
    Restricted assets
    
    
    
    
    
    
    3,138
    
    
    
    
    
    
    
    
    
    
    
    3,138Other current assets
    
    
    497
    
    
    
    3,512
    
    
    
    126
    
    
    
    
    
    
    
    4,135Total current assets
    
    
    267,613
    
    
    
    147,271
    
    
    
    453
    
    
    
    (26,129
    )
    
    
    389,208Property, plant and equipment, net
    
    
    623
    
    
    
    42,363
    
    
    
    
    
    
    
    
    
    
    
    42,986Investment in Escena, net
    
    
    
    
    
    
    
    
    
    
    13,244
    
    
    
    
    
    
    
    13,244Long-term investments accounted
for at cost
    
    
    49,486
    
    
    
    
    
    
    
    837
    
    
    
    
    
    
    
    50,323Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    49,566
    
    
    
    
    
    
    
    49,566Investments in consolidated subsidiaries
    
    
    282,010
    
    
    
    
    
    
    
    
    
    
    
    (282,010
    )
    
    
    Restricted assets
    
    
    2,685
    
    
    
    2,150
    
    
    
    
    
    
    
    
    
    
    
    4,835Deferred income taxes
    
    
    28,729
    
    
    
    94,088
    
    
    
    9,667
    
    
    
    (92,646
    )
    
    
    39,838Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    8,994
    
    
    
    
    
    
    
    
    
    
    
    8,994Other assets
    
    
    14,942
    
    
    
    14,095
    
    
    
    
    
    
    
    
    
    
    
    29,037Total assets
    
    $
    646,088
    
    
    $
    416,472
    
    
    $
    73,767
    
    
    $
    (400,785
    )
    
    $
    735,542LIABILITIES AND STOCKHOLDERS DEFICIENCY:Current liabilities:Current portion of notes
payable and long-term debt
    
    $
    
    
    
    $
    21,773
    
    
    $
    116
    
    
    $
    
    
    
    $
    21,889Current portion of employee
benefits
    
    
    
    
    
    
    1,029
    
    
    
    
    
    
    
    
    
    
    
    1,029Accounts payable
    
    
    1,490
    
    
    
    2,763
    
    
    
    102
    
    
    
    
    
    
    
    4,355Intercompany payables
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    Accrued promotional expenses
    
    
    
    
    
    
    12,745
    
    
    
    
    
    
    
    
    
    
    
    12,745Income taxes payable, net
    
    
    14,472
    
    
    
    547
    
    
    
    30,991
    
    
    
    (26,086
    )
    
    
    19,924Accrued excise and payroll taxes
payable, net
    
    
    
    
    
    
    24,088
    
    
    
    5
    
    
    
    
    
    
    
    24,093Settlement accruals
    
    
    
    
    
    
    18,803
    
    
    
    
    
    
    
    
    
    
    
    18,803Deferred income taxes
    
    
    14,992
    
    
    
    2,262
    
    
    
    
    
    
    
    
    
    
    
    17,254Accrued interest
    
    
    13,840
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,840Other current liabilities
    
    
    6,039
    
    
    
    8,427
    
    
    
    610
    
    
    
    
    
    
    
    15,076Total current liabilities
    
    
    50,876
    
    
    
    92,437
    
    
    
    31,824
    
    
    
    (26,129
    )
    
    
    149,008Notes payable, long-term debt and
other obligations, less current
portion
    
    
    319,588
    
    
    
    14,853
    
    
    
    479
    
    
    
    
    
    
    
    334,920Fair value of derivatives
embedded within convertible debt
    
    
    153,016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153,016Non-current employee benefits
    
    
    13,301
    
    
    
    20,946
    
    
    
    
    
    
    
    
    
    
    
    34,247Deferred income taxes
    
    
    113,667
    
    
    
    24,040
    
    
    
    59
    
    
    
    (92,646
    )
    
    
    45,120Other liabilities
    
    
    322
    
    
    
    22,763
    
    
    
    828
    
    
    
    
    
    
    
    23,913Total liabilities
    
    
    650,770
    
    
    
    175,039
    
    
    
    33,190
    
    
    
    (118,775
    )
    
    
    740,224Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders deficiency
    
    
    (4,682
    )
    
    
    241,433
    
    
    
    40,577
    
    
    
    (282,010
    )
    
    
    (4,682
    )Total liabilities and
stockholders deficiency
    
    $
    646,088
    
    
    $
    416,472
    
    
    $
    73,767
    
    
    $
    (400,785
    )
    
    $
    735,542
 30




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 Three Months Ended March 31, 2010Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    222,087
    
    
    $
    
    
    
    $
    
    
    
    $
    222,087Expenses:Cost of goods sold
    
    
    
    
    
    
    169,911
    
    
    
    
    
    
    
    
    
    
    
    169,911Operating, selling,
administrative and general
expenses
    
    
    5,218
    
    
    
    16,195
    
    
    
    (255
    )
    
    
    
    
    
    
    21,158Management fee expense
    
    
    
    
    
    
    2,130
    
    
    
    
    
    
    
    (2,130
    )
    
    
    Operating (loss) income
    
    
    (5,218
    )
    
    
    33,851
    
    
    
    255
    
    
    
    2,130
    
    
    
    31,018Other income (expenses):Interest and dividend
income
    
    
    57
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    65Interest expense
    
    
    (18,575
    )
    
    
    (219
    )
    
    
    (11
    )
    
    
    
    
    
    
    (18,805
    )Changes in fair value of
derivatives embedded
within convertible debt
    
    
    (2,714
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,714
    )Equity income on
non-consolidated real
estate businesses
    
    
    
    
    
    
    
    
    
    
    4,571
    
    
    
    
    
    
    
    4,571Gain on the sale of investment
securities
available for
sale
    
    
    4,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,664Equity income in
consolidated subsidiaries
    
    
    27,368
    
    
    
    
    
    
    
    
    
    
    
    (27,368
    )
    
    
    Management fee income
    
    
    2,130
    
    
    
    
    
    
    
    
    
    
    
    (2,130
    )
    
    
    Other, net
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61Income before provision for
income taxes
    
    
    7,773
    
    
    
    33,640
    
    
    
    4,815
    
    
    
    (27,368
    )
    
    
    18,860Income tax (expense)
benefit
    
    
    (9,928
    )
    
    
    (9,132
    )
    
    
    (1,955
    )
    
    
    14,093
    
    
    
    (6,922
    )Net income
    
    $
    (2,155
    )
    
    $
    24,508
    
    
    $
    2,860
    
    
    $
    (13,275
    )
    
    $
    11,938
 31




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 Three Months Ended March 31, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    121,216
    
    
    $
    
    
    
    $
    
    
    
    $
    121,216Expenses:Cost of goods sold
    
    
    
    
    
    
    72,526
    
    
    
    
    
    
    
    
    
    
    
    72,526Operating, selling,
administrative and general
expenses
    
    
    5,150
    
    
    
    15,990
    
    
    
    390
    
    
    
    
    
    
    
    21,530Gain on brand transaction
    
    
    
    
    
    
    (5,000
    )
    
    
    
    
    
    
    
    
    
    
    (5,000
    )Restructuring charges
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,000Management fee expense
    
    
    
    
    
    
    2,056
    
    
    
    
    
    
    
    (2,056
    )
    
    
    Operating(loss) income
    
    
    (5,150
    )
    
    
    34,644
    
    
    
    (390
    )
    
    
    2,056
    
    
    
    31,160Other income (expenses):Interest and dividend
income
    
    
    75
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    150Interest expense
    
    
    (15,794
    )
    
    
    (280
    )
    
    
    
    
    
    
    
    
    
    
    (16,074
    )Changes in fair value of
derivatives embedded
within convertible debt
    
    
    (303
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (303
    )Impairment charges on
investments
    
    
    
    
    
    
    
    
    
    
    (8,500
    )
    
    
    
    
    
    
    (8,500
    )Equity loss on
non-consolidated real
estate businesses
    
    
    
    
    
    
    
    
    
    
    (995
    )
    
    
    
    
    
    
    (995
    )Equity income in
consolidated subsidiaries
    
    
    15,499
    
    
    
    
    
    
    
    
    
    
    
    (15,499
    )
    
    
    Management fee income
    
    
    2,056
    
    
    
    
    
    
    
    
    
    
    
    (2,056
    )
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before provision for
income taxes
    
    
    (3,617
    )
    
    
    34,439
    
    
    
    (9,885
    )
    
    
    (15,499
    )
    
    
    5,438Income tax benefit
(expense)
    
    
    6,717
    
    
    
    (13,119
    )
    
    
    4,064
    
    
    
    
    
    
    
    (2,338
    )Net income (loss)
    
    $
    3,100
    
    
    $
    21,320
    
    
    $
    (5,821
    )
    
    $
    (15,499
    )
    
    $
    3,100
 32




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 Three Months Ended March 31, 2010Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by (used in)
operating activities
    
    $
    18,368
    
    
    $
    48,836
    
    
    $
    1,074
    
    
    $
    (55,115
    )
    
    $
    13,163Cash flows from investing
activities:Sale or maturity of
investment securities
    
    
    6,933
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,933Investment in non-
consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    (605
    )
    
    
    
    
    
    
    (605
    )Distributions from
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    2,154
    
    
    
    
    
    
    
    2,154Increase in cash surrender
value of life insurance policies
    
    
    (425
    )
    
    
    (111
    )
    
    
    
    
    
    
    
    
    
    
    (536
    )(Increase) decrease in
non-current restricted assets
    
    
    19
    
    
    
    (350
    )
    
    
    
    
    
    
    
    
    
    
    (331
    )Proceeds from sale of fixed
assets
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Investments in subsidiaries
    
    
    (1,731
    )
    
    
    
    
    
    
    
    
    
    
    1,731
    
    
    
    Capital expenditures
    
    
    (29
    )
    
    
    (3,445
    )
    
    
    (321
    )
    
    
    
    
    
    
    (3,795
    )Net cash (used in) provided by
investing activities
    
    
    4,767
    
    
    
    (3,903
    )
    
    
    1,228
    
    
    
    1,731
    
    
    
    3,823Cash flows from financing activities:Proceeds from debt issuance
    
    
    
    
    
    
    2,112
    
    
    
    
    
    
    
    
    
    
    
    2,112Repayments of debt
    
    
    
    
    
    
    (1,140
    )
    
    
    (28
    )
    
    
    
    
    
    
    (1,168
    )Borrowings under revolver
    
    
    
    
    
    
    216,456
    
    
    
    
    
    
    
    
    
    
    
    216,456Repayments on revolver
    
    
    
    
    
    
    (210,997
    )
    
    
    
    
    
    
    
    
    
    
    (210,997
    )Capital contributions received
    
    
    
    
    
    
    1,450
    
    
    
    281
    
    
    
    (1,731
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (52,900
    )
    
    
    (2,215
    )
    
    
    55,115
    
    
    
    Dividends and distributions
on common stock
    
    
    (30,024
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,024
    )Proceeds from exercise of
Vector options and warrants
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138Net cash provided by (used in)
financing activities
    
    
    (29,886
    )
    
    
    (45,019
    )
    
    
    (1,962
    )
    
    
    53,384
    
    
    
    (23,483
    )Net decrease in cash and cash
equivalents
    
    
    (6,751
    )
    
    
    (86
    )
    
    
    340
    
    
    
    
    
    
    
    (6,497
    )Cash and cash equivalents,
beginning of period
    
    
    204,133
    
    
    
    5,004
    
    
    
    317
    
    
    
    
    
    
    
    209,454Cash and cash equivalents, end of
period
    
    $
    197,382
    
    
    $
    4,918
    
    
    $
    657
    
    
    $
    
    
    
    $
    202,957
 33




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 Three Months Ended March 31, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by (used in)
operating activities
    
    $
    23,102
    
    
    $
    7,037
    
    
    $
    333
    
    
    $
    (9,384
    )
    
    $
    21,088Cash flows from investing
activities:Proceeds from sale or
liquidation of long-term
investments
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    908Distributions from
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    1,182
    
    
    
    
    
    
    
    1,182Increase in cash surrender
value of life insurance policies
    
    
    (244
    )
    
    
    (112
    )
    
    
    
    
    
    
    
    
    
    
    (356
    )(Increase) decrease in
non-current restricted assets
    
    
    (116
    )
    
    
    568
    
    
    
    
    
    
    
    
    
    
    
    452Investments in subsidiaries
    
    
    (1,350
    )
    
    
    
    
    
    
    
    
    
    
    -              1,35
    
    
    
    0                 -Capital expenditures
    
    
    
    
    
    
    (803
    )
    
    
    
    
    
    
    
    
    
    
    (803
    )Net cash (used in) provided by
investing activities
    
    
    (802
    )
    
    
    (347
    )
    
    
    1,182
    
    
    
    1,350
    
    
    
    1,383Cash flows from financing activities:Proceeds from debt issuance
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Repayments of debt
    
    
    
    
    
    
    (1,604
    )
    
    
    
    
    
    
    
    
    
    
    (1,604
    )Borrowings under revolver
    
    
    
    
    
    
    123,724
    
    
    
    
    
    
    
    
    
    
    
    123,724Repayments on revolver
    
    
    
    
    
    
    (123,291
    )
    
    
    
    
    
    
    
    
    
    
    (123,291
    )Capital contributions received
    
    
    
    
    
    
    1,350
    
    
    
    
    
    
    
    (1,350
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (7,875
    )
    
    
    (1,509
    )
    
    
    9,384
    
    
    
    Dividends and distributions
on common stock
    
    
    (30,076
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,076
    )Proceeds from exercise of
Vector options and warrants
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Net cash provided by (used in)
financing activities
    
    
    (30,066
    )
    
    
    (7,686
    )
    
    
    (1,509
    )
    
    
    8,034
    
    
    
    (31,227
    )Net decrease in cash and cash
equivalents
    
    
    (7,766
    )
    
    
    (996
    )
    
    
    6
    
    
    
    
    
    
    
    (8,756
    )Cash and cash equivalents,
beginning of period
    
    
    200,066
    
    
    
    11,039
    
    
    
    
    
    
    
    
    
    
    
    211,105Cash and cash equivalents, end of
period
    
    $
    192,300
    
    
    $
    10,043
    
    
    $
    6
    
    
    $
    
    
    
    $
    202,349
 34




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Dollars in Thousands, Except Per Share Amounts
 Overview
  
    
    the manufacture and sale of cigarettes in the United States through our Liggett
Group LLC,
    
    research relating to reduced risk cigarette products through our Vector Tobacco
Inc. subsidiary, and
    
    the real estate business through our New Valley LLC subsidiary, which is seeking to
acquire additional operating companies and real estate properties. New Valley owns
50% of Douglas Elliman Realty, LLC, which operates the largest residential brokerage
company in the New York metropolitan area.
   
    
    LIGGETT SELECT  a leading brand in the deep discount category,
    
    GRAND PRIX  re-launched as a national brand in 2005,
    
    EVE  a leading brand of 120 millimeter cigarettes in the branded discount
category,
    
    PYRAMID  the industrys first deep discount product with a brand identity
re-launched in the second quarter of 2009, and
    
    USA and various Partner Brands and private label brands.
   - 35 -




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##### Table of Contents



Recent Developments
 Senior Secured Notes
 Enacted and proposed excise tax increases.
 New
Valley Oaktree Chelsea Eleven, LLC.
 Aberdeen Townhomes LLC.
 Recent Developments in Tobacco-Related Litigation
  - 36 -




---



##### Table of Contents



Liggett Only Cases. Engle in Ferlanti v. Liggett Group Hausrath v. Philip Morris
 Engle Progeny Cases Engle v. R.J. Reynolds Tobacco Co. Engle Engle Engle Engle Engle Engle Engle Engle Engle Lukacs v. R. J.
Reynolds Tobacco Company Engle per curiam Engle
 Critical Accounting Policies
  - 37 -




---



##### Table of Contents



Results of Operations
   Three Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009Revenues:Tobacco
    
    $
    222,087
    
    
    $
    121,216Operating income (loss):Tobacco
    
    $
    34,932
    
    
    $
    35,625
    (1)Real estate
    
    
    282
    
    
    
    Corporate and other
    
    
    (4,196
    )
    
    
    (4,465
    )Total operating income
    
    $
    31,018
    
    
    $
    31,160
 
 (1)
    
    Includes a gain of $5,000 on the Philip Morris brand transaction completed in
February 2009 and restructuring expenses of $1,000. Three Months Ended March 31, 2010 Compared to Three Months ended March 31, 2009
 Revenues.
  - 38 -




---



##### Table of Contents



Tobacco
Gross Profit.
 Expenses.
 Operating
Income.
 Other expenses.
  - 39 -




---



##### Table of Contents



Income before income taxes.
 Income tax provision.
 Liquidity and Capital Resources
     Liggett
 - 40 -




---



##### Table of Contents



Engle Engle Engle
     - 41 -




---



##### Table of Contents



Indenture
    
    March 31,
    
    December 31,Covenant
    
    Requirement
    
    2010
    
    2009Consolidated EBITDA, as defined
    
    $
    50,000
    
    
    $
    177,594
    
    
    $
    174,158Leverage ratio, as defined
    
    <3.0 to 1
    
    
    0.2 to 1
    
    
    
    0.3 to 1Secured leverage ratio, as defined
    
    <1.5 to 1
    
    Negative
    
    Negative
     Market Risk
   - 42 -




---



##### Table of Contents



New Accounting Pronouncements
  Legislation and Regulation
 - 43 -




---



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
    
    increases the number of health warnings required on cigarette and smokeless tobacco
products, increases the size of warnings on packaging and in advertising, requires the
FDA to develop graphic warnings for cigarette packages, and grants the FDA authority
to require new warnings;
    
    requires practically all tobacco product advertising to eliminate color and imagery
and instead consist solely of black text on white background;
    
    imposes new restrictions on the sale and distribution of tobacco products,
including significant new restrictions on tobacco product advertising and promotion,
as well as the use of brand and trade names;
    
    bans the use of light, mild, low or similar descriptors on tobacco products;
    
    bans the use of characterizing flavors in cigarettes other than tobacco or
menthol;
    
    gives the FDA the authority to impose tobacco product standards that are
appropriate for the protection of the public health (by, for example, requiring
reduction or elimination of the use of particular constituents or components,
requiring product testing, or addressing other aspects of tobacco product
construction, constituents, properties or labeling);
    
    requires manufacturers to obtain FDA review and authorization for the marketing of
certain new or modified tobacco products;
    
    requires pre-market approval by the FDA for tobacco products represented (through
labels, labeling, advertising, or other means) as presenting a lower risk of harm or
tobacco-related disease;
    
    requires manufacturers to report ingredients and harmful constituents and requires
the FDA to disclose certain constituent information to the public;
    
    mandates that manufacturers test and report on ingredients and constituents
identified by the FDA as requiring such testing to protect the public health, and
allows the FDA to require the disclosure of testing results to the public;
    
    requires manufacturers to submit to the FDA certain information regarding the
health, toxicological, behavioral or physiologic effects of tobacco products;
    
    prohibits use of tobacco containing a pesticide chemical residue at a level greater
than allowed under federal law;
    
    requires the FDA to establish good manufacturing practices to be followed at
tobacco manufacturing facilities;
    
    requires tobacco product manufacturers (and certain other entities) to register
with the FDA;
    
    authorizes the FDA to require the reduction of nicotine (although it may not
require the reduction of nicotine yields of a tobacco product to zero) and the
potential reduction or elimination of other constituents, including menthol;
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
    
    imposes (and allows the FDA to impose) various recordkeeping and reporting
requirements on tobacco product manufacturers; and
    
    grants the FDA the regulatory authority to impose broad additional restrictions.
  
    
    a recommendation on modified risk applications;
    
    a recommendation on the effects of tobacco product nicotine yield alteration and
whether there is a threshold level below which nicotine yields do not produce
dependence;
    
    a report on the public health impact of the use of menthol in cigarettes; and
    
    a report on the public health impact of dissolvable tobacco products.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    economic outlook,
    
    capital expenditures,
    
    cost reduction,
    
    new legislation,
    
    cash flows,
    
    operating performance,
    
    litigation,
    
    impairment charges and cost saving associated with restructurings of our tobacco
operations, and
    
    related industry developments (including trends affecting our business, financial
condition and results of operations).
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
    
    general economic and market conditions and any changes therein, due to acts of war
and terrorism or otherwise,
    
    impact of current crises in capital and credit markets, including any continued
worsening,
    
    governmental regulations and policies,
    
    effects of industry competition,
    
    impact of business combinations, including acquisitions and divestitures, both
internally for us and externally in the tobacco industry,
    
    impact of restructurings on our tobacco business and our ability to achieve any
increases in profitability estimated to occur as a result of these restructurings,
    
    impact of new legislation on our competitors payment obligations, results of
operations and product costs, i.e. the impact of recent federal legislation
eliminating the federal tobacco quota system and providing for regulation of tobacco
products by the FDA,
    
    impact of substantial increases in federal, state and local excise taxes,
    
    uncertainty related to litigation and potential additional payment obligations for
us under the Master Settlement Agreement and other settlement agreements with the
states, and
    
    risks inherent in our new product development initiatives.
   
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
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PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Reference is made to Note 5, incorporated herein by reference, to our condensed
consolidated financial statements included elsewhere in this report which contains a
general description of certain legal proceedings to which our company, VGR Holding,
Liggett, Vector Tobacco, New Valley or their subsidiaries are a party and certain
related matters. Reference is also made to Exhibit 99.1 for additional information
regarding the pending smoking-related material legal proceedings to which Liggett or us
is a party. A copy of Exhibit 99.1 will be furnished without charge upon written
request to us at our principal executive offices, 100 S.E. Second
St., 32nd Floor, Miami, Florida
33131, Attn. Investor Relations.
 
 Item 1A. Risk Factors
 Except as set forth below, there are no material changes from the risk factors set forth
in Item 1A, Risk Factors, of our Annual Report on 10-K for the year ended December 31,
2009. Please refer to that section for disclosures regarding the risks and
uncertainties related to our business. The risk factors in the Annual Report on Form
10-K entitled Litigation will continue to harm the tobacco industry, Individual
tobacco-related cases have increased as a result of the Florida Supreme Courts ruling
in Engle and Liggett may have additional payment obligations under the Master
Settlement Agreement and its other settlement agreements with the states are revised to
reflect the updated information concerning the number and status of cases and other
matters discussed under Note 5 to our condensed consolidated financial statements and in
Managements Discussion and Analysis of Financial Condition  Recent Developments 
Tobacco Settlement Agreements,  Recent Developments in Legislation, Regulation and
Tobacco-Related Litigation, and  Legislation and Regulation.
 
 Item 6. Exhibits
 31.1
    
    Certification of Chief Executive Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.99.1
    
    Material Legal Proceedings
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SIGNATURE
  VECTOR GROUP LTD.
(Registrant)By:
    /s/ J. Bryant Kirkland IIIJ. Bryant Kirkland IIIVice President, Treasurer and Chief
Financial Officer  -51-