##### 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, 2009
 
 VECTOR GROUP LTD.
  Delaware
    
    1-5759
    
    65-0949535(State or other jurisdiction 
incorporation or organization)
    
    Commission File Number
    
    (I.R.S. Employer Identification No.)
 100 S.E. Second Street
Miami, Florida 33131
305/579-8000
 
 x o
 o o
   Large accelerated filer x
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o x




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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, 2009 and December 31, 2008
    
    
    2Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and March 31, 2008
    
    
    3Condensed Consolidated Statement of Stockholders Equity for the three months ended
March 31, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and March 31, 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    43Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    64Item 4.
    
    Controls and Procedures
    
    
    64PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    65Item 1A.
    
    Risk Factors
    
    
    65Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    65Item 6.
    
    Exhibits
    
    
    66SIGNATURE
    
    
    67EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. VECTOR GROUP LTD. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
 VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 March 31,
    
    
    
    December 31,2009
    
    
    
    2008ASSETS:Current assets:Cash and cash equivalents
    
    $
    202,349
    
    
    
    $
    211,105Investment securities available for sale
    
    
    24,496
    
    
    
    
    28,518Accounts receivable  trade
    
    
    1,756
    
    
    
    
    9,506Inventories
    
    
    91,546
    
    
    
    
    92,581Deferred income taxes
    
    
    5,683
    
    
    
    
    3,642Restricted assets
    
    
    3,229
    
    
    
    
    Other current assets
    
    
    6,364
    
    
    
    
    9,931Total current assets
    
    
    335,423
    
    
    
    
    355,283Property, plant and equipment, net
    
    
    48,927
    
    
    
    
    50,691Mortgage receivable, net
    
    
    12,704
    
    
    
    
    17,704Long-term investments accounted for at cost
    
    
    51,118
    
    
    
    
    51,118Investments in non-consolidated real estate businesses
    
    
    44,058
    
    
    
    
    50,775Restricted assets
    
    
    6,103
    
    
    
    
    6,555Deferred income taxes
    
    
    48,850
    
    
    
    
    45,222Intangible asset
    
    
    107,511
    
    
    
    
    107,511Prepaid pension costs
    
    
    2,991
    
    
    
    
    2,901Other assets
    
    
    25,541
    
    
    
    
    29,952Total assets
    
    $
    683,226
    
    
    
    $
    717,712LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt
    
    $
    100,059
    
    
    
    $
    97,498Current portion of employee benefits
    
    
    21,840
    
    
    
    
    21,840Accounts payable
    
    
    5,957
    
    
    
    
    6,104Accrued promotional expenses
    
    
    9,589
    
    
    
    
    10,131Income taxes payable, net
    
    
    88,245
    
    
    
    
    11,803Accrued excise and payroll taxes payable, net
    
    
    4,575
    
    
    
    
    7,004Settlement accruals
    
    
    29,918
    
    
    
    
    20,668Deferred income taxes
    
    
    14,105
    
    
    
    
    92,507Accrued interest
    
    
    5,074
    
    
    
    
    9,612Other current liabilities
    
    
    11,165
    
    
    
    
    18,992Total current liabilities
    
    
    290,527
    
    
    
    
    296,159Notes payable, long-term debt and other obligations, less current portion
    
    
    209,261
    
    
    
    
    210,301Fair value of derivatives embedded within convertible debt
    
    
    77,548
    
    
    
    
    77,245Non-current employee benefits
    
    
    35,690
    
    
    
    
    34,856Deferred income taxes
    
    
    48,050
    
    
    
    
    48,807Other liabilities
    
    
    16,577
    
    
    
    
    16,739Total liabilities
    
    
    677,653
    
    
    
    
    684,107Commitments and contingencies
    
    
    
    
    
    
    
    Stockholders equity: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,
69,108,075 and 69,107,320 shares issued and 66,014,825 and
and 66,014,070 shares outstanding
    
    
    6,601
    
    
    
    
    6,601Additional paid-in capital
    
    
    41,384
    
    
    
    
    65,103Retained earnings (accumulated deficit)
    
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    (29,555
    )
    
    
    
    (25,242
    )Less: 3,093,250 and 3,093,250 shares of common stock in treasury, at cost
    
    
    (12,857
    )
    
    
    
    (12,857
    )Total stockholders equity
    
    
    5,573
    
    
    
    
    33,605Total liabilities and stockholders equity
    
    $
    683,226
    
    
    
    $
    717,712
 
 -2-




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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, 2009
    
    
    
    March 31, 2008Revenues*
    
    $
    121,216
    
    
    
    $
    132,205Expenses:Cost of goods sold*
    
    
    72,526
    
    
    
    
    80,007Operating, selling, administrative and general expenses
    
    
    21,530
    
    
    
    
    24,157Gain on brand transaction
    
    
    (5,000
    )
    
    
    
    Restructuring charges
    
    
    1,000
    
    
    
    
    Operating income
    
    
    31,160
    
    
    
    
    28,041Other income (expenses):Interest and dividend income
    
    
    150
    
    
    
    
    1,971Interest expense
    
    
    (16,074
    )
    
    
    
    (15,253
    )Change in fair value of derivatives embedded within
convertible debt
    
    
    (303
    )
    
    
    
    (2,444
    )Impairment charges on investments
    
    
    (8,500
    )
    
    
    
    Equity (loss) income from non-consolidated real
estate businesses
    
    
    (995
    )
    
    
    
    13,320Other, net
    
    
    
    
    
    
    
    (573
    )Income before provision for income taxes
    
    
    5,438
    
    
    
    
    25,062Income tax expense
    
    
    2,338
    
    
    
    
    10,755Net income
    
    $
    3,100
    
    
    
    $
    14,307Per basic common share:Net income applicable to common shares
    
    $
    0.04
    
    
    
    $
    0.22Per diluted common share:Net income applicable to common shares
    
    $
    0.04
    
    
    
    $
    0.21Cash distributions and dividends declared per share
    
    $
    0.40
    
    
    
    $
    0.38
 
 *
    
    Revenues and Cost of goods sold include excise taxes of $33,712 and $40,522, respectively. 
 -3-




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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
( Dollars in Thousands, Except Share Amounts )  Unaudited
 AccumulatedCommon Stock
    
    
    
    Additional
    
    
    
    
    
    
    
    
    OtherPaid-In
    
    
    
    Retained
    
    
    
    Comprehensive
    
    
    
    TreasuryShares
    
    
    Amount
    
    
    
    Capital
    
    
    
    Earnings
    
    
    
    Income (Loss)
    
    
    
    Stock
    
    
    
    TotalBalance, December 31, 2008
    
    
    
    66,014,070
    
    
    $
    6,601
    
    
    
    $
    65,103
    
    
    
    $
    
    
    
    
    $
    (25,242
    )
    
    
    $
    (12,857
    )
    
    
    $
    33,605Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,100Pension-related minimum liability adjustments,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    418
    
    
    
    
    
    
    
    
    
    418Forward contract adjustments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    9Unrealized loss on investment securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,740
    )
    
    
    
    
    
    
    
    
    (4,740
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,313
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,213
    )Distributions and dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    (24,605
    )
    
    
    
    (3,100
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,705
    )Exercise of options
    
    
    
    755
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    876
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    876Balance, March 31, 2009
    
    
    
    66,014,825
    
    
    $
    6,601
    
    
    
    $
    41,384
    
    
    
    $
    
    
    
    
    $
    (29,555
    )
    
    
    $
    (12,857
    )
    
    
    $
    5,573
 
 -4-




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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, 2009
    
    
    
    March 31, 2008Net cash provided by operating activities
    
    $
    21,088
    
    
    
    $
    14,159Cash flows from investing activities:Purchase of investment securities
    
    
    
    
    
    
    
    (5,182
    )Proceeds from sale or liquidation of long-term investments.
    
    
    908
    
    
    
    
    10Purchase of mortgage receivable
    
    
    
    
    
    
    
    (21,445
    )Distributions from non-consolidated real estate businesses.
    
    
    1,182
    
    
    
    
    15,822Increase in cash surrender value of life insurance policies
    
    
    (356
    )
    
    
    
    (143
    )Decrease (increase) in non-current restricted assets
    
    
    452
    
    
    
    
    (109
    )Capital expenditures
    
    
    (803
    )
    
    
    
    (1,227
    )Net cash provided by (used in) investing activities
    
    
    1,383
    
    
    
    
    (12,274
    )Cash flows from financing activities:Proceeds from debt issuance
    
    
    10
    
    
    
    
    Repayments of debt
    
    
    (1,604
    )
    
    
    
    (1,501
    )Deferred financing charges
    
    
    
    
    
    
    
    (99
    )Borrowings under revolver
    
    
    123,724
    
    
    
    
    128,429Repayments on revolver
    
    
    (123,291
    )
    
    
    
    (121,303
    )Dividends and distributions on common stock
    
    
    (30,076
    )
    
    
    
    (26,717
    )Proceeds from exercise of options
    
    
    10
    
    
    
    
    14Net cash used in financing activities
    
    
    (31,227
    )
    
    
    
    (21,177
    )Net decrease in cash and cash equivalents
    
    
    (8,756
    )
    
    
    
    (19,292
    )Cash and cash equivalents, beginning of period
    
    
    211,105
    
    
    
    
    238,117Cash and cash equivalents, end of period
    
    $
    202,349
    
    
    
    $
    218,825
 
 -5-




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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
  -6-




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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, 2009
    
    
    
    March 31, 2008Net income
    
    $
    3,100
    
    
    
    $
    14,307Income attributable to
participating securities
    
    
    (142
    )
    
    
    
    (678
    )Net income available to
common stockholders
    
    $
    2,958
    
    
    
    $
    13,629
    Three Months
    
    
    
    Three MonthsEnded
    
    
    
    EndedMarch 31, 2009
    
    
    
    March 31, 2008Weighted-average shares for basic EPS
    
    
    65,802,907
    
    
    
    
    62,971,920Plus incremental shares related to
stock options
    
    
    16,205
    
    
    
    
    1,646,786Weighted-average shares for fully diluted EPS
    
    
    65,819,112
    
    
    
    
    64,618,706
   -7-




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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, 2009
    
    
    
    March 31, 2008Number of stock options
    
    
    632,378
    
    
    
    
    226,741Weighted-average exercise price
    
    $
    18.31
    
    
    
    $
    24.26Weighted-average shares of non-
vested restricted stock
    
    
    211,314
    
    
    
    
    73,041Weighted-average expense per share
    
    $
    17.12
    
    
    
    $
    17.82Weighted-average number of shares
issuable upon conversion of debt
    
    
    12,932,556
    
    
    
    
    12,932,556Weighted-average conversion price
    
    $
    17.16
    
    
    
    $
    17.16
 Comprehensive Income
  Fair Value of Derivatives Embedded within Convertible Debt
  Capital and Credit Market Crisis
  -8-




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
  Contingencies
  Davis
 Restricted Stock Award
  New Accounting Pronouncements
   -9-




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
       -10-




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
  2. RESTRUCTURING
    3. INVESTMENT SECURITIES AVAILABLE FOR SALE
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueMarketable equity securities
    
    $
    28,957
    
    
    $
    2,893
    
    
    $
    (7,354
    )
    
    $
    24,496
  
    
    13,888,889 shares of Ladenburg Thalmann Financial Services Inc. common
stock, carried at $7,361 and $10,000, respectively;
    
    5,057,110 shares of Opko Health Inc. common stock, carried at $4,956 and
$8,193, respectively; and
    
    2,259,796 shares of Cardo Medical, Inc. common stock, carried at $3,389
and $3,277, respectively.
 -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
  4. INVENTORIES
  March 31,
    
    
    
    December 31,2009
    
    
    
    2008Leaf tobacco
    
    $
    50,479
    
    
    
    $
    48,880Other raw materials
    
    
    5,908
    
    
    
    
    5,128Work-in-process
    
    
    839
    
    
    
    
    314Finished goods
    
    
    45,711
    
    
    
    
    46,202Inventories at current cost
    
    
    102,937
    
    
    
    
    100,524LIFO adjustments
    
    
    (11,391
    )
    
    
    
    (7,943
    )$
    91,546
    
    
    
    $
    92,581
    5. LONG-TERM INVESTMENTS
  March 31, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueInvestment partnerships
accounted for at cost
    
    $
    51,118
    
    
    $
    54,640
    
    
    $
    51,118
    
    
    $
    54,997
 -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
    InvestmentPartnershipsAccounted forat CostBalance as of January 1, 2009
    
    $
    54,997Unrealized loss on long-term
investments
    
    
    (357
    )Realized loss on long-term
investments
    
    
    Balance as of March 31, 2009
    
    $
    54,640
  Investment
    
    
    InvestmentPartnerships
    
    
    PartnershipsAccounted for at
    
    
    Accounted for onCost
    
    
    the Equity MethodBalance as of January 1, 2008
    
    $
    89,007
    
    
    $
    10,495Unrealized loss on long-term investments
    
    
    (2,034
    )
    
    
    (675
    )Realized loss on long-term investments
    
    
    
    
    
    
    (567
    )Balance as of March 31, 2008
    
    $
    86,973
    
    
    $
    9,253
   -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
 6. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
  March 31,
    
    
    
    December 31,2009
    
    
    
    2008Vector:11% Senior Secured Notes due 2015
    
    $
    165,000
    
    
    
    $
    165,0003.875% Variable Interest Senior Convertible Debentures due
2026, net of unamortized discount of $83,888 and $83,993*
    
    
    26,112
    
    
    
    
    26,0075% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $36,989 and $39,565*
    
    
    74,875
    
    
    
    
    72,299Liggett:Revolving credit facility
    
    
    19,948
    
    
    
    
    19,515Term loan under credit facility
    
    
    7,155
    
    
    
    
    7,290Equipment loans
    
    
    7,273
    
    
    
    
    8,307V.T. Aviation:Note payable
    
    
    4,924
    
    
    
    
    5,266VGR Aviation:Note payable
    
    
    3,963
    
    
    
    
    4,053Other
    
    
    70
    
    
    
    
    62Total notes payable, long-term debt and other obligations
    
    
    309,320
    
    
    
    
    307,799Less:Current maturities
    
    
    (100,059
    )
    
    
    
    (97,498
    )Amount due after one year
    
    $
    209,261
    
    
    
    $
    210,301
 
 *
    
    The fair value of the derivatives embedded within the 3.875% Variable Interest
Senior Convertible Debentures ($53,581 at March 31, 2009 and $51,829 at December 31,
2008) and the 5% Variable Interest Senior Convertible Notes ($23,967 at March 31,
2009 and $25,416 at December 31, 2008) is separately classified as a derivative
liability in the condensed consolidated balance sheets. 11% Senior Secured Notes due 2015  Vector
   -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
  Indenture
    
    March 31,
    
    December 31,Covenant
    
    Requirement
    
    2009
    
    2008Consolidated EBITDA, as defined
    
    $
    50,000
    
    
    $
    157,035
    
    
    $
    154,053Leverage ratio, as defined
    
    <3.0 to 1
    
    
    0.2 to 1
    
    
    
    0.1 to 1Secured leverage ratio, as defined
    
    <1.5 to 1
    
    Negative
    
    Negative
 Variable Interest Senior Convertible Debt  Vector
   Three Months
    
    
    
    Three MonthsEnded
    
    
    
    EndedMarch 31, 2009
    
    
    
    March 31, 20083.875% convertible debentures
    
    $
    112
    
    
    
    $
    905% convertible notes
    
    
    1,657
    
    
    
    
    1,188Interest expense associated with
embedded derivatives
    
    $
    1,769
    
    
    
    $
    1,278
  Three Months
    
    
    
    Three MonthsEnded
    
    
    
    EndedMarch 31, 2009
    
    
    
    March 31, 20083.875% convertible debentures
    
    $
    (1,752
    )
    
    
    $
    (3,250
    )5% convertible notes
    
    
    1,449
    
    
    
    
    806Loss on changes in fair value of
derivatives
embedded within
convertible debt
    
    $
    (303
    )
    
    
    $
    (2,444
    )
  3.875%
    
    
    
    5%Convertible
    
    
    
    ConvertibleDebentures
    
    
    
    Notes
    
    
    
    TotalBalance at December 31, 2008
    
    $
    51,829
    
    
    
    $
    25,416
    
    
    
    $
    77,245Loss (gain) from changes in fair
value of embedded derivatives
    
    
    1,752
    
    
    
    
    (1,449
    )
    
    
    
    303Balance at March 31, 2009
    
    $
    53,581
    
    
    
    $
    23,967
    
    
    
    $
    77,548
 -15-




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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
 Beneficial Conversion Feature on Variable Interest Senior Convertible Debt
  Three Months
    
    
    
    Three MonthsEnded
    
    
    
    EndedMarch 31, 2009
    
    
    
    March 31, 2008Amortization
of beneficial conversion feature:3.875% convertible debentures
    
    $
    (7
    )
    
    
    $
    (8
    )5% convertible notes
    
    
    919
    
    
    
    
    656Interest expense associated with
beneficial conversion feature
    
    $
    912
    
    
    
    $
    648
 Unamortized Debt Discount:
  3.875%
    
    
    
    5%Convertible
    
    
    
    ConvertibleDebentures
    
    
    
    Notes
    
    
    
    TotalBalance at December 31, 2008
    
    $
    83,993
    
    
    
    $
    39,565
    
    
    
    $
    123,558Amortization of embedded derivatives
    
    
    (112
    )
    
    
    
    (1,657
    )
    
    
    
    (1,769
    )Amortization of beneficial conversion feature
    
    
    7
    
    
    
    
    (919
    )
    
    
    
    (912
    )Balance at March 31, 2009
    
    $
    83,888
    
    
    
    $
    36,989
    
    
    
    $
    120,877
 Revolving Credit Facility  Liggett
  5% Variable Interest Senior Convertible Notes Due November 2011:
  -16-




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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
 6.75% Variable Interest Senior Convertible Notes due 2014:
   Scheduled Maturities
  UnamortizedPrincipal
    
    
    Discount
    
    
    NetYear Ending
December 31:2009
    
    
    135,922
    
    
    
    36,989
    
    
    
    98,9332010
    
    
    4,422
    
    
    
    
    
    
    
    4,4222011
    
    
    16,126
    
    
    
    8,389
    
    
    
    7,7372012
    
    
    103,211
    
    
    
    75,499
    
    
    
    27,7122013
    
    
    5,516
    
    
    
    
    
    
    
    5,516Thereafter
    
    
    165,000
    
    
    
    
    
    
    
    165,000Total
    
    $
    430,197
    
    
    $
    120,877
    
    
    $
    309,320
    -17-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
  7. EMPLOYEE BENEFIT PLANS
 Defined Benefit and Postretirement Plans
  OtherPension Benefits
    
    
    
    Postretirement BenefitsThree Months Ended
    
    
    
    Three Months EndedMarch 31,
    
    
    
    March 31,
    
    
    
    March 31,
    
    
    
    March 31,2009
    
    
    
    2008
    
    
    
    2009
    
    
    
    2008Service cost  benefits earned
during the period
    
    $
    330
    
    
    
    $
    1,035
    
    
    
    $
    4
    
    
    
    $
    4Interest cost on projected benefit
obligation
    
    
    2,346
    
    
    
    
    2,381
    
    
    
    
    142
    
    
    
    
    148Expected return on plan assets
    
    
    (1,954
    )
    
    
    
    (3,036
    )
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    200
    
    
    
    
    350
    
    
    
    
    
    
    
    
    
    Amortization of net actuarial loss
    
    
    534
    
    
    
    
    25
    
    
    
    
    (41
    )
    
    
    
    (45
    )Net expense
    
    $
    1,456
    
    
    
    $
    755
    
    
    
    $
    105
    
    
    
    $
    107
  -18-




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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
 8. CONTINGENCIES
 Tobacco-Related Litigation :
 Overview
   Individual Actions
 Engle Engle
 NumberState
    
    of CasesFlorida
    
    
    14New York
    
    
    10Louisiana
    
    
    5Maryland
    
    
    4West Virginia
    
    
    2District of Columbia
    
    
    1Mississippi
    
    
    1Missouri
    
    
    1Ohio
    
    
    1
 -19-




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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
 Liggett Only Cases. Davis v. Liggett Group, In Ferlanti v. Liggett Group Engle Engle Hausrath v.
Philip Morris
   Davis Ferlanti
 Engle Progeny Cases Engle v. R.J. Reynolds Tobacco Co. Engle Engle Engle Engle Engle Engle Engle Engle Engle Engle Engle Engle
 -20-




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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
 Class Actions
 Castano v.
American Tobacco Co. Inc.
 Engle Case Engle
  Engle
 Lukacs v. R.J. Reynolds Tobacco
Co., Lukacs Engle
 -21-




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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
 Other Class Actions. Smith v. Philip Morris Smith
 Schwab [McLaughlin]
v. Philip Morris, Cleary Altria Group Inc. v. Good Good
 Young v. American Tobacco Co., Scott v. American Tobacco Co.
 Cleary v. Philip Morris, Cleary Schwab,
 Brown v. American Tobacco Co.,
 In Re: Tobacco Litigation (Personal Injury Cases)
 -22-




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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
 Scott.
 Governmental Actions
  City of St. Louis v. American Tobacco Company
 DOJ Case.
  -23-




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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
 Third-Party Payor Actions
    National Committee to Preserve Social Security and Medicare v. Philip Morris
USA,
 Upcoming Trials
 Engle
 MSA and Other State Settlement Agreements
   -24-




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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
  
    
    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.
     -25-




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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
 Certain MSA Disputes
   NPM Adjustment.
  Gross v. Net Calculations.
  -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
 
    
    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.
  QUEST 3
 Litigation Challenging the MSA. Freedom Holdings Inc. v. Cuomo
 Grand River Enterprises Six Nations, Ltd. v. Pryor
  -27-




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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
 Other State Settlements.
   Cautionary Statement Davis Ferlanti Lukacs Engle Engle Engle
 Engle Engle
  -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
   Other Matters :
   9. INCOME TAXES
    -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
  10. NEW VALLEY
  March 31, 2009
    
    
    December 31, 2008Douglas Elliman Realty LLC
    
    $
    30,552
    
    
    $
    33,175Aberdeen Townhomes LLC
    
    
    3,000
    
    
    
    6,500New Valley Oaktree Chelsea Eleven LLC
    
    
    10,506
    
    
    
    11,100Investments in non-consolidated real
estate businesses
    
    $
    44,058
    
    
    $
    50,775
 Residential Brokerage Business.
  March 31, 2009
    
    
    December 31, 2008Cash
    
    $
    12,140
    
    
    $
    22,125Other current assets
    
    
    6,849
    
    
    
    7,496Property, plant and equipment, net
    
    
    14,877
    
    
    
    15,868Trademarks
    
    
    21,663
    
    
    
    21,663Goodwill
    
    
    38,330
    
    
    
    38,325Other intangible assets, net
    
    
    1,246
    
    
    
    1,311Other non-current assets
    
    
    911
    
    
    
    904Notes payable  current
    
    
    571
    
    
    
    1,413Current portion of notes payable to member 

Prudential Real
Estate Financial Services
of America, Inc.
    
    
    4,729
    
    
    
    4,729Current portion of notes payable
to member  New Valley
    
    
    4,729
    
    
    
    4,729Other current liabilities
    
    
    17,514
    
    
    
    23,294Notes payable  long term
    
    
    715
    
    
    
    1,805Notes payable to member  Prudential Real
Estate Financial Services of America, Inc.
    
    
    995
    
    
    
    2,030Notes payable to member  New Valley
    
    
    995
    
    
    
    2,030Other long-term liabilities
    
    
    8,295
    
    
    
    6,939Members equity
    
    
    57,473
    
    
    
    60,723
 -30-




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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 EndedMarch 31,2009
    
    
    2008Revenues
    
    $
    48,956
    
    
    $
    81,363Costs and expenses
    
    
    50,560
    
    
    
    77,229Depreciation expense
    
    
    1,199
    
    
    
    1,350Amortization expense
    
    
    64
    
    
    
    74Interest expense, net
    
    
    691
    
    
    
    863Income tax (benefit) expense
    
    
    (310
    )
    
    
    115Net (loss) income
    
    $
    (3,248
    )
    
    $
    1,732
  .
 Aberdeen Townhomes LLC.
   -31-




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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
  New Valley Oaktree Chelsea Eleven, LLC.
  Mortgage receivable/Escena Project.
  Real Estate Market Conditions.
 -32-




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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
 11. INVESTMENTS AND FAIR VALUE MEASUREMENTS
    Level 1
    
    Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.Level 2
    
    Inputs other than quoted prices that are observable for the assets
or liability, either directory or indirectly. These include
quoted prices for similar assets or liabilities in active markets
and quoted prices for identical or similar assets or liabilities
in markets that are not active.Level 3
    
    Unobservable inputs in which there is little market data, which
requires the reporting entity to develop their own assumptions.
   Fair Value Measurements as of March 31, 2009Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Money market funds
    
    $
    192,600
    
    
    $
    192,600
    
    
    $
    
    
    
    $
    Bonds
    
    
    1,525
    
    
    
    1,525Investment securities
available for sale
    
    
    24,496
    
    
    
    18,742
    
    
    
    5,754
    
    
    
    Total
    
    $
    218,621
    
    
    $
    212,867
    
    
    $
    5,754
    
    
    $
    Liabilities:Fair value of derivatives
embedded within
convertible debt
    
    $
    77,548
    
    
    $
    
    
    
    $
    
    
    
    $
    77,548
 -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
 Fair
Value Measurements as of December 31, 2008Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Money market funds
    
    $
    192,348
    
    
    $
    192,348
    
    
    $
    
    
    
    $
    Investment securities
available for sale
    
    
    28,518
    
    
    
    20,627
    
    
    
    7,891
    
    
    
    Total
    
    $
    220,866
    
    
    $
    212,975
    
    
    $
    7,891
    
    
    $
    Liabilities:Fair value of derivatives
embedded within
convertible debt
    
    $
    77,245
    
    
    $
    
    
    
    $
    
    
    
    $
    77,245
     Fair
Value Measurements as of March 31, 2009Quoted PricesThree Months
    
    
    
    
    
    
    In Active
    
    
    Significantended
    
    
    
    
    
    
    Markets for
    
    
    Other
    
    
    SignificantMarch 31, 2009
    
    
    
    
    
    
    Identical
    
    
    Observable
    
    
    UnobservableImpairment
    
    
    
    
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    Charge
    
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Mortgage receivable
    
    $
    5,000
    
    
    $
    12,704
    
    
    $
    
    
    
    $
    
    
    
    $
    12,704Non-consolidated real
estate
    
    
    3,500
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    3,000Total
    
    $
    8,500
    
    
    $
    15,704
    
    
    $
    
    
    
    $
    
    
    
    $
    15,704
  -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
 12. SEGMENT INFORMATION
   Vector
    
    
    New
    
    
    CorporateLiggett
    
    
    Tobacco
    
    
    Valley
    
    
    and Other
    
    
    TotalThree months ended March 31,
2009Revenues
    
    $
    120,887
    
    
    $
    329
    
    
    
    
    
    
    
    
    
    
    $
    121,216Operating income (loss)
    
    
    38,410
    (1)
    
    
    (2,785
    )
    
    
    
    
    
    
    (4,465
    )
    
    
    31,160Equity loss on non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    (995
    )
    
    
    
    
    
    
    (995
    )Identifiable assets
    
    
    287,783
    
    
    
    2,168
    
    
    
    56,762
    
    
    
    336,513
    
    
    
    683,226Depreciation and amortization
    
    
    1,985
    
    
    
    28
    
    
    
    
    
    
    
    580
    
    
    
    2,593Capital expenditures
    
    
    744
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    803Three months ended March 31,
2008Revenues
    
    $
    131,645
    
    
    $
    560
    
    
    
    
    
    
    
    
    
    
    $
    132,205Operating income (loss)
    
    
    37,344
    
    
    
    (2,410
    )
    
    
    
    
    
    
    (6,893
    )
    
    
    28,041Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    13,320
    
    
    
    
    
    
    
    13,320Identifiable assets
    
    
    336,829
    
    
    
    2,176
    
    
    
    53,350
    
    
    
    396,206
    
    
    
    788,561Depreciation and amortization
    
    
    1,853
    
    
    
    30
    
    
    
    
    
    
    
    585
    
    
    
    2,468Capital expenditures
    
    
    1,215
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    1,227
 
 (1)Operating income includes a gain of $5,000 on the Philip Morris brand
transaction completed February 2009. 13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
  -35-




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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
    -36-




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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, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    192,300
    
    
    $
    10,043
    
    
    $
    6
    
    
    $
    
    
    
    $
    202,349Investment securities
available for sale
    
    
    24,418
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    24,496Accounts receivable 
trade
    
    
    
    
    
    
    1,756
    
    
    
    
    
    
    
    
    
    
    
    1,756Intercompany receivables
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    (102
    )
    
    
    Inventories
    
    
    
    
    
    
    91,546
    
    
    
    
    
    
    
    
    
    
    
    91,546Deferred income taxes
    
    
    5,772
    
    
    
    
    
    
    
    
    
    
    
    (89
    )
    
    
    5,683Income taxes receivable
    
    
    
    
    
    
    10,160
    
    
    
    
    
    
    
    (10,160
    )
    
    
    Restricted assets
    
    
    
    
    
    
    3,229
    
    
    
    
    
    
    
    
    
    
    
    3,229Other current assets
    
    
    3,026
    
    
    
    3,338
    
    
    
    
    
    
    
    
    
    
    
    6,364Total current assets
    
    
    225,618
    
    
    
    120,072
    
    
    
    84
    
    
    
    (10,351
    )
    
    
    335,423Property, plant and equipment, net
    
    
    707
    
    
    
    48,220
    
    
    
    
    
    
    
    
    
    
    
    48,927Mortgage receivable
    
    
    
    
    
    
    
    
    
    
    12,704
    
    
    
    
    
    
    
    12,704Long-term investments accounted
for at cost
    
    
    50,332
    
    
    
    
    
    
    
    786
    
    
    
    
    
    
    
    51,118Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    44,058
    
    
    
    
    
    
    
    44,058Investments in consolidated
subsidiaries
    
    
    172,842
    
    
    
    
    
    
    
    
    
    
    
    (172,842
    )
    
    
    Restricted assets
    
    
    3,961
    
    
    
    2,142
    
    
    
    
    
    
    
    
    
    
    
    6,103Deferred income taxes
    
    
    37,444
    
    
    
    882
    
    
    
    10,524
    
    
    
    
    
    
    
    48,850Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    2,991
    
    
    
    
    
    
    
    
    
    
    
    2,991Other assets
    
    
    11,760
    
    
    
    13,781
    
    
    
    
    
    
    
    
    
    
    
    25,541Total assets
    
    $
    502,664
    
    
    $
    295,599
    
    
    $
    68,156
    
    
    $
    (183,193
    )
    
    $
    683,226LIABILITIES AND STOCKHOLDERS
EQUITY:Current liabilities:Current portion of notes
payable and long-term debt
    
    $
    74,876
    
    
    $
    25,183
    
    
    $
    
    
    
    $
    
    
    
    $
    100,059Current portion of employee
Benefits.
    
    
    21,840
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,840Accounts payable
    
    
    312
    
    
    
    5,645
    
    
    
    
    
    
    
    
    
    
    
    5,957Intercompany payables
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    (102
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    9,589
    
    
    
    
    
    
    
    
    
    
    
    9,589Income taxes payable, net
    
    
    72,941
    
    
    
    6
    
    
    
    25,458
    
    
    
    (10,160
    )
    
    
    88,245Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    4,575
    
    
    
    
    
    
    
    
    
    
    
    4,575Settlement accruals
    
    
    
    
    
    
    29,918
    
    
    
    
    
    
    
    
    
    
    
    29,918Deferred income taxes
    
    
    12,075
    
    
    
    2,119
    
    
    
    
    
    
    
    (89
    )
    
    
    14,105Accrued interest
    
    
    5,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,074Other current liabilities
    
    
    2,104
    
    
    
    8,390
    
    
    
    671
    
    
    
    
    
    
    
    11,165Total current liabilities
    
    
    189,222
    
    
    
    85,527
    
    
    
    26,129
    
    
    
    (10,351
    )
    
    
    290,527Notes payable, long-term debt and
other obligations, less current
portion
    
    
    191,112
    
    
    
    18,149
    
    
    
    
    
    
    
    
    
    
    
    209,261Fair value of derivatives embedded
within convertible debt
    
    
    77,548
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,548Non-current employee
benefits
    
    
    11,270
    
    
    
    24,420
    
    
    
    
    
    
    
    
    
    
    
    35,690Deferred income
taxes
    
    
    27,514
    
    
    
    20,427
    
    
    
    109
    
    
    
    
    
    
    
    48,050Other liabilities
    
    
    425
    
    
    
    15,147
    
    
    
    1,005
    
    
    
    
    
    
    
    16,577Total liabilities
    
    
    497,091
    
    
    
    163,670
    
    
    
    27,243
    
    
    
    (10,351
    )
    
    
    677,653Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    5,573
    
    
    
    131,929
    
    
    
    40,913
    
    
    
    (172,842
    )
    
    
    5,573Total liabilities and
stockholders equity
    
    $
    502,664
    
    
    $
    295,599
    
    
    $
    68,156
    
    
    $
    (183,193
    )
    
    $
    683,226
 -37-




---



##### 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, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    200,066
    
    
    $
    11,039
    
    
    $
    
    
    
    $
    
    
    
    $
    211,105Investment securities
available for sale
    
    
    28,440
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    28,518Accounts receivable 
trade
    
    
    
    
    
    
    9,506
    
    
    
    
    
    
    
    
    
    
    
    9,506Intercompany receivables
    
    
    1,938
    
    
    
    
    
    
    
    
    
    
    
    (1,938
    )
    
    
    Inventories
    
    
    
    
    
    
    92,581
    
    
    
    
    
    
    
    
    
    
    
    92,581Deferred income taxes
    
    
    3,304
    
    
    
    338
    
    
    
    
    
    
    
    
    
    
    
    3,642Income taxes receivable
    
    
    25,125
    
    
    
    
    
    
    
    
    
    
    
    (25,125
    )
    
    
    Other current assets
    
    
    3,962
    
    
    
    5,969
    
    
    
    
    
    
    
    
    
    
    
    9,931Total current assets
    
    
    263,835
    
    
    
    119,433
    
    
    
    78
    
    
    
    (27,063
    )
    
    
    355,283Property, plant and equipment, net
    
    
    735
    
    
    
    49,956
    
    
    
    
    
    
    
    
    
    
    
    50,691Mortgage receivable
    
    
    
    
    
    
    
    
    
    
    17,704
    
    
    
    
    
    
    
    17,704Long-term investments accounted for
at cost
    
    
    50,332
    
    
    
    
    
    
    
    786
    
    
    
    
    
    
    
    51,118Long-term investments accounted
under the equity method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    50,775
    
    
    
    
    
    
    
    50,775Investments in consolidated
subsidiaries
    
    
    164,917
    
    
    
    
    
    
    
    
    
    
    
    (164,917
    )
    
    
    Restricted assets
    
    
    3,845
    
    
    
    2,710
    
    
    
    
    
    
    
    
    
    
    
    6,555Deferred income taxes
    
    
    37,177
    
    
    
    870
    
    
    
    7,175
    
    
    
    
    
    
    
    45,222Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    2,901
    
    
    
    
    
    
    
    
    
    
    
    2,901Other assets
    
    
    16,295
    
    
    
    13,657
    
    
    
    
    
    
    
    
    
    
    
    29,952Total assets
    
    $
    536,136
    
    
    $
    297,038
    
    
    $
    76,518
    
    
    $
    (191,980
    )
    
    $
    717,712LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes
payable and long-term debt
    
    $
    72,299
    
    
    $
    25,199
    
    
    $
    
    
    
    $
    
    
    
    $
    97,498Current portion of employee
Benefits.
    
    
    21,840
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,840Accounts payable
    
    
    2,168
    
    
    
    3,936
    
    
    
    
    
    
    
    
    
    
    
    6,104Intercompany payables
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    (3
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    10,131
    
    
    
    
    
    
    
    
    
    
    
    10,131Income taxes payable, net
    
    
    
    
    
    
    10,754
    
    
    
    26,174
    
    
    
    (25,125
    )
    
    
    11,803Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    7,004
    
    
    
    
    
    
    
    
    
    
    
    7,004Settlement accruals
    
    
    
    
    
    
    20,668
    
    
    
    
    
    
    
    
    
    
    
    20,668Deferred income taxes
    
    
    81,961
    
    
    
    10,546
    
    
    
    
    
    
    
    
    
    
    
    92,507Accrued interest
    
    
    9,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,612Other current liabilities
    
    
    
    
    
    
    20,017
    
    
    
    910
    
    
    
    (1,935
    )
    
    
    18,992Total current liabilities
    
    
    187,880
    
    
    
    108,258
    
    
    
    27,084
    
    
    
    (27,063
    )
    
    
    296,159Notes payable, long-term debt and
other obligations, less current
portion
    
    
    191,007
    
    
    
    19,294
    
    
    
    
    
    
    
    
    
    
    
    210,301Fair value of derivatives embedded
within convertible debt
    
    
    77,245
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,245Non-current employee
benefits
    
    
    17,388
    
    
    
    17,468
    
    
    
    
    
    
    
    
    
    
    
    34,856Deferred income
taxes
    
    
    28,573
    
    
    
    20,125
    
    
    
    109
    
    
    
    
    
    
    
    48,807Other liabilities
    
    
    438
    
    
    
    15,219
    
    
    
    1,082
    
    
    
    
    
    
    
    16,739Total liabilities
    
    
    502,531
    
    
    
    180,876
    
    
    
    28,275
    
    
    
    (27,575
    )
    
    
    684,107Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    33,605
    
    
    
    116,674
    
    
    
    48,243
    
    
    
    (164,917
    )
    
    
    33,605Total liabilities and
stockholders equity
    
    $
    536,136
    
    
    $
    297,038
    
    
    $
    77,118
    
    
    $
    (192,580
    )
    
    $
    717,712
 -38-




---



##### 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 income
(loss)
    
    
    (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
    
    $
    3,100
    
    
    $
    21,320
    
    
    $
    (5,821
    )
    
    $
    (15,499
    )
    
    $
    3,100
 -39-




---



##### 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, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    132,205
    
    
    $
    
    
    
    $
    
    
    
    $
    132,205Expenses:Cost of goods sold
    
    
    
    
    
    
    80,007
    
    
    
    
    
    
    
    
    
    
    
    80,007Operating, selling,
administrative and
general expenses
    
    
    7,194
    
    
    
    16,568
    
    
    
    395
    
    
    
    
    
    
    
    24,157Management fee
expense
    
    
    
    
    
    
    1,985
    
    
    
    
    
    
    
    (1,985
    )
    
    
    Operating income
(loss)
    
    
    (7,194
    )
    
    
    33,645
    
    
    
    (395
    )
    
    
    1,985
    
    
    
    28,041Other income (expenses):Interest and dividend
income
    
    
    1,896
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    1,971Interest expense
    
    
    (14,671
    )
    
    
    (582
    )
    
    
    
    
    
    
    
    
    
    
    (15,253
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    (2,444
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,444
    )Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    13,320
    
    
    
    
    
    
    
    13,320Equity income in
consolidated
subsidiaries
    
    
    27,742
    
    
    
    
    
    
    
    
    
    
    
    (27,742
    )
    
    
    Management fee income
    
    
    1,985
    
    
    
    
    
    
    
    
    
    
    
    (1,985
    )
    
    
    Other, net
    
    
    (569
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (573
    )Income before
provision for income
taxes
    
    
    6,745
    
    
    
    33,138
    
    
    
    12,921
    
    
    
    (27,742
    )
    
    
    25,062Income tax
benefit (expense)
    
    
    7,562
    
    
    
    (13,032
    )
    
    
    (5,285
    )
    
    
    
    
    
    
    (10,755
    )Net income
    
    $
    14,307
    
    
    $
    20,106
    
    
    $
    7,636
    
    
    $
    (27,742
    )
    
    $
    14,307
 -40-




---



##### 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:Purchase of investment
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale or
liquidation of long-term
investments
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    908Purchase of mortgage
receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions 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
    
    
    
    
    
    
    
    
    
    
    
    (2,171
    )Investments in
subsidiaries
    
    
    (1,350
    )
    
    
    
    
    
    
    
    
    
    
    1,350
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Tax benefit of options
exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net 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
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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, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by (used in)
operating activities
    
    $
    16,735
    
    
    $
    (4,689
    )
    
    $
    968
    
    
    $
    1,145
    
    
    $
    14,159Cash flows from investing
activities:Purchase of investment
securities
    
    
    (5,182
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,182
    )Proceeds from sale or
liquidation of long-term
investments
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Purchase of mortgage
receivable
    
    
    
    
    
    
    
    
    
    
    (21,445
    )
    
    
    
    
    
    
    (21,445
    )Distributions from
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    15,822
    
    
    
    
    
    
    
    15,822Increase in cash surrender
value of life insurance
policies
    
    
    (101
    )
    
    
    (42
    )
    
    
    
    
    
    
    
    
    
    
    (143
    )(Increase) decrease
in non-current restricted
assets
    
    
    (92
    )
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    (109
    )Investments in
subsidiaries
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (1,227
    )
    
    
    
    
    
    
    
    
    
    
    (1,227
    )Net cash used in
investing activities
    
    
    (6,375
    )
    
    
    (1,286
    )
    
    
    (5,613
    )
    
    
    1,000
    
    
    
    (12,274
    )Cash flows from
financing activities:Repayments of debt
    
    
    
    
    
    
    (1,501
    )
    
    
    
    
    
    
    
    
    
    
    (1,501
    )Deferred financing charges
    
    
    (99
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99
    )Borrowings under revolver
    
    
    
    
    
    
    128,429
    
    
    
    
    
    
    
    
    
    
    
    128,429Repayments on revolver
    
    
    
    
    
    
    (121,303
    )
    
    
    
    
    
    
    
    
    
    
    (121,303
    )Capital contributions received
    
    
    
    
    
    
    1,000
    
    
    
    4,645
    
    
    
    (5,645
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (3,500
    )
    
    
    
    
    
    
    3,500
    
    
    
    Dividends and distributions
on common stock
    
    
    (26,717
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,717
    )Proceeds from exercise of
Vector options and warrants
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Tax benefit of options
exercised
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net cash provided by (used in)
financing activities
    
    
    (26,802
    )
    
    
    3,125
    
    
    
    4,645
    
    
    
    (2,145
    )
    
    
    (21,177
    )Net decrease in cash and cash
equivalents
    
    
    (16,442
    )
    
    
    (2,850
    )
    
    
    
    
    
    
    
    
    
    
    (19,292
    )Cash and cash equivalents,
beginning of period
    
    
    228,901
    
    
    
    9,216
    
    
    
    
    
    
    
    
    
    
    
    238,117Cash and cash equivalents, end of
period
    
    $
    212,459
    
    
    $
    6,366
    
    
    $
    
    
    
    $
    
    
    
    $
    218,825
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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 subsidiary
Liggett Group LLC,
    
    the marketing of the low nicotine and nicotine-free QUEST cigarette products and
the development of reduced risk cigarette products through our subsidiary Vector
Tobacco Inc., and
    
    the real estate business through our subsidiary, New Valley LLC, 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  the third largest brand in the deep discount category,
    
    GRAND PRIX  a growing brand in the deep discount segment,
    
    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, and
    
    USA and various Partner Brands and private label brands.
   -43-




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Recent Developments
 6.75% Variable Interest Senior Convertible Notes due 2014
 Proposed and enacted excise tax increases.
 Long-term Investments.
 -44-




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Philip Morris Brand Transaction.
   Vector Tobacco Restructuring.
  Issuance of Restricted Shares.
 Mortgage receivable/Escena Project.
  -45-




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Aberdeen Townhomes LLC.
    New Valley Oaktree Chelsea Eleven, LLC.
  Sale of St. Regis Hotel.
 -46-




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Tobacco Settlement Agreements.
    -47-




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Recent Developments in Tobacco-Related Litigation
  -48-




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##### Table of Contents



Altria Group Inc. v. Good, et al., Schwab, et al. [McLaughlin] v. Philip Morris Schwab
  Engle Engle Lukacs v. R. J. Reynolds Tobacco Company Engle Engle
 -49-




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Critical Accounting Policies
  Recently Adopted Accounting Pronouncements.
    -50-




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Results of Operations
   Three Months EndedMarch 31,
    
    
    
    March 31,2009
    
    
    
    2008Revenues:Liggett
    
    $
    120,887
    
    
    
    $
    131,645Vector Tobacco
    
    
    329
    
    
    
    
    560Total revenues
    
    $
    121,216
    
    
    
    $
    132,205Operating income (loss):Liggett
    
    $
    38,410
    
    
    
    $
    37,344Vector Tobacco
    
    
    (2,785
    )
    
    
    
    (2,410
    )Total tobacco
    
    
    35,625
    
    
    
    
    34,934Corporate and other
    
    
    (4,465
    )
    
    
    
    (6,893
    )Total operating income
    
    $
    31,160
    
    
    
    $
    28,041
 Three Months Ended March 31, 2009 Compared to Three Months ended March 31, 2008
 Revenues.
 -51-




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Tobacco Revenues.
    Tobacco Gross Profit.
   -52-




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Expenses.
  Other expenses.
  Income before income taxes.
 Income tax provision.
 -53-




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Liquidity and Capital Resources
     Liggett
 -54-




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##### Table of Contents



Engle Engle Engle
  Vector
 
    
    cash interest expense of approximately $53,500,
    
    dividends on our outstanding common shares (currently at an annual rate of
approximately $116,500),
    
    a payment of a retirement benefit under our Supplemental Retirement Plan in July 2009
to our former Executive Chairman of approximately $20,900,
    
    the mandatory redemption by November 15, 2009 of approximately $12,600 of the
outstanding principal amount of our 5% Variable Interest Senior Convertible Notes, and the
possible redemption of an additional approximately $88,250 principal amount of 5% Notes as
a result of an option by the holders to require us to repurchase some or all of the
remaining principal amount of 5% Notes on November 15, 2009, and
    
    other corporate expenses and taxes, including a tax payment of approximately $75,500 in
connection with the Philip Morris brands transaction.
  -55-




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-56-




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Market Risk
     -57-




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New Accounting Pronouncements
    -58-




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-59-




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Legislation and Regulation
   -60-




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-61-




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-62-




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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 savings associated with restructurings of our tobacco
operations, and
    
    related industry developments (including trends affecting our business, financial
condition and results of operations).
   
    
    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,
    
    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.
   -63-




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   -64-




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PART II
 OTHER INFORMATION
 
 Legal Proceedings
  
 Risk Factors
  Unregistered Sales of Equity Securities and Use of Proceeds
   -65-




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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
 -66-




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SIGNATURE
  VECTOR GROUP LTD.
(Registrant)By:
    /s/ J. Bryant Kirkland IIIJ. Bryant Kirkland IIIVice President, Treasurer and Chief
Financial Officer  -67-