##### 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 June 30, 2008
 
 VECTOR GROUP LTD.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    1-5759
Commission File Number
    
    65-0949535
(I.R.S. Employer Identification No.)
 100 S.E. Second Street  Miami, Florida 33131
305/579-8000
 
 x 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 June 30, 2008 and December 31, 2007
    
    
    2Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2008 and June 30, 2007
    
    
    3Condensed Consolidated Statement of Stockholders Equity for the six months ended
June 30, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2008 and June 30, 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    44Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    63Item 4. Controls and Procedures
    
    
    63PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    64Item 1A. Risk Factors
    
    
    64Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    64Item 4. Submission of Matters to a Vote of Security Holders
    
    
    65Item 6. Exhibits
    
    
    66SIGNATURE
    
    
    67EX-10.1 Supplemental Retirement PlanEx-31.1 Section 302 Certification CEOEx-31.2 Section 302 Certification CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFOEx-99.1 Material Legal Proceedings
  1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
  
 VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETS:Current assets:Cash and cash equivalents
    
    $
    219,798
    
    
    $
    238,117Investment securities available for sale
    
    
    37,508
    
    
    
    45,875Accounts receivable  trade
    
    
    8,607
    
    
    
    3,113Inventories
    
    
    91,102
    
    
    
    86,825Deferred income taxes
    
    
    17,760
    
    
    
    18,336Other current assets
    
    
    4,850
    
    
    
    3,360Total current assets
    
    
    379,625
    
    
    
    395,626Property, plant and equipment, net
    
    
    51,848
    
    
    
    54,432Mortgage receivable
    
    
    21,704
    
    
    
    Long-term investments accounted for at cost
    
    
    73,018
    
    
    
    72,971Long-term investment accounted for under the equity method
    
    
    
    
    
    
    10,495Investments in non-consolidated real estate businesses
    
    
    43,857
    
    
    
    35,731Restricted assets
    
    
    9,025
    
    
    
    8,766Deferred income taxes
    
    
    27,417
    
    
    
    26,637Intangible asset
    
    
    107,511
    
    
    
    107,511Prepaid pension costs
    
    
    44,126
    
    
    
    42,084Other assets
    
    
    29,928
    
    
    
    31,036Total assets
    
    $
    788,059
    
    
    $
    785,289LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt
    
    $
    18,946
    
    
    $
    20,618Accounts payable
    
    
    3,008
    
    
    
    6,980Accrued promotional expenses
    
    
    10,479
    
    
    
    9,210Income taxes payable, net
    
    
    7,505
    
    
    
    2,363Accrued excise and payroll taxes payable, net
    
    
    4,728
    
    
    
    5,327Settlement accruals
    
    
    27,497
    
    
    
    10,041Deferred income taxes
    
    
    96,557
    
    
    
    24,019Accrued interest
    
    
    9,525
    
    
    
    9,475Other current liabilities
    
    
    17,167
    
    
    
    21,304Total current liabilities
    
    
    195,412
    
    
    
    109,337Notes payable, long-term debt and other obligations, less current portion
    
    
    278,246
    
    
    
    277,178Fair value of derivatives embedded within convertible debt
    
    
    94,267
    
    
    
    101,582Non-current employee benefits
    
    
    43,489
    
    
    
    40,933Deferred income taxes
    
    
    63,854
    
    
    
    141,904Other liabilities
    
    
    18,149
    
    
    
    13,503Total liabilities
    
    
    693,417
    
    
    
    684,437Commitments and contingenciesStockholders 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,
65,811,262 and 63,307,020 shares issued and 62,865,310 and
and 60,361,068 shares outstanding
    
    
    6,286
    
    
    
    6,036Additional paid-in capital
    
    
    91,022
    
    
    
    89,494Retained earnings
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    10,191
    
    
    
    18,179Less: 2,945,952 shares of common stock in treasury, at cost
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity
    
    
    94,642
    
    
    
    100,852Total liabilities and stockholders equity
    
    $
    788,059
    
    
    $
    785,289
  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 Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues*
    
    $
    142,960
    
    
    $
    140,351
    
    
    $
    275,165
    
    
    $
    274,243Expenses:Cost of goods sold*
    
    
    86,030
    
    
    
    87,222
    
    
    
    166,037
    
    
    
    171,907Operating, selling, administrative and general expenses
    
    
    22,585
    
    
    
    23,946
    
    
    
    46,742
    
    
    
    47,433Operating income
    
    
    34,345
    
    
    
    29,183
    
    
    
    62,386
    
    
    
    54,903Other income (expenses):Interest and dividend income
    
    
    1,375
    
    
    
    1,561
    
    
    
    3,346
    
    
    
    3,417Interest expense
    
    
    (15,257
    )
    
    
    (9,520
    )
    
    
    (30,510
    )
    
    
    (18,654
    )Change in fair value of derivatives embedded within
convertible debt
    
    
    9,759
    
    
    
    2,089
    
    
    
    7,315
    
    
    
    2,116Provision for loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,158
    )Gain from exchange of LTS notes
    
    
    
    
    
    
    8,121
    
    
    
    
    
    
    
    8,121Equity income from non-consolidated real
estate businesses
    
    
    4,184
    
    
    
    6,927
    
    
    
    17,504
    
    
    
    9,337Income from lawsuit settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000Other, net
    
    
    (4
    )
    
    
    (31
    )
    
    
    (577
    )
    
    
    (36
    )Income before provision for income taxes
    
    
    34,402
    
    
    
    38,330
    
    
    
    59,464
    
    
    
    78,046Income tax expense
    
    
    15,277
    
    
    
    16,949
    
    
    
    26,032
    
    
    
    33,538Net income
    
    $
    19,125
    
    
    $
    21,381
    
    
    $
    33,432
    
    
    $
    44,508Per basic common share:Net income applicable to common shares
    
    $
    0.30
    
    
    $
    0.33
    
    
    $
    0.53
    
    
    $
    0.70Per diluted common share:Net income applicable to common shares
    
    $
    0.25
    
    
    $
    0.32
    
    
    $
    0.51
    
    
    $
    0.68Cash distributions and dividends declared per share
    
    $
    0.40
    
    
    $
    0.38
    
    
    $
    0.80
    
    
    $
    0.76
 
 *
    
    Revenues and Cost of goods sold include excise taxes of $43,201, $44,795, $83,723 and
$89,280, 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
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Stock
    
    
    TotalBalance, December 31, 2007
    
    
    60,361,068
    
    
    $
    6,036
    
    
    $
    89,494
    
    
    $
    
    
    
    $
    18,179
    
    
    $
    (12,857
    )
    
    $
    100,852Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,432
    
    
    
    
    
    
    
    
    
    
    
    33,432Pension-related minimum liability adjustments,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    390
    
    
    
    
    
    
    
    390Forward contract adjustments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    17Unrealized loss on long-term investments accounted for
under the equity method, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    (399
    )Unrealized loss on investment securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,996
    )
    
    
    
    
    
    
    (7,996
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,988
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,444Distributions and dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (18,295
    )
    
    
    (33,432
    )
    
    
    
    
    
    
    
    
    
    
    (51,727
    )Exercise of options, net of 1,375,895 shares delivered to
pay exercise price
    
    
    2,504,242
    
    
    
    250
    
    
    
    (226
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Excess tax benefit of options exercised
    
    
    
    
    
    
    
    
    
    
    18,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,283Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    1,766
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,766Balance, June 30, 2008
    
    
    62,865,310
    
    
    $
    6,286
    
    
    $
    91,022
    
    
    $
    
    
    
    $
    10,191
    
    
    $
    (12,857
    )
    
    $
    94,642
  4




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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
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2008
    
    
    June 30, 2007Net cash provided by operating activities
    
    $
    35,885
    
    
    $
    57,360Cash flows from investing activities:Purchase of investment securities
    
    
    (5,182
    )
    
    
    (6,032
    )Proceeds from sale or liquidation of long-term investments
    
    
    8,334
    
    
    
    50Purchase of long-term investments
    
    
    (51
    )
    
    
    (91
    )Purchase of mortgage receivable
    
    
    (21,704
    )
    
    
    Distributions from non-consolidated real estate businesses
    
    
    16,446
    
    
    
    1,000Investments in non-consolidated real estate businesses
    
    
    (10,000
    )
    
    
    (750
    )Increases in cash surrender value of life insurance policies
    
    
    (521
    )
    
    
    (524
    )Increase in non-current restricted assets
    
    
    (259
    )
    
    
    (313
    )Proceeds from sale of fixed assets
    
    
    373
    
    
    
    Capital expenditures
    
    
    (2,456
    )
    
    
    (2,716
    )Net cash used in investing activities
    
    
    (15,020
    )
    
    
    (9,376
    )Cash flows from financing activities:Proceeds from debt issuance
    
    
    
    
    
    
    1,576Repayments of debt
    
    
    (2,984
    )
    
    
    (38,205
    )Deferred financing charges
    
    
    (137
    )
    
    
    Borrowings under revolver
    
    
    255,118
    
    
    
    275,062Repayments on revolver
    
    
    (256,753
    )
    
    
    (258,419
    )Dividends and distributions on common stock
    
    
    (52,737
    )
    
    
    (50,360
    )Excess tax benefit of options exercised
    
    
    18,283
    
    
    
    Proceeds from exercise of options
    
    
    26
    
    
    
    1,978Net cash used in financing activities
    
    
    (39,184
    )
    
    
    (68,368
    )Net decrease in cash and cash equivalents
    
    
    (18,319
    )
    
    
    (20,384
    )Cash and cash equivalents, beginning of period
    
    
    238,117
    
    
    
    146,769Cash and cash equivalents, end of period
    
    $
    219,798
    
    
    $
    126,385
  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
 (a)
    
    Basis of Presentation:
    (b)
    
    Distributions and dividends on common stock:
  (c)
    
    Earnings Per Share (EPS):
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    19,125
    
    
    $
    21,381
    
    
    $
    33,432
    
    
    $
    44,508Income attributable to
participating securities
    
    
    (871
    )
    
    
    (1,400
    )
    
    
    (1,553
    )
    
    
    (2,916
    )Net income available to
common stockholders
    
    $
    18,254
    
    
    $
    19,981
    
    
    $
    31,879
    
    
    $
    41,592
 
 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 Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    19,125
    
    
    $
    21,381
    
    
    $
    33,432
    
    
    $
    44,508(Income) expenses attributable
to 3.875% convertible
debentures
    
    
    (1,500
    )
    
    
    1,578
    
    
    
    2,527
    
    
    
    3,903Income attributable to
participating securities
    
    
    (803
    )
    
    
    (1,502
    )
    
    
    (1,670
    )
    
    
    (3,172
    )Net income available to
common stockholders
    
    $
    16,822
    
    
    $
    21,457
    
    
    $
    34,289
    
    
    $
    45,239
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted-average shares for
basic EPS
    
    
    60,472,973
    
    
    
    59,474,807
    
    
    
    60,223,014
    
    
    
    59,420,061Plus incremental shares
related to stock options and
non-vested restricted stock.
    
    
    1,234,435
    
    
    
    1,366,028
    
    
    
    1,401,401
    
    
    
    1,433,767Plus incremental shares related
to convertible debt
    
    
    5,641,026
    
    
    
    5,641,026
    
    
    
    5,641,026
    
    
    
    5,641,026Weighted-average shares for
fully diluted EPS
    
    
    67,348,434
    
    
    
    66,481,861
    
    
    
    67,265,441
    
    
    
    66,494,854
  7




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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 Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Number of stock options
    
    
    491,569
    
    
    
    500,717
    
    
    
    491,569
    
    
    
    500,717Weighted-average exercise price
    
    $
    20.21
    
    
    $
    20.31
    
    
    $
    20.21
    
    
    $
    20.31Weighted-average shares of
non-vested restricted stock
    
    
    388,495
    
    
    
    12,000
    
    
    
    112,870
    
    
    
    112,345Weighted-average expense per share
    
    $
    17.94
    
    
    $
    18.87
    
    
    $
    18.47
    
    
    $
    18.26Weighted-average number of shares
issuable upon conversion of debt
    
    
    6,674,463
    
    
    
    6,674,463
    
    
    
    6,674,463
    
    
    
    6,674,463Weighted-average conversion price
    
    $
    16.76
    
    
    $
    16.76
    
    
    $
    16.76
    
    
    $
    16.76
  (d)
    
    Comprehensive Income:
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    19,125
    
    
    $
    21,381
    
    
    $
    33,432
    
    
    $
    44,508Forward contract adjustments,
net of income taxes
    
    
    8
    
    
    
    (8
    )
    
    
    17
    
    
    
    (7
    )Pension related minimum liability
adjustments, net of income taxes
    
    
    195
    
    
    
    298
    
    
    
    390
    
    
    
    597Net unrealized gains on long-term
investments accounted under
the equity method:Change in net unrealized gains, net
of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized gains reclassified
into net income, net of income
taxes
    
    
    
    
    
    
    33
    
    
    
    (399
    )
    
    
    240Change in unrealized gains, net
of income taxes
    
    
    
    
    
    
    33
    
    
    
    (399
    )
    
    
    240Net unrealized gains on investment
securities available for sale:Change in net unrealized gains, net
of income taxes
    
    
    (4,865
    )
    
    
    (2,254
    )
    
    
    (7,996
    )
    
    
    11,369Net unrealized gains reclassified
into net income, net of income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    684Change in unrealized gains, net
of income taxes
    
    
    (4,865
    )
    
    
    (2,254
    )
    
    
    (7,996
    )
    
    
    12,053Total comprehensive income
    
    $
    14,463
    
    
    $
    19,450
    
    
    $
    25,444
    
    
    $
    57,391
 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
  June 30,
    
    
    December 31,2008
    
    
    2007Net unrealized gains on investment securities
available for sale, net of income taxes of
$4,809 and $9,943, respectively
    
    $
    6,370
    
    
    $
    14,367Net unrealized gains on long-term
investments accounted for under
the equity method, net of income taxes of
$0 and $276, respectively
    
    
    
    
    
    
    399Forward contracts adjustment, net of income
taxes of $207 and $219, respectively
    
    
    (300
    )
    
    
    (317
    )Additional pension liability, net of income taxes
of $2,721 and $2,452 respectively
    
    
    4,121
    
    
    
    3,730Accumulated other comprehensive
income
    
    $
    10,191
    
    
    $
    18,179
 (e)
    
    Fair Value of Derivatives Embedded within Convertible Debt:
  (f)
    
    Contingencies:
  9




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
  (g)
    
    New Accounting Pronouncements:
       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
 2.
    
    RESTRUCTURING
   3.
    
    INVESTMENT SECURITIES AVAILABLE FOR SALE
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueMarketable equity securities
    
    $
    26,730
    
    
    $
    11,303
    
    
    $
    (525
    )
    
    $
    37,508
  4.
    
    INVENTORIES
  June 30,
    
    
    December 31,2008
    
    
    2007Leaf tobacco
    
    $
    46,054
    
    
    $
    41,502Other raw materials
    
    
    4,146
    
    
    
    4,847Work-in-process
    
    
    131
    
    
    
    710Finished goods
    
    
    47,853
    
    
    
    45,331Inventories at current cost
    
    
    98,184
    
    
    
    92,390LIFO adjustments
    
    
    (7,082
    )
    
    
    (5,565
    )$
    91,102
    
    
    $
    86,825
  11




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
   5.
    
    LONG-TERM INVESTMENTS
  June 30, 2008
    
    
    December 31, 2007Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueInvestment partnerships
accounted for at cost
    
    $
    73,018
    
    
    $
    83,267
    
    
    $
    72,971
    
    
    $
    89,007Investments accounted for
on the equity method
    
    $
    
    
    
    $
    
    
    
    $
    10,495
    
    
    $
    10,495
     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
    
    
    
    9,253Contributions (distributions)
    
    
    47
    
    
    
    (8,328
    )Unrealized loss on long-term
investments
    
    
    (3,767
    )
    
    
    Realized gain on long-term
investments
    
    
    14
    
    
    
    Receivable classified as
Other currents assets
    
    
    
    
    
    
    (925
    )Balance as of June 30, 2008
    
    $
    83,267
    
    
    $
    
 12




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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
  June 30,
    
    
    December 31,2008
    
    
    2007Vector:11% Senior Secured Notes due 2015
    
    $
    165,000
    
    
    $
    165,0003.875% Variable Interest Senior Convertible Debentures due
2026, net of unamortized discount of $84,138 and $84,299*
    
    
    25,862
    
    
    
    25,7015% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $44,173 and $48,027*
    
    
    67,691
    
    
    
    63,837Liggett:Revolving credit facility
    
    
    13,146
    
    
    
    14,782Term loan under credit facility
    
    
    7,556
    
    
    
    7,822Equipment loans
    
    
    7,737
    
    
    
    9,660V.T. Aviation:Note payable
    
    
    5,895
    
    
    
    6,470VGR Aviation:Note payable
    
    
    4,205
    
    
    
    4,370Other
    
    
    100
    
    
    
    154Total notes payable, long-term debt and other obligations
    
    
    297,192
    
    
    
    297,796Less:Current maturities
    
    
    (18,946
    )
    
    
    (20,618
    )Amount due after one year
    
    $
    278,246
    
    
    $
    277,178
 
 *
    
    The fair value of the derivatives embedded within the 3.875% Variable Interest
Senior Convertible Debentures ($65,029 at June 30, 2008 and and $67,911 at December
31, 2007) and the 5% Variable Interest Senior Convertible Notes ($29,238 at June 30,
2008 and $33,671 at December 31, 2007) is separately classified as a derivative
liability in the condensed consolidated balance sheets. 11% Senior Secured Notes due 2015  Vector
  13




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Variable Interest Senior Convertible Debt  Vector:
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    20073.875% convertible debentures
    
    $
    90
    
    
    $
    73
    
    
    $
    180
    
    
    $
    (168
    )5% convertible notes
    
    
    1,293
    
    
    
    940
    
    
    
    2,481
    
    
    
    1,648Interest expense associated with
embedded derivatives
    
    $
    1,383
    
    
    $
    1,013
    
    
    $
    2,661
    
    
    $
    1,480
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    20073.875% convertible debentures
    
    $
    6,132
    
    
    $
    785
    
    
    $
    2,882
    
    
    $
    (106
    )5% convertible notes
    
    
    3,627
    
    
    
    1,304
    
    
    
    4,433
    
    
    
    2,222Gain on changes in fair value of
derivatives embedded within
convertible debt
    
    $
    9,759
    
    
    $
    2,089
    
    
    $
    7,315
    
    
    $
    2,116
  3.875%
    
    
    5%Convertible
    
    
    ConvertibleDebentures
    
    
    Notes
    
    
    TotalBalance at December 31, 2007
    
    $
    67,911
    
    
    $
    33,671
    
    
    $
    101,582Loss (gain) from changes in fair
value of embedded derivatives
    
    
    3,250
    
    
    
    (806
    )
    
    
    2,444Balance at March 31, 2008
    
    
    71,161
    
    
    
    32,865
    
    
    
    104,026Gain from changes in fair
value of embedded derivatives
    
    
    (6,132
    )
    
    
    (3,627
    )
    
    
    (9,759
    )Balance at June 30, 2008
    
    $
    65,029
    
    
    $
    29,238
    
    
    $
    94,267
 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
 Beneficial Conversion Feature on Variable Interest Senior Convertible Debt
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Amortization of beneficial
conversion feature:3.875% convertible debentures
    
    $
    (11
    )
    
    $
    (12
    )
    
    $
    (19
    )
    
    $
    (180
    )5% convertible notes
    
    
    717
    
    
    
    517
    
    
    
    1,373
    
    
    
    893Interest expense associated with
beneficial conversion feature
    
    $
    706
    
    
    $
    505
    
    
    $
    1,354
    
    
    $
    713
 Unamortized Debt Discount:
  3.875%
    
    
    5%Convertible
    
    
    ConvertibleDebentures
    
    

Notes
    
    

TotalBalance at December 31, 2007
    
    $
    84,299
    
    
    $
    48,027
    
    
    $
    132,326Amortization of embedded derivatives
    
    
    (180
    )
    
    
    (2,481
    )
    
    
    (2,661
    )Amortization of beneficial conversion feature
    
    
    19
    
    
    
    (1,373
    )
    
    
    (1,354
    )Balance at June 30, 2008
    
    $
    84,138
    
    
    $
    44,173
    
    
    $
    128,311
 Revolving Credit Facility  Liggett
  7.
    
    EMPLOYEE BENEFIT PLANSDefined Benefit and Postretirement Plans:Net periodic benefit cost for the Companys pension and other postretirement benefit plans for
the three and six months ended June 30, 2008 and 2007 consists of the following:
 Pension BenefitsThree Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2007
    
    
    June 30, 2008
    
    
    June 30, 2007Service cost  benefits earned
during the period
    
    $
    1,035
    
    
    $
    1,062
    
    
    $
    2,070
    
    
    $
    2,124Interest cost on projected benefit
obligation
    
    
    2,381
    
    
    
    2,281
    
    
    
    4,762
    
    
    
    4,562Expected return on plan assets
    
    
    (3,036
    )
    
    
    (3,183
    )
    
    
    (6,072
    )
    
    
    (6,366
    )Amortization of prior service cost
    
    
    350
    
    
    
    351
    
    
    
    700
    
    
    
    702Amortization of net loss
    
    
    25
    
    
    
    176
    
    
    
    50
    
    
    
    352Net expense
    
    $
    755
    
    
    $
    687
    
    
    $
    1,510
    
    
    $
    1,374
 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
 OtherPostretirement BenefitsThree Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2007
    
    
    June 30, 2008
    
    
    June 30, 2007Service cost
 benefits earned
during the period
    
    $
    4
    
    
    $
    4
    
    
    $
    8
    
    
    $
    8Interest cost on projected benefit
obligation
    
    
    148
    
    
    
    148
    
    
    
    296
    
    
    
    296Amortization of net loss
    
    
    (45
    )
    
    
    (26
    )
    
    
    (90
    )
    
    
    (52
    )Net expense
    
    $
    107
    
    
    $
    126
    
    
    $
    214
    
    
    $
    252
 The Company did not make contributions to its pension benefits plans for the three and six
months ended June 30, 2008 and does not anticipate making any contributions to such plans in
2008. The Company anticipates paying approximately $750 in other postretirement benefits in
2008.8.
    
    CONTINGENCIESTobacco-Related Litigation:OverviewSince 1954, Liggett and other United States cigarette manufacturers
have been named as defendants in numerous direct, third-party and
purported class actions predicated on the theory that cigarette
manufacturers should be liable for damages alleged to have been caused
by cigarette smoking or by exposure to secondary smoke from
cigarettes. New cases continue to be commenced against Liggett and
other cigarette manufacturers. The cases generally fall into the
following categories: (i) smoking and health cases alleging personal
injury brought on behalf of individual plaintiffs (Individual
Actions); (ii) smoking and health cases primarily alleging personal
injury or seeking court-supervised programs for ongoing medical
monitoring and purporting to be brought on behalf of a class of
individual plaintiffs (Class Actions); (iii) health care cost
recovery actions brought by various foreign and domestic governmental
entities (Governmental Actions); and (iv) health care cost recovery
actions brought by third-party payors including insurance companies,
union health and welfare trust funds, asbestos manufacturers and
others (Third-Party Payor Actions). As new cases are commenced, the
costs associated with defending these cases and the risks relating to
the inherent unpredictability of litigation continue to increase. The
future financial impact of the risks and expenses of litigation and
the effects of the tobacco litigation settlements discussed below are
not quantifiable at this time. Liggett incurred legal expenses and
other litigation related costs totaling approximately $1,706 and
$3,206, for the three months ended June 30, 2008 and 2007,
respectively and $3,069 and $4,237 for the six months ended June 30,
2008 and 2007, respectively.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Individual ActionsAs of June 30, 2008, there were 35 individual cases pending against Liggett and/or the
Company, where one or more individual plaintiffs allege injury resulting from cigarette
smoking, addiction to cigarette smoking or exposure to secondary smoke and seek
compensatory and, in some cases, punitive damages. In addition, there were approximately
2,150 Engleprogeny cases (defined below) pending, in state and federal courts in Florida,
and approximately 100 individual cases pending in West Virginia state court as part of a
consolidated action. The following table lists the number of individual cases by state
that are pending against Liggett (excluding Engleprogeny cases and the cases consolidated
in West Virginia) or its affiliates as of June 30, 2008:
 NumberState
    

of
CasesNew York
    
    
    11Florida
    
    
    9Louisiana
    
    
    5Maryland
    
    
    2Mississippi
    
    
    2West Virginia
    
    
    2District of Columbia
    
    
    1Missouri
    
    
    1Ohio
    
    
    1Pennsylvania
    
    
    1
 In April 2004, in Davis v. Liggett Group Inc.,a Florida state court jury awarded compensatory
damages of $540 against Liggett. In addition, plaintiffs counsel was awarded legal fees of
$752. Liggett appealed both the verdict and the legal fee award. In October 2007, the
compensatory award was affirmed by the Fourth District Court of Appeal, but the court certified
certain issues to the Florida Supreme Court. In April 2008, the Florida Supreme Court accepted
jurisdiction of the certified issues for appeal. The parties have briefed the issues. In March
2008, the Fourth District Court of Appeal reversed and remanded the legal fee award for further
proceedings in the trial court. No amounts have been expensed for this matter. There are three
other individual actions where Liggett is the only tobacco company defendant, although all three
cases are dormant.The plaintiffs allegations of liability in those cases in which individuals seek recovery for
injuries allegedly caused by cigarette smoking are based on various theories of recovery,
including negligence, gross negligence, breach of special duty, strict liability, fraud,
concealment, misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law
public nuisance, property damage, invasion of privacy, mental anguish, emotional distress,
disability, shock, indemnity and violations of deceptive trade practice laws, the federal
Racketeer Influenced and Corrupt Organizations Act (RICO), state RICO statutes and antitrust
statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek
other forms of relief including treble/multiple damages, medical monitoring, disgorgement of
profits and punitive damages. Although alleged damages often are not determinable from a
complaint, and the law governing the pleading and calculation of damages varies from state to
state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically
pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and
even billions of dollars.Defenses raised by defendants in individual cases include lack of proximate cause, assumption of
the risk, comparative fault and/or contributory negligence, lack of design defect, statute of
limitations, equitable defenses such as unclean hands and lack of benefit, failure to state a
claim and federal preemption.Jury awards representing material amounts of damages have been returned against other cigarette
manufacturers in recent years. The awards in these individual actions are for both compensatory
and punitive damages. Over the last several years, after conclusion of all appeals, damage
awards have been paid to several individual plaintiffs, including an award of $5,500 in
compensatory damages, $50,000 in punitive damages and $27,000 in interest in a case against
another cigarette manufacturer. There are several significant jury awards against other
cigarette manufacturers which are currently on appeal.Engle Progeny Cases. In 2000, a jury in Engle v. R.J. Reynolds Tobacco Co.rendered a
$145,000,000 punitive damages verdict in favor of a Florida Class against certain cigarette
manufacturers, including Liggett. Pursuant to the Florida Supreme Courts July 2006 ruling in
Engle, which decertified the class on a prospective basis, and affirmed the appellate courts
reversal of the punitive damages award, former class members had one year from January 11, 2007
in which to file individual lawsuits. In addition, some individuals who filed suit prior to
January 11, 2007, and who claim they meet the conditions in Engle, are attempting to avail
themselves of the Engleruling. Lawsuits by individuals requesting the benefit of the Engle
ruling, whether filed before or after the January 11, 2007 mandate, are referred to as the
Engleprogeny cases. Liggett and/or the Company have been named in approximately 2,150 Engle
progeny cases in both state and federal courts in Florida. Other cigarette manufacturers have
also been named as defendants in these cases. These cases include approximately 9,570
plaintiffs. Although the total number of Engleplaintiffs will not increase, the number of cases
will likely increase as the court may require multi-plaintiff cases to be severed into
individual cases. For further information on the Englecase, see Class Actions Engle
Case, below.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Class ActionsAs of June 30, 2008, there were 10 actions pending for which either a class has been certified
or plaintiffs are seeking class certification, where Liggett is a named defendant. Other
cigarette manufacturers are also named. Many of these actions purport to constitute statewide
class actions and were filed after May 1996 when the Fifth Circuit Court of Appeals, in Castano
v. American Tobacco Co., Inc., reversed a federal district courts certification of a purported
nationwide class action on behalf of persons who were allegedly addicted to tobacco products.Engle Case. In May 1994, Englewas filed against Liggett and others in Miami-Dade County,
Florida. The class consisted of all Florida residents who, by November 21, 1996, have
suffered, presently suffer or have died from diseases and medical conditions caused by their
addiction to cigarette smoking. In July 1999, after the conclusion of Phase I of the trial,
the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues
determined by the trial court to be common to the causes of action of the plaintiff class.
The jury made several findings adverse to the defendants including that defendants conduct
rose to a level that would permit a potential award or entitlement to punitive damages. Phase
II of the trial was a causation and damages trial for three of the class plaintiffs and a
punitive damages trial on a class-wide basis, before the same jury that returned the verdict in
Phase I. In April 2000, the jury awarded compensatory damages of $12,704 to the three class
plaintiffs, to be reduced in proportion to the respective plaintiffs fault. In July 2000, the
jury awarded approximately $145,000,000 in punitive damages against all defendants, including
$790,000 against Liggett.In May 2003, Floridas Third District Court of Appeal reversed the trial courts final judgment
and remanded the case with instructions to decertify the class. The judgment in favor of one of
the three class plaintiffs, in the amount of $5,831, was overturned as time barred and the court
found that Liggett was not liable to the other two class plaintiffs.In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages
award and held that the class should be decertified prospectively, but preserved several of the
trial courts Phase I findings (including that: (i) smoking causes lung cancer, among other
diseases; (ii) nicotine in cigarettes is addictive; (iii) defendants placed cigarettes on the
market that were defective and unreasonably dangerous; (iv) the defendants concealed material
information; (v) all defendants sold or supplied cigarettes that were defective; and (vi) all
defendants were negligent) and allowed former class members to proceed to trial on individual
liability issues (using the above findings) and compensatory and punitive damage issues,
provided they commence their individual lawsuits within one year from January 11, 2007, the date
of the courts mandate. In December 2006, the Florida Supreme Court added the finding that
defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to
the representations made by defendants. As a result of the decision, approximately 9,570 former
Engleclass members have commenced suit against Liggett and/or the Company as well as other
cigarette manufacturers.In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco
Company,awarded $37,500 in compensatory damages in a case involving Liggett and two other
cigarette manufacturers. In March 2003, the court reduced the amount of the compensatory
damages to $24,860. The jury found Liggett 50% responsible for the damages incurred by the
plaintiff. The Lukacscase was the first case to be tried as an individual Engleclass member
suit following entry of final judgment by the Engletrial court. After the issuance of the
Florida Supreme Courts opinion discussed above, the plaintiff filed a motion requesting that
the trial court enter partial final judgment, tax costs and attorneys fees and schedule trial
on the punitive damages claims. Defendants opposed the relief sought by plaintiff on the
grounds that the reversal by the Florida Supreme Court of the EnglePhase I finding on fraud
mandates the reversal of the jury verdict and precludes the entry of final judgment in
plaintiffs favor and, in January 2008, filed a submission asking the court to set aside the
verdict and order a new trial. Oral argument was held in March 2007. A further hearing on the
motion occurred on July 24, 2008. If the court enters judgment in plaintiffs favor, plaintiff
contends that interest on the judgment accrues from the date of the verdict. In the event the
court enters judgment in plaintiffs favor, Liggett intends to appeal, and may be required to
post a bond. In addition, plaintiff filed a motion seeking an award of attorneys fees from
Liggett based on plaintiffs prior proposal for settlement.Other Class Actions.Classes remain certified against Liggett in West Virginia (Blankenship),
Kansas (Smith) and New Mexico (Romero). Blankenshipis dormant. Smith v. Philip Morrisand
Romero v. Philip Morrisare actions in which plaintiffs allege that cigarette manufacturers
conspired to fix cigarette prices in violation of antitrust laws. Class certification was
granted in Smithin November 2001. Discovery is ongoing. Class certification was granted in
Romeroin April 2003 and was
affirmed by the New Mexico Supreme Court in February 2005. In June 2006, the trial court
granted defendants motions for summary judgment. Plaintiffs appealed to the New Mexico Court
of Appeals. Briefing was completed in August 2007 and the parties are awaiting a decision.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Class action suits have been filed in a number of states against cigarette manufacturers,
alleging, among other things, that the use of the terms light and ultra light constitutes
unfair and deceptive trade practices, among other things. One such suit, Schwab v. Philip
Morris,pending in federal court in New York since 2004, sought to create a nationwide class of
light cigarette smokers. The action asserted claims under RICO which could result in treble
damages. The proposed class sought as much as $200,000,000 in damages. In September 2006, the
court granted plaintiffs motion for class certification. In April 2008, the United States Court
of Appeals for the Second Circuit granted the defendants motions to decertify the class.
Liggett is a defendant in the Schwabcase.In June 1998, in Cleary v. Philip Morris, Inc., a putative class action was brought in Illinois
state court on behalf of persons who were allegedly injured by (i) the defendants purported
conspiracy pursuant to which defendants allegedly concealed material facts regarding the
addictive nature of nicotine; (ii) the defendants alleged acts of targeting their advertising
and marketing to minors; and (iii) the defendants claimed breach of the publics right to
defendants compliance with laws prohibiting the distribution of cigarettes to minors. The
plaintiffs request that the defendants be required to disgorge all profits unjustly received
through their sale of cigarettes to plaintiffs, which in no event will be greater than $75 each,
inclusive of punitive damages, interest and costs. In July 2006, the plaintiffs filed a motion
for class certification. A class certification hearing occurred in September 2007 and the
parties are awaiting a decision. Merits discovery is stayed pending a ruling by the court.
Liggett is a defendant in the Clearycase.In April 2001, in Brown v. American Tobacco Co., Inc.,a California state court granted in part
plaintiffs motion for class certification and certified a class comprised of adult residents of
California who smoked at least one of defendants cigarettes during the applicable time period
and who were exposed to defendants marketing and advertising activities in California. In
March 2005, the court granted defendants motion to decertify the class based on a recent change
in California law. In October 2006, the plaintiffs filed a petition for review with the
California Supreme Court, which was granted in November 2006. Oral argument has not yet been
scheduled. Liggett is a defendant in the Browncase.Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases), a
West Virginia State court consolidated approximately 750 individual smoker actions that were
pending prior to 2001 for trial of certain common issues. In January 2002, the court severed
Liggett from the trial of the consolidated action. The consolidation was affirmed on appeal by
the West Virginia Supreme Court. In February 2008, the United States Supreme Court denied the
defendants petition for writ of certiorari asking the Court to review the trial plan. It is
estimated that Liggett could be a defendant in approximately 100 of the cases. In February
2008, the court granted defendants motion to stay all proceedings pending United States Supreme
Court review in Altria Group Inc. v. Good.Class certification motions are pending in a number of other cases and a number of orders
denying class certification are on appeal. In addition to the cases described above, numerous
class actions remain certified against other cigarette manufacturers, including Scott v.
American Tobacco Co., Inc.In this case, a Louisiana jury returned a $591,000 verdict
(subsequently reduced by the court to $263,500) against other cigarette manufacturers to fund
medical monitoring or smoking cessation programs for members of the class. The verdict is on
appeal.Governmental ActionsAs of June 30, 2008, there were two Governmental Actions pending against Liggett, only one of
which is active. The claims asserted in health care cost recovery actions vary. In these cases,
the governmental entities typically assert equitable claims that the tobacco industry was
unjustly enriched by their payment of health care costs allegedly attributable to smoking and
seek reimbursement of those costs. Other claims made by some but not all plaintiffs include the
equitable claim of indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, breach of special duty, fraud, negligent misrepresentation,
conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud,
antitrust, deceptive trade practices and false advertising, and claims under RICO.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 In December 1998, in City of St. Louis v. American Tobacco Company Inc., a case pending in
Missouri state court, the City of St. Louis and approximately 50 hospitals brought suit against
Liggett and other cigarette manufacturers seeking recovery of costs expended by the hospitals on
behalf of patients who suffer, or have suffered, from illnesses allegedly resulting from the use
of cigarettes. In June 2005, the court granted defendants motion for summary judgment as to
claims for damages which accrued prior to November 16, 1993. The claims for damages which
accrued after November 16, 1993 are pending. Discovery is ongoing. A hearing has been scheduled
for September 3, 2008 on motions for summary judgment filed by the parties. Trial is scheduled
to commence in January 2010.DOJ Case.In September 1999, the United States government commenced litigation against Liggett
and other cigarette manufacturers in the United States District Court for the District of
Columbia. The action sought to recover an unspecified amount of health care costs paid for and
furnished, and to be paid for and furnished, by the federal government for lung cancer, heart
disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and
tortious conduct of defendants, to restrain defendants and co-conspirators from engaging in
alleged fraud and other allegedly unlawful conduct in the future, and to compel defendants to
disgorge the proceeds of their unlawful conduct. The action asserted claims under three federal
statutes, the Medical Care Recovery Act (MCRA), the Medicare Secondary Payer provisions of the
Social Security Act (MSP) and RICO. In September 2000, the court dismissed the governments
claims based on MCRA and MSP.In August 2006, the trial court entered a Final Judgment and Remedial Order against each of the
cigarette manufacturing defendants, except Liggett. The Final Judgment, among other things,
ordered that the non-Liggett defendants are enjoined from: (i) committing any act of
racketeering concerning the manufacturing, marketing, promotion, health consequences or sale of
cigarettes in the United States; (ii) making any material false, misleading, or deceptive
statement or representation concerning cigarettes that persuades people to purchase cigarettes;
and (iii) utilizing lights, low tar, ultra lights, mild, or natural descriptors, or
conveying any other express or implied health messages in connection with the marketing or sale
of cigarettes, domestically and internationally.No monetary damages were awarded other than the governments costs. The defendants appealed the
Final Judgment in March 2007. In its appellate brief, the government acknowledged that it was
not appealing the district courts decision to award no remedy against Liggett. 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 imposes
regulations which adversely affect the industry, Liggetts sales volume, operating income and
cash flows could be materially adversely affected.Third-Party Payor ActionsAs of June 30, 2008, there were two Third-Party Payor Actions pending against Liggett. Other
cigarette manufacturers are also named. The Third-Party Payor Actions typically have been
commenced by insurance companies, union health and welfare trust funds, asbestos manufacturers
and others. In Third-Party Payor Actions, plaintiffs seek damages for: funding of corrective
public education campaigns relating to issues of smoking and health; funding for clinical
smoking cessation programs; disgorgement of profits from sales of cigarettes; restitution;
treble damages; and attorneys fees. Although no specific amounts are provided, it is
understood that requested damages against cigarette manufacturers in these cases might be in the
billions of dollars.Several federal circuit courts of appeals and state appellate courts have ruled that Third-Party
Payors did not have standing to bring lawsuits against cigarette manufacturers, relying
primarily on grounds that plaintiffs claims were too remote. The United States Supreme Court
has refused to consider plaintiffs appeals from the cases decided by five federal circuit
courts of appeals.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 In June 2005, the Jerusalem District Court in Israel added Liggett as a defendant in an action
commenced in 1998 by the largest private insurer in that country, General Health Services,
against the major United States cigarette manufacturers. The plaintiff seeks to recover the past
and future value of the total expenditures for health care services provided to residents of
Israel resulting from tobacco related diseases, court ordered interest for past expenditures
from the date of filing the statement of claim, increased and/or punitive and/or exemplary
damages and costs. The court ruled that, although Liggett had not sold product in Israel since
at least 1978, it might still have liability for cigarettes sold prior to that time. Motions
filed by the 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.Upcoming TrialsThere are nine individual actions in Florida, all Engleprogeny cases, that have been set for
trial in 2008 or early 2009 where Liggett and/or the Company are named defendants. Trial dates
are subject to change.MSA and Other State Settlement AgreementsIn March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related
litigation with 45 states and territories. The settlements released Liggett from all
smoking-related claims within those states and territories, including claims for health care
cost reimbursement and claims concerning sales of cigarettes to minors.In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the Original
Participating Manufacturers or OPMs) and Liggett (together with any other tobacco product
manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs)
(the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers)
entered into the Master Settlement Agreement (the MSA) with 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern
Mariana Islands (collectively, the Settling States) to settle the asserted and unasserted
health care cost recovery and certain other claims of those Settling States. The MSA received
final judicial approval in each Settling State.In the Settling States, the MSA released Liggett from:
 
    
    all claims of the Settling States and their respective political subdivisions and other
recipients of state health care funds, relating to: (i) past conduct arising out of the
use, sale, distribution, manufacture, development, advertising and marketing of tobacco
products; (ii) the health effects of, the exposure to, or research, statements or warnings
about, tobacco products; and
    
    all monetary claims of the Settling States and their respective subdivisions and other
recipients of state health care funds relating to future conduct arising out of the use of,
or exposure to, tobacco products that have been manufactured in the ordinary course of
business.
 The MSA restricts tobacco product advertising and marketing within the Settling States and
otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA
prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products;
bans the use of cartoon characters in all tobacco advertising and promotion; limits each
Participating Manufacturer to one tobacco brand name sponsorship during any 12-month period;
bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco
product placement in various media; bans gift offers based on the purchase of tobacco products
without sufficient proof that the intended recipient is an adult; prohibits Participating
Manufacturers from licensing third parties to advertise tobacco brand names in any manner
prohibited under the MSA; and prohibits Participating Manufacturers from using as a tobacco
product brand name any nationally recognized non-tobacco brand or trade name or the names of
sports teams, entertainment groups or individual celebrities.The MSA also requires Participating Manufacturers to affirm corporate principles to comply with
the MSA and to reduce underage usage 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 amount of payments
owed pursuant to the MSA.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 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 2.2%, 2.4% and 2.5% of the total
cigarettes shipped in the United States in 2005, 2006 and 2007, respectively. 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, would
pay on each excess unit an amount equal (on a per-unit basis) to that due by the OPMs for that
year. In April 2005, 2006, and 2007, Liggett and Vector Tobacco paid $20,982, $10,637 and
$38,743 for their 2004, 2005 and 2006 MSA obligations, respectively. Liggett and Vector Tobacco
paid $35,995 for their 2007 MSA obligations, having prepaid $34,500 in 2007.Under the payment provisions of the MSA, the Participating Manufacturers are required to pay a
base annual amount of $9,000,000 in 2008 and each year thereafter (subject to applicable
adjustments, offsets and reductions). These annual payments are allocated based on unit volume
of domestic cigarette shipments. The payment obligations under the MSA are the several, and not
joint, obligations of each Participating Manufacturer and are not the responsibility of any
parent or affiliate of a Participating Manufacturer.Certain MSA DisputesIn 2005, the independent auditor under the MSA calculated that Liggett owed $28,668 for its
2004 sales. In April 2005, Liggett paid $11,678 and disputed the balance, as permitted by the
MSA. Liggett subsequently paid $9,304 of the disputed amount, although Liggett continues to
dispute that this amount is owed. This $9,304 relates to an adjustment to its 2003 payment
obligation claimed by Liggett for the market share loss to non-participating manufacturers,
which is known as the NPM Adjustment. At June 30, 2008, included in Other assets on the
Companys consolidated balance sheet, was a noncurrent receivable of $6,513 relating to such
amount. The remaining balance in dispute of $7,686 is comprised of $5,318 claimed for a 2004 NPM
Adjustment and $2,368 relating to the independent auditors retroactive change from gross to
net units in calculating MSA payments, which Liggett contends is improper, as discussed below.
From their April 2006 payment, Liggett and Vector Tobacco withheld approximately $1,600 claimed
for the 2005 NPM Adjustment and $2,612 relating to the retroactive change from gross to net
units. Liggett and Vector Tobacco withheld approximately $4,200 from their April 2007 payments
related to the 2006 NPM Adjustment and approximately $3,000 relating to the retroactive change
from gross to net units. From its April 2008 payment, Liggett withheld approximately $4,000
for the 2007 NPM Adjustment and approximately $3,300 relating to the retroactive change from
gross to net units. Vector Tobacco paid approximately $200 into the disputed payments
account for the 2007 NPM Adjustment.The following amounts have not been expensed in the accompanying condensed consolidated
financial statements as they relate to Liggetts and Vector Tobaccos claim for an NPM
adjustment: $6,513 for 2003, $3,789 for 2004 and $800 for 2005.NPM Adjustment.In March 2006, an economic consulting firm selected pursuant to the MSA
rendered its final and non-appealable decision that the MSA was a significant factor
contributing to the loss of market share of Participating Manufacturers for 2003. The economic
consulting firm rendered the same decision with respect to 2004 and 2005. As a result, the
manufacturers are entitled to potential NPM Adjustments to their 2003, 2004 and 2005 MSA
payments. A Settling State that has diligently enforced its qualifying escrow statute in the
year in question may be able to avoid application of the NPM Adjustment to the payments made by
the manufacturers for the benefit of that state or territory.Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation has
been commenced 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. To date, all 48
courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute is arbitrable
and 39 of those decisions are final. There can be no assurance that Liggett or Vector Tobacco
will receive any adjustment as a result of these proceedings.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Gross v. Net Calculations.In October 2004, the independent auditor notified Liggett and all
other Participating Manufacturers that their payment obligations under the MSA, dating from the
agreements execution in late 1998, had been recalculated using net unit amounts, rather than
gross unit amounts (which had been used since 1999). The change in the method of
calculation could, among other things, require additional MSA payments by Liggett of
approximately $18,300 for 2001 through 2007, require an additional payment of approximately
$3,300 for 2008 and require additional amounts in future periods because the proposed change
from gross to net units would serve to lower Liggetts market share exemption under the MSA.Liggett has objected to this retroactive change and has disputed the change in methodology.
Liggett contends that the retroactive change from using gross unit amounts to net unit
amounts is impermissible for several reasons, including:
 
    
    use of net unit amounts is not required by the MSA (as reflected by, among
other things, the use of gross unit amounts through 2005);
    
    such a change is not authorized without the consent of affected parties to the
MSA;
    
    the MSA provides for four-year time limitation periods for revisiting
calculations and determinations, which precludes recalculating Liggetts 1997
Market Share (and thus, Liggetts market share exemption); and
    
    Liggett and others have relied upon the calculations based on gross unit
amounts since 1998.
 No amounts have been expensed or accrued in the accompanying condensed consolidated financial
statements for any potential liability relating to the gross versus net dispute.QUEST 3. Vector Tobacco does not make MSA payments on sales of its QUEST 3 product as Vector
Tobacco believes that QUEST 3 does not fall within the definition of a cigarette under the MSA.
There can be no assurance that Vector Tobaccos assessment is correct and that additional
payments under the MSA for QUEST 3 will not be owed.Litigation Challenging the MSA.In litigation pending in federal court in New York, certain
importers of cigarettes allege that the MSA and certain related New York statutes violate
federal antitrust and constitutional law. The United States Court of Appeals for the Second
Circuit has held that plaintiffs have stated a claim for relief on antitrust grounds. In
September 2004, the court denied plaintiffs motion to preliminarily enjoin the MSA and certain
related New York statutes, but the court issued a preliminary injunction against an amendment
repealing the allocable share provision of the New York escrow statute. The parties motions
for summary judgment are pending. Additionally, in another proceeding pending in New York
federal court, 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 plaintiffs stated a claim for relief and that
the New York federal court had jurisdiction over the other defendant states. In October 2006,
the United States Supreme Court denied the petition of the attorneys general for writ of
certiorari. Similar challenges to the MSA and MSA-related state statutes are pending in
Kentucky, Arkansas, Kansas, Louisiana, Tennessee and Oklahoma. Liggett and the other cigarette
manufacturers are not defendants in these cases.Other State Settlements.The MSA replaces Liggetts prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. Each of these four
states, prior to the effective date of the MSA, negotiated and executed settlement
agreements with each of the other major tobacco companies, separate from those settlements
reached previously with Liggett. Liggetts agreements with these states remain in full
force and effect, and Liggett made various payments to these states during 1996, 1997 and
1998 under the agreements. These states settlement agreements with Liggett contained most
favored nation provisions which could reduce Liggetts payment obligations based on
subsequent settlements or resolutions by those states with certain other tobacco companies.
Beginning in 1999, Liggett determined that, based on each of these four states
settlements with United States Tobacco Company, Liggetts payment obligations to those
states had been eliminated. With respect to all non-economic obligations under the previous
settlements, Liggett believes it is entitled to the most favorable provisions as between
the MSA and each states respective settlement with the other major tobacco companies.
Therefore, Liggetts non-economic obligations to all states and territories are now defined
by the MSA. In 2003, in order to resolve any potential issues with Minnesota as to
Liggetts ongoing economic settlement obligations, Liggett negotiated a $100 a year payment
to Minnesota, to be paid any year cigarettes manufactured by Liggett are sold in that
state.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 In 2004, the Attorneys General for Florida, Mississippi and Texas advised Liggett that they
believed that Liggett had failed to make all required payments under the respective settlement
agreements with these states for the period 1998 through 2003 and that additional payments may
be due for 2004 and subsequent years. In 2004, Florida and Mississippi proposed settlements to
Liggett in the total amount of $20,000 for the period 1998 though 2003. Further discussions
among the parties have not resulted in any resolution of the disputes. Liggett believes these
allegations are without merit, based, among other things, on the language of the most favored
nation provisions of the settlement agreements.Except for $2,500 accrued at June 30, 2008, in connection with the foregoing matters, no
other amounts have been accrued in the accompanying condensed consolidated financial statements
for any additional amounts that may be payable by Liggett under the settlement agreements with
Florida, Mississippi and Texas. There can be no assurance that Liggett will resolve these
matters or that Liggett will not be required to make additional material payments, which
payments could adversely affect the Companys consolidated financial position, results of
operations or cash flows.Management is not able to predict the outcome of the litigation pending or threatened against
Liggett. Litigation is subject to many uncertainties. For example, in July 2006, the Florida
Supreme Court affirmed the intermediate appellate courts decision in the Englecase vacating
the punitive damages award and held that the class should be decertified prospectively, but,
preserved several of the trial courts Phase I findings. In June 2002, the jury in the Lukacs
case, an individual case brought under the third phase of the Englecase, awarded $37,500
(subsequently reduced by the court to $24,860) of compensatory damages against Liggett and two
other defendants and found Liggett 50% responsible for the damages. If a final judgment is
entered, Liggett may be required to bond the amount of the judgment to perfect its appeal. In
April 2004, a jury in an individual action in a Florida state court awarded compensatory damages
of $540 against Liggett and legal fees of $752. The legal fee award was reversed on appeal and
remanded to the trial court for further proceedings. It is possible that additional cases could
be decided unfavorably against Liggett. As a result of the Engledecision, approximately 9,570
former Engleclass members commenced suit against Liggett and/or the Company and other cigarette
manufacturers. Liggett may enter into discussions in an attempt to settle particular cases if it
believes it is appropriate to do so.Management cannot predict the cash requirements related to any future defense costs, settlements
or judgments, including cash required to bond any appeals, and there is a risk that those
requirements will not be able to be met. An unfavorable outcome of a pending smoking and health
case could encourage the commencement of additional similar litigation, or could lead to
multiple adverse decisions in the Engleprogeny cases. Management is unable to make a
reasonable estimate with respect to the amount or range of loss that could result from an
unfavorable outcome of the cases pending against Liggett or the costs of defending such cases
and as a result has not provided any amounts in its condensed consolidated financial statements
for unfavorable outcomes. The complaints filed in these cases rarely detail alleged damages.
Typically, the claims set forth in an individuals complaint against the tobacco industry seek
money damages in an amount to be determined by a jury, plus punitive damages and costs.The tobacco industry is subject to a wide range of laws and regulations regarding the marketing,
sale, taxation and use of tobacco products imposed by local, state and federal governments.
There have been a number of restrictive regulatory actions, adverse legislative and political
decisions and other unfavorable developments concerning cigarette smoking and the tobacco
industry. These developments may negatively affect the perception of potential triers of fact
with respect to the tobacco industry, possibly to the detriment of certain pending litigation,
and may prompt the commencement of additional similar litigation or legislation.It is possible that the Companys consolidated financial position, results of operations or cash
flows could be materially adversely affected by an unfavorable outcome in any of the
smoking-related litigation.Liggetts 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 was
recently extended through 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 June 30, 2008.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.9.
    
    INCOME TAXESVectors income tax rates for the three and six months ended June 30, 2008 and 2007 do not bear
a customary relationship to statutory income tax rates as a result of the impact of
nondeductible expenses, state income taxes and interest and penalties accrued on unrecognized
tax benefits offset by the impact of the domestic production activities deduction.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 in accordance with FIN 18, Accounting for Income Taxes in Interim Periodsan
interpretation of APB Opinion No. 28. In 2008, the Company did not include the gain on the
income of the Companys investment in the St. Regis Hotel in 2008 in the computation of the
effective annual income tax rate for 2007 from estimated pre-tax results from ordinary
operations. In 2007, the Company did not include the benefit from the settlement of a state
income tax assessment, the income from the lawsuit settlement with the United States government
or the gain from the exchange of the LTS notes in the computation of the effective annual income
tax rate for 2007 from estimated pre-tax results from ordinary operations. For the three months
ended June 30, 2007, the gain from the exchange of the LTS notes reduced income tax expense by
approximately $325 due to differences in the Companys marginal tax rate of approximately 41%
and its anticipated effective annual income tax rate from ordinary operations of approximately
45%.For the six months ended June 30, 2008, the Companys income tax provision was reduced because
of the impact of the gain on the income from the Companys investment in the St. Regis Hotel,
which reduced income tax expense by $460 due to differences in the Companys marginal tax rate
of approximately 41% and its anticipated effective annual income tax rate from ordinary
operations of approximately 45%. For the six months ended June 30, 2007, the Company did not
include either the benefit from the settlement of a state income tax assessment in March 2007 or
the income from the lawsuit settlement with the United States government in the computation of
the effective annual income tax rate from estimated pre-tax results from ordinary operations.
The benefit from the settlement of the state income tax assessment in March 2007 reduced income
tax expense by approximately $450 and the income from the lawsuit settlement reduced income tax
expense by approximately $800 due to differences in the Companys marginal tax rate of
approximately 41% and its
anticipated effective annual income tax rate from ordinary operations of approximately 45% in
2007. Accordingly, the provision for income taxes for the six months ended June 30, 2007 has
been computed by applying the discrete method in accordance with FIN 18 to account for these two
items.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 The Companys current deferred income tax liabilities increased by approximately $75,500 during
the six months ended June 30, 2008 as a result of the reclassification of a deferred tax
liability from non-current to current liabilities. This reclassification resulted from the
Companys settlement with the Internal Revenue Service in July 2006, which required the Company
to recognize taxable income of approximately $192,000 from the Philip Morris brand transaction
by March 1, 2009.10.
    
    NEW VALLEYInvestments in non-consolidated real estate businesses.The components of Investments in
non-consolidated real estate businesses were as follows as of June 30, 2008 and December 31,
2007:
 June 30, 2008
    
    
    December 31, 2007Douglas Elliman Realty LLC
    
    $
    33,857
    
    
    $
    31,89316th and K Holdings LLC
    
    
    
    
    
    
    3,838Koa Investors LLC
    
    
    
    
    
    
    Aberdeen Townhomes LLC
    
    
    10,000
    
    
    
    Investments in non-consolidated real
estate businesses
    
    $
    43,857
    
    
    $
    35,731
 Residential Brokerage Business.New Valley recorded income of $4,184 and $6,986 for the three
months ended June 30, 2008 and 2007, respectively, and income of $5,522 and $11,142 for the six
months ended June 30, 2008 and 2007, respectively, associated with Douglas Elliman Realty. New
Valleys income includes 50% of Douglas Ellimans net income, as well as interest income earned
by New Valley on a subordinated loan to Douglas Elliman Realty, increases to income resulting
from amortization of negative goodwill which resulted from purchase accounting, and management
fees. New Valley received cash distributions from Douglas Elliman Realty LLC of $2,232 and
$4,603 for the three months ended June 30, 2008 and 2007, respectively, and $3,557 and $4,848
for the six months ended June 30, 2008 and 2007, respectively.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Summarized financial information for Douglas Elliman Realty for the three and six months ended
June 30, 2008 and 2007 and as of June 30, 2008 and December 31, 2007 is presented below.
 June 30, 2008
    
    
    December 31, 2007Cash
    
    $
    19,375
    
    
    $
    26,916Other current assets
    
    
    9,787
    
    
    
    9,462Property, plant and equipment, net
    
    
    17,298
    
    
    
    18,394Trademarks
    
    
    21,663
    
    
    
    21,663Goodwill
    
    
    38,309
    
    
    
    38,294Other intangible assets, net
    
    
    1,462
    
    
    
    1,928Other non-current assets
    
    
    924
    
    
    
    850Notes payable  current
    
    
    588
    
    
    
    581Current
portion of notes payable to member -
Prudential Real Estate Financial Services
Of America, Inc.
    
    
    4,730
    
    
    
    4,373Current portion of notes payable
to member  New Valley
    
    
    4,730
    
    
    
    625Other current liabilities
    
    
    22,936
    
    
    
    26,579Notes payable  long term
    
    
    846
    
    
    
    2,402Notes
payable to member  Prudential Real
Estate Financial Services of America, Inc.
    
    
    4,037
    
    
    
    15,115Notes payable to member  New Valley
    
    
    4,037
    
    
    
    8,583Other long-term liabilities
    
    
    7,677
    
    
    
    6,599Members equity
    
    
    59,237
    
    
    
    52,650
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    100,893
    
    
    $
    111,446
    
    
    $
    182,256
    
    
    $
    203,295Costs and expenses
    
    
    91,010
    
    
    
    95,632
    
    
    
    168,239
    
    
    
    177,065Depreciation expense
    
    
    1,357
    
    
    
    1,452
    
    
    
    2,707
    
    
    
    3,052Amortization expense
    
    
    75
    
    
    
    87
    
    
    
    149
    
    
    
    174Interest expense, net
    
    
    802
    
    
    
    1,184
    
    
    
    1,665
    
    
    
    2,458Income tax expense
    
    
    231
    
    
    
    80
    
    
    
    346
    
    
    
    190Net income
    
    $
    7,418
    
    
    $
    13,011
    
    
    $
    9,150
    
    
    $
    20,356
 16th and K Holdings LLC.In 2007, 16th and K Holdings LLC entered into certain agreements to
sell 90% of the St. Regis Hotel. The sale closed in March 2008. In addition to retaining a 3%
interest, net of incentives, in the St. Regis Hotel, New Valley received $15,822 in March 2008
and anticipates receiving an additional approximate $1,400 associated with the sale of the hotel
in 2008 and approximately an additional $5,000 in various installments between 2009 and 2012.
The Company recorded the $15,822 as an investing activity in the condensed consolidated
statement of cash flows. New Valley recorded equity losses of $0 and $59 for the three months
ended June 30, 2008 and 2007, respectively, and $3,796 and $102 for the six months ended June
30, 2008 and 2007, respectively, associated with 16th and K Holdings LLC. For the six months
ended June 30, 2008, New Valley also recorded equity income of $15,779 in connection with the
gain from the sale of the St. Regis because the amount received from 16th and K Holdings
exceeded the Companys basis in the investment and the Company has no legal obligation to make
additional investments to 16th and K Holdings.Hawaiian Hotel.KOA Investors LLC owns the Sheraton Keauhou Bay Resort & Spa in Kailua-Kona,
Hawaii. New Valley and certain members in KOA Investors have chosen not to fund discretionary
capital calls in 2008 and KOA Investors may not be
able to meet its financial obligations in the third quarter of 2008. The Company carried its
investment in KOA at $0 at June 30, 2008.
 27




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Aberdeen Townhomes LLC.In June 2008, a subsidiary of New Valley purchased a preferred equity
interest in Aberdeen Townhomes LLC (Aberdeen) for $10,000. Aberdeen acquired five town home
residences located in Manhattan, New York which it is in the process of rehabilitating and
selling. In the event that Aberdeen makes distributions of cash, New Valley is entitled to a
priority preferred return of 15% per annum until it has recovered its invested capital. New
Valley is entitled to 25% of subsequent cash distributions of profits until it has achieved an
annual 18% internal rate of return (IRR). New Valley is then entitled to 20% of subsequent
cash distributions of profits until it has achieved an annual 23% IRR. After New Valley has
achieved an annual 23% IRR, it is then entitled to 10% of any remaining cash distributions of
profits. Aberdeen is a variable interest entity; however, the Company is not the primary
beneficiary. The Companys maximum exposure to loss as a result of its investment in Aberdeen
is $10,000. This investment is being accounted for under the cost method.Mortgage receivable.In March 2008, a subsidiary of New Valley purchased a loan secured by a
substantial portion of a 450-acre approved master planned community in Palm Springs,
California known as Escena. The loan, which is currently in foreclosure, was purchased for
its $20,000 face value plus accrued interest and other costs of $1,445. The loan is being
accounted for under the cost recovery method and the cost includes the purchase price and
additional capitalized acquisition costs of $259. At June 30, 2008, the Company carried the
loan on its condensed consolidated balance sheet at its cost of $21,704.The borrowers are Escena-PSC, LLC and Palm Springs Classic, LLC, a joint venture of Lennar
Homes of California, Inc. and Empire Land, LLC. Empire Land recently filed a Chapter 11
bankruptcy petition. Lennar Homes is an affiliate of Lennar Corporation. The loan collateral
consists of 867 residential lots with site and public infrastructure, an 18-hole Nicklaus
Design golf course, a substantially completed clubhouse, and a seven-acre site approved for a
450-room hotel.In October 2007, the as is value of the land was appraised in excess of the outstanding
value of the loan. The Company recently obtained an updated appraisal that valued the property
at substantially less than the outstanding loan balance. The reduction in value was attributed to the overall real estate market conditions in
California. Among other things, Lennar Corporation has a payment guarantee of up to 50% of
the outstanding loan as well as a guarantee to complete the development of the property. In
order to calculate the fair market value of the investment, the Company utilized the most
recent as is appraised value of the collateral and estimated the value of Lennar
Corporations completion and payment guaranties, less estimated costs to enforce the
guaranties and dispose of the property. Based on these estimates, the Company has determined
that the fair market value approximates the carrying amount of the mortgage receivable at June
30, 2008. The Company has commenced legal action to exercise its rights under the loan
documents.NASA Settlement.In 1994, New Valley commenced an action against the United States government
seeking damages for breach of a launch services agreement covering the launch of one of the
Westar satellites owned by New Valleys former Western Union satellite business. In March
2007, the parties entered into a Stipulation for Entry of Judgment to settle New Valleys
claims and, pursuant to the settlement, $20,000 was paid in May 2007. In the first quarter of
2007, we recognized a pre-tax gain of $19,590, which consisted of other non-operating income
of $20,000 and $410 of selling, general and administrative expenses, in connection with the
settlement.11.
    
    INVESTMENTS AND FAIR VALUE MEASUREMENTSOn January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, for
financial assets and financial liabilities. SFAS No. 157 does not require any new fair value
measurements but rather introduces a framework for measuring fair value and expands required
disclosure about fair value measurements of assets and liabilities.SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flow), and the cost
approach (cost to replace the service capacity of an asset or replacement cost). The statement
clarifies that fair value is an exit price, representing amounts that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants.SFAS No. 157 utilizes a three-tier fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The following is a brief
description of those three levels:
 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.
 28




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 This hierarchy requires the use of observable market data, when available, and to minimize the
use of unobservable inputs when determining fair value.The Companys population of recurring financial assets and liabilities subject to fair value
measurements and the necessary disclosures are as follows:
 Fair Value Measurements as of June 30, 2008Quoted Prices inActive Markets for
    
    
    Significant other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Money market funds
    
    $
    212,175
    
    
    $
    212,175
    
    
    $
    
    
    
    $
    Investment securities
available for sale
    
    
    37,508
    
    
    
    33,174
    
    
    
    4,334
    
    
    
    Total
    
    $
    249,683
    
    
    $
    245,349
    
    
    $
    4,334
    
    
    $
    Liabilities:Fair value of derivatives
embedded within
convertible debt
    
    $
    94,267
    
    
    $
    
    
    
    $
    
    
    
    $
    94,267
 The fair value of investment securities available for sale included in Level 1 are based on
quoted market prices from various stock exchanges. The $4,334 of the investments securities
available for sale in Level 2 are not registered and therefore 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 debt. The changes in fair value of
derivatives embedded within convertible debt as of June 30, 2008 are disclosed. (See Note 6.)12.
    
    SEGMENT INFORMATIONThe Companys significant business segments for the three months ended
June 30, 2008 and 2007 were Liggett, Vector Tobacco and New Valley.
The Liggett segment consists of the manufacture and sale of
conventional cigarettes and, for segment reporting purposes, includes
the operations of Medallion acquired on April 1, 2002 (which
operations are held for legal purposes as part of Vector Tobacco).
The Vector Tobacco segment includes the development and marketing of
the low nicotine and nicotine-free cigarette products as well as the
development of reduced risk cigarette products and, for segment
reporting purposes, excludes the operations of Medallion. The
accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The New Valley segment includes
the Companys equity income and investments in non-consolidated real estate businesses and
mortgage receivable.
 29




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Financial information for the Companys operations before taxes for the three and six months
ended June 30, 2008 and 2007 follows:
 Vector
    
    
    New
    
    
    CorporateLiggett
    
    
    Tobacco
    
    
    Valley
    
    
    and Other
    
    
    TotalThree months ended June 30, 2008Revenues
    
    $
    142,330
    
    
    $
    630
    
    
    
    
    
    
    
    
    
    
    $
    142,960Operating income (loss)
    
    
    43,692
    
    
    
    (1,926
    )
    
    
    
    
    
    
    (7,421
    )
    
    
    34,345Depreciation and amortization
    
    
    1,919
    
    
    
    29
    
    
    
    
    
    
    
    584
    
    
    
    2,532Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    4,184
    
    
    
    
    
    
    
    4,184Three months ended June 30, 2007Revenues
    
    $
    139,305
    
    
    $
    1,046
    
    
    
    
    
    
    
    
    
    
    $
    140,351Operating income (loss)
    
    
    37,463
    
    
    
    (2,102
    )
    
    
    
    
    
    
    (6,178
    )
    
    
    29,183Depreciation and amortization
    
    
    1,844
    
    
    
    25
    
    
    
    
    
    
    
    587
    
    
    
    2,456Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    6,927
    
    
    
    
    
    
    
    6,927Six months ended June 30, 2008Revenues
    
    $
    273,975
    
    
    $
    1,190
    
    
    
    
    
    
    
    
    
    
    $
    275,165Operating income (loss)
    
    
    81,036
    
    
    
    (4,336
    )
    
    
    
    
    
    
    (14,314
    )
    
    
    62,386Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    17,504
    
    
    
    
    
    
    
    17,504Identifiable assets
    
    
    322,563
    
    
    
    6,368
    
    
    
    43,857
    
    
    
    415,271
    
    
    
    788,059Depreciation and amortization
    
    
    3,772
    
    
    
    59
    
    
    
    
    
    
    
    1,169
    
    
    
    5,000Capital expenditures
    
    
    2,410
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    2,456Six months ended June 30, 2007Revenues
    
    $
    272,118
    
    
    $
    2,125
    
    
    $
    
    
    
    $
    
    
    
    $
    274,243Operating income (loss)
    
    
    72,923
    
    
    
    (4,406
    )
    
    
    
    
    
    
    (13,614
    )
    
    
    54,903Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    9,337
    
    
    
    
    
    
    
    9,337Identifiable assets
    
    
    307,797
    
    
    
    4,496
    
    
    
    32,855
    
    
    
    274,978
    
    
    
    620,126Depreciation and amortization
    
    
    3,855
    
    
    
    58
    
    
    
    
    
    
    
    1,172
    
    
    
    5,085Capital expenditures
    
    
    2,632
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    2,716
 30




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 13.
    
    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.The 11% Senior Secured Notes due 2015, issued on August 16, 2007 by Vector, are fully and
unconditionally guaranteed on a joint and several basis by all of the 100%-owned domestic
subsidiaries of the Company that are engaged in the conduct of its cigarette businesses. (See
Note 6.) The notes are not guaranteed by any of the Companys subsidiaries engaged in the real
estate businesses conducted through its subsidiary New Valley. Presented herein are unaudited
condensed consolidating balance sheets as of June 30, 2008 and December 31, 2007, the related
unaudited condensed consolidating statements of operations for the three and six months ended June
30, 2008 and 2007 and the unaudited condensed consolidated statements of cash flows for the six
months ended June 30, 2008 and 2007 of the Company (Parent/Issuer), the guarantor subsidiaries
(Subsidiary Guarantors) and the subsidiaries that are not guarantors (Subsidiary Non-Guarantors).The indenture contains covenants that restrict the payment of dividends by the Company if the
Companys consolidated earnings before interest, taxes, depreciation and amortization
(Consolidated EBITDA), as defined in the indenture, for the most recently ended four full
quarters is less than $50,000. The indenture also restricts the incurrence of debt if the
Companys Leverage Ratio and its Secured Leverage Ratio, as defined in the indenture, exceed 3.0
and 1.5, respectively. The Companys Leverage Ratio is defined in the indenture as the ratio of
the Companys and the guaranteeing subsidiaries total debt less the fair market value of the
Companys and the guaranteeing subsidiaries cash and cash equivalents, investments in securities
and long-term investments to Consolidated EBITDA, as defined in the indenture. The Companys
Secured Leverage Ratio is defined in the indenture in the same manner as the Leverage Ratio, except
that secured indebtedness is substituted for indebtedness.
 31




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING BALANCE SHEETS
 June 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    208,856
    
    
    $
    10,938
    
    
    $
    4
    
    
    $
    
    
    
    $
    219,798Investment securities
available for sale
    
    
    37,430
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    37,508Accounts receivable 
trade
    
    
    
    
    
    
    8,607
    
    
    
    
    
    
    
    
    
    
    
    8,607Intercompany receivables
    
    
    448
    
    
    
    
    
    
    
    
    
    
    
    (448
    )
    
    
    Inventories
    
    
    
    
    
    
    91,102
    
    
    
    
    
    
    
    
    
    
    
    91,102Deferred income taxes
    
    
    17,410
    
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    17,760Income taxes receivable
    
    
    15,598
    
    
    
    262
    
    
    
    
    
    
    
    (15,860
    )
    
    
    Other current assets
    
    
    1,561
    
    
    
    3,289
    
    
    
    
    
    
    
    
    
    
    
    4,850Total current assets
    
    
    281,303
    
    
    
    114,548
    
    
    
    82
    
    
    
    (16,308
    )
    
    
    379,625Property, plant and equipment, net
    
    
    800
    
    
    
    51,048
    
    
    
    
    
    
    
    
    
    
    
    51,848Mortgage receivable
    
    
    
    
    
    
    
    
    
    
    21,704
    
    
    
    
    
    
    
    21,704Long-term investments accounted
for at cost
    
    
    72,233
    
    
    
    
    
    
    
    785
    
    
    
    
    
    
    
    73,018Long-term investments accounted
under the equity method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    43,857
    
    
    
    
    
    
    
    43,857Investments in consolidated
subsidiaries
    
    
    221,262
    
    
    
    
    
    
    
    
    
    
    
    (221,262
    )
    
    
    Restricted assets
    
    
    4,091
    
    
    
    4,934
    
    
    
    
    
    
    
    
    
    
    
    9,025Deferred income taxes
    
    
    22,293
    
    
    
    908
    
    
    
    4,216
    
    
    
    
    
    
    
    27,417Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    44,126
    
    
    
    
    
    
    
    
    
    
    
    44,126Other assets
    
    
    16,633
    
    
    
    13,295
    
    
    
    
    
    
    
    
    
    
    
    29,928Total assets
    
    $
    618,615
    
    
    $
    336,370
    
    
    $
    70,644
    
    
    $
    (237,570
    )
    
    $
    788,059
 32




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 June 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes
payable and long-term debt
    
    $
    
    
    
    $
    18,946
    
    
    $
    
    
    
    $
    
    
    
    $
    18,946Accounts payable
    
    
    279
    
    
    
    2,729
    
    
    
    
    
    
    
    
    
    
    
    3,008Intercompany payables
    
    
    
    
    
    
    448
    
    
    
    
    
    
    
    (448
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    10,479
    
    
    
    
    
    
    
    
    
    
    
    10,479Income taxes payable, net
    
    
    
    
    
    
    309
    
    
    
    23,056
    
    
    
    (15,860
    )
    
    
    7,505Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    4,728
    
    
    
    
    
    
    
    
    
    
    
    4,728Settlement accruals
    
    
    
    
    
    
    27,497
    
    
    
    
    
    
    
    
    
    
    
    27,497Deferred income taxes
    
    
    84,811
    
    
    
    11,746
    
    
    
    
    
    
    
    
    
    
    
    96,557Accrued interest
    
    
    9,525
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,525Other current liabilities
    
    
    4,850
    
    
    
    11,542
    
    
    
    775
    
    
    
    
    
    
    
    17,167Total current liabilities
    
    
    99,465
    
    
    
    88,424
    
    
    
    23,831
    
    
    
    (16,308
    )
    
    
    195,412Notes payable, long-term debt and
other obligations, less current
portion
    
    
    258,553
    
    
    
    19,693
    
    
    
    
    
    
    
    
    
    
    
    278,246Fair value of derivatives embedded
within convertible debt
    
    
    94,267
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,267Non-current employee
benefits
    
    
    28,374
    
    
    
    15,115
    
    
    
    
    
    
    
    
    
    
    
    43,489Deferred income
taxes
    
    
    42,853
    
    
    
    20,891
    
    
    
    110
    
    
    
    
    
    
    
    63,854Other liabilities
    
    
    461
    
    
    
    15,275
    
    
    
    2,413
    
    
    
    
    
    
    
    18,149Total liabilities
    
    
    523,973
    
    
    
    159,398
    
    
    
    26,354
    
    
    
    (16,308
    )
    
    
    693,417Commitments and
contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    94,642
    
    
    
    176,972
    
    
    
    44,290
    
    
    
    (221,262
    )
    
    
    94,642Total liabilities and
stockholders equity
    
    $
    618,615
    
    
    $
    336,370
    
    
    $
    70,644
    
    
    $
    (237,750
    )
    
    $
    788,059
 33




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING BALANCE SHEETS
 December 31, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    228,901
    
    
    $
    9,216
    
    
    $
    
    
    
    $
    
    
    
    $
    238,117Investment securities
available for sale
    
    
    45,841
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    45,875Accounts receivable 
trade
    
    
    
    
    
    
    3,113
    
    
    
    
    
    
    
    
    
    
    
    3,113Intercompany receivables
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    Inventories
    
    
    
    
    
    
    86,825
    
    
    
    
    
    
    
    
    
    
    
    86,825Deferred income taxes
    
    
    18,003
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    18,336Income taxes receivable
    
    
    27,364
    
    
    
    
    
    
    
    
    
    
    
    (27,364
    )
    
    
    Other current assets
    
    
    103
    
    
    
    3,257
    
    
    
    
    
    
    
    
    
    
    
    3,360Total current assets
    
    
    320,231
    
    
    
    102,744
    
    
    
    34
    
    
    
    (27,383
    )
    
    
    395,626Property, plant and equipment, net
    
    
    867
    
    
    
    53,565
    
    
    
    
    
    
    
    
    
    
    
    54,432Long-term investments accounted
for at cost
    
    
    72,233
    
    
    
    
    
    
    
    738
    
    
    
    
    
    
    
    72,971Long-term investments accounted
under the equity method
    
    
    10,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,495Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    35,731
    
    
    
    
    
    
    
    35,731Investments in consolidated
subsidiaries
    
    
    190,354
    
    
    
    
    
    
    
    
    
    
    
    (190,354
    )
    
    
    Restricted assets
    
    
    3,859
    
    
    
    4,907
    
    
    
    
    
    
    
    
    
    
    
    8,766Deferred income taxes
    
    
    21,288
    
    
    
    883
    
    
    
    4,466
    
    
    
    
    
    
    
    26,637Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    42,084
    
    
    
    
    
    
    
    
    
    
    
    42,084Other assets
    
    
    18,066
    
    
    
    12,970
    
    
    
    
    
    
    
    
    
    
    
    31,036Total assets
    
    $
    637,393
    
    
    $
    324,664
    
    
    $
    40,969
    
    
    $
    (217,737
    )
    
    $
    785,289
 34




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 December 31, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes
payable and long-term debt
    
    $
    
    
    
    $
    20,618
    
    
    $
    
    
    
    $
    
    
    
    $
    20,618Accounts payable
    
    
    2,194
    
    
    
    4,786
    
    
    
    
    
    
    
    
    
    
    
    6,980Intercompany payables
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    (19
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    9,210
    
    
    
    
    
    
    
    
    
    
    
    9,210Income taxes payable, net
    
    
    
    
    
    
    13,245
    
    
    
    16,482
    
    
    
    (27,364
    )
    
    
    2,363Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    5,327
    
    
    
    
    
    
    
    
    
    
    
    5,327Settlement accruals
    
    
    
    
    
    
    10,041
    
    
    
    
    
    
    
    
    
    
    
    10,041Deferred income taxes
    
    
    20,218
    
    
    
    3,801
    
    
    
    
    
    
    
    
    
    
    
    24,019Accrued interest
    
    
    9,475
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,475Other current liabilities
    
    
    6,486
    
    
    
    14,118
    
    
    
    700
    
    
    
    
    
    
    
    21,304Total current liabilities
    
    
    38,373
    
    
    
    81,165
    
    
    
    17,182
    
    
    
    (27,383
    )
    
    
    109,337Notes payable, long-term debt and
other obligations, less current
portion
    
    
    254,538
    
    
    
    22,640
    
    
    
    
    
    
    
    
    
    
    
    277,178Fair value of derivatives embedded
within convertible debt
    
    
    101,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,582Non-current employee
benefits
    
    
    25,983
    
    
    
    14,950
    
    
    
    
    
    
    
    
    
    
    
    40,933Deferred income
taxes
    
    
    115,571
    
    
    
    26,223
    
    
    
    110
    
    
    
    
    
    
    
    141,904Other liabilities
    
    
    494
    
    
    
    10,571
    
    
    
    2,438
    
    
    
    
    
    
    
    13,503Total liabilities
    
    
    536,541
    
    
    
    155,549
    
    
    
    19,730
    
    
    
    (27,383
    )
    
    
    684,437Commitments and
contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    100,852
    
    
    
    169,115
    
    
    
    21,239
    
    
    
    (190,354
    )
    
    
    100,852Total liabilities and
stockholders equity
    
    $
    637,393
    
    
    $
    324,664
    
    
    $
    40,969
    
    
    $
    (217,737
    )
    
    $
    785,289
 35




---



##### 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 June 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    142,960
    
    
    $
    
    
    
    $
    
    
    
    $
    142,960Expenses:Cost of goods sold
    
    
    
    
    
    
    86,030
    
    
    
    
    
    
    
    
    
    
    
    86,030Operating, selling,
administrative and
general expenses
    
    
    7,977
    
    
    
    14,304
    
    
    
    304
    
    
    
    
    
    
    
    22,585Management fee
expense
    
    
    
    
    
    
    1,985
    
    
    
    
    
    
    
    (1,985
    )
    
    
    Operating
(loss) income
    
    
    (7,977
    )
    
    
    40,641
    
    
    
    (304
    )
    
    
    1,985
    
    
    
    34,345Other income (expenses):Interest and dividend
income
    
    
    1,144
    
    
    
    231
    
    
    
    
    
    
    
    
    
    
    
    1,375Interest expense
    
    
    (14,879
    )
    
    
    (378
    )
    
    
    
    
    
    
    
    
    
    
    (15,257
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    9,759
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,759Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    4,184
    
    
    
    
    
    
    
    4,184Equity income in
consolidated
subsidiaries
    
    
    27,475
    
    
    
    
    
    
    
    
    
    
    
    (27,475
    )
    
    
    Management fee income
    
    
    1,985
    
    
    
    
    
    
    
    
    
    
    
    (1,985
    )
    
    
    Other, net
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Income before
provision for income
taxes
    
    
    17,503
    
    
    
    40,494
    
    
    
    3,880
    
    
    
    (27,475
    )
    
    
    34,402Income tax
benefit (expense)
    
    
    1,622
    
    
    
    (15,312
    )
    
    
    (1,587
    )
    
    
    
    
    
    
    (15,277
    )Net income
    
    $
    19,125
    
    
    $
    25,182
    
    
    $
    2,293
    
    
    $
    (27,475
    )
    
    $
    19,125
 36




---



##### 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 June 30, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    140,351
    
    
    $
    
    
    
    $
    
    
    
    $
    140,351Expenses:Cost of goods sold
    
    
    
    
    
    
    87,222
    
    
    
    
    
    
    
    
    
    
    
    87,222Operating, selling,
administrative and
general expenses
    
    
    6,855
    
    
    
    16,922
    
    
    
    169
    
    
    
    
    
    
    
    23,946Management fee expense
    
    
    
    
    
    
    1,918
    
    
    
    
    
    
    
    (1,918
    )
    
    
    Operating (loss)
income
    
    
    (6,855
    )
    
    
    34,289
    
    
    
    (169
    )
    
    
    1,918
    
    
    
    29,183Other income
(expenses):Interest and dividend
income
    
    
    3,972
    
    
    
    161
    
    
    
    
    
    
    
    (2,572
    )
    
    
    1,561Interest expense
    
    
    (8,961
    )
    
    
    (3,131
    )
    
    
    
    
    
    
    2,572
    
    
    
    (9,520
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    2,089
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,089Gain on conversion
on LTS note
    
    
    
    
    
    
    
    
    
    
    8,121
    
    
    
    
    
    
    
    8,121Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    6,927
    
    
    
    
    
    
    
    6,927Equity income in
consolidated
subsidiaries
    
    
    26,918
    
    
    
    
    
    
    
    
    
    
    
    (26,918
    )
    
    
    Management fee income
    
    
    1,918
    
    
    
    
    
    
    
    
    
    
    
    (1,918
    )
    
    
    Other, net
    
    
    (57
    )
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    (31
    )Income before
provision for income
taxes
    
    
    19,024
    
    
    
    31,319
    
    
    
    14,905
    
    
    
    (26,918
    )
    
    
    38,330Income tax
benefit (expense)
    
    
    2,357
    
    
    
    (13,210
    )
    
    
    (6,096
    )
    
    
    
    
    
    
    (16,949
    )Net income
    
    $
    21,381
    
    
    $
    18,109
    
    
    $
    8,809
    
    
    $
    (26,918
    )
    
    $
    21,381
 37




---



##### 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
 Six Months Ended June 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    275,165
    
    
    $
    
    
    
    $
    
    
    
    $
    275,165Expenses:Cost of goods sold
    
    
    
    
    
    
    166,037
    
    
    
    
    
    
    
    
    
    
    
    166,037Operating, selling,
administrative and
general expenses
    
    
    15,171
    
    
    
    30,872
    
    
    
    699
    
    
    
    
    
    
    
    46,742Management fee
expense
    
    
    
    
    
    
    3,970
    
    
    
    
    
    
    
    (3,970
    )
    
    
    Operating
(loss) income
    
    
    (15,171
    )
    
    
    74,286
    
    
    
    (699
    )
    
    
    3,970
    
    
    
    62,386Other income (expenses):Interest and dividend
income
    
    
    3,040
    
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    3,346Interest expense
    
    
    (29,550
    )
    
    
    (960
    )
    
    
    
    
    
    
    
    
    
    
    (30,510
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    7,315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,315Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    17,504
    
    
    
    
    
    
    
    17,504Equity income in
consolidated
subsidiaries
    
    
    55,217
    
    
    
    
    
    
    
    
    
    
    
    (55,217
    )
    
    
    Management fee income
    
    
    3,970
    
    
    
    
    
    
    
    
    
    
    
    (3,970
    )
    
    
    Other, net
    
    
    (573
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (577
    )Income before
provision for income
taxes
    
    
    24,248
    
    
    
    73,632
    
    
    
    16,801
    
    
    
    (55,217
    )
    
    
    59,464Income tax
benefit (expense)
    
    
    9,184
    
    
    
    (28,344
    )
    
    
    (6,872
    )
    
    
    
    
    
    
    (26,032
    )Net income
    
    $
    33,432
    
    
    $
    45,288
    
    
    $
    9,929
    
    
    $
    (55,217
    )
    
    $
    33,432
 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
 Six Months Ended June 30, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    274,243
    
    
    $
    
    
    
    $
    
    
    
    $
    274,243Expenses:Cost of goods sold
    
    
    
    
    
    
    171,907
    
    
    
    
    
    
    
    
    
    
    
    171,907Operating, selling,
administrative and
general expenses
    
    
    14,627
    
    
    
    32,018
    
    
    
    788
    
    
    
    
    
    
    
    47,433Management fee expense
    
    
    
    
    
    
    3,835
    
    
    
    
    
    
    
    (3,835
    )
    
    
    Operating (loss)
income
    
    
    (14,627
    )
    
    
    66,483
    
    
    
    (788
    )
    
    
    3,835
    
    
    
    54,903Other income
(expenses):Interest and dividend
income
    
    
    8,244
    
    
    
    300
    
    
    
    
    
    
    
    (5,127
    )
    
    
    3,417Interest expense
    
    
    (17,099
    )
    
    
    (6,682
    )
    
    
    
    
    
    
    5,127
    
    
    
    (18,654
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    2,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,116Provision for loss on
Investments,
net
    
    
    2
    
    
    
    
    
    
    
    (1,160
    )
    
    
    
    
    
    
    (1,158
    )Gain from conversion
of LTS notes
    
    
    
    
    
    
    
    
    
    
    8,121
    
    
    
    
    
    
    
    8,121Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    9,337
    
    
    
    
    
    
    
    9,337Income from lawsuit
settlement
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    20,000Equity income in
consolidated
subsidiaries
    
    
    56,035
    
    
    
    
    
    
    
    
    
    
    
    (56,035
    )
    
    
    Management fee income
    
    
    3,835
    
    
    
    
    
    
    
    
    
    
    
    (3,835
    )
    
    
    Other, net
    
    
    (61
    )
    
    
    1
    
    
    
    24
    
    
    
    
    
    
    
    (36
    )Income before
provision for income
taxes
    
    
    38,445
    
    
    
    60,102
    
    
    
    35,534
    
    
    
    (56,035
    )
    
    
    78,046Income tax
benefit (expense)
    
    
    6,063
    
    
    
    (25,536
    )
    
    
    (14,065
    )
    
    
    
    
    
    
    (33,538
    )Net income
    
    $
    44,508
    
    
    $
    34,566
    
    
    $
    21,469
    
    
    $
    (56,035
    )
    
    $
    44,508
 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 CASH FLOWS
 Six Months Ended June 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by
operating activities
    
    $
    26,962
    
    
    $
    46,368
    
    
    $
    2,255
    
    
    $
    (39,700
    )
    
    $
    35,885Cash flows from investing
activities:Purchase of investment
securities
    
    
    (5,182
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,182
    )Proceeds from sale or
liquidation of long-term
investments
    
    
    8,334
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,334Purchase of long-term
investments
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Purchase of mortgage
receivable
    
    
    
    
    
    
    
    
    
    
    (21,704
    )
    
    
    
    
    
    
    (21,704
    )Distributions from
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    16,446
    
    
    
    
    
    
    
    16,446Investment in non-
consolidated real
estate businesses
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    
    
    
    
    (10,000
    )Increase in cash surrender
value of life insurance
policies
    
    
    (254
    )
    
    
    (267
    )
    
    
    
    
    
    
    
    
    
    
    (521
    )Increase
in non-current restricted
assets
    
    
    (232
    )
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    (259
    )Investments in
subsidiaries
    
    
    (15,108
    )
    
    
    
    
    
    
    
    
    
    
    15,108
    
    
    
    Proceeds from the sale
of fixed assets
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    
    
    
    
    373Capital expenditures
    
    
    
    
    
    
    (2,456
    )
    
    
    
    
    
    
    
    
    
    
    (2,456
    )Net cash used in
investing activities
    
    
    (12,442
    )
    
    
    (2,377
    )
    
    
    (15,309
    )
    
    
    15,108
    
    
    
    (15,020
    )
 40




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Cash flows from
financing activities:Repayments of debt
    
    
    
    
    
    
    (2,984
    )
    
    
    
    
    
    
    
    
    
    
    (2,984
    )Deferred financing charges
    
    
    (137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )Borrowings under revolver
    
    
    
    
    
    
    255,118
    
    
    
    
    
    
    
    
    
    
    
    255,118Repayments on revolver
    
    
    
    
    
    
    (256,753
    )
    
    
    
    
    
    
    
    
    
    
    (256,753
    )Capital contributions received
    
    
    
    
    
    
    2,050
    
    
    
    13,058
    
    
    
    (15,108
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (39,700
    )
    
    
    
    
    
    
    (39,700
    )
    
    
    Dividends and distributions
on common stock
    
    
    (52,737
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,737
    )Proceeds from exercise of
Vector options and warrants
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Excess tax benefit of options
exercised
    
    
    18,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,283Net cash (used in) provided by
financing activities
    
    
    (34,565
    )
    
    
    (42,269
    )
    
    
    13,058
    
    
    
    24,592
    
    
    
    (39,184
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (20,045
    )
    
    
    1,722
    
    
    
    4
    
    
    
    
    
    
    
    (18,319
    )Cash and cash equivalents,
beginning of year
    
    
    228,901
    
    
    
    9,216
    
    
    
    
    
    
    
    
    
    
    
    238,117Cash and cash equivalents, end of
year
    
    $
    208,856
    
    
    $
    10,938
    
    
    $
    4
    
    
    $
    
    
    
    $
    219,798
 41




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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
 Six Months Ended June 30, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by
operating activities
    
    $
    67,743
    
    
    $
    39,347
    
    
    $
    25,760
    
    
    $
    (75,490
    )
    
    $
    57,360Cash flows from investing
activities:Purchase of investment
securities
    
    
    (6,032
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,032
    )Proceeds from sale or
liquidation of long-term
investments
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    50Purchase of long-term
investments
    
    
    
    
    
    
    
    
    
    
    (91
    )
    
    
    
    
    
    
    (91
    )Distributions from
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Investment in non-
consolidated real
estate businesses
    
    
    
    
    
    
    
    
    
    
    (750
    )
    
    
    
    
    
    
    (750
    )Increase in cash surrender
value of life insurance
policies
    
    
    (225
    )
    
    
    (299
    )
    
    
    
    
    
    
    
    
    
    
    (524
    )Receipt of repayment
of notes receivable
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    (4,000
    )
    
    
    (Increase) decrease
in non-current restricted
assets
    
    
    (316
    )
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (313
    )Investments in
subsidiaries
    
    
    (37,350
    )
    
    
    
    
    
    
    
    
    
    
    37,350
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (2,716
    )
    
    
    
    
    
    
    
    
    
    
    (2,716
    )Net cash (used in) provided by
investing activities
    
    
    (39,923
    )
    
    
    (3,012
    )
    
    
    209
    
    
    
    33,350
    
    
    
    (9,376
    )
 42




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Cash flows from
financing activities:Proceeds from debt
issuance
    
    
    
    
    
    
    1,576
    
    
    
    
    
    
    
    
    
    
    
    1,576Repayments of debt
    
    
    
    
    
    
    (42,205
    )
    
    
    
    
    
    
    4,000
    
    
    
    (38,205
    )Borrowings under revolver
    
    
    
    
    
    
    275,062
    
    
    
    
    
    
    
    
    
    
    
    275,062Repayments on revolver
    
    
    
    
    
    
    (258,419
    )
    
    
    
    
    
    
    
    
    
    
    (258,419
    )Capital contributions received
    
    
    
    
    
    
    37,350
    
    
    
    
    
    
    
    (37,350
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (49,500
    )
    
    
    (25,990
    )
    
    
    75,490
    
    
    
    Dividends and distributions
on common stock
    
    
    (50,360
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,360
    )Proceeds from exercise of
Vector options and warrants
    
    
    1,978
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,978Net cash used in
financing activities
    
    
    (48,382
    )
    
    
    (36,136
    )
    
    
    (25,990
    )
    
    
    42,140
    
    
    
    (68,368
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (20,562
    )
    
    
    199
    
    
    
    (21
    )
    
    
    
    
    
    
    (20,384
    )Cash and cash equivalents,
beginning of year
    
    
    132,942
    
    
    
    13,797
    
    
    
    30
    
    
    
    
    
    
    
    146,769Cash and cash equivalents, end of
year
    
    $
    112,380
    
    
    $
    13,996
    
    
    $
    9
    
    
    $
    
    
    
    $
    126,385
 43




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##### 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 subsidiary
Liggett Group LLC,
    
    the development and 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.
   44




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Recent Developments
 NASA Settlement.
 Issuance of 11% Senior Secured Notes
 Proposed and enacted excise tax increases.
 Tobacco Settlement Agreements.
  45




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46




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Sale of St. Regis Hotel.
 Escena
  Aberdeen Townhomes LLC.
 SNUS
 47




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Recent Developments in Tobacco-Related Litigation
  Engle v. R.J. Reynolds Tobacco Co. Engle Engle Engle Engle Engle Engle
 Lukacs v. R.J. Reynolds
Tobacco Company Lukacs Engle Engle Engle
  48




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Critical Accounting Policies
  Recently Adopted Accounting Pronouncements.
 Results of Operations
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30
    
    
    June 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Liggett
    
    $
    142,330
    
    
    $
    139,305
    
    
    $
    273,975
    
    
    $
    272,118Vector Tobacco
    
    
    630
    
    
    
    1,046
    
    
    
    1,190
    
    
    
    2,125Total revenues
    
    $
    142,960
    
    
    $
    140,351
    
    
    $
    275,165
    
    
    $
    274,243Operating income (loss):Liggett
    
    $
    43,692
    
    
    $
    37,463
    
    
    $
    81,036
    
    
    $
    72,923Vector Tobacco
    
    
    (1,926
    )
    
    
    (2,102
    )
    
    
    (4,336
    )
    
    
    (4,406
    )Total tobacco
    
    
    41,766
    
    
    
    35,361
    
    
    
    76,700
    
    
    
    68,517Corporate and other
    
    
    (7,421
    )
    
    
    (6,178
    )
    
    
    (14,314
    )
    
    
    (13,614
    )Total operating income
    
    $
    34,345
    
    
    $
    29,183
    
    
    $
    62,386
    
    
    $
    54,903
 49




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Three Months Ended June 30, 2008 Compared to Three Months ended June 30, 2007
 Revenues.
 Tobacco Revenues.
   Tobacco Gross Profit.
  50




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##### Table of Contents



Expenses.
  Other Income (Expenses).
  Income before income taxes.
 Income tax provision.
  51




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Six Months Ended June 30, 2008 Compared to Six Months ended June 30, 2007
 Revenues.
 Tobacco Revenues.
   Tobacco Gross Profit.
   52




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Expenses.
  Other Income (Expenses). th th
  Income before income taxes.
 Income tax provision.
 53




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Liquidity and Capital Resources
     Liggett
 54




---



##### Table of Contents



Engle Engle
  Vector
  55




---



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Market Risk
      56




---



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New Accounting Pronouncements
      57




---



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Legislation and Regulation
    58




---



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59




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QUEST QUEST QUEST
  60




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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,
    
    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,
 61




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##### Table of Contents




    
    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.
   62




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   63




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##### Table of Contents



PART II
 OTHER INFORMATION
 
 Item 1.
    
    Legal ProceedingsReference is made to Note 8, 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 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., Miami, Florida 33131, Attn.
Investor Relations.
 
 Item 1A.
    
    Risk FactorsExcept 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,
2007. 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 8 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 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsNo securities of ours which were not registered under the Securities Act of 1933 have
been issued or sold by us during the three months ended June 30, 2008.Our purchases of our common stock during the three months ended June 30, 2008 were as
follows:
 Total Number
    
    
    Maximum Numberof Shares
    
    
    of Shares thatTotal
    
    
    
    
    
    
    Purchased as
    
    
    May Yet BeNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    Purchased UnderShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    or ProgramsApril 1 to April 30, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    May 1 to May 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1 to June 30, 2008
    
    
    1,375,895
    (1)
    
    
    17.73
    
    
    
    
    
    
    
    Total
    
    
    1,375,895
    
    
    $
    17.73
    
    
    
    
    
    
    
    
 
 (1)
    
    Delivery of shares to us in payment of exercise price in connection
with exercise of an employee stock option for 3,878,317 shares on June 12, 2008. 64




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Item 4.
    
    Submission of Matters to a Vote of Security HoldersWe held our 2008 annual meeting of stockholders on May 27, 2008. The matters submitted
to our stockholders for a vote at the meeting were to elect the following seven director
nominees to serve for the ensuing year and until their successors are elected. The votes
cast and withheld for the election of directors were as follows:
 Nominee
    
    For
    

WithheldBennett S. LeBow
    
    
    36,848,233
    
    
    
    14,031,189Howard M. Lorber
    
    
    36,760,438
    
    
    
    14,118,984Ronald J. Bernstein
    
    
    38,061,162
    
    
    
    12,818,260Henry C. Beinstein
    
    
    36,823,806
    
    
    
    14,055,616Robert J. Eide
    
    
    38,165,457
    
    
    
    12,713,965Jeffrey S. Podell
    
    
    38,164,853
    
    
    
    12,714,569Jean E. Sharpe
    
    
    38,170,191
    
    
    
    12,709,231
 Based on these voting results, each of the directors nominated was elected.
 65




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##### Table of Contents



Item 6.
    
    Exhibits10.1
    
    
    Vector Supplemental Retirement Plan (as amended and restated April 24, 2008)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
 
 *
    
    Incorporated by reference. 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