##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For The Quarterly Period Ended March 31, 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 33131305/579-8000
  
 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 March 31, 2008 and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and March 31, 2007
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the three months ended March 31, 2008
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and March 31, 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 . Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    39Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    55Item 4. Controls and Procedures
    
    
    55PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    56Item 1A. Risk Factors
    
    
    56Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    56Item 6. Exhibits
    
    
    57SIGNATURE
    
    
    58EX-31.1 Certification of Chief Executive OfficerEX-31.2 Certification of Cheif Financial OfficerEX-32.1 Certification of Chief Executive OfficerEX-32.2 Certification of Chief Financial OfficerEX-99.1 Material Legal Proceedings




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETS:Current assets:Cash and cash equivalents
    
    $
    218,825
    
    
    $
    238,117Investment securities available for sale
    
    
    45,742
    
    
    
    45,875Accounts receivable  trade
    
    
    9,080
    
    
    
    3,113Inventories
    
    
    90,951
    
    
    
    86,825Deferred income taxes
    
    
    14,826
    
    
    
    18,336Other current assets
    
    
    3,519
    
    
    
    3,360Total current assets
    
    
    382,943
    
    
    
    395,626Property, plant and equipment, net
    
    
    53,106
    
    
    
    54,432Mortgage receivable
    
    
    21,445
    
    
    
    Long-term investments accounted for at cost
    
    
    72,961
    
    
    
    72,971Long-term investment accounted for under the equity method
    
    
    9,253
    
    
    
    10,495Investments in non-consolidated real estate businesses
    
    
    31,905
    
    
    
    35,731Restricted assets
    
    
    8,875
    
    
    
    8,766Deferred income taxes
    
    
    27,160
    
    
    
    26,637Intangible asset
    
    
    107,511
    
    
    
    107,511Prepaid pension costs
    
    
    43,105
    
    
    
    42,084Other assets
    
    
    30,297
    
    
    
    31,036Total assets
    
    $
    788,561
    
    
    $
    785,289LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt
    
    $
    27,838
    
    
    $
    20,618Accounts payable
    
    
    5,312
    
    
    
    6,980Accrued promotional expenses
    
    
    9,610
    
    
    
    9,210Income taxes payable, net
    
    
    10,654
    
    
    
    2,363Accrued excise and payroll taxes payable, net
    
    
    5,964
    
    
    
    5,327Settlement accruals
    
    
    22,133
    
    
    
    10,041Deferred income taxes
    
    
    98,197
    
    
    
    24,019Accrued interest
    
    
    4,988
    
    
    
    9,475Other current liabilities
    
    
    14,786
    
    
    
    21,304Total current liabilities
    
    
    199,482
    
    
    
    109,337Notes payable, long-term debt and other obligations, less current portion
    
    
    277,515
    
    
    
    277,178Fair value of derivatives embedded within convertible debt
    
    
    104,026
    
    
    
    101,582Non-current employee benefits
    
    
    42,343
    
    
    
    40,933Deferred income taxes
    
    
    64,385
    
    
    
    141,904Other liabilities
    
    
    13,429
    
    
    
    13,503Total liabilities
    
    
    701,180
    
    
    
    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,
60,307,930 and 63,307,020 shares issued and 60,361,978 and
and 60,361,068 shares outstanding
    
    
    6,036
    
    
    
    6,036Additional paid-in capital
    
    
    79,349
    
    
    
    89,494Retained earnings
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    14,853
    
    
    
    18,179Less: 2,945,952 shares of common stock in treasury, at cost
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity
    
    
    87,381
    
    
    
    100,852Total liabilities and stockholders equity
    
    $
    788,561
    
    
    $
    785,289
  3




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VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March 31, 2007Revenues*
    
    $
    132,205
    
    
    $
    133,892Expenses:Cost of goods sold*
    
    
    80,007
    
    
    
    84,685Operating, selling, administrative and general expenses
    
    
    24,157
    
    
    
    23,487Operating income
    
    
    28,041
    
    
    
    25,720Other income (expenses):Interest and dividend income
    
    
    1,971
    
    
    
    1,856Interest expense
    
    
    (15,253
    )
    
    
    (9,134
    )Change in fair value of derivatives embedded within
convertible debt
    
    
    (2,444
    )
    
    
    27Provision for loss on investments
    
    
    
    
    
    
    (1,158
    )Equity income from non-consolidated real
estate businesses
    
    
    13,320
    
    
    
    2,410Income from lawsuit settlement
    
    
    
    
    
    
    20,000Other, net
    
    
    (573
    )
    
    
    (5
    )Income before provision for income taxes
    
    
    25,062
    
    
    
    39,716Income tax expense
    
    
    10,755
    
    
    
    16,589Net income
    
    $
    14,307
    
    
    $
    23,127Per basic common share:Net income applicable to common shares
    
    $
    0.23
    
    
    $
    0.36Per diluted common share:Net income applicable to common shares
    
    $
    0.22
    
    
    $
    0.35Cash distributions declared per share
    
    $
    0.40
    
    
    $
    0.38
 
 *
    
    Revenues and Cost of goods sold include excise taxes of $40,522 and $44,485 for the
three months ended March 31, 2008 and 2007, respectively. 
 4




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VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance, December 31, 2007
    
    
    60,361,068
    
    
    $
    6,036
    
    
    $
    89,494
    
    
    $
    
    
    
    $
    18,179
    
    
    $
    (12,857
    )
    
    $
    100,852Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,307
    
    
    
    
    
    
    
    
    
    
    
    14,307Pension-related minimum liability adjustments,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    
    
    
    
    195Forward contract adjustments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Unrealized gain of long-term investments accounted for
under the equity method, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    (399
    )Unrealized gain on investment securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,131
    )
    
    
    
    
    
    
    (3,131
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,326
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,981Distributions on common stock
    
    
    
    
    
    
    
    
    
    
    (11,039
    )
    
    
    (14,307
    )
    
    
    
    
    
    
    
    
    
    
    (25,346
    )Exercise of options
    
    
    910
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Tax benefit of options exercised
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    881
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    881Balance, March 31, 2008
    
    
    60,361,978
    
    
    $
    6,036
    
    
    $
    79,349
    
    
    $
    
    
    
    $
    14,853
    
    
    $
    (12,857
    )
    
    $
    87,381
 
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VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March, 31, 2007Net cash provided by operating activities
    
    $
    14,159
    
    
    $
    31,069Cash flows from investing activities:Purchase of investment securities
    
    
    (5,182
    )
    
    
    (6,032
    )Proceeds from sale or liquidation of long-term investments
    
    
    10
    
    
    
    Purchase of long-term investments
    
    
    
    
    
    
    (62
    )Purchase of mortgage receivable
    
    
    (21,445
    )
    
    
    Distributions from non-consolidated real estate businesses
    
    
    15,822
    
    
    
    1,000Investments in non-consolidated real estate businesses
    
    
    
    
    
    
    (750
    )Increases in cash surrender value of life insurance policies
    
    
    (143
    )
    
    
    (201
    )Increase in non-current restricted assets
    
    
    (109
    )
    
    
    (91
    )Capital expenditures
    
    
    (1,227
    )
    
    
    (1,710
    )Net cash used in investing activities
    
    
    (12,274
    )
    
    
    (7,846
    )Cash flows from financing activities:Repayments of debt
    
    
    (1,501
    )
    
    
    (1,702
    )Deferred financing charges
    
    
    (99
    )
    
    
    Borrowings under revolver
    
    
    128,429
    
    
    
    119,440Repayments on revolver
    
    
    (121,303
    )
    
    
    (124,803
    )Distributions on common stock
    
    
    (26,717
    )
    
    
    (25,934
    )Tax benefit of options exercised
    
    
    1
    
    
    
    Proceeds from exercise of options
    
    
    13
    
    
    
    846Net cash used in financing activities
    
    
    (21,177
    )
    
    
    (32,153
    )Net decrease in cash and cash equivalents
    
    
    (19,292
    )
    
    
    (8,930
    )Cash and cash equivalents, beginning of period
    
    
    238,117
    
    
    
    146,769Cash and cash equivalents, end of period
    
    $
    218,825
    
    
    $
    137,839
 
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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
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March 31, 2007Net income
    
    $
    14,307
    
    
    $
    23,127Income attributable to participating securities
    
    
    (678
    )
    
    
    (1,565
    )Net income available to common stockholders
    
    $
    13,629
    
    
    $
    21,562
 
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March 31, 2007Weighted-average shares for basic EPS
    
    
    59,973,257
    
    
    
    59,364,708Plus incremental shares related to
stock options
    
    
    1,568,368
    
    
    
    1,569,491Weighted-average shares for diluted EPS
    
    
    61,541,625
    
    
    
    60,934,199
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March 31, 2007Number of stock options
    
    
    215,944
    
    
    
    522,767Weighted-average exercise price
    
    $
    25.47
    
    
    $
    20.07Weighted-average shares of non-
vested restricted stock
    
    
    69,563
    
    
    
    519,749Weighted-average expense per share
    
    $
    18.71
    
    
    $
    17.84Weighted-average number of shares
issuable upon conversion of debt
    
    
    12,315,489
    
    
    
    12,315,489Weighted-average conversion price
    
    $
    18.02
    
    
    $
    18.02
  8




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 Comprehensive Income
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March 31, 2007Net income
    
    $
    14,307
    
    
    $
    23,127Forward contract adjustments,
net of income taxes
    
    
    9
    
    
    
    1Pension-related minimum liability
adjustments, net of income taxes
    
    
    195
    
    
    
    299Net unrealized gains of long-term
investments accounted under
the equity method:Net unrealized gains reclassified
into net income, net of income taxes
    
    
    (399
    )
    
    
    Change in unrealized gains,
net of income taxes
    
    
    (399
    )
    
    
    Net unrealized gains on investment
securities available for sale:Change in net unrealized gains,
net of income taxes
    
    
    (3,131
    )
    
    
    13,830Net unrealized gains reclassified into
net income, net of income taxes
    
    
    
    
    
    
    684Change in unrealized gains,
net of income taxes
    
    
    (3,131
    )
    
    
    14,514Total comprehensive income
    
    $
    10,981
    
    
    $
    37,941
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
  March 31,
    
    
    December 31,2008
    
    
    2007Net unrealized gains on investment securities
available for sale, net of income taxes of
$7,776 and $9,943, respectively
    
    $
    11,236
    
    
    $
    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 $213 and $219, respectively
    
    
    (308
    )
    
    
    (317
    )Additional pension liability, net of income taxes
of $2,586 and $2,452 respectively
    
    
    3,925
    
    
    
    3,730Accumulated other comprehensive
income
    
    $
    14,853
    
    
    $
    18,179
 (e)     Contingencies:The Company records Liggetts product liability legal expenses and other litigation costs as
operating, selling, general and administrative expenses as those costs are incurred. As
discussed in Note 8, legal proceedings covering a wide range of matters are pending or
threatened in various jurisdictions against Liggett.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 pending tobacco-related litigation or the costs
of defending such cases, and the Company has not provided any amounts in its consolidated
financial statements for unfavorable outcomes, if any. Litigation is subject to many
uncertainties, and it is possible that the Companys consolidated financial position, results of
operations or cash flows could be materially adversely affected by an unfavorable outcome in any
such tobacco-related litigation.(f)     New Accounting Pronouncements:Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No.
157, Fair Value Measurements, (SFAS No. 157) for financial assets and financial liabilities.
SFAS No. 157 does not require any new fair value measurements but provides a definition of fair
value, establishes a framework for measuring fair value and expands disclosure about fair value
measurements. The Company will adopt SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities on January 1, 2009. The adoption of SFAS No. 157 on financial assets and financial
liabilities did not have a material impact on our consolidated results of operations, financial
position or cash flows. The Company is currently assessing the impact of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities on its consolidated results of operations,
financial position or cash flows.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits entities to elect to measure many financial
instruments and certain other items at fair value that are not currently required to be measured
at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007,
with early adoption permitted provided the entity also elects to apply the provisions of SFAS
No. 157. The Company has not elected to use the fair value option.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 In December 2007, the FASB issued SFAS No. 141(R), a revised version of SFAS No. 141, Business
Combinations. The revision is intended to simplify existing guidance and converge rulemaking
under U.S. Generally Accepted Accounting
Principles (GAAP) with international accounting rules. This statement applies prospectively
to business combinations where the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. An entity may not apply it
before that date. The new standard also converges financial reporting under U.S. GAAP with
international accounting rules. The Company is currently assessing the impact, if any, of SFAS
No. 141(R) on its consolidated financial statements, which will depend on future transactions.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities-an amendment of FASB Statement No. 133. SFAS No. 161 seeks qualitative
disclosures about the objectives and strategies for using derivatives, quantitative data about
the fair value of and gains and losses on derivative contracts, and details of
credit-risk-related contingent features in hedged positions. SFAS No. 161 also seeks enhanced
disclosure around derivative instruments in financial statements, accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and how hedges affect an
entitys financial position, financial performance and cash flows. SFAS No. 161 is effective for
the Company as of January 1, 2009 and the Company does not expect the adoption of SFAS No. 161
to have a material impact on its consolidated results of operations, financial position or cash
flows.On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP
No. APB 14-1). The Company is currently assessing the impact of FSP No. APB 14-1 on its
consolidated financial statements.2.
    
    RESTRUCTURINGThe only remaining component of the 2006 Vector Research restructuring at March 31, 2008 and
December 31, 2007 was employee severance and benefits of $46 and $70, respectively.
Approximately $24 was utilized during the three months ended March 31, 2008.The only remaining component of the 2004 Liggett Vector Brands restructuring at March 31, 2008
and December 31, 2007 was contract termination and exit costs and the balance was $582 and $598
at March 31, 2008 and December 31, 2007, respectively. Approximately $16 was utilized for the
three months ended March 31, 2008.3.
    
    INVESTMENT SECURITIES AVAILABLE FOR SALEInvestment securities classified as available for sale are carried at fair value, with net
unrealized gains or losses included as a component of stockholders equity, net of income taxes.
The components of investment securities available for sale at March 31, 2008 are as follows:
 Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueMarketable equity securities
    
    $
    26,730
    
    
    $
    19,371
    
    
    $
    (359
    )
    
    $
    45,742
 Investment securities available for sale as of March 31, 2008 and December 31, 2007 include New
Valley LLCs 13,888,889 shares of Ladenburg Thalmann Financial Services Inc. (LTS) common
stock, which were carried at $25,972 and $29,444, respectively). Investment securities
available for sale as of March 31, 2008 and December 31, 2007 also include 5,057,110 and
2,257,110 shares, respectively, of Opko Health Inc. (Opko) common stock, which were carried at
$10,418 and $6,433. In March 2008, the Company acquired 2,800,000 shares of Opko in a private
placement. These shares have not been registered for resale but are expected to be freely tradeable within one year.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 4.
    
    INVENTORIESInventories consist of:
 March 31,
    
    
    December 31,2008
    
    
    2007Leaf tobacco
    
    $
    43,997
    
    
    $
    41,502Other raw materials
    
    
    4,715
    
    
    
    4,847Work-in-process
    
    
    811
    
    
    
    710Finished goods
    
    
    47,248
    
    
    
    45,331Inventories at current cost
    
    
    96,771
    
    
    
    92,390LIFO adjustments
    
    
    (5,820
    )
    
    
    (5,565
    )$
    90,951
    
    
    $
    86,825
 The Company has a leaf inventory management program whereby, among other things, it is committed
to purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not
in excess of anticipated requirements and are at prices, including carrying costs, established
at the commitment date. At March 31, 2008, Liggett had leaf tobacco purchase commitments of
approximately $20,806. There were no leaf tobacco purchase commitments at Vector Tobacco at
that date. During 2007, the Company entered into a single source supply agreement for fire safe
cigarette paper through 2012.The Company capitalizes the incremental prepaid cost of the Master Settlement Agreement in
ending inventory. For the three months ended March 31, 2008, the Companys MSA expense was reduced by approximately
$1,100 as a result of the MSA assessment for 2007, which was received in March 2008, being less
than anticipated.LIFO inventories represent approximately 95% of total inventories at March 31, 2008 and December
31, 2007.5.
    
    LONG-TERM INVESTMENTSLong-term investments consist of investments in the following:
 March 31, 2008
    
    
    December 31, 2007Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueInvestment partnerships
accounted for at cost
    
    $
    72,961
    
    
    $
    86,973
    
    
    $
    72,971
    
    
    $
    89,007Investments accounted for
on the equity method
    
    $
    9,253
    
    
    $
    9,253
    
    
    $
    10,495
    
    
    $
    10,495
 The principal business of these investment partnerships is investing in investment securities
and real estate. The estimated fair value of the investment partnerships was provided by the
partnerships based on the indicated market values of the underlying assets or investment
portfolio. New Valley is an investor in real estate partnerships where it has committed to make
additional investments of up to an aggregate of $172 at March 31, 2008. The investments in
these investment partnerships are illiquid and the ultimate realization of these investments is
subject to the performance of the underlying partnership and its management by the general
partners.In April 2008, the Company elected to withdraw its investment in Jefferies Buckeye Fund, LLC
(Buckeye Fund), a privately managed investment partnership, of which Jefferies Asset
Management, LLC is the portfolio manager. The Company recorded a loss
of $567 associated with the Buckeye Fund's performance, which has been
included as Other expense on the Companys condensed consolidated statement of operations, for
the three months ended March 31, 2008. The Company received
proceeds of $8,328 in May 2008 and anticipates receiving an additional $925 of proceeds in the
second and third quarters of 2008.These investments are carried on the condensed consolidated balance sheet at cost. The fair
value determination disclosed above would be classified as Level 3 under the SFAS 157
hierarchy disclosed in Note 12 if such assets were recorded on the condensed consolidated
balance sheet at fair value. The fair values were determined on unobservable inputs and were
based on company assumptions, and information obtained from the partnerships based on the
indicated market values of the underlying assets or investment portfolio.The changes in the fair value of these investments as of March 31, 2008 were as follows:
 Investment
    
    
    Investmentpartnerships
    
    
    partnershipsaccounted for at
    
    
    accounted for oncost
    
    
    the equity methodBalance as of January 1, 2008
    
    $
    89,007
    
    
    $
    10,495Unrealized loss on long
term investments
    
    
    (2,034
    )
    
    
    (675
    )Realized loss on long-term
investments
    
    
    
    
    
    
    (567
    )Balance as of March 31, 2008
    
    $
    86,973
    
    
    $
    9,253
 In the future, the Company may invest in other investments, including limited partnerships, real
estate investments, equity securities, debt securities, derivatives and certificates of deposit,
depending on risk factors and potential rates of return.
 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 OBLIGATIONSNotes payable, long-term debt and other obligations consist of:
 March 31,
    
    
    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 $84,217 and $84,299*
    
    
    25,783
    
    
    
    25,7015% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $46,183 and $48,027*
    
    
    65,681
    
    
    
    63,837Liggett:Revolving credit facility
    
    
    21,908
    
    
    
    14,782Term loan under credit facility
    
    
    7,689
    
    
    
    7,822Equipment loans
    
    
    8,700
    
    
    
    9,660V.T. Aviation:Note payable
    
    
    6,197
    
    
    
    6,470VGR Aviation:Note payable
    
    
    4,290
    
    
    
    4,370Other
    
    
    105
    
    
    
    154Total notes payable, long-term debt and other obligations.
    
    
    305,353
    
    
    
    297,796Less:Current maturities
    
    
    (27,838
    )
    
    
    (20,618
    )Amount due after one year
    
    $
    277,515
    
    
    $
    277,178
 
 *
    
    The fair value of the derivatives embedded within the 3.875% Variable Interest
Senior Convertible Debentures ($71,161 and $67,911 at March 31, 2008 and December
31, 2007, respectively) and the 5% Variable Interest Senior Convertible Notes
($32,865 at March 31, 2008 and $33,671 at December 31, 2007, respectively) is
separately classified as a derivative liability in the condensed consolidated
balance sheets. 11% Senior Secured Notes due 2015  Vector:In August 2007, the Company sold $165,000 of its 11% Senior Secured
Notes due 2015 (the Senior Secured Notes) in a private offering to
qualified institutional investors in accordance with Rule 144A of the
Securities Act of 1933. On April 29, 2008, the Company commenced an
offer to exchange the Secured Notes for an equal amount of newly
issued 11% Senior Secured Notes due 2015. The new Secured Notes have
substantially the same terms as the original notes, except that the
new Secured Notes have been registered under the Securities Act.
 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:Vector has issued two series of variable interest senior convertible
debt. Both series of debt pay interest on a quarterly basis at a
stated rate plus an additional amount of interest on each payment
date. The additional amount is based on the amount of cash dividends
paid during the prior three-month period ending on the record date for
such interest payment multiplied by the total number of shares of its
common stock into which the debt will be convertible on such record
date.A summary of non-cash interest expense associated with the embedded derivative liability
associated with the Companys Variable Interest Senior Convertible Debt for the three months
ended March 31, 2008 and 2007 is as follows:
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March 31, 20073.875% convertible debentures
    
    $
    90
    
    
    $
    (241
    )5% convertible notes
    
    
    1,188
    
    
    
    708Interest expense associated with
embedded derivatives
    
    $
    1,278
    
    
    $
    467
 A summary of non-cash changes in fair value of derivatives embedded within convertible debt is
as follows:
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March 31, 20073.875% convertible debentures
    
    $
    (3,250
    )
    
    $
    (891
    )5% convertible notes
    
    
    806
    
    
    
    918(Loss) gain on changes in fair value of
derivatives embedded within
convertible debt
    
    $
    (2,444
    )
    
    $
    27
 The following table reconciles the fair value of derivatives embedded within convertible debt at
March 31, 2008.
 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
    
    
    $
    104,026
 14




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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:A summary of non-cash interest expense associated with the beneficial conversion feature on the
Companys Variable Interest Senior Convertible Debt for the three months ended March 31, 2008
and 2007 is as follows:
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March 31, 2007Amortization of beneficial
conversion feature:3.875% convertible debentures
    
    $
    (8
    )
    
    $
    (168
    )5% convertible notes
    
    
    656
    
    
    
    376Interest expense associated with
beneficial conversion feature.
    
    $
    648
    
    
    $
    208
 Unamortized Debt Discount:The following table reconciles unamortized debt discount at March 31, 2008:
 3.875%
    
    
    5%Convertible
    
    
    ConvertibleDebentures
    
    
    Notes
    
    
    TotalBalance at December 31, 2007
    
    $
    84,299
    
    
    $
    48,027
    
    
    $
    132,326Amortization of embedded derivative
    
    
    (90
    )
    
    
    (1,188
    )
    
    
    (1,278
    )Amortization of beneficial conversion
feature
    
    
    8
    
    
    
    (656
    )
    
    
    (648
    )Balance at March 31, 2008
    
    $
    84,217
    
    
    $
    46,183
    
    
    $
    130,400
 Revolving Credit Facility  Liggett:Liggett has a $50,000 credit facility with Wachovia Bank, N.A. (Wachovia) under which $21,908
was outstanding at March 31, 2008. Availability as determined under the facility was
approximately $8,200 based on eligible collateral at March 31, 2008.7.
    
    EMPLOYEE BENEFIT PLANSDefined Benefit and Postretirement Plans:Net periodic benefit cost for the Companys pension and other postretirement benefit plans for
the three months ended March 31, 2008 and 2007 consists of the following:
 OtherPension Benefits
    
    
    Postretirement BenefitsThree Months Ended
    
    
    Three Months EndedMarch 31, 2008
    
    
    March 31, 2007
    
    
    March 31, 2008
    
    
    March 31, 2007Service cost  benefits earned
during the period
    
    $
    1,035
    
    
    $
    1,062
    
    
    $
    4
    
    
    $
    4Interest cost on projected benefit
obligation
    
    
    2,381
    
    
    
    2,281
    
    
    
    148
    
    
    
    148Expected return on plan assets
    
    
    (3,036
    )
    
    
    (3,183
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    350
    
    
    
    351
    
    
    
    
    
    
    
    Amortization of net actuarial loss
    
    
    25
    
    
    
    176
    
    
    
    (45
    )
    
    
    (26
    )Net expense
    
    $
    755
    
    
    $
    687
    
    
    $
    107
    
    
    $
    126
 The Company did not make contributions to its pension benefits plans for the three months ended
March 31, 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.
 15




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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. For the three months ended March 31,
2008 and 2007, Liggett incurred legal expenses and other litigation
related costs totaling approximately $1,363 and $1,031, respectively.Individual ActionsAs of March 31, 2008, there were 37 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
1,900 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 March 31, 2008:
 NumberState
    
    of CasesFlorida
    
    
    12New York
    
    
    11Louisiana
    
    
    5Mississippi
    
    
    2West Virginia
    
    
    2District of Columbia
    
    
    1Maryland
    
    
    1Missouri
    
    
    1Ohio
    
    
    1Pennsylvania
    
    
    1
 Of the individual cases listed above, three name Liggett as the only defendant. 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. On April 16, 2008, the Florida Supreme Court accepted jurisdiction of
the certified issues for appeal. Briefing of these issues is pending. 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. In March 2005, in Ferlanti v.
Liggett Group Inc.,a Florida state court granted Liggetts motion for summary judgment. The
plaintiff appealed and in June 2006, the appellate court reversed and remanded back to the trial
court. The court granted leave to plaintiff to add a claim for punitive
damages. Trial commenced on February 19, 2008 and, on February 22, 2008, the court declared a
mistrial. This case has since been consolidated with another Engle progeny case, where other
defendants are named. The only other individual case where Liggett was the sole defendant,
Duecker v. Liggett Group Inc.,was administratively closed.
 16




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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. As of March 31, 2008, Liggett and/or the Company have been served in
approximately 1,900 Engleprogeny cases in both state and federal courts in Florida. Other
cigarette manufacturers have been named as defendants in these cases. These cases include
approximately 8,150 plaintiffs. Although the deadline for filing Engleprogeny cases has
passed, the total number of cases will increase as not all cases have been served. For further
information on the Englecase, see Class Actions EngleCase, below.Class ActionsAs of March 31, 2008, there were 11 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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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, as of March 31, 2008,
Liggett and/or the Company have been served in approximately 1,900 Engleprogeny cases. Other
cigarette manufacturers have been named in these cases. These cases include approximately 8,150
plaintiffs.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 dismiss the case. Oral argument was held in March 2007. A further hearing on the
motion is scheduled for 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, at which time
Liggett 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.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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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 Good v. Altria Group Inc.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 $279,000) 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 March 31, 2008, there were two Governmental Actions pending against Liggett, only one of
which is active. The claims asserted in health care cost recovery actions vary. In these cases,
the governmental entities typically assert equitable claims that the tobacco industry was
unjustly enriched by their payment of health care costs allegedly attributable to smoking and
seek reimbursement of those costs. Other claims made by some but not all plaintiffs include the
equitable claim of indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, breach of special duty, fraud, negligent misrepresentation,
conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud,
antitrust, deceptive trade practices and false advertising, and claims under RICO.In 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
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 
 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, commencing January 1, 2007.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 March 31, 2008, there was one Third-Party Payor Action 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.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 is one individual action pending in New York state court, Hausrath v. Philip Morris Inc.,
where Liggett is a defendant, along with other cigarette manufacturers, that has been set for
trial on September 8, 2008. There are at least nine individual actions in Florida, all Engle
progeny cases, that may be set for trial in 2008. Trial dates are subject to change.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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.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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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 March 31, 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 its 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 36 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.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,
plus interest, 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;
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 
    
    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.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 March 31, 2008, in connection with the foregoing matters, no
other amounts have been accrued in the accompanying condensed consolidated financial statements
for any additional amounts that may be payable by Liggett under the settlement agreements with
Florida, Mississippi and Texas. There can be no assurance that Liggett will
resolve these matters or that Liggett will not be required to make additional material
payments, which payments could adversely affect the Companys consolidated financial position,
results of operations or cash flows.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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, Liggett and/or the
Company have been served in approximately 1,900 Engleprogeny cases. Other cigarette
manufacturers have been named in these cases. These cases include approximately 8,150
plaintiffs. 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.Other Litigation: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. In May 2007, New Valley
received a $20,000 payment from the government in connection with the settlement. The Company
recognized a pre-tax gain in 2007 of $19,590, net of operating, selling, administrative and
general expenses of $410, in connection with the settlement.
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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 March 31, 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 months ended March 31, 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. For the three months ended March 31, 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 three months ended March 31, 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 three months
ended March 31, 2007 has been computed by applying the discrete method in accordance with FIN 18
to account for these two items.The Companys current deferred income tax liabilities increased by approximately $75,500 during the
three months ended March 31, 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 March 31, 2008 and December 31,
2007:
 March 31, 2008
    
    
    December 31, 2007Douglas Elliman Realty LLC
    
    $
    31,905
    
    
    $
    31,89316th and K Holdings LLC
    
    
    
    
    
    
    3,838Investments in non-consolidated real
estate businesses
    
    $
    31,905
    
    
    $
    35,731
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 Residential Brokerage Business.New Valley recorded income of $1,337 and $4,156 for the three
months ended March 31, 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 $325 and $245
for the three months ended March 31, 2008 and 2007, respectively.Summarized financial information for Douglas Elliman Realty for the three months ended March 31,
2008 and 2007 and as of March 31, 2008 and December 31, 2007 is presented below.
 March 31, 2008
    
    
    December 31, 2007Cash
    
    $
    19,418
    
    
    $
    26,916Other current assets
    
    
    9,020
    
    
    
    9,462Property, plant and equipment, net
    
    
    17,444
    
    
    
    18,394Trademarks
    
    
    21,663
    
    
    
    21,663Goodwill
    
    
    38,305
    
    
    
    38,294Other intangible assets, net
    
    
    1,538
    
    
    
    1,928Other non-current assets
    
    
    919
    
    
    
    850Notes payable  current
    
    
    584
    
    
    
    581Current portion of notes payable to member -
Prudential Real Estate Financial Services
Of America, Inc.
    
    
    4,373
    
    
    
    4,373Current portion of notes payable
to member  New Valley
    
    
    625
    
    
    
    625Other current liabilities
    
    
    18,516
    
    
    
    26,579Notes payable  long term
    
    
    890
    
    
    
    2,402Notes payable to member  Prudential Real
Estate Financial Services of America, Inc.
    
    
    12,389
    
    
    
    15,115Notes payable to member  New Valley
    
    
    8,673
    
    
    
    8,583Other long-term liabilities
    
    
    7,874
    
    
    
    6,599Members equity
    
    
    54,383
    
    
    
    52,650
 Three Months EndedMarch 31,2008
    
    
    2007Revenues
    
    $
    81,363
    
    
    $
    91,849Costs and expenses
    
    
    77,229
    
    
    
    81,433Depreciation expense.
    
    
    1,350
    
    
    
    1,600Amortization expense.
    
    
    74
    
    
    
    87Interest expense, net
    
    
    863
    
    
    
    1,274Income tax expense
    
    
    115
    
    
    
    110Net income
    
    $
    1,732
    
    
    $
    7,345
 16thand 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 as the distribution related to the sale of the St. Regis hotel. New Valley recorded equity losses of $3,796 and $43 for the three months ended March
31, 2008 and 2007, respectively, associated with 16th and K Holdings LLC. For the
three months ended March 31, 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.
 26




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 Mortgage receivable.In March 2008, a subsidiary of New Valley LLC 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
face value plus acquisition costs. The loan is being accounted for under the cost recovery
method.The borrowers are Escena-PSC, LLC and Palm Springs Classic, LLC, a joint venture of Lennar Homes
of California, Inc and Empire Land, LLC. Lennar Homes is an affiliate of Lennar Corporation. The
project consists of 867 residential lots with site and public infrastructure, a 18-hole Nicklaus
Design golf course, a substantially completed clubhouse, and a 450-room hotel site on seven
acres of land.11.
    
    INVESTMENTS AND FAIR VALUE MEASUREMENTSOn January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, for
financial assts 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
 This hierarchy requires the use of observable market data, when available, and to minimize the
use of unobservable inputs when determining fair value.
 27




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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 population of recurring financial assets and liabilities subject to fair value
measurements and the necessary disclosures are as follows:
 Fair Value Measurements as of March 31, 2008QuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Cash and cash equivalents
    
    $
    211,896
    
    
    $
    211,896
    
    
    $
    
    
    
    $
    Investment securities
available for sale
    
    
    45,742
    
    
    
    39,897
    
    
    
    5,845
    
    
    
    Total
    
    $
    254,036
    
    
    $
    248,191
    
    
    $
    5,845
    
    
    $
    Liabilities:Fair Value of
derivatives embedded
within convertible debt
    
    $
    104,026
    
    
    $
    
    
    
    $
    
    
    
    $
    104,026
 The fair value of investment securities available for sale included in Level 1 are based on
quoted market prices from various stock exchanges. The $5,845 of the investments securities
available for sale in Level 2 are not registered and therefore do not have direct market quotes.
 28




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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 March 31, 2008 are disclosed in Note 6.12.
    
    SEGMENT INFORMATIONThe Companys significant business segments for the three months ended
March 31, 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.Financial information for the Companys continuing operations before
taxes for the three months ended March 31, 2008
and 2007 follows:
 Vector
    
    
    Real
    
    
    CorporateLiggett
    
    
    Tobacco
    
    
    Estate
    
    
    and Other
    
    
    TotalThree months ended March 31, 2008Revenues
    
    $
    131,645
    
    
    $
    560
    
    
    
    
    
    
    
    
    
    
    $
    132,205Operating income (loss)
    
    
    37,344
    
    
    
    (2,410
    )
    
    
    
    
    
    
    (6,893
    )
    
    
    28,041Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    13,320
    
    
    
    
    
    
    
    13,320Identifiable assets
    
    
    336,829
    
    
    
    2,176
    
    
    
    53,350
    
    
    
    396,206
    
    
    
    788,561Depreciation and amortization
    
    
    1,853
    
    
    
    30
    
    
    
    
    
    
    
    585
    
    
    
    2,468Capital expenditures
    
    
    1,215
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    1,227Three months ended March 31, 2007Revenues
    
    $
    132,813
    
    
    $
    1,079
    
    
    $
    
    
    
    $
    
    
    
    $
    133,892Operating income (loss)
    
    
    35,460
    
    
    
    (2,304
    )
    
    
    
    
    
    
    (7,436
    )
    
    
    25,720Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    2,410
    
    
    
    
    
    
    
    2,410Identifiable assets
    
    
    311,479
    
    
    
    7,808
    
    
    
    30,455
    
    
    
    315,204
    
    
    
    664,946Depreciation and amortization
    
    
    2,011
    
    
    
    33
    
    
    
    
    
    
    
    585
    
    
    
    2,629Capital expenditures
    
    
    1,666
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    1,710
 29




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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 issued 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 LLC. Presented herein are unaudited
condensed consolidating balance sheets as of March 31, 2008 and December 31, 2007, the related
unaudited condensed consolidating statements of operations for the three months ended March 31,
2008 and 2007 and the unaudited condensed consolidated statements of cash flows for the three
months ended March 31, 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.
 30




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 CONDENSED CONSOLIDATING BALANCE SHEETS
 March 31, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    212,459
    
    
    $
    6,366
    
    
    $
    
    
    
    $
    
    
    
    $
    218,825Investment securities
available for sale
    
    
    45,664
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    45,742Accounts receivable 
trade
    
    
    
    
    
    
    9,080
    
    
    
    
    
    
    
    
    
    
    
    9,080Intercompany receivables
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    (90
    )
    
    
    Inventories
    
    
    
    
    
    
    90,951
    
    
    
    
    
    
    
    
    
    
    
    90,951Deferred income taxes
    
    
    14,464
    
    
    
    362
    
    
    
    
    
    
    
    
    
    
    
    14,826Income taxes receivable
    
    
    
    
    
    
    14,774
    
    
    
    
    
    
    
    (14,774
    )
    
    
    Other current assets
    
    
    303
    
    
    
    3,216
    
    
    
    
    
    
    
    
    
    
    
    3,519Total current assets
    
    
    272,980
    
    
    
    124,749
    
    
    
    78
    
    
    
    (14,864
    )
    
    
    382,943Property, plant and equipment, net
    
    
    834
    
    
    
    52,272
    
    
    
    
    
    
    
    
    
    
    
    53,106Mortgage receivable
    
    
    
    
    
    
    
    
    
    
    21,445
    
    
    
    
    
    
    
    21,445Long-term investments accounted
for at cost
    
    
    72,233
    
    
    
    
    
    
    
    728
    
    
    
    
    
    
    
    72,961Long-term investments accounted
under the equity method
    
    
    9,253
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,253Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    31,905
    
    
    
    
    
    
    
    31,905Investments in consolidated
subsidiaries
    
    
    220,395
    
    
    
    
    
    
    
    
    
    
    
    (220,395
    )
    
    
    Restricted assets
    
    
    3,951
    
    
    
    4,924
    
    
    
    
    
    
    
    
    
    
    
    8,875Deferred income taxes
    
    
    21,928
    
    
    
    905
    
    
    
    4,327
    
    
    
    
    
    
    
    27,160Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    43,105
    
    
    
    
    
    
    
    
    
    
    
    43,105Other assets
    
    
    17,350
    
    
    
    12,946
    
    
    
    1
    
    
    
    
    
    
    
    30,297Total assets
    
    $
    618,924
    
    
    $
    346,412
    
    
    $
    58,484
    
    
    $
    (235,259
    )
    
    $
    788,561
 31




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 March 31, 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
    
    $
    
    
    
    $
    27,838
    
    
    $
    
    
    
    $
    
    
    
    $
    27,838Accounts payable
    
    
    364
    
    
    
    4,942
    
    
    
    6
    
    
    
    
    
    
    
    5,312Intercompany payables
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    (90
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    9,610
    
    
    
    
    
    
    
    
    
    
    
    9,610Income taxes payable, net
    
    
    3,848
    
    
    
    
    
    
    
    21,580
    
    
    
    (14,774
    )
    
    
    10,654Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    5,964
    
    
    
    
    
    
    
    
    
    
    
    5,964Settlement accruals
    
    
    
    
    
    
    22,133
    
    
    
    
    
    
    
    
    
    
    
    22,133Deferred income taxes
    
    
    86,223
    
    
    
    11,974
    
    
    
    
    
    
    
    
    
    
    
    98,197Accrued interest
    
    
    4,988
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,988Other current liabilities
    
    
    3,826
    
    
    
    10,181
    
    
    
    779
    
    
    
    
    
    
    
    14,786Total current liabilities
    
    
    99,249
    
    
    
    92,732
    
    
    
    22,365
    
    
    
    (14,864
    )
    
    
    199,482Notes payable, long-term debt and
other obligations, less current
portion
    
    
    256,466
    
    
    
    21,049
    
    
    
    
    
    
    
    
    
    
    
    277,515Fair value of derivatives embedded
within convertible debt
    
    
    104,026
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104,026Non-current employee benefits
    
    
    27,178
    
    
    
    15,165
    
    
    
    
    
    
    
    
    
    
    
    42,343Deferred income taxes
    
    
    44,143
    
    
    
    20,132
    
    
    
    110
    
    
    
    
    
    
    
    64,385Other liabilities
    
    
    481
    
    
    
    10,523
    
    
    
    2,425
    
    
    
    
    
    
    
    13,429Total liabilities
    
    
    531,543
    
    
    
    159,601
    
    
    
    24,900
    
    
    
    (14,864
    )
    
    
    701,180Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    87,381
    
    
    
    186,811
    
    
    
    33,584
    
    
    
    (220,395
    )
    
    
    87,381Total liabilities and
stockholders equity
    
    $
    618,924
    
    
    $
    346,412
    
    
    $
    58,484
    
    
    $
    (235,259
    )
    
    $
    788,561
 32




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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
 33




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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
 34




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 Three Months Ended March 31, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    132,205
    
    
    $
    
    
    
    $
    
    
    
    $
    132,205Expenses:Cost of goods sold
    
    
    
    
    
    
    80,007
    
    
    
    
    
    
    
    
    
    
    
    80,007Operating, selling,
administrative and
general expenses
    
    
    7,194
    
    
    
    16,568
    
    
    
    395
    
    
    
    
    
    
    
    24,157Management fee
expense
    
    
    
    
    
    
    1,985
    
    
    
    
    
    
    
    (1,985
    )
    
    
    Operating income
(loss)
    
    
    (7,194
    )
    
    
    33,645
    
    
    
    (395
    )
    
    
    1,985
    
    
    
    28,041Other income (expenses):Interest and dividend
income
    
    
    1,896
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    1,971Interest expense
    
    
    (14,671
    )
    
    
    (582
    )
    
    
    
    
    
    
    
    
    
    
    (15,253
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    (2,444
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,444
    )Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    13,320
    
    
    
    
    
    
    
    13,320Equity income in
consolidated
subsidiaries
    
    
    27,742
    
    
    
    
    
    
    
    
    
    
    
    (27,742
    )
    
    
    Management fee income
    
    
    1,985
    
    
    
    
    
    
    
    
    
    
    
    (1,985
    )
    
    
    Other, net
    
    
    (569
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (573
    )Income before
provision for income
taxes
    
    
    6,745
    
    
    
    33,138
    
    
    
    12,921
    
    
    
    (27,742
    )
    
    
    25,062Income tax
benefit (expense)
    
    
    7,562
    
    
    
    (13,032
    )
    
    
    (5,285
    )
    
    
    
    
    
    
    (10,755
    )Net income
    
    $
    14,307
    
    
    $
    20,106
    
    
    $
    7,636
    
    
    $
    (27,742
    )
    
    $
    14,307
 35




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 Three Months Ended March 31, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    133,892
    
    
    $
    
    
    
    $
    
    
    
    $
    133,892Expenses:Cost of goods sold
    
    
    
    
    
    
    84,685
    
    
    
    
    
    
    
    
    
    
    
    84,685Operating, selling,
administrative and
general expenses
    
    
    7,772
    
    
    
    15,096
    
    
    
    619
    
    
    
    
    
    
    
    23,487Management fee expense
    
    
    
    
    
    
    1,917
    
    
    
    
    
    
    
    (1,917
    )
    
    
    Operating
income (loss)
    
    
    (7,772
    )
    
    
    32,194
    
    
    
    (619
    )
    
    
    1,917
    
    
    
    25,720Other income
(expenses):Interest and dividend
income
    
    
    4,272
    
    
    
    139
    
    
    
    
    
    
    
    (2,555
    )
    
    
    1,856Interest expense
    
    
    (8,138
    )
    
    
    (3,551
    )
    
    
    
    
    
    
    2,555
    
    
    
    (9,134
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27Provision for loss on
Investments,
net
    
    
    2
    
    
    
    
    
    
    
    (1,160
    )
    
    
    
    
    
    
    (1,158
    )Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    2,410
    
    
    
    
    
    
    
    2,410Income from lawsuit
settlement.
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    20,000Equity income in
consolidated
subsidiaries
    
    
    29,117
    
    
    
    
    
    
    
    
    
    
    
    (29,117
    )
    
    
    Management fee income
    
    
    1,917
    
    
    
    
    
    
    
    
    
    
    
    (1,917
    )
    
    
    Other, net
    
    
    (4
    )
    
    
    1
    
    
    
    (2
    )
    
    
    
    
    
    
    (5
    )Income before
provision for income
taxes
    
    
    19,421
    
    
    
    28,783
    
    
    
    20,629
    
    
    
    (29,117
    )
    
    
    39,716Income tax
benefit (expense)
    
    
    3,706
    
    
    
    (12,326
    )
    
    
    (7,969
    )
    
    
    
    
    
    
    (16,589
    )Net income
    
    $
    23,127
    
    
    $
    16,457
    
    
    $
    12,660
    
    
    $
    (29,117
    )
    
    $
    23,127
 36




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 Three Months Ended March 31, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by (used in)
operating activities
    
    $
    16,735
    
    
    $
    (4,689
    )
    
    $
    968
    
    
    $
    1,145
    
    
    $
    14,159Cash flows from investing
activities:Purchase of investment
securities
    
    
    (5,182
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,182
    )Proceeds from sale or
liquidation of long-term
investments
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Purchase of mortgage
receivable
    
    
    
    
    
    
    
    
    
    
    (21,445
    )
    
    
    
    
    
    
    (21,445
    )Distributions from
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    15,822
    
    
    
    
    
    
    
    15,822Increase in cash surrender
value of life insurance
policies
    
    
    (101
    )
    
    
    (42
    )
    
    
    
    
    
    
    
    
    
    
    (143
    )(Increase) decrease
in non-current restricted assets
    
    
    (92
    )
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    (109
    )Investments in
subsidiaries
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (1,227
    )
    
    
    
    
    
    
    
    
    
    
    (1,227
    )Net cash used in
    
    
    (6,375
    )
    
    
    (1,286
    )
    
    
    (5,613
    )
    
    
    1,000
    
    
    
    (12,274
    )investing activitiesCash flows from
financing activities:Repayments of debt
    
    
    
    
    
    
    (1,501
    )
    
    
    
    
    
    
    
    
    
    
    (1,501
    )Deferred financing charges
    
    
    (99
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99
    )Borrowings under revolver
    
    
    
    
    
    
    128,429
    
    
    
    
    
    
    
    
    
    
    
    128,429Repayments on revolver
    
    
    
    
    
    
    (121,303
    )
    
    
    
    
    
    
    
    
    
    
    (121,303
    )Capital contributions received
    
    
    
    
    
    
    1,000
    
    
    
    4,645
    
    
    
    (5,645
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (3,500
    )
    
    
    
    
    
    
    3,500
    
    
    
    Dividends and distributions
on common stock
    
    
    (26,717
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,717
    )Proceeds from exercise of
Vector options and warrants
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Tax benefit of options
exercised
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net cash provided by (used in)
financing activities
    
    
    (26,802
    )
    
    
    3,125
    
    
    
    4,645
    
    
    
    (2,145
    )
    
    
    (21,177
    )Net decrease in cash
and cash equivalents
    
    
    (16,442
    )
    
    
    (2,850
    )
    
    
    
    
    
    
    
    
    
    
    (19,292
    )Cash and cash equivalents,
beginning of year
    
    
    228,901
    
    
    
    9,216
    
    
    
    
    
    
    
    
    
    
    
    238,117Cash and cash equivalents, end of
year
    
    $
    212,459
    
    
    $
    6,366
    
    
    $
    
    
    
    $
    
    
    
    $
    218,825
 37




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 Three Months Ended March 31, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by operating
activities
    
    $
    17,357
    
    
    $
    38,902
    
    
    $
    98
    
    
    $
    (25,288
    )
    
    $
    31,069Cash flows from investing
activities:Purchase of investment
securities
    
    
    (6,032
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,032
    )Purchase of long-term
investments
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (62
    )Distributions from
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Investments in
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    (750
    )
    
    
    
    
    
    
    (750
    )Increase in cash surrender
value of life insurance
policies
    
    
    (93
    )
    
    
    (108
    )
    
    
    
    
    
    
    
    
    
    
    (201
    )(Increase) decrease in non-current
restricted assets
    
    
    (150
    )
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    (91
    )Receipt of repayment of
notes receivable
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    (4,000
    )
    
    
    Investments in subsidiaries
    
    
    (950
    )
    
    
    
    
    
    
    
    
    
    
    950
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (1,710
    )
    
    
    
    
    
    
    
    
    
    
    (1,710
    )Net cash (used in) provided by
investing activities
    
    
    (3,225
    )
    
    
    (1,759
    )
    
    
    188
    
    
    
    (3,050
    )
    
    
    (7,846
    )Cash flows from
financing activities:Repayments of debt
    
    
    
    
    
    
    (5,702
    )
    
    
    
    
    
    
    4,000
    
    
    
    (1,702
    )Borrowings under revolver
    
    
    
    
    
    
    119,440
    
    
    
    
    
    
    
    
    
    
    
    119,440Repayments on revolver
    
    
    
    
    
    
    (124,803
    )
    
    
    
    
    
    
    
    
    
    
    (124,803
    )Distributions on common stock
    
    
    (25,934
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,934
    )Capital contributions received
    
    
    
    
    
    
    950
    
    
    
    
    
    
    
    (950
    )
    
    
    Intercompany dividends
    
    
    
    
    
    
    (25,000
    )
    
    
    (288
    )
    
    
    25,288
    
    
    
    Proceeds from exercise of
options and warrants
    
    
    846
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    846Net cash used in
financing activities
    
    
    (25,088
    )
    
    
    (35,115
    )
    
    
    (288
    )
    
    
    28,338
    
    
    
    (32,153
    )Net (decrease) increase in cash and
cash equivalents.
    
    
    (10,956
    )
    
    
    2,028
    
    
    
    (2
    )
    
    
    
    
    
    
    (8,930
    )Cash and cash equivalents,
beginning of year
    
    
    132,942
    
    
    
    13,797
    
    
    
    30
    
    
    
    
    
    
    
    146,769Cash and cash equivalents, end of
year
    
    $
    121,986
    
    
    $
    15,825
    
    
    $
    28
    
    
    $
    
    
    
    $
    137,839
 38




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  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.
  39




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##### Table of Contents



Recent Developments
 NASA Settlement.
 Issuance of 11% Senior Secured Notes
 Proposed and enacted excise tax increases.
 Tobacco Settlement Agreements.
 40




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##### Table of Contents



41




---



##### Table of Contents



Real Estate Activities th th th
 Sale of St. Regis Hotel.
 Escena
 Recent Developments in Tobacco-Related Litigation
  42




---



##### Table of Contents



Engle v. R.J. Reynolds Tobacco Co. Engle Engle Engle
 Lukacs v. R.J. Reynolds
Tobacco Company Lukacs Engle Engle Engle
  43




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##### Table of Contents



Critical Accounting Policies
  Recently Adopted Accounting Pronouncements.
 Results of Operations
   Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2008
    
    
    March 31, 2007Revenues:Liggett
    
    $
    131,645
    
    
    $
    132,813Vector Tobacco
    
    
    560
    
    
    
    1,079Total revenues
    
    $
    132,205
    
    
    $
    133,892Operating income:Liggett
    
    $
    37,344
    
    
    $
    35,460Vector Tobacco
    
    
    (2,410
    )
    
    
    (2,304
    )Total tobacco
    
    
    34,934
    
    
    
    33,156Corporate and other
    
    
    (6,893
    )
    
    
    (7,436
    )Total operating income
    
    $
    28,041
    
    
    $
    25,720
 44




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##### Table of Contents



Three Months Ended March 31, 2008 Compared to Three Months ended March 31, 2007
 Revenues.
 Tobacco Revenues.
 Tobacco Revenues.
  Tobacco Gross Profit.
   Expenses.
 45




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##### Table of Contents



Other Income (Expenses).
  Income before income taxes.
 Income tax provision.
  46




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##### Table of Contents



Liquidity and Capital Resources
     Liggett
  47




---



##### Table of Contents



Engle Engle
  Vector
  Market Risk
  48




---



##### Table of Contents



New Accounting Pronouncements
   49




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##### Table of Contents



Legislation and Regulation
    50




---



##### Table of Contents



51




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##### Table of Contents



QUEST QUEST QUEST
  52




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##### Table of Contents



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,
 53




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##### Table of Contents




    
    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,
    
    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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
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PART II
 OTHER INFORMATION
 
 Item 1.
    
    Legal 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 March 31, 2008.No securities of ours were repurchased by us or our affiliated purchasers during the
three months ended March 31, 2008.
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Item 6.
    
    Exhibits31.1
    
    
    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. 57




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SIGNATURE
  VECTOR GROUP LTD.
(Registrant)By:
    /s/ J. Bryant Kirkland IIIJ. Bryant Kirkland IIIVice President, Treasurer and Chief
Financial Officer  58