##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For The Quarterly Period Ended June 30, 2009
 
 VECTOR GROUP LTD.
  Delaware
    
    1-5759
    
    65-0949535(State or other jurisdiction of 
incorporation or organization)
    
    Commission File Number
    
    (I.R.S. Employer Identification No.)
 100 S.E. Second Street
Miami, Florida 33131
305/579-8000
 
 þ o
 o o
  þ Large accelerated filer
    
    o Accelerated filer
    
    o Non-accelerated filer
(Do not check if a smaller reporting company)
    
    o Smaller reporting company
 o þ




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##### 



VECTOR GROUP LTD.
 FORM 10-Q
 TABLE OF CONTENTS
 PagePART
I. FINANCIAL INFORMATIONItem 1.
Vector Group Ltd. Condensed Consolidated Financial Statements
(Unaudited):Condensed Consolidated Balance Sheets as of June 30, 2009 and
December 31, 2008
    
    
    2Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2009 and June 30, 2008
    
    
    3Condensed Consolidated Statement of Stockholders Equity for the six months ended
June 30, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2009 and June 30, 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    50Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    76Item 4. Controls and Procedures
    
    
    76PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    77Item 1A. Risk Factors
    
    
    77Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    77Item 4. Submission of Matters to a Vote of Security Holders
    
    
    78Item 6. Exhibits
    
    
    79SIGNATURE
    
    
    80EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
  -1-




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##### Table of Contents



PART
I. FINANCIAL INFORMATION
 
 Item 1.
Vector Group Ltd. Condensed Consolidated Financial Statements
(Unaudited)
 
 VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 June 30,
    
    
    December 31,2009
    
    
    2008ASSETS:Current assets:Cash and cash equivalents
    
    $
    232,526
    
    
    $
    211,105Investment securities available for sale
    
    
    42,219
    
    
    
    28,518Accounts receivable  trade
    
    
    9,511
    
    
    
    9,506Inventories
    
    
    102,166
    
    
    
    92,581Deferred income taxes
    
    
    5,444
    
    
    
    3,642Restricted assets
    
    
    5,567
    
    
    
    2,653Other current assets
    
    
    3,197
    
    
    
    7,278Total current assets
    
    
    400,630
    
    
    
    355,283Property, plant and equipment, net
    
    
    46,942
    
    
    
    50,691Mortgage receivable
    
    
    
    
    
    
    17,704Investment in real estate
    
    
    12,204
    
    
    
    Long-term investments accounted for at cost
    
    
    51,118
    
    
    
    51,118Investments in non-consolidated real estate businesses
    
    
    43,820
    
    
    
    50,775Restricted assets
    
    
    6,109
    
    
    
    6,555Deferred income taxes
    
    
    58,207
    
    
    
    45,222Intangible asset
    
    
    107,511
    
    
    
    107,511Prepaid pension costs
    
    
    3,081
    
    
    
    2,901Other assets
    
    
    27,609
    
    
    
    29,952Total assets
    
    $
    757,231
    
    
    $
    717,712LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt
    
    $
    25,665
    
    
    $
    97,498Current portion of employee benefits
    
    
    22,311
    
    
    
    21,840Accounts payable
    
    
    6,471
    
    
    
    6,104Accrued promotional expenses
    
    
    10,760
    
    
    
    10,131Income taxes payable, net
    
    
    86,889
    
    
    
    11,803Accrued excise and payroll taxes payable, net
    
    
    25,797
    
    
    
    7,004Settlement accruals
    
    
    26,344
    
    
    
    20,668Deferred income taxes
    
    
    15,706
    
    
    
    92,507Accrued interest
    
    
    10,402
    
    
    
    9,612Other current liabilities
    
    
    12,222
    
    
    
    18,992Total current liabilities
    
    
    242,567
    
    
    
    296,159Notes payable, long-term debt and other obligations, less current portion
    
    
    253,681
    
    
    
    210,301Fair value of derivatives embedded within convertible debt
    
    
    136,796
    
    
    
    77,245Non-current employee benefits
    
    
    36,314
    
    
    
    34,856Deferred income taxes
    
    
    61,070
    
    
    
    48,807Other liabilities
    
    
    24,138
    
    
    
    16,739Total liabilities
    
    
    754,566
    
    
    
    684,107Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock, par value $1.00 per share, 10,000,000 shares authorized
    
    
    
    
    
    
    Common stock, par value $0.10 per share, 150,000,000 shares authorized,
69,620,319 and 69,107,320 shares issued and 66,527,070 and
66,014,070 shares outstanding
    
    
    6,652
    
    
    
    6,601Additional paid-in capital
    
    
    39,207
    
    
    
    65,103Retained earnings (accumulated deficit)
    
    
    (4,846
    )
    
    
    Accumulated other comprehensive loss
    
    
    (25,491
    )
    
    
    (25,242
    )Less: 3,093,250 and 3,093,250 shares of common stock in treasury, at
cost
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity
    
    
    2,665
    
    
    
    33,605Total liabilities and stockholders equity
    
    $
    757,231
    
    
    $
    717,712
  -2-




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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues*
    
    $
    206,794
    
    
    $
    142,960
    
    
    $
    328,010
    
    
    $
    275,165Expenses:Cost of goods sold*
    
    
    147,764
    
    
    
    86,030
    
    
    
    220,290
    
    
    
    166,037Operating, selling, administrative and general expenses
    
    
    20,183
    
    
    
    22,585
    
    
    
    41,713
    
    
    
    46,742Gain on brand transaction
    
    
    
    
    
    
    
    
    
    
    (5,000
    )
    
    
    Restructuring charges
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    Operating income
    
    
    38,847
    
    
    
    34,345
    
    
    
    70,007
    
    
    
    62,386Other income (expenses):Interest and dividend income
    
    
    76
    
    
    
    1,375
    
    
    
    226
    
    
    
    3,346Interest expense
    
    
    (17,086
    )
    
    
    (15,257
    )
    
    
    (33,160
    )
    
    
    (30,510
    )Loss on extinguishment of debt
    
    
    (18,444
    )
    
    
    
    
    
    
    (18,444
    )
    
    
    Change in fair value of derivatives embedded within
convertible debt
    
    
    (19,488
    )
    
    
    9,759
    
    
    
    (19,791
    )
    
    
    7,315Impairment charges on investments
    
    
    
    
    
    
    
    
    
    
    (8,500
    )
    
    
    Equity income from non-consolidated real
estate businesses
    
    
    1,811
    
    
    
    4,184
    
    
    
    816
    
    
    
    17,504Other, net
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (577
    )(Loss) income before provision for income taxes
    
    
    (14,284
    )
    
    
    34,402
    
    
    
    (8,846
    )
    
    
    59,464Income tax (benefit) expense
    
    
    (6,338
    )
    
    
    15,277
    
    
    
    (4,000
    )
    
    
    26,032Net (loss) income
    
    $
    (7,946
    )
    
    $
    19,125
    
    
    $
    (4,846
    )
    
    $
    33,432Per basic common share:Net (loss) income applicable to common shares
    
    $
    (0.12
    )
    
    $
    0.29
    
    
    $
    (0.07
    )
    
    $
    0.50Per diluted common share:Net (loss) income applicable to common shares
    
    $
    (0.12
    )
    
    $
    0.24
    
    
    $
    (0.07
    )
    
    $
    0.49Cash distributions and dividends declared per share
    
    $
    0.40
    
    
    $
    0.38
    
    
    $
    0.80
    
    
    $
    0.76
 
 *
    
    Revenues and Cost of goods sold include excise taxes of $103,458, $43,201, $137,170 and
$83,723, respectively.  -3-




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##### Table of Contents



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

    Comprehensive
    
    
    
    TreasuryShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance, December 31, 2008
    
    
    66,014,070
    
    
    $
    6,601
    
    
    $
    65,103
    
    
    $
    
    
    
    $
    (25,242
    )
    
    $
    (12,857
    )
    
    $
    33,605Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,846
    )
    
    
    
    
    
    
    
    
    
    
    (4,846
    )Pension-related minimum liability adjustments,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302
    
    
    
    
    
    
    
    302Forward contract adjustments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    17Unrealized loss on investment securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (568
    )
    
    
    
    
    
    
    (568
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (249
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,095
    )Distributions and dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (55,598
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55,598
    )Restricted stock grant
    
    
    500,000
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Exercise of options
    
    
    13,000
    
    
    
    1
    
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131Excess tax benefit of options exercised
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    2,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,033Beneficial conversion feature of notes payable,
net of taxes
    
    
    
    
    
    
    
    
    
    
    27,526
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,526Balance, June 30, 2009
    
    
    66,527,070
    
    
    $
    6,652
    
    
    $
    39,207
    
    
    $
    (4,846
    )
    
    $
    (25,491
    )
    
    $
    (12,857
    )
    
    $
    2,665
  -4-




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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2009
    
    
    June 30, 2008Net cash provided by operating activities
    
    $
    52,553
    
    
    $
    35,885Cash flows from investing activities:Purchase of investment securities
    
    
    (10,667
    )
    
    
    (5,182
    )Proceeds from sale or liquidation of long-term investments
    
    
    1,407
    
    
    
    8,334Purchase of long-term investments
    
    
    
    
    
    
    (51
    )Purchase of mortgage receivable
    
    
    
    
    
    
    (21,704
    )Distributions from non-consolidated real estate businesses
    
    
    2,364
    
    
    
    16,446Investment in non-consolidated real estate assets
    
    
    
    
    
    
    (10,000
    )Increase in cash surrender value of life insurance policies
    
    
    (757
    )
    
    
    (521
    )Decrease (increase) in non-current restricted assets
    
    
    446
    
    
    
    (259
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    373Capital expenditures
    
    
    (1,409
    )
    
    
    (2,456
    )Net cash used in investing activities
    
    
    (8,616
    )
    
    
    (15,020
    )Cash flows from financing activities:Proceeds from debt issuance
    
    
    38,246
    
    
    
    Repayments of debt
    
    
    (3,052
    )
    
    
    (2,984
    )Deferred financing charges
    
    
    (216
    )
    
    
    (137
    )Borrowings under revolver
    
    
    306,788
    
    
    
    255,118Repayments on revolver
    
    
    (306,167
    )
    
    
    (256,753
    )Dividends and distributions on common stock
    
    
    (58,310
    )
    
    
    (52,737
    )Excess tax benefit of options exercised
    
    
    13
    
    
    
    18,283Proceeds from exercise of options
    
    
    182
    
    
    
    26Net cash used in financing activities
    
    
    (22,516
    )
    
    
    (39,184
    )Net increase (decrease) in cash and cash equivalents
    
    
    21,421
    
    
    
    (18,319
    )Cash and cash equivalents, beginning of period
    
    
    211,105
    
    
    
    238,117Cash and cash equivalents, end of period
    
    $
    232,526
    
    
    $
    219,798
  -5-




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##### Table of Contents



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:
 The condensed consolidated financial statements of Vector Group Ltd. (the Company or
Vector) include the accounts of VGR Holding LLC (VGR Holding), Liggett Group LLC
(Liggett), Vector Tobacco Inc. (Vector Tobacco), Liggett Vector Brands Inc. (Liggett
Vector Brands), New Valley LLC (New Valley) and other less significant subsidiaries. All
significant intercompany balances and transactions have been eliminated.Liggett is engaged in the manufacture and sale of cigarettes in the United States.
Vector Tobacco is engaged in the marketing of low nicotine and nicotine-free cigarette
products and the development of reduced risk cigarette products. New Valley is engaged in the
real estate business and is seeking to acquire additional operating companies and real estate
properties.The interim condensed consolidated financial statements of the Company are unaudited and,
in the opinion of management, reflect all adjustments necessary (which are normal and
recurring) to state fairly the Companys consolidated financial position, results of
operations and cash flows. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes thereto included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2008 filed with the
Securities and Exchange Commission. The consolidated results of operations for interim
periods should not be regarded as necessarily indicative of the results that may be expected
for the entire year.
 (b)
    
    Distributions and Dividends on Common Stock:
 The Company records distributions on its common stock as dividends in its condensed
consolidated statement of stockholders equity to the extent of retained earnings. Any
amounts exceeding retained earnings are recorded as reductions to additional paid-in capital.
 (c)
    
    Earnings Per Share (EPS):
 Information concerning the Companys common stock has been adjusted to give retroactive
effect to the 5% stock dividend paid to Company stockholders on September 29, 2008. All per
share amounts have been presented as if the stock dividends had occurred on January 1, 2008.
 -6-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 The Company has stock option awards which provide for common stock dividends at the same
rate as paid on the common stock with respect to the shares underlying the unexercised
portion of the options. As a result, in its calculation of basic EPS for the three and six
months ended June 30, 2009 and 2008, the Company has adjusted its net income for the effect
of its participating securities as follows:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net (loss) income
    
    $
    (7,946
    )
    
    $
    19,125
    
    
    $
    (4,846
    )
    
    $
    33,432Loss (income) attributable to
participating securities
    
    
    364
    
    
    
    (871
    )
    
    
    222
    
    
    
    (1,553
    )Net (loss) income available to
common stockholders
    
    $
    (7,582
    )
    
    $
    18,254
    
    
    $
    (4,624
    )
    
    $
    31,879
 Basic EPS is computed by dividing net income available to common stockholders by the
weighted-average number of shares outstanding.
 Diluted EPS is computed by dividing net income available to common stockholders by the
diluted weighted-average number of shares outstanding, which includes dilutive non-vested
restricted stock grants, stock options and convertible securities. Diluted EPS includes the
dilutive effect of stock options, unvested restricted stock grants and convertible
securities. However, in its calculation of diluted EPS for the three and six months ended
June 30, 2009 and 2008, the Company has adjusted its net income for the effect of the
participating securities, stock options, unvested restricted stock grants and convertible
securities as follows:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net (loss) income
    
    $
    (7,946
    )
    
    $
    19,125
    
    
    $
    (4,846
    )
    
    $
    33,432(Income) expenses attributable
to 3.875% convertible
debentures
    
    
    
    
    
    
    (1,500
    )
    
    
    
    
    
    
    2,527Income attributable to
participating securities
    
    
    364
    
    
    
    (803
    )
    
    
    222
    
    
    
    (1,670
    )Net income available to
common stockholders
    
    $
    (7,582
    )
    
    $
    16,822
    
    
    $
    (4,624
    )
    
    $
    34,289
 Basic and diluted EPS were calculated using the following shares for the three and six
months ended June 30, 2009 and 2008:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted-average shares for
basic EPS
    
    
    65,812,958
    
    
    
    63,496,622
    
    
    
    65,807,960
    
    
    
    63,234,165Plus incremental shares
related to stock options and
non-vested restricted stock
    
    
    
    
    
    
    1,296,157
    
    
    
    
    
    
    
    1,471,471
 -7-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Plus incremental shares related
to convertible debt
    
    
    
    
    
    
    5,923,077
    
    
    
    
    
    
    
    5,923,077Weighted-average shares for
fully diluted EPS
    
    
    65,812,958
    
    
    
    70,715,856
    
    
    
    65,807,960
    
    
    
    70,628,713
 The Companys non-vested restricted share grants contain rights to receive forfeitable
dividends, and thus are not participating securities requiring the two class method of
computing EPS.
 The following stock options, non-vested restricted stock and shares issuable upon the
conversion of convertible debt were outstanding during the three and six months ended June
30, 2008 but were not included in the computation of diluted EPS because the exercise prices
of the options and the per share expense associated with the restricted stock were greater
than the average market price of the common shares during the respective periods, and the
impact of common shares issuable under the convertible debt were anti-dilutive to EPS.
Amounts presented for the three and six months ended June 30, 2009 were not included in the
computation of diluted EPS because the Company reported a loss during such period and the
impact was anti-dilutive.
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Number of stock options
    
    
    5,271,881
    
    
    
    516,147
    
    
    
    5,271,881
    
    
    
    516,147Weighted-average exercise price
    
    $
    11.59
    
    
    $
    19.25
    
    
    $
    11.59
    
    
    $
    19.25Weighted-average shares of
non-vested restricted stock
    
    
    658,156
    
    
    
    407,920
    
    
    
    428,662
    
    
    
    118,514Weighted-average expense per share
    
    $
    14.17
    
    
    $
    17.09
    
    
    $
    14.83
    
    
    $
    17.59Weighted-average number of shares
issuable upon conversion of debt
    
    
    14,380,320
    
    
    
    7,008,186
    
    
    
    13,660,437
    
    
    
    7,008,186Weighted-average conversion price
    
    $
    16.92
    
    
    $
    15.96
    
    
    $
    16.63
    
    
    $
    15.96
 (d)
    
    Comprehensive Income:
 Other comprehensive income is a component of stockholders equity and includes such items as
the unrealized gains and losses on investment securities available for sale, forward foreign
contracts and minimum pension liability adjustments. The Companys comprehensive loss was
$3,882 and $5,095 for the three and six months ended June 30, 2009. The Companys
comprehensive income was $14,463 and $25,444 for the three and six months ended June 30, 2008.
 (e)
    
    Fair Value of Derivatives Embedded within Convertible Debt:
 The Company has estimated the fair market value of the embedded derivatives based principally
on the results of a valuation model. The estimated fair value of the derivatives embedded
within the convertible debt is based principally on the present value of future dividend
payments expected to be received by the convertible debt
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 holders over the term of the debt. The discount rate applied to the future cash flows is
estimated based on a spread in the yield of the Companys debt when compared to risk-free
securities with the same duration; thus, a readily determinable fair market value of the
embedded derivatives is not available. 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 valuation also considers
other items, including current and future dividends and the volatility of Vectors stock price.
The range of estimated fair market values of the Companys embedded derivatives was between
$134,269 and $139,419. The Company recorded the fair market value of its embedded derivatives
at the midpoint of the inputs at $136,796 as of June 30, 2009. The estimated fair market value
of the Companys embedded derivatives could change significantly based on future market
conditions. (See Note 6.)
 (f)
    
    Capital and Credit Market Crisis
 During the recent capital and credit market crisis, the Company has performed additional
assessments to determine the impact, if any, of market developments, on the Companys
consolidated condensed financial statements. The Companys additional assessments have included
a review of access to liquidity in the capital and credit markets, counterparty
creditworthiness, value of the Companys investments (including long-term investments, mortgage
receivable and employee benefit plans) and macroeconomic conditions. The recent unprecedented
volatility in capital and credit markets may create additional risks in the upcoming months and
possibly years and the Company will continue to perform additional assessments to determine the
impact, if any, on the Companys condensed consolidated financial statements. Thus, future
impairment charges may occur.
 On a quarterly basis, the Company evaluates its investments to determine whether an impairment
has occurred. If so, the Company also makes a determination of whether such impairment is
considered temporary or other-than-temporary. The Company believes that the assessment of
temporary or other-than-temporary impairment is facts and circumstances driven. However, among
the matters that are considered in making such a determination are the period of time the
investment has remained below its cost or carrying value, the likelihood of recovery given the
reason for the decrease in market value and the Companys original expected holding period of
the investment.
 (g)
    
    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.
 The Company and its subsidiaries record provisions in their consolidated financial statements
for pending litigation when they determine that an unfavorable outcome is probable and the
amount of loss can be reasonably estimated. 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, unless specified in Note 8. 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.
 (h)
    
    New Accounting Pronouncements:
 On January 1, 2008, Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157) for financial assets and financial liabilities became effective
for the Company. 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. On January 1, 2009, the Company adopted SFAS No. 157 as it
relates to nonfinancial assets and nonfinancial liabilities that are not recognized or
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 disclosed at fair value in the financial statements on at least an annual basis. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in accounting principles
generally accepted in the United States of America (GAAP), and expands disclosures about fair
value measurements. The provisions of this standard apply to other accounting pronouncements
that require or permit fair value measurements and are to be applied prospectively with limited
exceptions. The adoption of SFAS No. 157 did not have a material impact on the Companys
condensed consolidated financial statements. (See Note 11.)
 On January 1, 2009, SFAS No. 141(R), a revised version of SFAS No. 141, Business Combinations
and FSP No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination that Arise from Contingencies became effective for the Company. The revision is
intended to simplify existing guidance and converge rulemaking under U.S. GAAP with
international accounting rules. The adoption of this standard did not have a material
impact on the Companys condensed consolidated financial statements.
 On January 1, 2009, SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133 became effective for the Company. 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. The adoption of
SFAS No. 161 did not have a material impact on the Companys condensed consolidated financial
statements.
 On January 1. 2009, 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) became effective for the Company. The adoption of FSP No. APB 14-1 had no
impact on the Companys condensed consolidated financial statements.
 On January 1, 2009, FSP No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities, (FSP EITF 03-6-1) became
effective for the Company. FSP EITF 03-6-1 states that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The adoption of FSP EITF 03-6-1 had no impact on the
Companys condensed consolidated financial statements.
 In April 2009, FSP SFAS 157-4, Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are
not Orderly became effective for the Company. FSP FAS No. 157-4 clarifies the methodology
used to determine fair value when there is no active market or where the price inputs being
used represent distressed sales. FSP FAS No. 157-4 also reaffirms the objective of fair value
measurement, as stated in FAS No. 157, Fair Value Measurements, which is to reflect how much
an asset would be sold for in an orderly transaction. It also reaffirms the need to use
judgment to determine if a formerly active market has become inactive, as well as to determine
fair values when markets have become inactive. The adoption of FSP SFAS 157-4 had no impact on
the Companys condensed consolidated financial statements.
 In April 2009, FSP FAS No. 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP No. 115-2 and FAS No. 124-2) became effective for the
Company. FSP FAS No. 115-2 and FAS No. 124-2 modifies the other-than-temporary impairment
guidance for debt securities through increased consistency in the timing of impairment
recognition and enhanced disclosures related to the credit and noncredit components of impaired
debt securities that are not expected to be sold. In addition, increased disclosures are
required for both debt and equity
securities regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses. The adoption of FSP FAS No. 115-2 and FAS No. 124-2 did not have a material
impact on the condensed consolidated financial statements.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 In April 2009, FSP FAS No. 107-1 and APB Opinion No. 28-1, Interim Disclosures about Fair
Value of Financial Instruments (FSP FAS No. 107-1 and APB Opinion No. 28-1) became effective
for the Company. FSP FAS No. 107-1 and APB Opinion No. 28-1 requires fair value disclosures
for financial instruments that are not reflected in the condensed consolidated balance sheets
at fair value. Prior to the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, the fair
values of those assets and liabilities were disclosed only once each year. With the issuance of
FSP FAS No. 107-1 and APB Opinion No. 28-1, the Company will now be required to disclose this
information on a quarterly basis, providing quantitative and qualitative information about fair
value estimates for all financial instruments not measured in the condensed consolidated
balance sheets at fair value. The adoption of FSP FAS No. 107-1 and APB Opinion No. 28-1 did
not have a material impact on the Companys condensed consolidated financial statements.
 In December 2008, the Financial Accounting Standards Board (FASB) issued FSP SFAS 132(R)-1
Employers Disclosures about Postretirement Benefit Plan Assets. This FSP amends the
disclosure requirements for employers disclosure of plan assets for defined benefit pensions
and other postretirement plans. The objective of this FSP is to provide users of financial
statements with an understanding of how investment allocation decisions are made, the major
categories of plan assets held by the plans, the inputs and valuation techniques used to
measure the fair value of plan assets, significant concentration of risk within the companys
plan assets, and for fair value measurements determined using significant unobservable inputs a
reconciliation of changes between the beginning and ending balances. FSP SFAS 132(R)-1 is
effective for fiscal years ending after December 15, 2009. The Company will adopt the new
disclosure requirements in the 2009 annual reporting period.
 In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162 (the Codification) (SFAS No. 168). The
Codification, which was launched on July 1, 2009, became the single source of authoritative
nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public
Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. The Codification
eliminates the GAAP hierarchy contained in SFAS No. 162 and establishes one level of
authoritative GAAP. All other literature is considered non-authoritative. This Statement is
effective for financial statements issued for interim and annual periods ending after September
15, 2009. The Company will adopt this Statement for its quarter ending September 30, 2009. The
Company is evaluating the impact of SFAS No. 168 on its condensed consolidated financial
statements.
 In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), and
SFAS No. 166, Accounting for Transfers of Financial Assetsan amendment of FASB Statement No.
140. SFAS No. 167 amends FASB Interpretation 46(R) to eliminate the quantitative approach
previously required for determining the primary beneficiary of a variable interest entity and
requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary
of a variable interest entity. SFAS No. 166 amends SFAS No. 140 by removing the exemption from
consolidation for Qualifying Special Purpose Entities (QSPEs). This Statement also limits the
circumstances in which a financial asset, or portion of a financial asset, should be
derecognized when the transferor has not transferred the entire original financial asset to an
entity that is not consolidated with the transferor in the financial statements being presented
and/or when the transferor has continuing involvement with the transferred financial asset. The
Company will adopt these Statements for interim and annual reporting periods beginning on
January 1, 2010. The Company is currently assessing the impact, if any, of SFAS No. 167 on its
condensed consolidated financial statements.
 In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This Statement sets forth: 1)
the period after the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or disclosure in the
financial statements; 2) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements; and 3) the
disclosures that an entity should make about events or transactions that occurred after the
balance sheet date. This Statement is effective for interim and annual periods ending after
June 15, 2009. The Company adopted this Statement in the quarter ended June 30, 2009. This
Statement did not impact the Companys condensed consolidated financial statements.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 2.
    
    RESTRUCTURING
 In March 2009, Vector Tobacco eliminated nine full-time positions in connection with the
decision by the Companys Board of Directors in 2006 to discontinue the genetics operation and
not to pursue FDA approval of QUEST as a smoking cessation aide, due to the projected
significant additional time and expense involved in seeking such approval.
 The Company recognized pre-tax restructuring charges of $1,000, during the first quarter of
2009. The restructuring charges primarily related to employee severance and benefit costs.
The remaining balance of the severance and benefit costs restructuring charges was $789 as of
June 30, 2009. Approximately $211 was utilized during the three and six months ended June 30,
2009, respectively.
 The only remaining component of the 2004 Liggett Vector Brands restructuring at June 30, 2009
and December 31, 2008 was contract termination and exit costs of $396 and $461, respectively.
Approximately $22 and $65 was utilized during the three and six months ended June 30, 2009,
respectively.
 3.
    
    INVESTMENT SECURITIES AVAILABLE FOR SALE
 Investment 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 June 30, 2009 were as
follows:
 Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueMarketable equity securities
    
    $
    39,621
    
    
    $
    9,548
    
    
    $
    (6,950
    )
    
    $
    42,219
 In October 2008, the Company purchased 320,000 shares of Castle Brands, Inc. (Castle Brands)
Series A Convertible Preferred Stock for $4,000. Castle Brands is a publicly-traded developer
and importer of premium branded spirits. The purchase was accounted for at historical cost and
included with Other Assets on the condensed balance sheet at December 31, 2008. In January
2009, the Series A Preferred Stock of Castle Brands were converted into 11,428,576 shares of
Common Stock. Effective with the conversion, the Castle Brands shares have been accounted for
as an investment held for sale. These shares were carried at $2,514 as of June 30, 2009.
 In May and June 2009, the Company purchased 3,683,526 common shares of Strategic Hotels &
Resorts, Inc. (Strategic Hotels) for approximately $5,553, excluding commissions. The shares
were carried at $4,089 as of June 30, 2009. The Company purchased an additional 1,650,000
shares in July 2009 for approximately $1,584, excluding commissions. On July 20, 2009, the
Company reported that it owned approximately 7.1% of the stock of Strategic Hotels.
 Investment securities available for sale as of June 30, 2009 and December 31, 2008 include New
Valleys 13,891,205 shares of Ladenburg Thalmann Financial Services Inc. (LTS) common stock,
which were carried at $7,500 and $10,000, respectively. Investment securities available for
sale as of June 30, 2009 and December 31, 2008 also include 10,057,110 and 5,057,110 shares,
respectively, of Opko Health Inc. (Opko) common stock, which were carried at $17,801 and
$8,193, respectively. In May 2009, the Company purchased an additional 5,000,000 shares of Opko
in a private placement for $5,000. These shares have not been registered for resale but are
expected to be freely tradable 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
 
 In 2008, the Company acquired 2,259,796 shares of Cardo Medical, Inc. for $500. The shares were
carried at $2,825 and $3,277 as of June 30, 2009 and December 31, 2008. These shares are now
freely tradable.
 4.
    
    INVENTORIES
 Inventories consist of:
 June 30,
    
    
    December 31,2009
    
    
    2008Leaf tobacco
    
    $
    50,163
    
    
    $
    48,880Other raw materials
    
    
    5,661
    
    
    
    5,128Work-in-process
    
    
    1,034
    
    
    
    314Finished goods
    
    
    57,701
    
    
    
    46,202Inventories at current cost
    
    
    114,559
    
    
    
    100,524LIFO adjustments
    
    
    (12,393
    )
    
    
    (7,943
    )$
    102,166
    
    
    $
    92,581
 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 June 30, 2009, Liggett had leaf tobacco purchase
commitments of approximately $16,633. 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 six months ended June 30, 2009 and 2008, the Companys MSA expense
was increased by approximately $650 for 2008 and reduced by approximately $1,300 for 2007,
respectively, as a result of a change in estimate to the MSA assessment.
 LIFO inventories represent approximately 94% and 95% of total inventories at June 30, 2009 and
December 31, 2008, respectively.
 5.
    
    LONG-TERM INVESTMENTS
 Long-term investments consist of investments in the following:
 June 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueInvestment partnerships
accounted for at cost
    
    $
    51,118
    
    
    $
    63,072
    
    
    $
    51,118
    
    
    $
    54,997
 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. 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.
 The long-term 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 11
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 if such assets were recorded on the condensed consolidated
balance sheet at fair value. The fair values were determined based 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 of the investment portfolio.
 The changes in the fair value of these investments as of June 30, 2009 were as follows:
 InvestmentPartnershipsAccounted for at CostBalance as of January 1, 2009
    
    $
    54,997Unrealized loss on long-term
Investments
    
    
    (357
    )Realized gain (loss) on long-term
Investments
    
    
    Balance as of March 31, 2009
    
    
    54,640Unrealized gain on long-term
Investments
    
    
    8,432Realized gain (loss) on long-term
investments
    
    
    Balance as of June 30, 2009
    
    $
    63,072
 The changes in the fair value of these investments as of June 30, 2008 were as follows:
 InvestmentInvestment
    
    
    PartnershipsPartnerships
    
    
    Accounted for on theAccounted for at Cost
    
    
    Equity MethodBalance as of January 1, 2008
    
    $
    89,007
    
    
    $
    10,495Unrealized loss on long-term
Investments
    
    
    (2,034
    )
    
    
    (675
    )Realized loss on long-term
Investments
    
    
    
    
    
    
    (567
    )Balance as of March 31, 2008
    
    
    86,973
    
    
    
    9,253Contributions (distributions)
    
    
    47
    
    
    
    (8,328
    )Unrealized loss on long-term
Investments
    
    
    (3,767
    )
    
    
    Realized gain on long-term
Investments
    
    
    14
    
    
    
    Receivable classified as
Other currents assets
    
    
    
    
    
    
    (925
    )Balance as of June 30, 2008
    
    $
    83,267
    
    
    $
    
 The Company will continue to perform additional assessments of the investments and the current
condition of capital and credit markets to determine the impact, if any, on the Companys
condensed consolidated financial statements. Thus, future impairment charges may occur.
 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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 6.
    
    NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
 Notes payable, long-term debt and other obligations consist of:
 June 30,
    
    
    December 31,2009
    
    
    2008Vector:11% Senior Secured Notes due 2015
    
    $
    165,000
    
    
    $
    165,0006.75% Variable Interest Senior Convertible Note due
2014, net of unamortized discount of $40,245 and $0*
    
    
    9,755
    
    
    
    6.75% Variable Interest Senior Convertible Exchange Notes
due 2014, net of unamortized discount of $71,292 and
$0*
    
    
    35,648
    
    
    
    3.875% Variable Interest Senior Convertible Debentures
due
2026, net of unamortized discount of $83,785 and
$83,993*
    
    
    26,215
    
    
    
    26,0075% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $270 and $39,565*
    
    
    645
    
    
    
    72,299Liggett:Revolving credit facility
    
    
    20,135
    
    
    
    19,515Term loan under credit facility
    
    
    7,022
    
    
    
    7,290Equipment loans
    
    
    6,403
    
    
    
    8,307V.T. Aviation:Note payable
    
    
    4,580
    
    
    
    5,266VGR Aviation:Note payable
    
    
    3,873
    
    
    
    4,053Other
    
    
    70
    
    
    
    62Total notes payable, long-term debt and other obligations
    
    
    279,346
    
    
    
    307,799Less:Current maturities
    
    
    (25,665
    )
    
    
    (97,498
    )Amount due after one year
    
    $
    253,681
    
    
    $
    210,301
 
 *
    
    The fair value of the derivatives embedded within the 6.75% Variable Interest
Senior Convertible Exchange Notes ($44,070 at June 30, 2009 and $0 at December 31,
2008), 6.75% Variable Interest Convertible Note ($23,376 at June 30, 2009 and $0
at December 31, 2008), 3.875% Variable Interest Senior Convertible Debentures
($69,158 at June 30, 2009 and $51,829 at December 31, 2008) and the 5% Variable
Interest Senior Convertible Notes ($192 at June 30, 2009 and $25,416 at December
31, 2008) is separately classified as a derivative liability in the condensed
consolidated balance sheets. 11% Senior Secured Notes due 2015  Vector:In August 2007, the Company sold $165,000 in 11% Senior Secured Notes
due 2015 (the Senior Secured Notes) in a private offering to
qualified institutional investors in accordance with Rule 144A of the
Securities Act of 1933. On May 28, 2008, the Company completed an
offer to exchange the Senior Secured Notes for an equal amount of
newly issued 11% Senior Secured Notes due 2015. The new Senior Secured
Notes have substantially the same terms as the original notes, except
that the new Senior Secured Notes have been registered under the
Securities Act.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
cash, investments in marketable 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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 The following table summarizes the requirements of these financial covenants and the results of
the calculation, as defined by the indenture.
 Indenture
    
    June 30,
    
    December 31,Covenant
    
    Requirement
    
    2009
    
    2008Consolidated EBITDA, as defined
    
    $50,000
    
    $160,014
    
    $154,053Leverage ratio, as defined
    
    <3.0 to 1
    
    Negative
    
    0.1 to 1Secured leverage ratio, as defined
    
    <1.5 to 1
    
    Negative
    
    Negative
 Variable Interest Senior Convertible Debt  Vector:
 Vector has issued four series of variable interest senior convertible debt. All four
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 would be
convertible on such record date.
 5% Variable Interest Senior Convertible Notes due November 2011:
 Between November 2004 and April 2005, the Company sold $111,864 principal amount of its 5%
Variable Interest Senior Convertible Notes due November 15, 2011 (the 5% Notes). In May
2009, the holder of $11,005 principal amount of the 5% Notes exchanged its 5% Notes for $11,775
principal amount of the Companys 6.75% Variable Interest Senior Convertible Note due 2014 (the
6.75% Note) as discussed below. In June 2009, certain holders of $99,944 principal amount of
the 5% Notes exchanged their 5% Notes for $106,940 principal amount of the Companys 6.75%
Variable Interest Senior Convertible Exchange Notes due 2014 of the Company (the 6.75%
Exchange Notes). As of June 30, 2009, a total of $915 principal amount of the 5% Notes
remained outstanding after these exchanges.
 6.75% Variable Interest Senior Convertible Note due 2014:
 On May 11, 2009, the Company issued in a private placement the 6.75% Note in the principal
amount of $50,000. The purchase price was paid in cash ($38,225) and by tendering $11,005
principal amount of the 5% Notes, valued at 107% of principal amount. The note pays interest (Total
Interest) on a quarterly basis at a rate of 3.75% per annum plus additional interest, which 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. Notwithstanding the
foregoing, however, the interest payable on each interest payment date shall be the higher of
(i) the Total Interest and (ii) 6.75% per annum. The note is convertible into the Companys
common stock at the holders option. The conversion price of $15.04 per share (approximately
66.4894 shares of common stock per $1,000 principal amount of the note) is subject to
adjustment for various events, including the issuance of stock dividends. The note will mature
on November 15, 2014. The Company will redeem on May 11, 2014 and at the end of each interest
accrual period thereafter an additional amount, if any, of the note necessary to prevent the
note from being treated as an Applicable High Yield Discount Obligation under the Internal
Revenue Code. If a fundamental change (as defined in the note) occurs, the Company will be
required to offer to repurchase the note at 100% of its principal amount, plus accrued
interest.
 The purchaser of the 6.75% Note is an entity affiliated with Dr. Phillip Frost, who reported, after the consummation of the sale, beneficial ownership of approximately 11.5% of the
Companys common stock.
 6.75% Variable Interest Senior Convertible Exchange Notes due 2014:
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 In June 2009, the Company entered into agreements with certain holders of the 5% Notes to
exchange their 5% notes for the Companys 6.75% Exchange Notes. On June 30, 2009, the Company
accepted for exchange $99,944 principal amount of the 5% Notes for $106,940 of its 6.75%
Exchange Notes. The Company issued its 6.75% Exchange Notes to the holders in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as amended,
afforded by Section 3(a)(9) thereof. The notes pay interest (Total Interest) on a quarterly
basis beginning August 15, 2009 at a rate of 3.75% per annum plus additional interest, which 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. Notwithstanding the
foregoing, however, the interest payable on each interest payment date shall be the higher of
(i) the Total Interest and (ii) 6.75% per annum. The notes are convertible into the Companys
common stock at the holders option. The conversion price of $17.06 per share (approximately
58.6063 shares of common stock per $1,000 principal amount of notes) is subject to adjustment
for various events, including the issuance of stock dividends. The notes will mature on
November 15, 2014. The Company will redeem on June 30, 2014 and at the end of each interest
accrual period thereafter an additional amount, if any, of the notes necessary to prevent the
notes from being treated as an Applicable High Yield Discount Obligation under the Internal
Revenue Code. If a fundamental change (as defined in the indenture) occurs, the Company will
be required to offer to repurchase the notes at 100% of their principal amount, plus accrued
interest and, under certain circumstances, a make whole payment.
 Embedded Derivatives on the Variable Interest Senior Convertible Debt:
 The portion of the interest on the Companys convertible debt which is computed by reference to
the cash dividends paid on the Companys common stock is considered an embedded derivative
within the convertible debt, which the Company is required to separately value. Pursuant to
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities,
the Company has bifurcated these embedded derivatives and estimated
the fair value of the embedded derivative liability including using a
third party valuation. The resulting discount
created by allocating a portion of the issuance proceeds to the embedded derivative is then
amortized to interest expense over the term of the debt using the effective interest method.
Changes to the fair value of these embedded derivatives are reflected quarterly in the
Companys consolidated statements of operations as Change in fair value of derivatives
embedded within convertible debt. The value of the embedded derivative is contingent on
changes in interest rates of debt instruments maturing over the duration of the convertible
debt as well as projections of future cash and stock dividends over the term of the debt.
 A summary of non-cash interest expense associated with the amortization of the debt discount
created by the embedded derivative liability associated with the Companys variable interest
senior convertible debt for the three and six months ended June 30, 2009 and 2008 is as
follows:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    20086.75% Note
    
    $
    70
    
    
    $
    
    
    
    $
    70
    
    
    $
    3.875% convertible debentures
    
    
    113
    
    
    
    90
    
    
    
    225
    
    
    
    1805% convertible notes
    
    
    1,712
    
    
    
    1,293
    
    
    
    3,369
    
    
    
    2,481Interest expense associated with
embedded derivatives
    
    $
    1,895
    
    
    $
    1,383
    
    
    $
    3,664
    
    
    $
    2,661
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 A summary of non-cash changes in fair value of derivatives embedded within convertible debt is
as follows:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    20086.75% Note
    
    $
    (1,809
    )
    
    $
    
    
    
    $
    (1,809
    )
    
    $
    3.875% convertible debentures
    
    
    (15,577
    )
    
    
    6,132
    
    
    
    (17,329
    )
    
    
    2,8825% convertible notes
    
    
    (2,102
    )
    
    
    3,627
    
    
    
    (653
    )
    
    
    4,433(Loss) gain on changes in fair value of
derivatives embedded within
convertible debt
    
    $
    (19,488
    )
    
    $
    9,759
    
    
    $
    (19,791
    )
    
    $
    7,315
 The following table reconciles the fair value of derivatives embedded within convertible debt
at June 30, 2009.
 6.75%
    
    
    3.875%
    
    
    5%6.75%
    
    
    Exchange
    
    
    Convertible
    
    
    ConvertibleNote
    
    
    Notes
    
    
    Debentures
    
    
    Debentures
    
    
    TotalBalance at December 31, 2008
    
    $
    
    
    
    $
    
    
    
    $
    51,829
    
    
    $
    25,416
    
    
    $
    77,245Loss (gain) from changes in fair
value of embedded derivatives
    
    
    
    
    
    
    
    
    
    
    1,752
    
    
    
    (1,449
    )
    
    
    303Balance at March 31, 2009
    
    
    
    
    
    
    
    
    
    
    53,581
    
    
    
    23,967
    
    
    
    77,548Issuance of 6.75% Note
    
    
    21,567
    
    
    
    
    
    
    
    
    
    
    
    (2,485
    )
    
    
    19,082Issuance of 6.75% Exchange Notes
    
    
    
    
    
    
    44,070
    
    
    
    
    
    
    
    (23,392
    )
    
    
    20,678Loss from changes in fair
value of embedded derivatives
    
    
    1,809
    
    
    
    
    
    
    
    15,577
    
    
    
    2,102
    
    
    
    19,488Balance at June 30, 2009
    
    $
    23,376
    
    
    $
    44,070
    
    
    $
    69,158
    
    
    $
    192
    
    
    $
    136,796
 Beneficial Conversion Feature on Variable Interest Senior Convertible Debt:
 After giving effect to the recording of the embedded derivative liability as a discount to the
convertible debt, the Companys common stock had a fair value at the issuance date of the debt
in excess of the conversion price resulting in a beneficial conversion feature. EITF Issue No.
98-5, Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Convertible Ratios, requires that the intrinsic value of the
beneficial conversion feature be recorded to additional paid-in capital and as a discount on
the debt. The discount is then amortized to interest expense over the term of the debt using
the effective interest method.
 In accordance with EITF Issue No. 05-8, the beneficial conversion feature has been recorded,
net of income taxes, as an increase to stockholders equity.
 A summary of non-cash interest expense associated with the amortization of the debt discount
created by the beneficial conversion feature on the Companys variable interest senior
convertible debt for the three and six months ended June 30, 2009 and 2008 is as follows:
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Amortization of beneficial
conversion feature:6.75% Note
    
    $
    60
    
    
    $
    
    
    
    $
    60
    
    
    $
    3.875% convertible debentures
    
    
    (10
    )
    
    
    (11
    )
    
    
    (17
    )
    
    
    (19
    )5%
convertible notes
    
    
    951
    
    
    
    717
    
    
    
    1,870
    
    
    
    1,373Interest expense associated with
beneficial conversion feature
    
    $
    1,001
    
    
    $
    706
    
    
    $
    1,913
    
    
    $
    1,354
 Unamortized Debt Discount:
 The following table reconciles unamortized debt discount at June 30, 2009:
 6.75%
    
    
    3.875%
    
    
    5%6.75%
    
    
    Exchange
    
    
    Convertible
    
    
    ConvertibleNote
    
    
    Notes
    
    
    Debentures
    
    
    Notes
    
    
    TotalBalance at December 31, 2008
    
    $
    
    
    
    $
    
    
    
    $
    83,993
    
    
    $
    39,565
    
    
    $
    123,558Amortization of embedded derivatives
    
    
    
    
    
    
    
    
    
    
    (112
    )
    
    
    (1,657
    )
    
    
    (1,769
    )Amortization of beneficial conversion feature
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (919
    )
    
    
    (912
    )Balance at March 31, 2009
    
    
    
    
    
    
    
    
    
    
    83,888
    
    
    
    36,989
    
    
    
    120,877Issuance of convertible notes 
embedded derivative
    
    
    21,567
    
    
    
    44,070
    
    
    
    
    
    
    
    
    
    
    
    65,637Issuance of convertible notes 
beneficial conversion feature
    
    
    18,808
    
    
    
    27,222
    
    
    
    
    
    
    
    
    
    
    
    46,688Issuance of 6.75% Note  write-off of
unamortized
debt discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,311
    )
    
    
    (3,311
    )Issuance of 6.75% Exchange Notes  write-off
of unamortized debt discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,745
    )
    
    
    (30,745
    )Amortization of embedded derivatives
    
    
    (70
    )
    
    
    
    
    
    
    (113
    )
    
    
    (1,712
    )
    
    
    (1,895
    )Amortization of beneficial conversion feature
    
    
    (60
    )
    
    
    
    
    
    
    10
    
    
    
    (951
    )
    
    
    (1,001
    )Balance at June 30, 2009
    
    $
    40,245
    
    
    $
    71,292
    
    
    $
    83,785
    
    
    $
    270
    
    
    $
    196,250
 Loss on Extinguishment of Debt:
 The exchange of the 5% Notes for the 6.75% Notes and the 6.75% Exchange Notes qualifies as
extinguishment of debt due to the significant change in terms. A summary of the Companys loss
on the extinguishment of the 5% Notes for the three and six months ended June 30, 2009 is as
follows:
 6.75%6.75%
    
    
    ExchangeNote
    
    
    Notes
    
    
    TotalIssuance of additional notes payable
    
    $
    770
    
    
    $
    6,996
    
    
    $
    7,766Termination of embedded derivative
    
    
    (2,485
    )
    
    
    (23,392
    )
    
    
    (25,877
    )Write-off of deferred finance costs
    
    
    257
    
    
    
    2,242
    
    
    
    2,499Write-off of unamortized
debt discount, net
    
    
    3,311
    
    
    
    30,745
    
    
    
    34,056Loss on extinguishment of debt
    
    $
    1,853
    
    
    $
    16,591
    
    
    $
    18,444
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Revolving Credit Facility  Liggett:
 Liggett has a $50,000 credit facility with Wachovia Bank, N.A. under which $20,135 was
outstanding at June 30, 2009. Availability as determined under the facility was approximately
$16,843 based on eligible collateral at June 30, 2009.
 Fair Value of Notes Payable and Long-term Debt:
 The estimated fair value of the Companys notes payable and long-term debt has been determined
by the Company using available market information and appropriate valuation methodologies
described in Note 1. However, considerable judgment is required to develop the estimates of
fair value and, accordingly, the estimate presented herein are not necessarily indicative of
the amount that could be realized in a current market exchange.
 June 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueNotes payable and
long-term debt
    
    $
    279,346
    
    
    $
    466,442
    
    
    $
    307,799
    
    
    $
    447,520
 Scheduled Maturities:
 Scheduled maturities of long-term debt as of June 30, 2009 are as follows:
 UnamortizedPrincipal
    
    
    Discount
    
    
    NetYear Ending December 31:2009
    
    $
    23,714
    
    
    $
    270
    
    
    $
    23,4442010
    
    
    4,425
    
    
    
    
    
    
    
    4,4252011
    
    
    16,131
    
    
    
    8,379
    
    
    
    7,7522012
    
    
    103,211
    
    
    
    75,406
    
    
    
    27,8052013
    
    
    5,516
    
    
    
    
    
    
    
    5,516Thereafter
    
    
    321,939
    
    
    
    111,535
    
    
    
    210,404Total
    
    $
    474,936
    
    
    $
    195,590
    
    
    $
    279,346
 The scheduled maturities of $103,211 (principal amount) in 2012 reflect $99,000 (principal
amount), which may be required to be redeemed in 2012 in accordance with the terms of its
3.875% Variable Interest Senior Convertible Debentures due 2026.
 7.
    
    EMPLOYEE BENEFIT PLANS
 Defined Benefit and Postretirement Plans:
 Net periodic benefit cost for the Companys pension and other postretirement benefit plans for
the three and six months ended June 30, 2009 and 2008 consists of the following:
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 Pension BenefitsThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Service cost  benefits earned
during the period
    
    $
    330
    
    
    $
    1,035
    
    
    $
    660
    
    
    $
    2,070Interest cost on projected benefit
obligation
    
    
    1,441
    
    
    
    2,381
    
    
    
    3,787
    
    
    
    4,762Expected return on plan assets
    
    
    (1,954
    )
    
    
    (3,036
    )
    
    
    (3,908
    )
    
    
    (6,072
    )Amortization of prior service cost
    
    
    200
    
    
    
    350
    
    
    
    400
    
    
    
    700Amortization of net loss
    
    
    534
    
    
    
    25
    
    
    
    1,068
    
    
    
    50Net expense
    
    $
    551
    
    
    $
    755
    
    
    $
    2,007
    
    
    $
    1,510
 OtherPostretirement BenefitsThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Service cost  benefits earned
during the period
    
    $
    4
    
    
    $
    4
    
    
    $
    8
    
    
    $
    8Interest cost on projected benefit
obligation
    
    
    142
    
    
    
    148
    
    
    
    284
    
    
    
    296Amortization of net loss
    
    
    (41
    )
    
    
    (45
    )
    
    
    (82
    )
    
    
    (90
    )Net expense
    
    $
    105
    
    
    $
    107
    
    
    $
    210
    
    
    $
    214
 The decrease of $204 in the Companys pension expense for the three months ended June 30, 2009
was the result of increased defined benefit expense at the Liggett segment of approximately
$1,600 due primarily to the amortization of losses experienced in 2008 on the investment
portfolio underlying Liggetts defined benefit plans. The amount was offset by lower expenses
of approximately $1,800 at the corporate segment due to the retirement of the Companys former
Executive Chairman on December 30, 2008. The increase of $497 in the Companys pension expense
for the six months ended June 30, 2009 was the result of increased defined benefit expense at
the Liggett segment of approximately $3,200 due primarily to the amortization of losses
experienced in 2008 on the investment portfolio underlying Liggetts defined benefit plans.
The amount was offset by lower expenses of approximately $2,700 at the corporate segment due to
the retirement of the Executive Chairman on December 30, 2008. The Company did not make
contributions to its pension benefits plans for the three and six months ended June 30, 2009
and does not anticipate making any contributions to such plans in 2009. The Company
anticipates paying approximately $750 in other postretirement benefits in 2009.
 In connection with the retirement of the Executive Chairman, he received in
July 2009 a payment of $20,860 under the terms of the Companys Supplemental Retirement Plan.
The payment was partially funded by approximately $1,554 held in a separate trust.
 8.
    
    CONTINGENCIESTobacco-Related Litigation:Overview
 Since 1954, Liggett and other United States cigarette manufacturers have been named as
defendants in numerous direct, third-party and purported class actions predicated on the theory
that cigarette manufacturers should be liable for damages alleged to have been caused by
cigarette smoking or by exposure to secondary smoke from cigarettes. New cases continue to be
commenced against Liggett and other cigarette manufacturers. The cases generally fall into the
following categories: (i) smoking and health cases alleging personal injury brought on behalf
of individual plaintiffs (Individual Actions); (ii) smoking and health cases primarily
alleging personal injury or
seeking court-supervised programs for ongoing medical monitoring, as well as cases alleging
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 the
use of the terms lights and/or ultra lights constitutes a deceptive and unfair trade
practice, common law fraud or violation of federal law, purporting to be brought on behalf of a
class of individual plaintiffs (Class Actions); (iii) health care cost recovery actions
brought by various foreign and domestic governmental entities (Governmental Actions); and
(iv) health care cost recovery actions brought by third-party payors including insurance
companies, union health and welfare trust funds, asbestos manufacturers and others
(Third-Party Payor Actions). As new cases are commenced, the costs associated with defending
these cases and the risks relating to the inherent unpredictability of litigation continue to
increase. The future financial impact of the risks and expenses of litigation and the effects
of the tobacco litigation settlements discussed below are not quantifiable at this time.
Liggett incurred legal expenses and other litigation costs totaling approximately $2,960 and
$3,069, for the six months ended June 30, 2009 and 2008 respectively.
 Litigation is subject to uncertainty and it is possible that there could be adverse
developments in pending or future cases. An unfavorable outcome or settlement of pending
tobacco-related or other litigation could encourage the commencement of additional litigation.
Damages claimed in some tobacco-related or other litigation are or can be significant.
 Although Liggett has been able to obtain required bonds or relief from bonding requirements in
order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been
appealed, there remains a risk that such relief may not be obtainable in all cases. This risk
has been substantially reduced given that 43 states now limit the dollar amount of bonds or
require no bond at all. Liggett has secured approximately $2,950 in bonds as of June 30, 2009.
 The Company and its subsidiaries record provisions in their consolidated financial statements
for pending litigation when they determine that an unfavorable outcome is probable and the
amount of loss can be reasonably estimated. At the present time, while it is reasonably
possible that an unfavorable outcome in a case may occur, except as discussed elsewhere in this
note: (i) management has concluded that it is not probable that a loss has been incurred in any
of the pending tobacco-related cases; or (ii) management is unable to estimate the possible
loss or range of loss that could result from an unfavorable outcome of any of the pending
tobacco-related cases and, therefore, management has not provided any amounts in the
consolidated financial statements for unfavorable outcomes, if any. Liggett believes, and has
been so advised by counsel, that it has valid defenses to the litigation pending against it, as
well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to
be, vigorously defended. However, Liggett may enter into settlement discussions in particular
cases if it believes it is in the best interest of the Company to do so.Individual Actions
 As of June 30, 2009, there were 35 individual cases pending against Liggett and/or the
Company, where one or more individual plaintiffs allege injury resulting from cigarette
smoking, addiction to cigarette smoking or exposure to secondary smoke and seek
compensatory and, in some cases, punitive damages. In addition, there were approximately
3,200 Engleprogeny cases (defined below) pending against Liggett and/or the Company, in
state and federal courts in Florida, and approximately 100 individual cases pending in
West Virginia state court as part of a consolidated action. The following table lists the
number of individual cases by state that are pending against Liggett or its affiliates as
of June 30, 2009 (excluding Engleprogeny cases and the cases consolidated in West
Virginia):
 NumberState
    
    of CasesFlorida
    
    
    14New York
    
    
    10Louisiana
    
    
    5West Virginia
    
    
    2Mississippi
    
    
    1Maryland
    
    
    1Missouri
    
    
    1Ohio
    
    
    1
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Liggett Only Cases.There are currently six cases pending where Liggett is the only tobacco
company defendant. In April 2004, in Davis v. Liggett Group,a Florida state court jury awarded
compensatory damages of $540 against Liggett, plus interest. In addition, the court awarded
plaintiffs counsel legal fees of $752. Liggett appealed both the compensatory and the legal
fee awards. In October 2007, the compensatory award was affirmed by the Fourth District Court
of Appeal and, thereafter, was paid by Liggett. In March 2008, the Fourth District Court of
Appeal reversed and remanded the legal fee award for further proceedings in the trial court.
The Company has accrued approximately $1,499 for plaintiffs claim for attorneys fees and
costs. In Ferlanti v. Liggett Group, in February 2009, a Florida state court jury awarded
compensatory damages of $1,200 against Liggett, but found that the plaintiff was 40% at fault.
Therefore, plaintiff was awarded $720 in compensatory damages plus $96 in expenses. Liggett has
appealed the award. Punitive damages were not awared. On May 1, 2009, the court granted plaintiffs motion for an award of
attorneys fees but the amount has not yet been determined. In Hausrath v. Philip Morris, a case pending in New York state court, plaintiffs recently
dismissed all defendants other than Liggett. The other three individual actions, where Liggett
is the only tobacco company defendant, are dormant.
 The plaintiffs allegations of liability in those cases in which individuals seek recovery for
injuries allegedly caused by cigarette smoking are based on various theories of recovery,
including negligence, gross negligence, breach of special duty, strict liability, fraud,
concealment, misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law
public nuisance, property damage, invasion of privacy, mental anguish, emotional distress,
disability, shock, indemnity and violations of deceptive trade practice laws, the federal
Racketeer Influenced and Corrupt Organizations Act (RICO), state RICO statutes and antitrust
statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek
other forms of relief including treble/multiple damages, medical monitoring, disgorgement of
profits and punitive damages. Although alleged damages often are not determinable from a
complaint, and the law governing the pleading and calculation of damages varies from state to
state and jurisdiction to jurisdiction, compensatory and punitive damages have been
specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of
millions and even billions of dollars.
 Defenses raised 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.
 In addition to the awards against Liggett in Davisand Ferlanti(described above), jury awards
in individual cases have also been returned against other cigarette manufacturers in recent
years. The awards in these individual actions, often in excess of millions of dollars, are for
both compensatory and punitive damages. 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 deadline, are referred to as the
Engleprogeny cases. Liggett and/or the
Company have been named in approximately 3,200 Engleprogeny cases in both state and federal
courts in Florida. Other cigarette manufacturers have also been named as defendants in most of
these cases. These cases include approximately 8,750 plaintiffs, approximately 3,200 of whom
have claims pending in federal court. Duplicate cases were filed in federal and state court on
behalf of approximately 660 plaintiffs. The majority of the cases pending in federal court are
stayed pending the outcome of an appeal to the United States Court of Appeals for the Eleventh
Circuit
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 of several district court orders in which it was found that the Florida Supreme Courts
decision in Englewas unconstitutional. The number of cases will likely increase as the courts
may require multi-plaintiff cases to be severed into individual cases. The total number of
plaintiffs may also increase as a result of attempts by existing plaintiffs to add additional
parties. There are approximately 54 Engleprogeny cases currently scheduled for trial, or
likely to be scheduled for trial, in 2009 and 2010. To date, six Engleprogeny cases have been
tried against other cigarette manufacturers resulting in four plaintiff verdicts and two
defense verdicts. For further information on the Englecase and on Engleprogeny cases, see
Class Actions  EngleCase, below.Class Actions
 As of June 30, 2009, there were seven actions pending for which either a class had been
certified or plaintiffs were seeking class certification, where Liggett is a named defendant,
including one alleged price fixing case. Other cigarette manufacturers are also named in these
actions. Many of these actions purport to constitute statewide class actions and were filed
after May 1996 when the United States Court of Appeals for the Fifth Circuit, in Castano v.
American Tobacco Co., Inc., reversed a federal district courts certification of a purported
nationwide class action on behalf of persons who were allegedly addicted to tobacco products.
 Plaintiffs allegations of liability in class action cases are based on various theories of
recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation,
design defect, failure to warn, nuisance, breach of express and implied warranties, breach of
special duty, conspiracy, concert of action, violation of deceptive trade practice laws and
consumer protection statutes and claims under the federal and state anti-racketeering statutes.
Plaintiffs in the class actions seek various forms of relief, including compensatory and
punitive damages, treble/multiple damages and other statutory damages and penalties, creation
of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and
equitable relief. Defenses raised in these cases include, among others, lack of proximate
cause, individual issues predominate, assumption of the risk, comparative fault and/or
contributory negligence, statutes of limitations and preemption by the Federal Cigarette
Labeling and Advertising Act.
 Engle Case. In May 1994, Englewas filed against Liggett and others in Miami-Dade County,
Florida. The class consisted of all Florida residents who, by November 21, 1996, have
suffered, presently suffer or have died from diseases and medical conditions caused by their
addiction to cigarette smoking. In July 1999, after the conclusion of Phase I of the trial,
the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues
determined by the trial court to be common to the causes of action of the plaintiff class.
The jury made several findings adverse to the defendants including that defendants conduct
rose to a level that would permit a potential award or entitlement to punitive damages.
Phase II of the trial was a causation and damages trial for three of the class plaintiffs and a
punitive damages trial on a class-wide basis, before the same jury that returned the verdict in
Phase I. In April 2000, the jury awarded compensatory damages of $12,704 to the three class
plaintiffs, to be reduced in proportion to the respective plaintiffs fault. In July 2000, the
jury awarded approximately $145,000,000 in punitive damages, including $790,000 against
Liggett.
 In May 2003, Floridas Third District Court of Appeal reversed the trial court and remanded the
case with instructions to decertify the class. The judgment in favor of one of the three class
plaintiffs, in the amount of $5,831, was overturned as time barred and the court found that
Liggett was not liable to the other two class plaintiffs.
 In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages
award and held that the class should be decertified prospectively, but preserved several of the
trial courts Phase I findings, including that: (i) smoking causes lung cancer, among other
diseases; (ii) nicotine in cigarettes is addictive; (iii) defendants placed cigarettes on the
market that were defective and unreasonably dangerous; (iv) defendants concealed material
information knowing that the information was false or misleading or failed to disclose a
material fact concerning the health effects or addictive nature of smoking; (v) defendants
agreed to conceal or omit information regarding the health effects of cigarettes or their
addictive nature with the intention that smokers would rely on the information to their
detriment; (vi) defendants sold or supplied cigarettes that were defective; and (vii)
defendants
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 were negligent. The Florida Supreme Court decision also allowed former class members
to proceed to trial on individual liability issues (using the above findings) and compensatory
and punitive damage issues, provided they file their individual lawsuits by January 2008. In
December 2006, the Florida Supreme Court added the finding that defendants sold or supplied
cigarettes that, at the time of sale or supply, did not conform to the representations made by
defendants. As a result of the decision, approximately 8,750 former Engleclass members filed
suit against the Company and/or Liggett as well as other cigarette manufacturers.
 Three federal district courts (in the Merlob, Brownand Burrcases) have ruled that the
findings in the first phase of the Engleproceedings cannot be used to satisfy elements of
plaintiffs claims, and two of those rulings (Brownand Burr) have been certified by the trial
court for interlocutory review. The certification in both cases has been granted by the United
States Court of Appeals for the Eleventh Circuit and the appeals have been consolidated. In
February 2009, the appeal in Burrwas dismissed for lack of prosecution. Engleprogeny cases
pending in the federal district courts in the Middle District of Florida have been stayed
pending interlocutory review by the Eleventh Circuit. Several state trial court judges have
issued contrary rulings that allowed plaintiffs to use the Englefindings to establish elements
of their claims and required certain defenses to be stricken.
 In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco
Co.,awarded $37,500 in compensatory damages, jointly and severally, in a case involving
Liggett and two other cigarette manufacturers, which amount was subsequently reduced by the
court. The jury found Liggett 50% responsible for the damages incurred by the plaintiff. The
Lukacscase was the first case to be tried as an individual Engleprogeny case, but was tried
almost five years prior to the Florida Supreme Courts final decision in Engle. In November
2008, the court entered final judgment in the amount of $24,835 (for which Liggett is 50%
responsible), plus interest from June 2002 which, as of June 30, 2009, was in excess of
$13,000. Defendants filed a notice of appeal in December 2008 and have posted supersedeas
bonds. Briefing is underway. In addition, plaintiff filed a motion seeking an award of
attorneys fees from Liggett based on plaintiffs prior proposal for settlement. All
proceedings relating to the motion for attorneys fees are stayed pending a final resolution of
appellate proceedings.
 Other Class Actions. Smith v. Philip Morris,a Kansas state court case, is an action 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 action suits have been filed in a number of states against cigarette manufacturers,
alleging, among other things, that use of the terms light and ultra light constitutes
unfair and deceptive trade practices, among other things. One such suit, Schwab [McLaughlin]
v. Philip Morris,pending in federal court in New York since 2004, sought to create a
nationwide class of light cigarette smokers. In September 2006, the United States District
Court for the Eastern District of New York certified the class. In April 2008, the United
States Court of Appeals for the Second Circuit decertified the class. The case was returned to
the trial court for further proceedings (see discussion of Clearycase below). In December
2008, the United States Supreme Court, in Altria Group Inc. v. Good, ruled that the Federal
Cigarette Labeling and Advertising Act did not preempt the state law claims asserted by the
plaintiffs and that they could proceed with their claims under the Maine Unfair Trade
Practices Act. This ruling may result in additional class action
cases in other states. Although Liggett is not a party in the Goodcase, an adverse ruling or commencement of
additional lights related class actions could have a material adverse effect on the Company.
 In November 1997, in Young v. American Tobacco Co.,a purported personal injury class action
was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who,
though not themselves cigarette smokers, are alleged to have been exposed to secondhand smoke
from cigarettes which were manufactured by the defendants, and who suffered injury as a result
of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and
punitive damages. In October 2004, the trial court stayed this case pending the outcome of the
appeal in Scott v. American Tobacco Co.(see description below).
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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,a putative class action was brought in Illinois state
court on behalf of persons who were allegedly injured by: (i) defendants purported conspiracy
to conceal material facts regarding the addictive nature of nicotine; (ii) defendants alleged
acts of targeting their advertising and marketing to minors; and (iii) defendants claimed
breach of the publics right to defendants compliance with laws prohibiting the distribution
of cigarettes to minors. Plaintiffs request that defendants be required to disgorge all profits
unjustly received through their sale of cigarettes to plaintiffs and the class. 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. In March 2009, plaintiffs filed a third amended complaint adding, among
other things, allegations regarding defendants sale of light cigarettes. In April 2009,
plaintiffs in 11 lights class actions, including Clearyand Schwab,moved to consolidate
pretrial proceedings in these 11 cases in the United States District Court for the Eastern
District of New York, or alternatively, the Southern District of Florida, in a Multidistrict
Litigation. Oral argument was heard on July 30, 2009.
 In April 2001, in Brown v. American Tobacco Co.,a California state court granted in part
plaintiffs motion for class certification and certified a class comprised of adult residents
of California who smoked at least one of defendants cigarettes during the applicable time
period and who were exposed to defendants marketing and advertising activities in California.
In March 2005, the court granted defendants motion to decertify the class based on a recent
change in California law. In June 2009, the California Supreme Court reversed and remanded.
The defendants moved for rehearing of that decision. A decision is expected in August 2009.
 Although not technically a class action, 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
defendants petition for writ of certiorari asking the Court to review the trial plan. If the
case eventually proceeds against Liggett, it is estimated that Liggett could be a defendant in
approximately 100 of the individual cases.
 Class certification motions are pending in a number of other cases and a number of orders
denying class certification are on appeal. In addition to the cases described above, numerous
class actions remain certified against other cigarette manufacturers, including Scott.In that
case, a Louisiana jury returned a $591,000 verdict (subsequently reduced by the court to
$263,500 plus interest from June 2004) against other cigarette manufacturers to fund medical
monitoring or smoking cessation programs for members of the class. The case is on appeal.Governmental Actions
 As of June 30, 2009, there is one active Governmental Action pending against Liggett. 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 City of St. Louis v. American Tobacco Company, a case pending in Missouri state court since
December 1998, the City of St. Louis and approximately 40 hospitals seek recovery of costs
expended by the hospitals on behalf of patients who suffer, or have suffered, from illnesses
allegedly resulting from the use of cigarettes. In June 2005, the court granted defendants
motion for summary judgment as to claims for damages which accrued prior to November 16, 1993.
The claims for damages which accrued after November 16, 1993 are pending. Discovery is
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 ongoing. In September 2008, the court heard argument on motions for summary judgment filed by
the parties. A decision is pending. Trial is currently 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 and to
be paid by the federal government for lung cancer, heart disease, emphysema and other
smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of
defendants, to restrain defendants and co-conspirators from engaging in alleged fraud and other
allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of
their unlawful conduct. 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,
enjoined the non-Liggett defendants from using 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. The Final Judgment was stayed pending appeal. In May
2009, the United States Court of Appeals for the District of Columbia Circuit affirmed most of
the district courts decision. The other cigarette manufacturers have indicated that they will
seek an appeal to the United States Supreme Court. Although this case has been concluded as to
Liggett, it is unclear what impact, if any, the Final Judgment will have on the cigarette
industry as a whole. To the extent that the Final Judgment leads to a decline in industry-wide
shipments of cigarettes in the United States or otherwise results in restrictions that
adversely affect the industry, Liggetts sales volume, operating income and cash flows could be
materially adversely affected.Third-Party Payor Actions
 As of June 30, 2009, there were two Third-Party Payor Actions pending against
Liggett and other cigarette manufacturers. Third-Party Payor Actions typically have
been filed 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 possible 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 do 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 defendants are pending before the Israel Supreme Court seeking
appeal from a lower courts decision granting leave to plaintiff for foreign service of
process.
 In May 2008, in National Committee to Preserve Social Security and Medicare v. Philip Morris
USA,a case pending in the United States District Court for the Eastern District of New York,
plaintiffs commenced an action to
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 recover twice the amount paid by Medicare for the health care
services provided to Medicare beneficiaries to treat diseases allegedly attributable to smoking
defendants cigarettes from May 21, 2002 to the present, for which treatment defendants
allegedly were required to make payment under MSP. Defendants Motion to Dismiss and
plaintiffs Motion for Partial Summary Judgment were filed in July 2008 and in March 2009, the
court dismissed the case. Plaintiffs appealed the decision.Upcoming Trials
 There are currently approximately 54 Engleprogeny cases that may be set for trial during 2009
and 2010. The Company and/or Liggett and other cigarette manufacturers are currently named as
defendants in each of these cases. 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 Agreements
 In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related
litigation with 45 states and territories. The settlements released Liggett from all
smoking-related claims within those states and territories, including claims for health care
cost reimbursement and claims concerning sales of cigarettes to minors.
 In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the Original
Participating Manufacturers or OPMs) and Liggett (together with any other tobacco product
manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs)
(the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers)
entered into the Master Settlement Agreement (the MSA) with 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern
Mariana Islands (collectively, the Settling States) to settle the asserted and unasserted
health care cost recovery and certain other claims of the Settling States. The MSA received
final judicial approval in each Settling State.As a result of the MSA, the Settling States released Liggett from:
 
    
    all claims of the Settling States and their respective political subdivisions and other
recipients of state health care funds, relating to: (i) past conduct arising out of the
use, sale, distribution, manufacture, development, advertising and marketing of tobacco
products; (ii) the health effects of, the exposure to, or research, statements or warnings
about, tobacco products; and
 
    
    all monetary claims of the Settling States and their respective subdivisions and other
recipients of state health care funds relating to future conduct arising out of the use
of, or exposure to, tobacco products that have been manufactured in the ordinary course of
business.
 The MSA restricts tobacco product advertising and marketing within the Settling States and
otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA
prohibits the targeting of youth in the advertising, promotion or marketing of tobacco
products; bans the use of cartoon characters in all tobacco advertising and promotion; limits
each Participating Manufacturer to one tobacco brand name sponsorship during any 12-month
period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for
tobacco product placement in various media; bans gift offers based on the purchase of tobacco
products without sufficient proof that the intended recipient is an adult; prohibits
Participating Manufacturers from licensing third parties to advertise tobacco brand names in
any manner prohibited under the MSA; and prohibits Participating Manufacturers from using as a
tobacco product brand name any nationally recognized non-tobacco brand or trade name or the
names of sports teams, entertainment groups or individual celebrities.
 The MSA also requires Participating Manufacturers to affirm corporate principles to comply with
the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying
activities conducted on behalf of Participating Manufacturers. In addition, the MSA provides
for the appointment of an independent auditor to calculate and determine the amounts of
payments owed pursuant to the MSA.
 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 2.4%, 2.5% and 2.5% of the total
cigarettes shipped in the United States in 2006, 2007 and 2008 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Tobacco, as the case may be, must pay on each excess unit
an amount equal (on a per-unit basis) to that due from the OPMs for that year. In April 2007,
Liggett and Vector Tobacco paid $38,743 for their 2006 MSA obligations and in April 2008, paid
$35,995 for their 2007 MSA obligations, having prepaid $34,500 of that amount in December 2007.
In December 2008, Liggett and Vector Tobacco prepaid $34,000 of their 2008 MSA obligations and
paid an additional $8,799 in April 2009 after withholding certain disputed amounts.
 Under the payment provisions of the MSA, the Participating Manufacturers are required to pay a
base annual amount of $9,000,000 in 2009 and each year thereafter (subject to applicable
adjustments, offsets and reductions). These annual payments are allocated based on unit volume
of domestic cigarette shipments. The payment obligations under the MSA are the several, and not
joint, obligations of each Participating Manufacturer and are not the responsibility of any
parent or affiliate of a Participating Manufacturer.Certain MSA Disputes
 In 2005, the independent auditor under the MSA calculated that Liggett owed $28,668 for
its 2004 sales. In April 2005, Liggett paid $11,678 and disputed the balance, as permitted by
the MSA. Liggett subsequently paid $9,304 of the disputed amount, although Liggett continues to
dispute that this amount is owed. This $9,304 relates to an adjustment to its 2003 payment
obligation claimed by Liggett for the market share loss to non-participating manufacturers,
which is known as the NPM Adjustment. At June 30, 2009, included in Other assets on the
Companys consolidated balance sheet, was a noncurrent receivable of $6,513 relating to such
amount. The remaining balance in dispute of $7,686 is comprised of $5,318 claimed for a 2004
NPM Adjustment and $2,368 relating to the independent auditors retroactive change from gross
to net units in calculating MSA payments, which Liggett contends is improper, as discussed
below. From their April 2006 payment, Liggett and Vector Tobacco withheld approximately $1,600
claimed for the 2005 NPM Adjustment and $2,949 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 $3,950 relating to the
retroactive change from gross to net units. From their April 2008 payment, Liggett and
Vector Tobacco withheld approximately $4,000 for the 2007 NPM Adjustment and approximately
$3,696 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. From their
April 2009 payment, Liggett and Vector Tobacco withheld approximately $6,100 relating to the
2008 NPM adjustment and approximately $3,300 relating to the retroactive change from gross to
net units.
 The following amounts have not previously been expensed by the Company 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 subsequently rendered the same decision with respect to 2004, 2005 and 2006. As
a result, the manufacturers are entitled to potential NPM Adjustments to their 2003, 2004, 2005
and 2006 MSA payments. 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 filed in 49 Settling States over the issue of whether the application of the NPM
Adjustment for 2003 is to be determined through litigation or arbitration. These actions relate
to the potential NPM Adjustment for 2003, which the independent auditor under the MSA
previously determined to be as much as $1,200,000 for all Participating Manufacturers. All 48
courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute is
arbitrable and 47 of those decisions are final and non-appealable. In response to a proposal
from the OPMs and many of the SPMs, 45 of the Settling
States, representing approximately 90% of the allocable share of the Settling States, entered
into an agreement providing for a nationwide arbitration of the dispute with respect to the NPM
Adjustment for 2003. The agreement provides for selection of the arbitration panel beginning
October 1, 2009 and that the parties and the arbitrators will thereafter establish the schedule
and procedures for the arbitration. Because states representing more than 80% of the allocable
share signed the agreement, signing
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 states will receive a 20% reduction of any potential 2003
NPM adjustment. It is anticipated that the arbitration will begin in 2010. There can be no
assurance that Liggett or Vector Tobacco will receive any adjustment as a result of these
proceedings.
 Gross v. Net Calculations.In October 2004, the independent auditor notified Liggett and all
other Participating Manufacturers that their payment obligations under the MSA, dating from the
agreements execution in late 1998, had been recalculated using net unit amounts, rather than
gross unit amounts (which had been used since 1999). The change in the method of calculation
could, among other things, require additional MSA payments by Liggett of approximately $25,900,
including interest, for 2001 through 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 to net unit amounts is
impermissible for several reasons, including:
 
    
    use of net unit amounts is not required by the MSA (as reflected by, among
other things, the use of gross unit amounts through 2005);
    
    such a change is not authorized without the consent of affected parties to
the MSA;
    
    the MSA provides for four-year time limitation periods for revisiting
calculations and determinations, which precludes recalculating Liggetts 1997
Market Share (and thus, Liggetts market share exemption); and
    
    Liggett and others have relied upon the calculations based on gross unit
amounts since 1998.
 No amounts have been expensed or accrued in the accompanying consolidated financial statements
for any potential liability relating to the gross versus net dispute.
 QUEST 3. Vector Tobacco has not made 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.
Quest is no longer being sold by Vector Tobacco. There can be no assurance that additional
payments under the MSA for QUEST 3 will not be owed.
 Litigation Challenging the MSA.In Freedom Holdings Inc. v. Cuomo, litigation pending in
federal court in New York, certain importers of cigarettes allege that the MSA and certain
related New York statutes violate federal antitrust and constitutional law. The district court
granted New Yorks motion to dismiss the complaint for failure to state a claim. On appeal,
the United States Court of Appeals for the Second Circuit held that if all of the allegations
of the complaint were assumed to be true, plaintiffs had stated a claim for relief on antitrust
grounds. In January 2009, the district court granted New Yorks motion for summary judgment,
dismissing all claims brought by the plaintiffs, and dissolving the preliminary injunction.
The plaintiffs have appealed.
 In Grand River Enterprises Six Nations, Ltd. v. Pryor, another proceeding pending in federal
court in New York, plaintiffs seek to enjoin the statutes enacted by New York and other states
in connection with the MSA on the grounds that the statutes violate the Commerce Clause of the
United States Constitution and federal antitrust laws. In September 2005, the United States
Court of Appeals for
the Second Circuit held that if all of the allegations of the complaint were assumed to be
true, plaintiffs had stated a claim for relief and that the New York federal court had
jurisdiction over the other defendant states. On remand, the trial court held that plaintiffs
are unlikely to succeed on the merits. Discovery is pending. Similar challenges to the MSA and
MSA-related state statutes are pending in Kentucky, Arkansas, Kansas, Louisiana, Tennessee and
Oklahoma. Liggett and the other
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 cigarette manufacturers are not defendants in these cases.
Litigation challenging the validity of the MSA, including claims that the MSA violates
antitrust laws, has not been successful to date.
 In October 2008, Vibo Corporation, Inc., d/b/a General Tobacco (Vibo) commenced litigation in
the United States District Court for the Western District of Kentucky against each of the
Settling States and certain Participating Manufacturers. Vibo alleged, among other things,
that the market share exemptions (i.e., grandfathered shares) provided to certain SPMs under
the MSA, including Liggett and Vector Tobacco, violate federal antitrust and constitutional
law. In January 2009, the court issued a memorandum opinion and order granting the defendants
motions and dismissing Vibos lawsuit. On December 11, 2008, Vibo filed a second lawsuit,
seeking declaratory relief under the MSA, in California state court against the State of
California and certain cigarette manufacturers, including Liggett and Vector Tobacco, seeking a
determination that the proposed amendment to its agreement to join the MSA, under which it
would no longer have to make certain MSA payments, did not trigger the MSAs most favored
nation provision. In March 2009, the OPMs and SPMs each filed motions for summary judgment.
On July 21, 2009, the trial court granted the OPMs and SPMs motions for summary judgment. It
is likely that Vibo will appeal the final judgment.
 Other State Settlements.The MSA replaces Liggetts prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. Each of these four
states, prior to the effective date of the MSA, negotiated and executed settlement
agreements with each of the other major tobacco companies, separate from those settlements
reached previously with Liggett. Liggetts agreements with these states remain in full
force and effect, and Liggett made various payments to these states under the agreements.
These states settlement agreements with Liggett contained most favored nation provisions
which could reduce Liggetts payment obligations based on subsequent settlements or
resolutions by those states with certain other tobacco companies. Beginning in 1999,
Liggett determined that, based on each of these four states settlements with United
States Tobacco Company, Liggetts payment obligations to those states had been eliminated.
With respect to all non-economic obligations under the previous settlements, Liggett
believes it is entitled to the most favorable provisions as between the MSA and each
states respective settlement with the other major tobacco companies. Therefore,
Liggetts non-economic obligations to all states and territories are now defined by the
MSA.
 In 2003, in order to resolve any potential issues with Minnesota as to Liggetts ongoing
economic settlement obligations, Liggett negotiated a $100 a year payment to Minnesota, to be
paid any year cigarettes manufactured by Liggett are sold in that state. In 2004, the
Attorneys General for Florida, Mississippi and Texas advised Liggett that they believed that
Liggett had failed to make all required payments under the respective settlement agreements
with these states for the period 1998 through 2003 and that additional payments may be due for
2004 and subsequent years. Liggett believes the states allegations are without merit, based,
among other things, on the language of the most favored nation provisions of the settlement
agreements.
 Except for $2,500 accrued at June 30, 2009, 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. The previous demands by these states are substantially in
excess of the $2,500 accrual, although there have been no substantive settlement discussions
for several years. 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.Cautionary Statement. Management is not able to predict the outcome of the litigation pending or
threatened against Liggett. Litigation is subject to many uncertainties. For example, in addition
to $540 awarded in the Daviscase, plus legal fees, and the $816 awarded in the Ferlanticase, plus
legal fees, in June 2002, the jury in the Lukacscase, an individual case brought under the third
phase of the Englecase, awarded compensatory damages against Liggett and two other defendants and
found Liggett 50% responsible for the damages. In November 2008, the court entered final judgment
in favor of the plaintiff for $24,835, plus interest from June 11, 2002 which, as of June 30, 2009,
exceeded $13,000. It is possible that additional cases could be decided
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 unfavorably against Liggett. As a result of the Engledecision, approximately 8,750 former
Engleclass members commenced suit against Liggett and/or the Company and other cigarette
manufacturers. Liggett may enter into discussions in an attempt to settle particular cases if
it believes it is in its best interest to do so.
 Management cannot predict the cash requirements related to any future defense costs,
settlements or judgments, including cash required to bond any appeals, and there is a risk that
those requirements will not be able to be met. An unfavorable outcome of a pending smoking and
health case could encourage the commencement of additional similar litigation, or could lead to
multiple adverse decisions in the Engleprogeny cases. Adverse verdicts have been rendered in
four Engleprogeny cases out of six that have been tried. 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 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
extended through 2014. Under the agreement, Liggett Vector Brands has agreed to pay a portion
of losses, if any, incurred by the surety under the bond program, with a maximum loss exposure
of $500 for Liggett Vector Brands. To secure its potential obligations under the agreement,
Liggett Vector Brands has delivered to the subsidiary of the association a $100 letter of
credit and agreed to fund up to an additional $400. Liggett Vector Brands has incurred no
losses to date under this agreement, and the Company believes the fair value of Liggett Vector
Brands obligation under the agreement was immaterial at June 30, 2009.
 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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 9.
    
    INCOME TAXESVectors income tax rates for the three and six months ended June 30, 2009 and 2008 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 and six months ended June 30, 2008, the
Companys income tax provision was reduced because of the impact of the gain on the income from
the Companys investment in the St. Regis Hotel, which reduced income tax expense by $460 due
to differences in the Companys marginal tax rate of approximately 41% and its anticipated
effective annual income tax rate from ordinary operations of approximately 45%.
 For the three and six months ended June 30, 2009, the Companys income tax benefit was reduced
because of the impact of the loss on extinguishment of debt, which reduced income tax benefit
by approximately $600 due to differences in the Companys marginal tax rate of approximately
40% and its anticipated effective annual income tax rate from ordinary operations of
approximately 43%. The Companys income tax benefit for the three and six months ended June
30, 2009 was increased by approximately $800 due to anticipated reductions in the Companys
marginal tax rate in 2009.
 The Companys current income taxes payable increased by approximately $75,500 and its current
portion of deferred income taxes payable decreased by approximately $75,500 as a result of
taxable income of approximately $197,000 from exercise by Philip Morris of an option associated
with the brands transaction.
 The Internal Revenue Service is auditing the Companys 2005 tax year. The Company believes it
has adequately reserved for any potential adjustments that may arise as a result of the audit.
 10. NEW VALLEY
 Investments in Non-Consolidated Real Estate Businesses:
 The components of Investments in non-consolidated real estate businesses were as follows as
of June 30, 2009 and December 31, 2008:
 June 30, 2009
    
    
    December 31, 2008Douglas Elliman Realty LLC
    
    $
    30,314
    
    
    $
    33,175Aberdeen Townhomes LLC
    
    
    3,000
    
    
    
    6,500New Valley Oaktree Chelsea Eleven LLC
    
    
    10,506
    
    
    
    11,100Investments in non-consolidated real
estate businesses
    
    $
    43,820
    
    
    $
    50,775
 Residential Brokerage Business.New Valley recorded income of $1,810 and $4,184 for the
three months ended June 30, 2009 and 2008, respectively, and income of $615 and $5,522 for the
six months ended June 30, 2009 and 2008, respectively, associated with Douglas Elliman Realty.
New Valleys income or loss includes 50% of Douglas Ellimans net income or loss, as well as
interest income earned by New Valley on a subordinated loan to Douglas Elliman Realty,
increases to income resulting from management fees and other adjustments. New Valley received
cash distributions from Douglas Elliman Realty LLC of $2,049 and $2,232 for the three months
ended June 30, 2009 and 2008, respectively, and $3,476 and $3,557 for the six months ended June
30, 2009 and 2008, respectively.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 Summarized financial information for Douglas Elliman Realty for the three and six months ended
June 30, 2009 and 2008 and as of June 30, 2009 and December 31, 2008 is presented below.
 June 30, 2009
    
    December 31, 2008Cash
    
    $
    14,191
    
    
    $
    22,125Other current assets
    
    
    7,427
    
    
    
    7,496Property, plant and equipment, net
    
    
    13,779
    
    
    
    15,868Trademarks
    
    
    21,663
    
    
    
    21,663Goodwill
    
    
    38,334
    
    
    
    38,325Other intangible assets, net
    
    
    1,181
    
    
    
    1,311Other non-current assets
    
    
    3,185
    
    
    
    904Notes payable  current
    
    
    549
    
    
    
    1,413Current portion of notes payable to member 
Prudential Real Estate Financial Services
of America, Inc.
    
    
    4,668
    
    
    
    4,729Current portion of notes payable
to member  New Valley
    
    
    4,668
    
    
    
    4,729Other current liabilities
    
    
    20,485
    
    
    
    23,294Notes payable  long term
    
    
    673
    
    
    
    1,805Notes payable to member  Prudential Real
Estate Financial Services of America, Inc.
    
    
    
    
    
    
    2,030Notes payable to member  New Valley
    
    
    
    
    
    
    2,030Other long-term liabilities
    
    
    8,381
    
    
    
    6,939Members equity
    
    
    60,336
    
    
    
    60,723
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    60,373
    
    
    $
    100,893
    
    
    $
    109,329
    
    
    $
    182,256Costs and expenses
    
    
    55,766
    
    
    
    91,010
    
    
    
    106,326
    
    
    
    168,239Depreciation expense
    
    
    1,134
    
    
    
    1,357
    
    
    
    2,333
    
    
    
    2,707Amortization expense
    
    
    64
    
    
    
    75
    
    
    
    128
    
    
    
    149Interest expense, net
    
    
    602
    
    
    
    802
    
    
    
    1,293
    
    
    
    1,665Income tax expense
    
    
    (55
    )
    
    
    231
    
    
    
    (365
    )
    
    
    346Net income
    
    $
    2,862
    
    
    $
    7,418
    
    
    $
    (386
    )
    
    $
    9,150
 Douglas Elliman Realty has been negatively impacted by the current downturn in the
residential real estate market. The residential real estate market is cyclical and is
affected by changes in the general economic conditions that are beyond Douglas Elliman
Realtys control. The U.S. residential real estate market, including the market in the New
York metropolitan area where Douglas Elliman operates, is currently in a significant downturn
due to various factors including downward pressure on housing prices, the impact of the
recent contraction in the subprime and mortgage markets generally and an exceptionally large
inventory of unsold homes at the same time that sales volumes are decreasing. The depth and
length of the current downturn in the real estate industry has proved exceedingly difficult
to predict. The Company cannot predict whether the downturn will worsen or when the market
and related economic forces will return the U.S. residential real estate industry to a growth
period.
 All of Douglas Elliman Realtys current operations are located in the New York metropolitan
area.Local and regional economic and general business conditions in this market could differ
materially from prevailing conditions in other parts of the country. Among other things, the
New York metropolitan residential real estate
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 market has been impacted by the significant decline in the financial services industry. A
continued downturn in the residential real estate market or economic conditions in that
region could have a material adverse effect on Douglas Elliman Realty.
 Aberdeen Townhomes LLC.In June 2008, a subsidiary of New Valley purchased a preferred
equity interest in Aberdeen Townhomes LLC (Aberdeen) for $10,000. Aberdeen acquired five
town home residences located in Manhattan, New York, which it is in the process of
rehabilitating and selling. In the event that Aberdeen makes distributions of cash, New
Valley is entitled to a priority preferred return of 15% per annum until it has recovered its
invested capital. New Valley is entitled to 25% of subsequent cash distributions of profits
until it has achieved an annual 18% internal rate of return (IRR). New Valley is then
entitled to 20% of subsequent cash distributions of profits until it has achieved an annual
23% IRR. After New Valley has achieved an annual 23% IRR, it is then entitled to 10% of any
remaining cash distributions of profits.
 In February 2009, the managing member of Aberdeen Townhomes resigned, and a subsidiary of New
Valley became the new managing member as of March 1, 2009. Aberdeen is a variable interest
entity; however even as the managing member, the Company is not the primary beneficiary as
other parties to the investment would absorb a majority of the variable interest entitys
losses under the current arrangement. On June 15, 2009, the Company entered into a line of
credit in the amount of $250 on behalf of Aberdeen, of which $13 was outstanding at June 30,
2009.
 In January 2009, the Company obtained an appraisal of the town home residences and determined
that the value of the properties, less estimated disposal costs, was approximately $3,500
less than their carrying value and recorded an impairment charge for $3,500 for the year
ended December 31, 2008. In the first quarter of 2009, the Company reevaluated the fair
market value of the town home residences and determined an additional decline in the value of
the properties of $3,500 had occurred and recorded an additional impairment charge of $3,500.
The reduction in value was attributed to the overall real estate market conditions in New
York City.
 As a result of the impairment charges, the Companys maximum exposure to a loss on its
investment in Aberdeen is $3,013 at June 30, 2009.
 Mortgages on four of the five Aberdeen town homes with a balance of approximately $36,100
matured on March 1, 2009 and have not been refinanced or paid
and are in default. The Company is currently in discussions with the lender,
Wachovia Bank, N.A. The
remaining mortgage with a balance of approximately $4,550 matures on
September 30, 2009 and was
also in default as of June 30, 2009 due to non-payment of interest.
 New Valley Oaktree Chelsea Eleven, LLC.In September 2008, a subsidiary of New
Valley (New Valley Chelsea) purchased for $12,000 a 40% interest in New Valley Oaktree Chelsea Eleven, LLC (New Valley
Oaktree). New Valley Oaktree lent $29,000 and contributed $1,000 for 29% of the capital in
Chelsea Eleven LLC (Chelsea), which is developing a condominium project in Manhattan, New
York. The development consists of 72 luxury residential units and one commercial unit.
Approximately 75% of the units are pre-sold and there is approximately $35,000 in deposits
held in escrow. The loan from New Valley Oaktree is subordinate to a $110,000
construction loan and a $24,000 mezzanine loan plus accrued interest. The loan from New
Valley Oaktree to Chelsea bears interest at 60.25% per annum, compounded monthly, with $3,750
initially being held in an interest reserve, from which five monthly
payments of $300 were paid to New Valley.
 New Valley Chelsea is a variable interest entity; however, the Company is not the primary
beneficiary. The Companys maximum exposure to loss as a result of its investment in Chelsea
is $10,506. This investment is being accounted for under the equity method. New Valley
Chelsea operates as an investment vehicle for the Chelsea real estate development project.
During the first three months of 2009, the Company received a distribution of $594. In July
2009, the Company contributed an additional $467 to New Valley Oaktree. As of June 30, 2009
and December 31, 2008, Chelsea had approximately $230,952 and $206,778 of total assets,
respectively and $210,447 and $185,665 of total liabilities, respectively. No income has
been recorded as all amounts have been capitalized in the construction project.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 Investment in Real Estate:
 Escena.In March 2008, a subsidiary of New Valley purchased a loan collateralized by a
substantial portion of a 450-acre approved master planned community in Palm Springs,
California known as Escena. The loan, which was in foreclosure, was purchased for its
$20,000 face value plus accrued interest and other costs of $1,445. The collateral consists
of 867 residential lots with site and public infrastructure, an 18-hole golf course, a
substantially completed clubhouse, and a seven-acre site approved for a 450-room hotel.
 In April 2009, New Valleys subsidiary entered into a settlement agreement with Lennar
Corporation, a guarantor of the loan, which requires the guarantor to satisfy its obligations
under a completion guaranty by completing improvements to the project in settlement, among
other things, of its payment guarantees. In addition, the guarantor agreed to pay
approximately $250 in legal fees and $1,000 of delinquent taxes and penalties and post a letter
of credit to secure its construction obligation. As a result of this settlement, the Company
calculated the fair market value of the investment as of March 31, 2009, utilizing the most
recent as is appraisal of the collateral and the value of the completion guaranty less
estimated costs to dispose of the property. Based on these estimates, the Company determined
that the fair market value was less than the carrying amount of the mortgage receivable at
March 31, 2009 by approximately $5,000. Accordingly, a charge of $5,000 was recorded
during the three months ended March 31, 2009, which resulted in the loan being carried at its
net basis of $12,704 as of March 31, 2009. On April 15, 2009 New Valley completed the
foreclosure process and on April 16, 2009, took title to the collateral. In June 2009, the
Company received $500 from Lennar Corporation pursuant to the settlement agreement. The assets
have been classified as an Investment in real estate, and
were carried on the Companys condensed consolidated balance
sheet at $12,204 as of June 30, 2009.
 Real Estate Market Conditions. Because real estate
markets may continue to worsen, the
Company will continue to perform additional assessments to determine the impact of the markets,
if any, on the Companys consolidated financial statements. Thus, future impairment charges
may occur.
 11.
    
    INVESTMENTS AND FAIR VALUE MEASUREMENTS
 As of January 1, 2009, SFAS No. 157, Fair Value Measurements, applies to both the Companys
financial assets and liabilities and non-financial assets and liabilities. SFAS No. 157
provides guidance for using fair value to measure assets and liabilities and only applies when
other standards require or permit the fair value measurement of assets and 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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 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.
 The Companys recurring financial assets and liabilities subject to fair value measurements and
the necessary disclosures are as follows:
 Fair Value Measurements as of June 30, 2009Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Money market funds
    
    $
    222,123
    
    
    $
    222,123
    
    
    $
    
    
    
    $
    Certificates of deposit
    
    
    2,422
    
    
    
    
    
    
    
    2,422
    
    
    
    Bonds
    
    
    3,859
    
    
    
    3,859
    
    
    
    
    
    
    
    Investment
securities available for sale
    
    
    42,219
    
    
    
    30,777
    
    
    
    11,442
    
    
    
    Total
    
    $
    270,623
    
    
    $
    256,759
    
    
    $
    13,864
    
    
    $
    Liabilities:Fair value of derivatives
embedded within
convertible debt
    
    $
    136,796
    
    
    $
    
    
    
    $
    
    
    
    $
    136,796
 Fair Value Measurements as of December 31, 2008Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Money market funds
    
    $
    192,348
    
    
    $
    192,348
    
    
    $
    
    
    
    $
    Investment
securities available for sale
    
    
    28,518
    
    
    
    20,627
    
    
    
    7,891
    
    
    
    Total
    
    $
    220,866
    
    
    $
    212,975
    
    
    $
    7,891
    
    
    $
    Liabilities:Fair value of derivatives
embedded within
convertible debt
    
    $
    77,245
    
    
    $
    
    
    
    $
    
    
    
    $
    77,245
 The fair value of investment securities available for sale included in Level 1 are based
on quoted market prices from various stock exchanges. The Level 2 investment securities
available for sale were not registered and therefore do not have direct market quotes or have
certain restrictions.
 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
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 
 debt. The changes in fair value of derivatives embedded within convertible debt as of June 30,
2009 are disclosed. (See Note 6.)
 In addition to assets and liabilities that are recorded at fair value on a recurring basis, the
Company is required to record assets and liabilities at fair value on a nonrecurring basis.
Generally, assets and liabilities are recorded at fair value on a nonrecurring basis as a
result of impairment charges.
 The Companys nonrecurring nonfinancial assets subject to fair value measurements are as follows:
 Fair Value Measurements as of June 30, 2009Quoted PricesSix Months
    
    
    
    
    
    
    in Active
    
    
    SignificantEnded
    
    
    
    
    
    
    Markets for
    
    
    Other
    
    
    SignificantJune 30, 2009
    
    
    
    
    
    
    Identical
    
    
    Observable
    
    
    UnobservableImpairment
    
    
    
    
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    Charge
    
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Investment in real estate
    
    $
    5,000
    
    
    $
    12,204
    
    
    $
    
    
    
    $
    
    
    
    $
    12,204Investment in non-consolidated
real estate businesses
    
    
    3,500
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    3,000Total
    
    $
    8,500
    
    
    $
    15,204
    
    
    $
    
    
    
    $
    
    
    
    $
    15,204
 The Company estimated the fair value of its mortgage receivable and non-consolidated real
estate using observable inputs such as market pricing based on recent events, however,
significant judgment was required to select certain inputs from observed market data. The
decrease in the mortgage receivable and the non-consolidated real
estate were attributed to the
decline in the New York and California real estate markets due to various factors including
downward pressure on housing prices, the impact of the recent contraction in the subprime and
mortgage markets generally and a large inventory of unsold homes at the same time that sales
volumes were decreasing. The $8,500 of impairment charges taken in
the first quarter of 2009 were
included in the results from operations for the six months ended June 30, 2009.
 12.
    
    RESTRICTED STOCK AWARD
 On April 7, 2009, the President of the Company was awarded a restricted stock grant of 500,000
shares of Vectors common stock pursuant to Vectors Amended and Restated 1999 Long-Term
Incentive Plan. Under the terms of the award, one-fifth of the shares vest on September 15,
2010, with an additional one-fifth vesting on each of the four succeeding one-year
anniversaries of the first vesting date through September 15, 2014. In the event that his
employment with the Company is terminated for any reason other than his death, his disability
or a change of control (as defined in this Restricted Share Agreement) of the Company, any
remaining balance of the shares not previously vested will be forfeited by him. The fair market
value of the restricted shares on the date of grant was $6,467 is being amortized over the
vesting period as a charge to compensation expense.
 13.
    
    SEGMENT INFORMATIONThe Companys significant business segments for the three and six
months ended June 30, 2009 and 2008 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 (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 for segment reporting purposes,
excludes the operations of Medallion. The accounting policies of the
segments are the same as those
 -39-




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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
 
 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 operations before taxes for the three and six months
ended June 30, 2009 and 2008 follows:
 Vector
    
    New
    
    CorporateLiggett
    
    Tobacco
    
    Valley
    
    and Other
    
    TotalThree months ended June 30, 2009Revenues
    
    $
    206,071
    
    
    $
    723
    
    
    
    
    
    
    
    
    
    
    $
    206,794Operating income (loss)
    
    
    43,310
    
    
    
    (1,362
    )
    
    
    
    
    
    
    (3,101
    )
    
    
    38,847Depreciation and amortization
    
    
    1,973
    
    
    
    25
    
    
    
    
    
    
    
    527
    
    
    
    2,525Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    1,811
    
    
    
    
    
    
    
    1,811Three months ended June 30, 2008Revenues
    
    $
    142,330
    
    
    $
    630
    
    
    
    
    
    
    
    
    
    
    $
    142,960Operating income (loss)
    
    
    43,692
    
    
    
    (1,926
    )
    
    
    
    
    
    
    (7,421
    )
    
    
    34,345Depreciation and amortization
    
    
    1,919
    
    
    
    29
    
    
    
    
    
    
    
    584
    
    
    
    2,532Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    4,184
    
    
    
    
    
    
    
    4,184Six months ended June 30, 2009Revenues
    
    $
    326,958
    
    
    $
    1,052
    
    
    
    
    
    
    
    
    
    
    $
    328,010Operating income (loss)
    
    
    81,720
    (1)
    
    
    (4,147
    )(2)
    
    
    
    
    
    
    (7,566
    )
    
    
    70,007Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    816
    
    
    
    
    
    
    
    816Identifiable assets
    
    
    292,749
    
    
    
    2,578
    
    
    
    56,324
    
    
    
    405,580
    
    
    
    757,231Depreciation and amortization
    
    
    3,958
    
    
    
    53
    
    
    
    
    
    
    
    1,107
    
    
    
    5,118Capital expenditures
    
    
    1,402
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    1,409Six months ended June 30, 2008Revenues
    
    $
    273,975
    
    
    $
    1,190
    
    
    
    
    
    
    
    
    
    
    $
    275,165Operating income (loss)
    
    
    81,036
    
    
    
    (4,336
    )
    
    
    
    
    
    
    (14,314
    )
    
    
    62,386Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    17,504
    
    
    
    
    
    
    
    17,504Identifiable assets
    
    
    322,563
    
    
    
    6,368
    
    
    
    43,857
    
    
    
    415,271
    
    
    
    788,059Depreciation and amortization
    
    
    3,772
    
    
    
    59
    
    
    
    
    
    
    
    1,169
    
    
    
    5,000Capital expenditures
    
    
    2,410
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    2,456
 
 (1)
    
    Operating income includes a gain of $5,000 on the Philip Morris brand
transaction completed February 2009.(2)
    
    Operating income includes restructuring costs of $1,000. -40-




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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
 14.
    
    Subsequent EventsThe Company has evaluated events that occurred subsequent to June 30, 2009, through the
financial statement issue date of August 10, 2009, and determined that there were no recordable
or reportable subsequent events.
 15.
    
    CONDENSED CONSOLIDATING FINANCIAL INFORMATION
 The 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
guaranties are full and unconditional and joint and several. The Companys investments in its
consolidated subsidiaries are presented under the equity method of accounting.
 The 11% Senior Secured Notes due 2015, issued on August 16, 2007 by Vector, are fully and
unconditionally guarantied 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 guarantied by any of the Companys subsidiaries engaged in the real
estate businesses conducted through its subsidiary New Valley. Presented herein are unaudited
condensed consolidating balance sheets as of June 30, 2009 and December 31, 2008, the related
unaudited condensed consolidating statements of operations for the three and six months ended
June 30, 2009 and 2008 and the unaudited condensed consolidated statements of cash flows for
the six months ended June 30, 2009 and 2008 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 guarantying subsidiaries total debt less the fair market value
of the Companys and the guarantying 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.
 -41-




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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
 June 30, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    223,608
    
    
    $
    8,917
    
    
    $
    1
    
    
    $
    
    
    
    $
    232,526Investment securities
available for sale
    
    
    42,141
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    42,219Accounts receivable 
trade
    
    
    
    
    
    
    9,511
    
    
    
    
    
    
    
    
    
    
    
    9,511Intercompany receivables
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    Inventories
    
    
    
    
    
    
    102,166
    
    
    
    
    
    
    
    
    
    
    
    102,166Deferred income taxes
    
    
    5,025
    
    
    
    419
    
    
    
    
    
    
    
    
    
    
    
    5,444Income taxes receivable
    
    
    
    
    
    
    222
    
    
    
    
    
    
    
    (222
    )
    
    
    Restricted assets
    
    
    
    
    
    
    5,567
    
    
    
    
    
    
    
    
    
    
    
    5,567Other current assets
    
    
    307
    
    
    
    2,890
    
    
    
    
    
    
    
    
    
    
    
    3,197Total current assets
    
    
    271,118
    
    
    
    129,692
    
    
    
    79
    
    
    
    (259
    )
    
    
    400,630Property, plant and equipment, net
    
    
    678
    
    
    
    46,264
    
    
    
    
    
    
    
    
    
    
    
    46,942Investment in real estate
    
    
    
    
    
    
    
    
    
    
    12,204
    
    
    
    
    
    
    
    12,204Long-term investments accounted
for at cost
    
    
    50,332
    
    
    
    
    
    
    
    786
    
    
    
    
    
    
    
    51,118Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    43,820
    
    
    
    
    
    
    
    43,820Investments in consolidated subsidiaries
    
    
    149,120
    
    
    
    
    
    
    
    
    
    
    
    (149,120
    )
    
    
    Restricted assets
    
    
    3,967
    
    
    
    2,142
    
    
    
    
    
    
    
    
    
    
    
    6,109Deferred income taxes
    
    
    46,747
    
    
    
    894
    
    
    
    10,566
    
    
    
    
    
    
    
    58,207Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    3,081
    
    
    
    
    
    
    
    
    
    
    
    3,081Other assets
    
    
    13,621
    
    
    
    13,988
    
    
    
    
    
    
    
    
    
    
    
    27,609Total assets
    
    $
    535,583
    
    
    $
    303,572
    
    
    $
    67,455
    
    
    $
    (149,379
    )
    
    $
    757,231LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes
payable and long-term debt
    
    $
    645
    
    
    $
    25,020
    
    
    $
    
    
    
    $
    
    
    
    $
    25,665Current portion of employee
benefits
    
    
    21,260
    
    
    
    1,051
    
    
    
    
    
    
    
    
    
    
    
    22,311Accounts payable
    
    
    2,643
    
    
    
    3,828
    
    
    
    
    
    
    
    
    
    
    
    6,471Intercompany payables
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    (37
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    10,760
    
    
    
    
    
    
    
    
    
    
    
    10,760Income taxes payable, net
    
    
    55,932
    
    
    
    4,717
    
    
    
    26,462
    
    
    
    (222
    )
    
    
    86,889Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    25,797
    
    
    
    
    
    
    
    
    
    
    
    25,797Settlement accruals
    
    
    
    
    
    
    26,344
    
    
    
    
    
    
    
    
    
    
    
    26,344Deferred income taxes
    
    
    13,392
    
    
    
    2,314
    
    
    
    
    
    
    
    
    
    
    
    15,706Accrued interest
    
    
    10,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,402Other current liabilities
    
    
    3,731
    
    
    
    7,975
    
    
    
    516
    
    
    
    
    
    
    
    12,222Total current liabilities
    
    
    108,005
    
    
    
    107,843
    
    
    
    26,978
    
    
    
    (259
    )
    
    
    242,567Notes payable, long-term debt and
other obligations, less current
portion
    
    
    236,618
    
    
    
    17,063
    
    
    
    
    
    
    
    
    
    
    
    253,681Fair value of derivatives embedded
within convertible debt
    
    
    136,796
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136,796Non-current employee
benefits
    
    
    11,702
    
    
    
    24,612
    
    
    
    
    
    
    
    
    
    
    
    36,314Deferred income
taxes
    
    
    39,415
    
    
    
    21,546
    
    
    
    109
    
    
    
    
    
    
    
    61,070Other liabilities
    
    
    382
    
    
    
    22,843
    
    
    
    913
    
    
    
    
    
    
    
    24,138Total liabilities
    
    
    532,918
    
    
    
    193,907
    
    
    
    28,000
    
    
    
    (259
    )
    
    
    754,566Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    2,665
    
    
    
    109,665
    
    
    
    39,455
    
    
    
    (149,120
    )
    
    
    2,665Total liabilities and
stockholders equity
    
    $
    535,583
    
    
    $
    303,572
    
    
    $
    67,455
    
    
    $
    (149,379
    )
    
    $
    757,231
 -42-




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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, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    200,066
    
    
    $
    11,039
    
    
    $
    
    
    
    $
    
    
    
    $
    211,105Investment securities
available for sale
    
    
    28,440
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    28,518Accounts receivable 
trade
    
    
    
    
    
    
    9,506
    
    
    
    
    
    
    
    
    
    
    
    9,506Intercompany receivables
    
    
    1,938
    
    
    
    
    
    
    
    
    
    
    
    (1,938
    )
    
    
    Inventories
    
    
    
    
    
    
    92,581
    
    
    
    
    
    
    
    
    
    
    
    92,581Deferred income taxes
    
    
    3,304
    
    
    
    338
    
    
    
    
    
    
    
    
    
    
    
    3,642Income taxes receivable
    
    
    25,125
    
    
    
    
    
    
    
    
    
    
    
    (25,125
    )
    
    
    Other current assets
    
    
    3,962
    
    
    
    5,969
    
    
    
    
    
    
    
    
    
    
    
    9,931Total current assets
    
    
    262,835
    
    
    
    119,433
    
    
    
    78
    
    
    
    (27,063
    )
    
    
    355,283Property, plant and equipment, net
    
    
    735
    
    
    
    49,956
    
    
    
    
    
    
    
    
    
    
    
    50,691Mortgage receivable
    
    
    
    
    
    
    
    
    
    
    17,704
    
    
    
    
    
    
    
    17,704Long-term investments accounted
for at cost
    
    
    50,332
    
    
    
    
    
    
    
    786
    
    
    
    
    
    
    
    51,118Long-term investments accounted
under the equity method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    50,775
    
    
    
    
    
    
    
    50,775Investments in consolidated subsidiaries
    
    
    164,917
    
    
    
    
    
    
    
    
    
    
    
    (164,917
    )
    
    
    Restricted assets
    
    
    3,845
    
    
    
    2,710
    
    
    
    
    
    
    
    
    
    
    
    6,555Deferred income taxes
    
    
    37,177
    
    
    
    870
    
    
    
    7,175
    
    
    
    
    
    
    
    45,222Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    2,901
    
    
    
    
    
    
    
    
    
    
    
    2,901Other assets
    
    
    16,295
    
    
    
    13,657
    
    
    
    
    
    
    
    
    
    
    
    29,952Total assets
    
    $
    536,136
    
    
    $
    297,038
    
    
    $
    76,518
    
    
    $
    (191,980
    )
    
    $
    717,712LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes
payable and long-term debt
    
    $
    72,299
    
    
    $
    25,199
    
    
    $
    
    
    
    $
    
    
    
    $
    97,498Current portion of employee
benefits
    
    
    20,789
    
    
    
    1,051
    
    
    
    
    
    
    
    
    
    
    
    21,840Accounts payable
    
    
    3,219
    
    
    
    2,885
    
    
    
    
    
    
    
    
    
    
    
    6,104Intercompany payables
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    (3
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    10,131
    
    
    
    
    
    
    
    
    
    
    
    10,131Income taxes payable, net
    
    
    
    
    
    
    10,754
    
    
    
    26,174
    
    
    
    (25,125
    )
    
    
    11,803Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    7,004
    
    
    
    
    
    
    
    
    
    
    
    7,004Settlement accruals
    
    
    
    
    
    
    20,668
    
    
    
    
    
    
    
    
    
    
    
    20,668Deferred income taxes
    
    
    81,961
    
    
    
    10,546
    
    
    
    
    
    
    
    
    
    
    
    92,507Accrued interest
    
    
    9,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,612Other current liabilities
    
    
    
    
    
    
    20,017
    
    
    
    910
    
    
    
    (1,935
    )
    
    
    18,992Total current liabilities
    
    
    187,880
    
    
    
    108,258
    
    
    
    27,084
    
    
    
    (27,063
    )
    
    
    296,159Notes payable, long-term debt and
other obligations, less current
portion
    
    
    191,007
    
    
    
    19,294
    
    
    
    
    
    
    
    
    
    
    
    210,301Fair value of derivatives embedded
within convertible debt
    
    
    77,245
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,245Non-current employee
benefits
    
    
    17,388
    
    
    
    17,468
    
    
    
    
    
    
    
    
    
    
    
    34,856Deferred income
taxes
    
    
    28,573
    
    
    
    20,125
    
    
    
    109
    
    
    
    
    
    
    
    48,807Other liabilities
    
    
    438
    
    
    
    15,219
    
    
    
    1,082
    
    
    
    
    
    
    
    16,739Total liabilities
    
    
    502,531
    
    
    
    180,364
    
    
    
    28,275
    
    
    
    (27,063
    )
    
    
    684,107Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    33,605
    
    
    
    116,674
    
    
    
    48,243
    
    
    
    (164,917
    )
    
    
    33,605Total liabilities and
stockholders equity
    
    $
    536,136
    
    
    $
    297,038
    
    
    $
    76,518
    
    
    $
    (191,980
    )
    
    $
    717,712
 -43-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 Three Months Ended June 30, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    206,794
    
    
    $
    
    
    
    $
    
    
    
    $
    206,794Expenses:Cost of goods sold
    
    
    
    
    
    
    147,764
    
    
    
    
    
    
    
    
    
    
    
    147,764Operating, selling,
administrative and
general expenses
    
    
    4,502
    
    
    
    15,870
    
    
    
    (189
    )
    
    
    
    
    
    
    20,183Management fee expense
    
    
    
    
    
    
    2,056
    
    
    
    
    
    
    
    (2,056
    )
    
    
    Operating income
(loss)
    
    
    (4,502
    )
    
    
    41,104
    
    
    
    189
    
    
    
    2,056
    
    
    
    38,847Other income (expenses):Interest and dividend
income
    
    
    62
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    76Interest expense
    
    
    (16,838
    )
    
    
    (248
    )
    
    
    
    
    
    
    
    
    
    
    (17,086
    )Loss on exchanges
    
    
    (18,444
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,444
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    (19,488
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,488
    )Equity income on
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    1,811
    
    
    
    
    
    
    
    1,811Equity income in
consolidated
subsidiaries
    
    
    26,253
    
    
    
    
    
    
    
    
    
    
    
    (26,253
    )
    
    
    Management fee income
    
    
    2,056
    
    
    
    
    
    
    
    
    
    
    
    (2,056
    )
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before
provision for income
taxes
    
    
    (30,901
    )
    
    
    40,870
    
    
    
    2,000
    
    
    
    (26,253
    )
    
    
    (14,284
    )Income tax
benefit (expense)
    
    
    22,955
    
    
    
    (15,656
    )
    
    
    (961
    )
    
    
    
    
    
    
    6,338Net income (loss)
    
    $
    (7,946
    )
    
    $
    25,214
    
    
    $
    1,039
    
    
    $
    (26,253
    )
    
    $
    (7,946
    )
 -44-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Three Months Ended June 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    142,960
    
    
    $
    
    
    
    $
    
    
    
    $
    142,960Expenses:Cost of goods sold
    
    
    
    
    
    
    86,030
    
    
    
    
    
    
    
    
    
    
    
    86,030Operating, selling,
administrative and
general expenses
    
    
    7,977
    
    
    
    14,304
    
    
    
    304
    
    
    
    
    
    
    
    22,585Management fee expense
    
    
    
    
    
    
    1,985
    
    
    
    
    
    
    
    (1,985
    )
    
    
    Operating (loss)
income
    
    
    (7,977
    )
    
    
    40,641
    
    
    
    (304
    )
    
    
    1,985
    
    
    
    34,345Other income (expenses):Interest and dividend
income
    
    
    1,144
    
    
    
    231
    
    
    
    
    
    
    
    
    
    
    
    1,375Interest expense
    
    
    (14,879
    )
    
    
    (378
    )
    
    
    
    
    
    
    
    
    
    
    (15,257
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    9,759
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,759Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    4,184
    
    
    
    
    
    
    
    4,184Equity income in
consolidated
subsidiaries
    
    
    27,475
    
    
    
    
    
    
    
    
    
    
    
    (27,475
    )
    
    
    Management fee income
    
    
    1,985
    
    
    
    
    
    
    
    
    
    
    
    (1,985
    )
    
    
    Other, net
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Income before
provision for income
taxes
    
    
    17,503
    
    
    
    40,494
    
    
    
    3,880
    
    
    
    (27,475
    )
    
    
    34,402Income tax
benefit (expense)
    
    
    1,622
    
    
    
    (15,312
    )
    
    
    (1,587
    )
    
    
    
    
    
    
    (15,277
    )Net income
    
    $
    19,125
    
    
    $
    25,182
    
    
    $
    2,293
    
    
    $
    (27,475
    )
    
    $
    19,125
 -45-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Six Months Ended June 30, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    328,010
    
    
    $
    
    
    
    $
    
    
    
    $
    328,010Expenses:Cost of goods sold
    
    
    
    
    
    
    220,290
    
    
    
    
    
    
    
    
    
    
    
    220,290Operating, selling,
administrative and
general expenses
    
    
    9,652
    
    
    
    31,860
    
    
    
    201
    
    
    
    
    
    
    
    41,713Gain on brand
transaction
    
    
    
    
    
    
    (5,000
    )
    
    
    
    
    
    
    
    
    
    
    (5,000
    )Restructuring
charges
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,000Management fee expense
    
    
    
    
    
    
    4,112
    
    
    
    
    
    
    
    (4,112
    )
    
    
    Operating income
(loss)
    
    
    (9,652
    )
    
    
    75,748
    
    
    
    (201
    )
    
    
    4,112
    
    
    
    70,007Other income (expenses):Interest and dividend
income
    
    
    137
    
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    226Interest expense
    
    
    (32,632
    )
    
    
    (528
    )
    
    
    
    
    
    
    
    
    
    
    (33,160
    )Loss on exchanges
    
    
    (18,444
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,444
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    (19,791
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,791
    )Impairment charges
on investments
    
    
    
    
    
    
    
    
    
    
    (8,500
    )
    
    
    
    
    
    
    (8,500
    )Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    816
    
    
    
    
    
    
    
    816Equity income in
consolidated
subsidiaries
    
    
    41,752
    
    
    
    
    
    
    
    
    
    
    
    (41,752
    )
    
    
    Management fee income
    
    
    4,112
    
    
    
    
    
    
    
    
    
    
    
    (4,112
    )
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income
(loss) before
provision for income
taxes
    
    
    (34,518
    )
    
    
    75,309
    
    
    
    (7,885
    )
    
    
    (41,752
    )
    
    
    (8,846
    )Income tax
benefit (expense)
    
    
    29,672
    
    
    
    (28,775
    )
    
    
    3,103
    
    
    
    
    
    
    
    4,000Net income
(loss)
    
    $
    (4,846
    )
    
    $
    46,534
    
    
    $
    (4,782
    )
    
    $
    (41,752
    )
    
    $
    (4,846
    )
 -46-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Six Months Ended June 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    275,165
    
    
    $
    
    
    
    $
    
    
    
    $
    275,165Expenses:Cost of goods sold
    
    
    
    
    
    
    166,037
    
    
    
    
    
    
    
    
    
    
    
    166,037Operating, selling,
administrative and
general expenses
    
    
    15,171
    
    
    
    30,872
    
    
    
    699
    
    
    
    
    
    
    
    46,742Management fee expense
    
    
    
    
    
    
    3,970
    
    
    
    
    
    
    
    (3,970
    )
    
    
    Operating income
(loss)
    
    
    (15,171
    )
    
    
    74,286
    
    
    
    (699
    )
    
    
    3,970
    
    
    
    62,386Other income (expenses):Interest and dividend
income
    
    
    3,040
    
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    3,346Interest expense
    
    
    (29,550
    )
    
    
    (960
    )
    
    
    
    
    
    
    
    
    
    
    (30,510
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    7,315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,315Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    17,504
    
    
    
    
    
    
    
    17,504Equity income in
consolidated
subsidiaries
    
    
    55,217
    
    
    
    
    
    
    
    
    
    
    
    (55,217
    )
    
    
    Management fee income
    
    
    3,970
    
    
    
    
    
    
    
    
    
    
    
    (3,970
    )
    
    
    Other, net
    
    
    (573
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (577
    )Income before
provision for income
taxes
    
    
    24,248
    
    
    
    73,632
    
    
    
    16,801
    
    
    
    (55,217
    )
    
    
    59,464Income tax
benefit (expense)
    
    
    9,184
    
    
    
    (28,344
    )
    
    
    (6,872
    )
    
    
    
    
    
    
    (26,032
    )Net income
    
    $
    33,432
    
    
    $
    45,288
    
    
    $
    9,929
    
    
    $
    (55,217
    )
    
    $
    33,432
 -47-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 Six Months Ended June 30, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by operating activities
    
    $
    55,499
    
    
    $
    55,892
    
    
    $
    1,642
    
    
    $
    (60,480
    )
    
    $
    52,553Cash flows from investing
activities:Purchase of investment
securities
    
    
    (10,667
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,667
    )Proceeds from sale or
liquidation of long-term
investments
    
    
    1,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,407Distributions from
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    2,364
    
    
    
    
    
    
    
    2,364Investments
in subsidiaries
    
    
    (2,050
    )
    
    
    
    
    
    
    
    
    
    
    2,050
    
    
    
    Increase in cash surrender
value of life insurance
policies
    
    
    (425
    )
    
    
    (332
    )
    
    
    
    
    
    
    
    
    
    
    (757
    )(Increase) decrease in non-
current restricted assets
    
    
    (122
    )
    
    
    568
    
    
    
    
    
    
    
    
    
    
    
    446Capital expenditures
    
    
    
    
    
    
    (1,409
    )
    
    
    
    
    
    
    
    
    
    
    (1,409
    )Net cash (used in) provided by
investing activities
    
    
    (11,857
    )
    
    
    (1,173
    )
    
    
    2,364
    
    
    
    2,050
    
    
    
    (8,616
    )Cash flows from
financing activities:Proceeds from debt
Issuance
    
    
    38,225
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    38,246Repayments of debt
    
    
    
    
    
    
    (3,052
    )
    
    
    
    
    
    
    
    
    
    
    (3,052
    )Deferred financing charges
    
    
    (210
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (216
    )Borrowings under revolver
    
    
    
    
    
    
    306,788
    
    
    
    
    
    
    
    
    
    
    
    306,788Repayments on revolver
    
    
    
    
    
    
    (306,167
    )
    
    
    
    
    
    
    
    
    
    
    (306,167
    )Capital contributions received
    
    
    
    
    
    
    2,050
    
    
    
    
    
    
    
    (2,050
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (56,475
    )
    
    
    (4,005
    )
    
    
    60,480
    
    
    
    Dividends and distributions
on common stock
    
    
    (58,310
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,310
    )Proceeds from exercise of
Vector options and warrants
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182Tax benefit of options
exercised
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Net cash (used in)
financing activities
    
    
    (20,100
    )
    
    
    (56,841
    )
    
    
    (4,005
    )
    
    
    58,430
    
    
    
    (22,516
    )Net increase (decrease) in cash
and cash equivalents
    
    
    23,542
    
    
    
    (2,122
    )
    
    
    1
    
    
    
    
    
    
    
    21,421Cash and cash equivalents,
beginning of period
    
    
    200,066
    
    
    
    11,039
    
    
    
    
    
    
    
    
    
    
    
    211,105Cash and cash equivalents, end of
period
    
    $
    223,608
    
    
    $
    8,917
    
    
    $
    1
    
    
    $
    
    
    
    $
    232,526
 -48-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 Six Months Ended June 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by operating
activities
    
    $
    26,962
    
    
    $
    46,368
    
    
    $
    2,255
    
    
    $
    (39,700
    )
    
    $
    35,885Cash flows from investing
activities:Purchase of investment
securities
    
    
    (5,182
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,182
    )Proceeds from sale or
liquidation of long-term
investments
    
    
    8,334
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,334Purchase of long-term
investments
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Purchase of mortgage
receivable
    
    
    
    
    
    
    
    
    
    
    (21,704
    )
    
    
    
    
    
    
    (21,704
    )Distributions from
non-consolidated real estate
businesses
    
    
    
    
    
    
    
    
    
    
    16,446
    
    
    
    
    
    
    
    16,446Investment in non-
consolidated real
estate businesses
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    
    
    
    
    (10,000
    )Increase in cash surrender
value of life insurance
policies
    
    
    (254
    )
    
    
    (267
    )
    
    
    
    
    
    
    
    
    
    
    (521
    )Increase in non-current
restricted assets
    
    
    (232
    )
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    (259
    )Investments in
subsidiaries
    
    
    (15,108
    )
    
    
    
    
    
    
    
    
    
    
    15,108
    
    
    
    Proceeds from the sale
of fixed assets
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    
    
    
    
    373Capital expenditures
    
    
    
    
    
    
    (2,456
    )
    
    
    
    
    
    
    
    
    
    
    (2,456
    )Net cash used in
investing activities
    
    
    (12,442
    )
    
    
    (2,377
    )
    
    
    (15,309
    )
    
    
    15,108
    
    
    
    (15,020
    )Cash flows from
financing activities:Repayments of debt
    
    
    
    
    
    
    (2,984
    )
    
    
    
    
    
    
    
    
    
    
    (2,984
    )Deferred financing charges
    
    
    (137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )Borrowings under revolver
    
    
    
    
    
    
    255,118
    
    
    
    
    
    
    
    
    
    
    
    255,118Repayments on revolver
    
    
    
    
    
    
    (256,753
    )
    
    
    
    
    
    
    
    
    
    
    (256,753
    )Capital contributions received
    
    
    
    
    
    
    2,050
    
    
    
    13,058
    
    
    
    (15,108
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (39,700
    )
    
    
    
    
    
    
    39,700
    
    
    
    Dividends and distributions
on common stock
    
    
    (52,737
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,737
    )Proceeds from exercise of
Vector options and warrants
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Excess tax benefit of options
exercised
    
    
    18,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,283Net cash (used in) provided by
financing activities
    
    
    (34,565
    )
    
    
    (42,269
    )
    
    
    13,058
    
    
    
    24,592
    
    
    
    (39,184
    )Net (decrease) increase in cash
and cash equivalents
    
    
    (20,045
    )
    
    
    1,722
    
    
    
    4
    
    
    
    
    
    
    
    (18,319
    )Cash and cash equivalents,
beginning of period
    
    
    228,901
    
    
    
    9,216
    
    
    
    
    
    
    
    
    
    
    
    238,117Cash and cash equivalents, end of
period
    
    $
    208,856
    
    
    $
    10,938
    
    
    $
    4
    
    
    $
    
    
    
    $
    219,798
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Dollars in Thousands, Except Per Share Amounts
 Overview
  
    
    the manufacture and sale of cigarettes in the United States through our subsidiary
Liggett Group LLC,
    
    the marketing of the low nicotine and nicotine-free QUEST cigarette products and
the development of reduced risk cigarette products through our subsidiary Vector
Tobacco Inc., and
    
    the real estate business through our subsidiary, New Valley LLC, which is seeking
to acquire additional operating companies and real estate properties. New Valley owns
50% of Douglas Elliman Realty, LLC, which operates the largest residential brokerage
company in the New York metropolitan area.
   
    
    LIGGETT SELECT  a leading brand in the deep discount category,
    
    GRAND PRIX  re-launched as a national brand in 2005,
    
    EVE  a leading brand of 120 millimeter cigarettes in the branded discount category,
    
    PYRAMID  the industrys first deep discount product with a brand identity, and
    
    USA and various Partner Brands and private label brands.
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Recent Developments
 5% Variable Interest Senior Convertible Notes Due November 2011.
  6.75% Variable Interest Senior Convertible Note due 2014.
  6.75% Variable Interest Senior Convertible Exchange Notes due 2014.
 -51-




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Proposed and enacted excise tax increases.
 Family Smoking Prevention and Tobacco Control Act (FDA Legislation)
 Long-term Investments.
 Philip Morris Brand Transaction.
 -52-




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Vector Tobacco Restructuring.
  Issuance of Restricted Shares.
 Investment in Real Estate.
  Aberdeen Townhomes LLC.
 -53-




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New Valley Oaktree Chelsea Eleven, LLC.
  Sale of St. Regis Hotel.
 -54-




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Tobacco Settlement Agreements.
     -55-




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Recent Developments in Tobacco-Related Litigation
 Engle
 -56-




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Altria Group
v. Good Altria Group v. Good Good Schwab
  Engle v. R.J. Reynolds Tobacco Co. Engle Engle Engle Engle Engle Engle Engle
 -57-




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Engle Engle Lukacs v. R. J. Reynolds Tobacco Company Engle Engle
  Critical Accounting Policies
  -58-




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Results of Operations
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30
    
    
    June 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Liggett
    
    $
    206,071
    
    
    $
    142,330
    
    
    $
    326,958
    
    
    $
    273,975Vector Tobacco
    
    
    723
    
    
    
    630
    
    
    
    1,052
    
    
    
    1,190Total revenues
    
    $
    206,794
    
    
    $
    142,960
    
    
    $
    328,010
    
    
    $
    275,165Operating income (loss):Liggett
    
    $
    43,310
    
    
    $
    43,692
    
    
    $
    81,720
    
    
    $
    81,036Vector Tobacco
    
    
    (1,362
    )
    
    
    (1,926
    )
    
    
    (4,147
    )
    
    
    (4,336
    )Total tobacco
    
    
    41,948
    
    
    
    41,766
    
    
    
    77,573
    
    
    
    76,700Corporate and other
    
    
    (3,101
    )
    
    
    (7,421
    )
    
    
    (7,566
    )
    
    
    (14,314
    )Total operating income
    
    $
    38,847
    
    
    $
    34,345
    
    
    $
    70,007
    
    
    $
    62,386
 Three Months Ended June 30, 2009 Compared to Three Months ended June 30, 2008
 Revenues.
 Tobacco Revenues.
  -59-




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Tobacco Gross Profit.
   Expenses.
  -60-




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Other Income (Expenses).
  (Loss) income before income taxes.
 Income tax provision.
  Six Months Ended June 30, 2008 Compared to Six Months ended June 30, 2007
 Revenues.
 -61-




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Tobacco Revenues.
   Tobacco Gross Profit.
   Expenses.
 -62-




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Other Income (Expenses). th th
  (Loss) income before income taxes.
 Income tax provision.
 -63-




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Liquidity and Capital Resources
     Liggett
 Engle
 -64-




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Engle Engle
  Vector
  
    
    cash interest expense of approximately $53,900,
    
    dividends on our outstanding common shares (currently at an annual rate of
approximately $118,000),
    
    a payment of a retirement benefit under our Supplemental Retirement Plan
to our former Executive Chairman of approximately $20,860 (paid in July 2009), and
    
    other corporate expenses and taxes, including a tax payment of approximately $75,500 in
connection with the Philip Morris brands transaction.
   -65-




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Market Risk
 -66-




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-67-




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New Accounting Pronouncements
     -68-




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-69-




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Legislation and Regulation
  -70-




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
    
    increases the number of health warnings required on cigarette and smokeless tobacco
products, increases the size of warnings on packaging and in advertising, requires the
FDA to develop graphic warnings for cigarette packages, and grants the FDA authority to
require new warnings;
    
    requires practically all tobacco product advertising to eliminate color and imagery
and instead consist solely of black text on white background;
    
    imposes new restrictions on the sale and distribution of tobacco products;
    
    bans the use of light, mild, low or similar descriptors on tobacco products;
    
    bans the use of characterizing flavors in cigarettes other than tobacco or
menthol;
    
    gives the FDA the authority to impose tobacco product standards that are appropriate
for the protection of the public health (by, for example, requiring reduction or
elimination of the use of particular constituents or components, requiring product
testing, or addressing other aspects of tobacco product construction, constituents,
properties or labeling);
    
    requires manufacturers to obtain FDA review and authorization for the marketing
of certain new or modified tobacco products;
    
    requires pre-market approval by the FDA for tobacco products represented (through
labels, labeling, advertising, or other means) as presenting a lower risk of harm or
tobacco-related disease;
    
    requires manufacturers to report ingredients and harmful constituents and requires
the FDA to disclose certain constituent information to the public;
    
    mandates that manufacturers test and report on ingredients and constituents
identified by the FDA as requiring such testing to protect the public health, and
allows the FDA to require the disclosure of testing results to the public;
    
    requires manufacturers to submit to the FDA certain information regarding the
health, toxicological, behavioral or physiologic effects of tobacco products;
    
    prohibits use of tobacco containing a pesticide chemical residue at a level greater
than allowed under federal law;
    
    requires the FDA to establish good manufacturing practices to be followed at
tobacco manufacturing facilities;
    
    requires tobacco product manufacturers (and certain other entities) to register with
the FDA;
    
    authorizes the FDA to require the reduction of nicotine (although it may not require
the reduction of nicotine yields of a tobacco product to zero) and the reduction or
elimination of other constituents;
    
    imposes (and allows the FDA to impose) various recordkeeping and reporting
requirements on tobacco product manufacturers; and
    
    grants the FDA the regulatory authority to impose broad additional restrictions.
  -71-




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
    
    a recommendation on modified risk applications;
    
    a recommendation on the effects of tobacco product nicotine yield alteration and
whether there is a threshold level below which nicotine yields do not produce
dependence;
    
    a report on the public health impact of the use of menthol in cigarettes; and
    
    a report on the public health impact of dissolvable tobacco products.
      -72-




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-73-




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    economic outlook,
    
    capital expenditures,
    
    cost reduction,
    
    new legislation,
    
    cash flows,
    
    operating performance,
    
    litigation,
    
    impairment charges and cost savings associated with restructurings of our tobacco
operations, and
    
    related industry developments (including trends affecting our business, financial
condition and results of operations).
   
    
    general economic and market conditions and any changes therein, due to acts of war
and terrorism or otherwise,
    
    impact of current crises in capital and credit markets, including any continued
worsening ,
    
    governmental regulations and policies,
    
    effects of industry competition,
    
    impact of business combinations, including acquisitions and divestitures, both
internally for us and externally in the tobacco industry,
    
    impact of restructurings on our tobacco business and our ability to achieve any
increases in profitability estimated to occur as a result of these restructurings,
 -74-




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
    
    impact of new legislation on our competitors payment obligations, results of
operations and product costs, i.e. the impact of recent federal legislation eliminating
the federal tobacco quota system,
    
    impact of substantial increases in federal, state and local excise taxes,
    
    uncertainty related to litigation and potential additional payment obligations for
us under the Master Settlement Agreement and other settlement agreements with the
states, and
    
    risks inherent in our new product development initiatives.
   -75-




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
   -76-




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PART II
 OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
   -77-




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Item 4.
    
    Submission of Matters to a Vote of Security Holders
  Nominee
    
    For
    
    WithheldBennett S. LeBow
    
    
    48,038,359
    
    
    
    13,883,281Howard M. Lorber
    
    
    48,016,887
    
    
    
    13,904,753Ronald J. Bernstein
    
    
    48,463,254
    
    
    
    13,458,386Henry C. Beinstein
    
    
    48,184,265
    
    
    
    13,737,375Robert J. Eide
    
    
    48,518,268
    
    
    
    13,403,372Jeffrey S. Podell
    
    
    48,555,887
    
    
    
    13,365,753Jean E. Sharpe
    
    
    48,520,409
    
    
    
    13,401,231
  -78-




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##### Table of Contents



Item 6.
    
    Exhibits
 4.1
    
    Form of Note, dated May 11, 2009, by Vector Group Ltd.
to Frost Nevada Investments Trust (incorporated by
reference to Exhibit 4.1 of Vectors Form 8-K dated May
11, 2009).4.2
    
    Purchase Agreement, dated as of May 11, 2009, between
Vector Group Ltd. and Frost Nevada Investments Trust
(incorporated by reference to Exhibit 4.2 of Vectors
Form 8-K dated May 11, 2009).4.3
    
    Form of Issuance and Exchange Agreement, dated as of
June 15, 2009 between Vector Group Ltd. and holders of
its 5% Variable Interest Senior Convertible Notes due
2011 (incorporated by reference to Exhibit 4.1 of
Vectors Form 8-K dated June 15, 2009).4.4
    
    Indenture, between Vector Group Ltd. and Wells Fargo
Bank, N.A. as trustee, relating to the 6.75% Variable
Interest Senior Convertible Exchange Notes Due 2014,
including the form of the note, dated as of June 30,
2009 (incorporated by reference to Exhibit 4.1 of
Vectors Form 8-K dated June 30, 2009).10.1
    
    Restricted Share Award Agreement, dated as of April 7,
2009, between Vector Group Ltd. and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 of Vectors
Form 8-K dated April 10, 2009).31.1
    
    Certification of Chief Executive Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.99.1
    
    Material Legal Proceedings
 -79-




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SIGNATURE
  VECTOR GROUP LTD.
(Registrant)By:
    
    /s/ J. Bryant Kirkland IIIJ. Bryant Kirkland III
Vice President, Treasurer and Chief
Financial Officer
  -80-