##### 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 September 30, 2009
 
 
 VECTOR GROUP LTD.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    1-5759
Commission File Number
    
    65-0949535
(I.R.S. Employer Identification No.)
 100 S.E. Second Street
Miami, Florida 33131
305/579-8000
 
 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 September 30, 2009 and
December 31, 2008
    
    
    2Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2009 and September 30, 2008
    
    
    3Condensed Consolidated Statement of Stockholders Equity for the nine months ended
September 30, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2009 and September 30, 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2 . Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    51Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    74Item 4. Controls and Procedures
    
    
    74PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    75Item 1A. Risk Factors
    
    
    75Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    75Item 6. Exhibits
    
    
    76SIGNATURE
    
    
    77EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
  -1-




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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 September 30,
    
    
    
    December 31,2009
    
    
    
    2008ASSETS:Current assets:Cash and cash equivalents
    
    $
    237,468
    
    
    $
    211,105Investment securities available for sale
    
    
    62,094
    
    
    
    28,518Accounts receivable  trade
    
    
    6,824
    
    
    
    9,506Inventories
    
    
    100,021
    
    
    
    92,581Deferred income taxes
    
    
    4,199
    
    
    
    3,642Restricted assets
    
    
    3,545
    
    
    
    2,653Other current assets
    
    
    3,114
    
    
    
    7,278Total current assets
    
    
    417,265
    
    
    
    355,283Property, plant and equipment, net
    
    
    45,851
    
    
    
    50,691Mortgage receivable
    
    
    
    
    
    
    17,704Investment in real estate
    
    
    12,204
    
    
    
    Long-term investments accounted for at cost
    
    
    51,170
    
    
    
    51,118Investments in non-consolidated real estate businesses
    
    
    45,628
    
    
    
    50,775Restricted assets
    
    
    4,586
    
    
    
    6,555Deferred income taxes
    
    
    58,211
    
    
    
    45,222Intangible asset
    
    
    107,511
    
    
    
    107,511Prepaid pension costs
    
    
    3,171
    
    
    
    2,901Other assets
    
    
    29,783
    
    
    
    29,952Total assets
    
    $
    775,380
    
    
    $
    717,712LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt
    
    $
    20,892
    
    
    $
    97,498Current portion of employee benefits
    
    
    1,051
    
    
    
    21,840Accounts payable
    
    
    9,769
    
    
    
    6,104Accrued promotional expenses
    
    
    12,081
    
    
    
    10,131Income taxes payable, net
    
    
    31,112
    
    
    
    11,803Accrued excise and payroll taxes payable, net
    
    
    568
    
    
    
    7,004Settlement accruals
    
    
    46,787
    
    
    
    20,668Deferred income taxes
    
    
    17,203
    
    
    
    92,507Accrued interest
    
    
    6,861
    
    
    
    9,612Other current liabilities
    
    
    12,215
    
    
    
    18,992Total current liabilities
    
    
    158,539
    
    
    
    296,159Notes payable, long-term debt and other obligations, less current portion
    
    
    334,502
    
    
    
    210,301Fair value of derivatives embedded within convertible debt
    
    
    142,850
    
    
    
    77,245Non-current employee benefits
    
    
    36,933
    
    
    
    34,856Deferred income taxes
    
    
    68,492
    
    
    
    48,807Other liabilities
    
    
    24,042
    
    
    
    16,739Total liabilities
    
    
    765,358
    
    
    
    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,
74,220,968 and 69,107,320 shares issued and 70,973,057 and
and 66,014,070 shares outstanding
    
    
    7,097
    
    
    
    6,601Additional paid-in capital
    
    
    30,293
    
    
    
    65,103Retained earnings
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    (14,511
    )
    
    
    (25,242
    )Less: 3,247,911 and 3,093,250 shares of common stock in treasury, at cost
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity
    
    
    10,022
    
    
    
    33,605Total liabilities and stockholders equity
    
    $
    775,380
    
    
    $
    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
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    2008Revenues*
    
    $
    236,736
    
    
    $
    145,601
    
    
    
    $
    564,746
    
    
    $
    420,766Expenses:Cost of goods sold*
    
    
    177,798
    
    
    
    84,999
    
    
    
    
    398,088
    
    
    
    251,036Operating, selling, administrative and general expenses
    
    
    21,966
    
    
    
    23,067
    
    
    
    
    63,679
    
    
    
    69,809Gain on brand transaction
    
    
    
    
    
    
    
    
    
    
    
    (5,000
    )
    
    
    Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    Operating income
    
    
    36,972
    
    
    
    37,535
    
    
    
    
    106,979
    
    
    
    99,921Other income (expenses):Interest and dividend income
    
    
    51
    
    
    
    1,094
    
    
    
    
    277
    
    
    
    4,440Interest expense
    
    
    (16,808
    )
    
    
    (15,515
    )
    
    
    
    (49,968
    )
    
    
    (46,025
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    (18,444
    )
    
    
    Change in fair value of derivatives embedded withinconvertible debt
    
    
    (6,054
    )
    
    
    522
    
    
    
    
    (25,845
    )
    
    
    7,837Impairment charges on investments
    
    
    
    
    
    
    (7,000
    )
    
    
    
    (8,500
    )
    
    
    (7,000
    )Equity income from non-consolidated realestate businesses
    
    
    4,712
    
    
    
    5,202
    
    
    
    
    5,528
    
    
    
    22,706Other, net
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    (578
    )Income before provision for income taxes
    
    
    18,873
    
    
    
    21,837
    
    
    
    
    10,027
    
    
    
    81,301Income tax
expense (benefit)
    
    
    2,654
    
    
    
    7,010
    
    
    
    
    (1,346
    )
    
    
    33,042Net income
    
    $
    16,219
    
    
    $
    14,827
    
    
    
    $
    11,373
    
    
    $
    48,259Per basic common share:Net income applicable to common shares
    
    $
    0.22
    
    
    $
    0.21
    
    
    
    $
    0.16
    
    
    $
    0.68Per diluted common share:Net income applicable to common shares
    
    $
    0.22
    
    
    $
    0.20
    
    
    
    $
    0.16
    
    
    $
    0.67Cash distributions and dividends declared per share
    
    $
    0.38
    
    
    $
    0.36
    
    
    
    $
    1.14
    
    
    $
    1.09
 
 *
    
    Revenues and Cost of goods sold include excise taxes of $119,643, $43,327, $256,813
and $127,050, 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
    
    
    
    Retained
    
    
    
    Comprehensive
    
    
    
    TreasuryShares
    
    
    Amount
    
    
    
    Capital
    
    
    
    Earnings
    
    
    
    Income (Loss)
    
    
    
    Stock
    
    
    
    TotalBalance, December 31, 2008
    
    
    
    66,014,070
    
    
    $
    6,601
    
    
    
    $
    65,103
    
    
    
    $
    
    
    
    
    $
    (25,242
    )
    
    
    $
    (12,857
    )
    
    
    $
    33,605Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,373
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,373Pension-related minimum liability adjustments,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    
    
    464Forward contract adjustments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    (7
    )Unrealized gain on investment securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,274
    
    
    
    
    
    
    
    
    
    10,274Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,731Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,104Distributions and dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    (72,427
    )
    
    
    
    (11,040
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83,467
    )Restricted stock grant
    
    
    
    500,000
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Effect of stock dividend
    
    
    
    3,326,623
    
    
    
    333
    
    
    
    
    
    
    
    
    
    (333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options, net of 2,120,479 shares delivered
to pay exercise price
    
    
    
    1,132,364
    
    
    
    113
    
    
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    347Excess tax benefit of options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    6,944
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,944Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    3,097
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,097Beneficial conversion feature of notes payable, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    27,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,342Balance, September 30, 2009
    
    
    
    70,973,057
    
    
    $
    7,097
    
    
    
    $
    30,293
    
    
    
    $
    
    
    
    
    $
    (14,511
    )
    
    
    $
    (12,857
    )
    
    
    $
    10,022
 
 -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
 Nine Months
    
    
    
    Nine MonthsEnded
    
    
    
    EndedSeptember 30, 2009
    
    
    
    September 30, 2008Net cash provided by operating activities
    
    $
    9,334
    
    
    
    $
    70,435Cash flows from investing activities:Purchase of investment securities
    
    
    (12,300
    )
    
    
    
    (5,682
    )Proceeds from sale or liquidation of long-term investments
    
    
    1,407
    
    
    
    
    8,334Purchase of long-term investments
    
    
    (51
    )
    
    
    
    (51
    )Purchase of mortgage receivable
    
    
    
    
    
    
    
    (21,704
    )Distributions from non-consolidated real estate businesses
    
    
    5,548
    
    
    
    
    17,628Investment in non-consolidated real estate businesses
    
    
    (467
    )
    
    
    
    (22,000
    )Increase in cash surrender value of life insurance policies
    
    
    (839
    )
    
    
    
    (766
    )Decrease in non-current restricted assets
    
    
    1,969
    
    
    
    
    838Proceeds from sale of fixed assets
    
    
    
    
    
    
    
    403Capital expenditures
    
    
    (3,005
    )
    
    
    
    (5,426
    )Net cash used in investing activities
    
    
    (7,738
    )
    
    
    
    (28,426
    )Cash flows from financing activities:Proceeds from debt issuance
    
    
    118,782
    
    
    
    
    2,830Repayments of debt
    
    
    (4,516
    )
    
    
    
    (4,666
    )Deferred financing charges
    
    
    (5,573
    )
    
    
    
    (137
    )Borrowings under revolver
    
    
    526,949
    
    
    
    
    386,499Repayments on revolver
    
    
    (530,766
    )
    
    
    
    (397,892
    )Dividends and distributions on common stock
    
    
    (87,451
    )
    
    
    
    (78,581
    )Excess tax benefit of options exercised
    
    
    6,944
    
    
    
    
    18,304Proceeds from exercise of options
    
    
    398
    
    
    
    
    26Net cash provided by (used in) financing activities
    
    
    24,767
    
    
    
    
    (73,617
    )Net increase (decrease) in cash and cash equivalents
    
    
    26,363
    
    
    
    
    (31,608
    )Cash and cash equivalents, beginning of period
    
    
    211,105
    
    
    
    
    238,117Cash and cash equivalents, end of period
    
    $
    237,468
    
    
    
    $
    206,509
 
 -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:
    (b)
    
    Distributions and Dividends on Common Stock:
  (c)
    
    Earnings Per Share (EPS):
  -6-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
  Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    2008Net income
    
    $
    16,219
    
    
    $
    14,827
    
    
    
    $
    11,373
    
    
    $
    48,259Income attributable to
participating securities
    
    
    (740
    )
    
    
    (675
    )
    
    
    
    (519
    )
    
    
    (2,228
    )Net income available to
common stockholders
    
    $
    15,479
    
    
    $
    14,152
    
    
    
    $
    10,854
    
    
    $
    46,031
   Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    2008Net income
    
    $
    16,219
    
    
    $
    14,827
    
    
    
    $
    11,373
    
    
    $
    48,259Expenses attributable
to 5% convertible
debentures
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    Income attributable to
participating securities
    
    
    (741
    )
    
    
    (675
    )
    
    
    
    (519
    )
    
    
    (2,228
    )Net income available to
common stockholders
    
    $
    15,491
    
    
    $
    14,152
    
    
    
    $
    10,854
    
    
    $
    46,031
 -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
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    2008Weighted-average shares for
basic EPS
    
    
    69,232,323
    
    
    
    68,926,087
    
    
    
    
    69,143,505
    
    
    
    67,245,435Plus incremental shares
related to stock options and
non-vested restricted stock
    
    
    125,311
    
    
    
    1,308,592
    
    
    
    
    60,315
    
    
    
    1,466,227Plus incremental shares related
to convertible debt
    
    
    60,183
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average shares for
fully diluted EPS
    
    
    69,417,817
    
    
    
    70,234,679
    
    
    
    
    69,203,820
    
    
    
    68,711,662
   Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    2008Number of stock options
    
    
    509,442
    
    
    
    540,472
    
    
    
    
    546,489
    
    
    
    540,472Weighted-average exercise price
    
    $
    18.77
    
    
    $
    18.30
    
    
    
    $
    17.84
    
    
    $
    18.30Weighted-average shares of
non-vested restricted stock
    
    
    177,784
    
    
    
    85,134
    
    
    
    
    196,789
    
    
    
    237,073Weighted-average expense per share
    
    $
    16.26
    
    
    $
    16.78
    
    
    
    $
    16.25
    
    
    $
    16.33Weighted-average number of shares
issuable upon conversion of debt
    
    
    16,350,285
    
    
    
    13,579,184
    
    
    
    
    15,018,085
    
    
    
    13,579,184Weighted-average conversion price
    
    $
    16.38
    
    
    $
    16.34
    
    
    
    $
    16.29
    
    
    $
    16.34
 -8-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 (d)
    
    Comprehensive Income:
  (e)
    
    Fair Value of Derivatives Embedded within Convertible Debt:
  (f)
    
    Capital and Credit Market Crisis
   (g)
    
    Contingencies:
   -9-




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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
 (h)
    
    New Accounting Pronouncements:
       -10-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
        -11-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
  2.
    
    RESTRUCTURING
    3.
    
    INVESTMENT SECURITIES AVAILABLE FOR SALE
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueMarketable equity securities
    
    $
    41,255
    
    
    $
    22,226
    
    
    $
    (1,387
    )
    
    $
    62,094
  4.
    
    INVENTORIES
  September 30,
    
    
    
    December 31,2009
    
    
    
    2008Leaf tobacco
    
    $
    51,376
    
    
    
    $
    48,880Other raw materials
    
    
    3,359
    
    
    
    
    5,128Work-in-process
    
    
    406
    
    
    
    
    314Finished goods
    
    
    59,526
    
    
    
    
    46,202Inventories at current cost
    
    
    114,667
    
    
    
    
    100,524LIFO adjustments
    
    
    (14,646
    )
    
    
    
    (7,943
    )$
    100,021
    
    
    
    $
    92,581
 -12-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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 September 30, 2009, Liggett had leaf tobacco
purchase commitments of approximately $15,513. 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 nine months ended September 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 95% of total inventories at September 30, 2009 and
December 31, 2008, respectively.
 5.
    
    LONG-TERM INVESTMENTS
 Long-term investments consist of investments in the following:
 September 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueInvestment partnerships
accounted for at cost
    
    $
    51,170
    
    
    $
    69,987
    
    
    $
    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 fair value
authoritative guidance hierarchy disclosed in Note 11 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.
 -13-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 The changes in the fair value of these investments as of September 30, 2009 were as follows:
 InvestmentPartnershipsAccounted for at CostBalance as of January 1, 2009
    
    $
    54,997Unrealized loss on long-term investments
    
    
    (357
    )Balance as of March 31, 2009
    
    
    54,640Unrealized gain on long-term investments
    
    
    8,432Balance as of June 30, 2009
    
    
    63,072Contributions
    
    
    52Unrealized gain on long-term investments
    
    
    6,863Balance as of September 30, 2009
    
    $
    69,987
 The changes in the fair value of these investments as of September 30, 2008 were as
follows:
 Investment
    
    
    InvestmentPartnerships
    
    
    PartnershipsAccounted for at
    
    
    Accounted for onCost
    
    
    the Equity MethodBalance as of January 1, 2008
    
    $
    89,007
    
    
    $
    10,495Unrealized loss on long-term investments
    
    
    (2,034
    )
    
    
    (675
    )Realized loss on long-term investments
    
    
    
    
    
    
    (567
    )Balance as of March 31, 2008
    
    
    86,973
    
    
    
    9,253Contributions (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
    
    
    
    Unrealized loss on long-term investments
    
    
    (7,778
    )
    
    
    Impairment loss on long-term investments
    
    
    (3,000
    )
    
    
    Balance as of September 30, 2008
    
    $
    72,489
    
    
    $
    
 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.
 The Company received a distribution of approximately $847
from one of the limited partnerships in
the fourth quarter of 2009.
 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:
 September 30,


    
    
    December 31,2009

    
    
    2008Vector:11% Senior Secured Notes due 2015, net of unamortized
discount of $5,037 and $0
    
    $
    244,963
    
    
    $
    165,0006.75% Variable Interest Senior Convertible Note due
2014, net of unamortized discount of $39,999 and $0*
    
    
    10,001
    
    
    
    6.75% Variable Interest Senior Convertible Exchange Notes
due 2014, net of unamortized discount of $70,309 and $0*
    
    
    36,628
    
    
    
    3.875% Variable Interest Senior Convertible Debentures due
2026, net of unamortized discount of $83,687 and $83,993*
    
    
    26,313
    
    
    
    26,0075% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $246 and $39,565*
    
    
    669
    
    
    
    72,299Liggett:Revolving credit facility
    
    
    15,698
    
    
    
    19,515Term loan under credit facility
    
    
    6,889
    
    
    
    7,290Equipment loans
    
    
    5,521
    
    
    
    8,307V.T. Aviation:Note payable
    
    
    4,232
    
    
    
    5,266VGR Aviation:Note payable
    
    
    3,781
    
    
    
    4,053Other
    
    
    699
    
    
    
    62Total notes payable, long-term debt and other obligations
    
    
    355,394
    
    
    
    307,799Less:Current maturities
    
    
    (20,892
    )
    
    
    (97,498
    )Amount due after one year
    
    $
    334,502
    
    
    $
    210,301
 
 *
    
    The fair value of the derivatives embedded within the 6.75% Variable Interest Senior
Convertible Exchange Notes ($42,710 at September 30, 2009 and $0 at December 31,
2008), 6.75% Variable Interest Convertible Note ($23,783 at September 30, 2009 and
$0 at December 31, 2008), 3.875% Variable Interest Senior Convertible Debentures
($76,187 at September 30, 2009 and $51,829 at December 31, 2008) and the 5% Variable
Interest Senior Convertible Notes ($170 at September 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 of its 11% Senior Secured Notes due 2015 (the Senior
Secured Notes) in a private offering to qualified institutional investors in accordance with
Rule 144A of the Securities Act of 1933. On 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.
 In September 2009, the Company sold an additional
$85,000 principal amount of the Senior
Secured Notes at 94% of face value in a private offering to qualified institutional investors
in accordance with Rule 144A of the Securities Act of 1933. The Company received net proceeds
from the offering of approximately $79,900. The Company will amortize the deferred costs and
debt discount related to the additional Senior Secured Notes over the estimated life of the debt. In
connection with the September 2009 offering, the Company agreed to consummate a registered exchange offer
for these Senior Secured Notes within 360 days after the date of
their initial issuance.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 If the Company fails to timely comply with its registration
obligations, it will be required to pay additional interest on these Senior Secured
Notes until it complies.
 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.
 The following table summarizes the requirements of these financial covenants and the results of
the calculation, as defined by the indenture.
 Indenture
    
    September 30,
    
    December 31,Covenant
    
    Requirement
    
    2009
    
    2008Consolidated EBITDA, as defined
    
    $
    50,000
    
    
    $
    160,232
    
    
    $
    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 September 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 $14.32 per share (approximately
69.8139 shares of common stock per $1,000 principal amount of the note) is
 -16-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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:
 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 $16.25 per share (approximately
61.5366 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. In accordance
with authoritative guidance on accounting for derivatives and hedging, 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.
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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 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 is as follows:
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    20086.75% Note
    
    $
    131
    
    
    $
    
    
    
    
    $
    201
    
    
    $
    6.75% exchange notes
    
    
    608
    
    
    
    
    
    
    
    
    608
    
    
    
    3.875% convertible debentures
    
    
    114
    
    
    
    89
    
    
    
    
    339
    
    
    
    2695% convertible notes
    
    
    16
    
    
    
    1,423
    
    
    
    
    3,385
    
    
    
    3,904Interest expense associated with
embedded derivatives
    
    $
    869
    
    
    $
    1,512
    
    
    
    $
    4,533
    
    
    $
    4,173
 A summary of non-cash changes in fair value of derivatives embedded within convertible
debt is as follows:
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    20086.75% Note
    
    $
    (407
    )
    
    $
    
    
    
    
    $
    (2,216
    )
    
    $
    6.75% exchange notes
    
    
    1,360
    
    
    
    
    
    
    
    
    1,360
    
    
    
    3.875% convertible debentures
    
    
    (7,029
    )
    
    
    43
    
    
    
    
    (24,358
    )
    
    
    2,9255% convertible notes
    
    
    22
    
    
    
    479
    
    
    
    
    (631
    )
    
    
    4,912(Loss) gain on changes in fair value of
derivatives embedded within
convertible debt
    
    $
    (6,054
    )
    
    $
    522
    
    
    
    $
    (25,845
    )
    
    $
    7,837
 The following table reconciles the fair value of derivatives embedded within convertible
debt at September 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
    
    
    
    
    136,796Loss (gain) from changes in fair
value of embedded derivatives
    
    
    407
    
    
    
    
    (1,360
    )
    
    
    
    7,029
    
    
    
    
    (22
    )
    
    
    
    6,054Balance at September 30, 2009
    
    $
    23,783
    
    
    
    $
    42,710
    
    
    
    $
    76,187
    
    
    
    $
    170
    
    
    
    $
    142,850
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 Beneficial Conversion Feature on Variable Interest Senior Convertible Debt:
 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. The accounting
guidance on debt with conversion and other options 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. 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 nine months ended September 30, 2009 and 2008 is as follows:
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    2008Amortization of beneficial
conversion feature:6.75% Note
    
    $
    115
    
    
    $
    
    
    
    
    $
    175
    
    
    $
    6.75% exchange notes
    
    
    375
    
    
    
    
    
    
    
    
    375
    
    
    
    3.875% convertible debentures
    
    
    (16
    )
    
    
    (17
    )
    
    
    
    (33
    )
    
    
    (36
    )5% convertible notes
    
    
    8
    
    
    
    789
    
    
    
    
    1,878
    
    
    
    2,162Interest expense associated with
beneficial conversion feature
    
    $
    482
    
    
    $
    772
    
    
    
    $
    2,395
    
    
    $
    2,126
 Unamortized Debt Discount on Variable Interest Senior Convertible Debt:
 The following table reconciles unamortized debt discount within convertible debt at September
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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,030Issuance 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
    
    
    
    
    195,592Amortization of embedded derivatives
    
    
    (131
    )
    
    
    
    (608
    )
    
    
    
    (114
    )
    
    
    
    (16
    )
    
    
    
    (869
    )Amortization of beneficial conversion feature
    
    
    (115
    )
    
    
    
    (375
    )
    
    
    
    16
    
    
    
    
    (8
    )
    
    
    
    (482
    )Balance at September 30, 2009
    
    $
    39,999
    
    
    
    $
    70,309
    
    
    
    $
    83,687
    
    
    
    $
    246
    
    
    
    $
    194,241
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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. The loss was $0 and $18,444 for
the three and nine months ended September 30, 2009. A summary of the Companys loss on the
extinguishment of the 5% Notes for the nine months ended September 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
 Revolving Credit Facility  Liggett:
 Liggett has a $50,000 credit facility with Wachovia Bank, N.A. under which $15,698 was
outstanding at September 30, 2009. Availability as determined under the facility was
approximately $20,300 based on eligible collateral at September 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.
 September 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueNotes payable and
long-term debt
    
    $
    355,394
    
    
    $
    568,034
    
    
    $
    307,799
    
    
    $
    447,520
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 Scheduled Maturities:Scheduled maturities of long-term debt as of September 30, 2009 are as follows:
 UnamortizedPrincipal
    
    
    Discount
    
    
    NetYear Ending December 31:2009
    
    $
    17,919
    
    
    $
    246
    
    
    $
    17,6732010
    
    
    4,499
    
    
    
    
    
    
    
    4,4992011
    
    
    16,250
    
    
    
    1,458
    
    
    
    14,7922012
    
    
    108,490
    
    
    
    82,229
    
    
    
    26,2612013
    
    
    505
    
    
    
    
    
    
    
    505Thereafter
    
    
    407,009
    
    
    
    115,345
    
    
    
    291,664Total
    
    $
    554,672
    
    
    $
    199,278
    
    
    $
    355,394
 The scheduled maturities of $108,490 (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
consists of the following:
 Pension BenefitsThree Months Ended
    
    
    
    Nine Months EndedSeptember
    
    
    September
    
    
    
    September
    
    
    September30, 2009
    
    
    30, 2008
    
    
    
    30, 2009
    
    
    30, 2008Service cost  benefits earned
during the period
    
    $
    330
    
    
    $
    1,035
    
    
    
    $
    990
    
    
    $
    3,105Interest cost on projected benefit
obligation
    
    
    1,894
    
    
    
    2,381
    
    
    
    
    5,681
    
    
    
    7,143Expected return on plan assets
    
    
    (1,954
    )
    
    
    (3,036
    )
    
    
    
    (5,862
    )
    
    
    (9,108
    )Amortization of prior service cost
    
    
    200
    
    
    
    350
    
    
    
    
    600
    
    
    
    1,050Amortization of net loss
    
    
    534
    
    
    
    25
    
    
    
    
    1,602
    
    
    
    75Net expense
    
    $
    1,004
    
    
    $
    755
    
    
    
    $
    3,011
    
    
    $
    2,265
 OtherPostretirement BenefitsThree Months Ended
    
    
    
    Nine Months EndedSeptember
    
    
    September
    
    
    
    September
    
    
    September30, 2009
    
    
    30, 2008
    
    
    
    30, 2009
    
    
    30, 2008Service cost  benefits earned
during the period
    
    $
    4
    
    
    $
    4
    
    
    
    $
    12
    
    
    $
    12Interest cost on projected benefit
obligation
    
    
    142
    
    
    
    148
    
    
    
    
    426
    
    
    
    444Amortization of net loss
    
    
    (41
    )
    
    
    (45
    )
    
    
    
    (123
    )
    
    
    (135
    )Net expense
    
    $
    105
    
    
    $
    107
    
    
    
    $
    315
    
    
    $
    321
 The increase of $249 in the Companys pension expense for the three months ended September
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
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 plans. The amount was offset by lower expenses of approximately $1,400 at the corporate
segment due to the retirement of the Companys former Executive Chairman on December 30, 2008.
The increase of $746 in the Companys pension expense for the nine months ended September 30,
2009 was the result of increased defined benefit expense at the Liggett segment of
approximately $4,800 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 $4,000 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 nine months ended September 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.
    
    CONTINGENCIES
 Tobacco-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 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 $4,286 and $4,806, for the nine months ended September 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 September 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,
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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 ActionsAs of September 30, 2009, there were 37 individual cases pending against Liggett and/or
the Company, where one or more individual plaintiffs allege injury resulting from
cigarette smoking, addiction to cigarette smoking or exposure to secondary smoke and seek
compensatory and, in some cases, punitive damages. In addition, there were approximately 3,300
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 September
30, 2009 (excluding Engleprogeny cases and the cases consolidated in West Virginia):
 NumberState
    
    of CasesFlorida
    
    
    15New York
    
    
    9Louisiana
    
    
    5Maryland
    
    
    2West Virginia
    
    
    2Illinois
    
    
    1Mississippi
    
    
    1Missouri
    
    
    1Ohio
    
    
    1
 Liggett Only Cases.There are currently six cases pending where Liggett is the only tobacco
company defendant. Cases where Liggett is the only defendant could increase substantially as a
result of the Engleprogeny cases. 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. In July 2009, the trial court awarded approximately $1,650 in
legal fees, inclusive of interest and costs, which has been paid by Liggett. 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. Punitive damages were not awarded.
Liggett has appealed the award. 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, in which 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,
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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 Engle
progeny 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 8,585
plaintiffs, approximately 3,300 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 of several district court orders in which it
was found that the Florida Supreme Courts decision in Englewas unconstitutional. The number
of progeny 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. As of September 30, 2009, there were
approximately 43 Engleprogeny cases scheduled for trial, or likely to be scheduled for trial,
in 2009 and 2010. As of September 30, 2009, eight Engleprogeny cases have been tried resulting
in six plaintiff verdicts and two defense verdicts. In one of these cases, judgment was entered
against Liggett for $156. For further information on the Englecase and on Engleprogeny cases,
see Class Actions  EngleCase, below.Class ActionsAs of September 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.Plaintiffs 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
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
 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 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 8,585 former Engleclass members have
suits pending 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, which has since been dismissed
for lack of prosecution) were certified by the trial court for interlocutory review. The
certification was granted by the United States Court of Appeals for the Eleventh Circuit and
oral argument is scheduled for January 2010. 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),
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 plus interest from June 2002 which, as of September 30, 2009, was in excess of $13,000.
Defendants filed a notice of appeal in December 2008. 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 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).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 a Multidistrict Litigation. In September 2009, the
court denied the motion to consolidate the Clearyand Schwabcases.
 In April 2001, in Brown v. Philip Morris USA,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.
Defendants motion for rehearing was denied. In September 2009, plaintiffs advised the court
that they intend to seek reconsideration of the courts order finding that plaintiffs
allegations regarding lights cigarettes were preempted by federal law, in light of the recent
United States Supreme Court decision in Altria Group v. Good.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases),
a West Virginia state court consolidated approximately 750 individual smoker actions that were
pending prior to 2001 for trial of certain common issues. In January 2002, the court severed
Liggett from the trial of the consolidated action, which is scheduled for February 2010. If the
case were to proceed 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 ActionsAs of September 30, 2009, there was 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 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
June 7, 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. Claims were asserted under RICO.In August 2006, the trial court entered a Final Judgment and Remedial Order against each of the
cigarette manufacturing defendants, except Liggett. 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. In May 2009, the United States Court of Appeals for
the District of Columbia Circuit affirmed most of the district courts decision. The
defendants, other than Liggett, have appealed 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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Third-Party Payor ActionsAs of September 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 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 the Medicare Secondary Payer provisions of the
Social Security Act . 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 TrialsAs of September 30, 2009, there were approximately 43 Engleprogeny cases that may be set for
trial during 2009 or 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.MSA and Other State Settlement AgreementsIn March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related
litigation with 45 states and territories. The settlements released Liggett from all
smoking-related claims within those states and territories, including claims for health care
cost reimbursement and claims concerning sales of cigarettes to minors.In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the Original
Participating Manufacturers or OPMs) and Liggett (together with any other tobacco product
manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs)
(the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers)
entered into the Master Settlement Agreement (the MSA) with 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern
Mariana Islands (collectively, the Settling States) to settle the asserted and unasserted
health care
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 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 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.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Certain MSA DisputesIn 2005, the independent auditor under the MSA calculated that Liggett owed $28,668 for
its 2004 sales. In April 2005, Liggett paid $11,678 and disputed the balance, as permitted by
the MSA. Liggett subsequently paid $9,304 of the disputed amount, although Liggett continues to
dispute that this amount is owed. This $9,304 relates to an adjustment to its 2003 payment
obligation claimed by Liggett for the market share loss to non-participating manufacturers,
which is known as the NPM Adjustment. At September 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 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. The Participating Manufacturers are also entitled to potential NPM
Adjustments to their 2007, 2008 and 2009 payments pursuant to an agreement entered into in June
2009 between the OPMs and the Settling States under which the OPMs agreed to make certain
payments for the benefit of the Settling States, in exchange for which the Settling States
stipulated that the MSA was a significant factor contributing to the loss of market share of
Participating Manufacturers in 2007, 2008 and 2009. A Settling State that has diligently
enforced its qualifying escrow statute in the year in question may be able to avoid application
of the NPM Adjustment to the payments made by the manufacturers for the benefit of that 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 but
one of the 48 courts that have decided the issue have ruled that the 2003 NPM Adjustment
dispute is arbitrable. All 47 of those decisions are final and non-appealable. One court, the
Montana Supreme Court, ruled that Montanas claim of diligent enforcement must be litigated. In
response to a proposal from the OPMs and many of the SPMs, 45 of the Settling States,
representing approximately 90% of the allocable share of the Settling States, entered into an
agreement providing for a nationwide arbitration of the dispute with respect to the NPM
Adjustment for 2003. The agreement provides for selection of the arbitration panel beginning
November 1, 2009 and that the parties and the arbitrators will thereafter establish the schedule
and procedures for the arbitration. Because states representing more than 80% of the allocable
share signed the agreement, signing states will receive a 20% reduction of any potential 2003
NPM adjustment. It is anticipated that the arbitration will 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
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 1999). The change in the method of calculation
could, among other things, require additional MSA payments by Liggett of approximately $26,200,
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 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
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 granting the defendants
motions and dismissing Vibos lawsuit. In December 2008, Vibo filed a second lawsuit, seeking
declaratory relief under the MSA, in California state court against California and certain
cigarette manufacturers, including Liggett and Vector Tobacco, seeking a determination that the
proposed amendment to Vibos 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. In July 2009, the trial court
granted the OPMs and SPMs motions for summary judgment. Vibo appealed 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 September 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 settlement demands made by these
states are substantially in excess of the $2,500 accrual. 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 $816 awarded in the Ferlanti
case, 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 September 30, 2009, exceeded $13,000. Recently, Liggett was found liable in an
Engleprogeny case and its portion of the total award was $156. It is possible that additional
cases could be decided unfavorably against Liggett. As a result of the Engledecision,
approximately 8,585 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
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 additional similar litigation, or could lead to
multiple adverse decisions in the Engleprogeny cases. Adverse verdicts have been rendered in
six Engleprogeny cases out of eight 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 September 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.
 9.
    
    INCOME TAXESFor the three and nine months ended September 30, 2009,
the Companys income tax provision was an expense of
$2,654 and a benefit of $1,346 compared to an expense of $7,010 and $33,042 for the three and nine months
ended September 30, 2008.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 The Companys provision for income taxes in interim periods is based on an estimated annual
effective income tax rate derived, in part, from estimated annual pre-tax results from ordinary
operations. The annual effective income tax rate is reviewed and, if necessary, adjusted on a
quarterly basis.Vectors income tax rates for the three and nine months ended September 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. In
addition, the Company recorded a benefit of $6,166 for the three and nine months ended
September 30, 2009 resulting from the reduction of a previously established valuation allowance
of a deferred tax asset. The valuation allowance was reduced for the
recognition of state tax net
operating losses at Vector Tobacco Inc. after evaluating the impact of the negative and
positive evidence that such asset would be realized. The Company based its conclusion on the
fact that Vector Tobacco is anticipated to report state taxable income on a separate company
basis for the second consecutive year in 2009.For the nine months ended September 30, 2009, the Companys tax provision was reduced because
of the impact of the loss on extinguishment of debt and reduced income tax benefit by
approximately $535 due to differences in the Companys marginal tax rate and its anticipated
effective annual income tax rate from ordinary operations.For the three and nine months ended September 30, 2008, the Companys income tax provision was
increased by approximately $240 because of the impact of the impairment charges. For the nine months
ended September 30, 2008, the Companys income tax provision was reduced by approximately $370
because of the impact of the income from the Companys investment in the St. Regis Hotel.The Companys income tax (benefit) expense consists of the following:
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    2008Income before provision for
income taxes
    
    $
    18,873
    
    
    $
    21,837
    
    
    
    $
    10,027
    
    
    $
    81,301Income tax expense using estimated
annual effective income tax rate
    
    
    8,210
    
    
    
    9,608
    
    
    
    
    4,362
    
    
    
    35,772Changes in effective tax rates
    
    
    610
    
    
    
    (238
    )
    
    
    
    (77
    )
    
    
    Impact of discrete items, net
    
    
    
    
    
    
    240
    
    
    
    
    535
    
    
    
    (130
    )Reduction of
valuation allowance
    
    
    (6,166
    )
    
    
    
    
    
    
    
    (6,166
    )
    
    
    Reversal of unrecognized
tax benefits
    
    
    
    
    
    
    (2,600
    )
    
    
    
    
    
    
    
    (2,600
    )Income tax
expense (benefit)
    
    $
    2,654
    
    
    $
    7,010
    
    
    
    $
    (1,346
    )
    
    $
    33,042
 The Companys 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 concluded an audit of the Companys income tax return for the year
ended December 31, 2005. There was no material impact on the Companys condensed consolidated
financial statements as a result of the audit.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 10.
    
    NEW VALLEYInvestments in Non-Consolidated Real Estate Businesses:The components of Investments in non-consolidated real estate businesses were as follows:
 September 30, 2009
    
    
    December 31, 2008Douglas Elliman Realty LLC
    
    $
    33,657
    
    
    $
    33,175Aberdeen Townhomes LLC
    
    
    1,248
    
    
    
    6,500New Valley Oaktree Chelsea Eleven LLC
    
    
    10,723
    
    
    
    11,100Investments in non-consolidated real
estate businesses
    
    $
    45,628
    
    
    $
    50,775
 Residential Brokerage Business.New Valley recorded income of $4,712 and $4,727 for the three
months ended September 30, 2009 and 2008, respectively, and income of $5,328 and $10,249 for
the nine months ended September 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, income resulting from management fees and other adjustments. New Valley
received cash distributions from Douglas Elliman Realty LLC of $1,370 and $3,200 for the three
months ended September 30, 2009 and 2008, respectively, and $4,846 and $5,757 for the nine
months ended September 30, 2009 and 2008, respectively.Summarized financial information for Douglas Elliman Realty for the three and nine months ended
September 30, 2009 and 2008 and as of September 30, 2009 and December 31, 2008 is presented
below.
 September 30, 2009
    
    December 31, 2008Cash
    
    $
    22,334
    
    
    $
    22,125Other current assets
    
    
    9,925
    
    
    
    7,496Property, plant and equipment, net
    
    
    12,793
    
    
    
    15,868Trademarks
    
    
    21,663
    
    
    
    21,663Goodwill
    
    
    38,342
    
    
    
    38,325Other intangible assets, net
    
    
    1,043
    
    
    
    1,311Other non-current assets
    
    
    2,759
    
    
    
    904Notes payable  current
    
    
    1,175
    
    
    
    1,413Current portion of notes payable to member 
Prudential Real Estate Financial Services
of America, Inc.
    
    
    3,589
    
    
    
    4,729Current portion of notes payable
to member  New Valley
    
    
    3,589
    
    
    
    4,729Other current liabilities
    
    
    23,270
    
    
    
    23,294Notes payable  long term
    
    
    627
    
    
    
    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
    
    
    8,252
    
    
    
    6,939Members equity
    
    
    68,357
    
    
    
    60,723
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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
    
    
    
    Nine months EndedSeptember 30,
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    2009
    
    
    2008Revenues
    
    $
    80,484
    
    
    $
    99,259
    
    
    
    $
    189,813
    
    
    $
    281,515Costs and expenses
    
    
    71,271
    
    
    
    88,564
    
    
    
    
    177,597
    
    
    
    256,803Depreciation expense
    
    
    1,075
    
    
    
    1,373
    
    
    
    
    3,408
    
    
    
    4,080Amortization expense
    
    
    64
    
    
    
    74
    
    
    
    
    192
    
    
    
    223Other income
    
    
    1,000
    
    
    
    
    
    
    
    
    1,000Interest expense, net
    
    
    732
    
    
    
    800
    
    
    
    
    2,025
    
    
    
    2,465Income tax expense (benefit)
    
    
    323
    
    
    
    76
    
    
    
    
    (42
    )
    
    
    422Net income
    
    $
    8,019
    
    
    $
    8,372
    
    
    
    $
    7,633
    
    
    $
    17,522
 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. Since 2008, the U.S. residential real estate market, including the market
in the New York metropolitan area where Douglas Elliman operates, has been negatively
impacted by 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 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. The Company had recorded an impairment
loss of $3,500 related to Aberdeen at December 31, 2008. The Companys investment in Aberdeen Townhomes consists of the following:
 Balance as of January 1, 2009
    
    $
    6,500Impairment loss recorded in
first quarter of 2009
    
    
    (3,500
    )Preferred return
distribution
    
    
    (1,752
    )Balance as of September 30, 2009
    
    $
    1,248
 In September 2009, one of the five townhomes was sold and the mortgage of approximately
$8,700 was retired. The Company received a preferred return distribution of approximately
$1,752. The Company did not record a gain or loss on the sale.Mortgages on three of the four Aberdeen town homes with a balance of approximately $27,400
matured on March 1, 2009 and have not been refinanced or paid and are in default. Aberdeen
is currently in discussions with the lender. The remaining mortgage with a balance of
approximately $4,550, which matured on September 30, 2009, was also in default as of that
date due to non-payment of interest.
 -36-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
   New Valley Oaktree Chelsea Eleven, LLC.
   Investment in Real Estate
 Escena.
   -37-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
   Real Estate Market Conditions
 11. INVESTMENTS AND FAIR VALUE MEASUREMENTS
   Level 1
    
    Observable inputs such as quoted prices (unadjusted) in
active markets for identical assets or liabilities.Level 2
    
    Inputs other than quoted prices that are observable for the
assets or liability, either directory or indirectly. These
include quoted prices for similar assets or liabilities in
active markets and quoted prices for identical or similar
assets or liabilities in markets that are not active.Level 3
    
    Unobservable inputs in which there is little market data,
which requires the reporting entity to develop their own
assumptions
   -38-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Fair Value Measurements as of September 30, 2009Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Money market funds
    
    $
    225,971
    
    
    $
    225,971
    
    
    $
    
    
    
    $
    Certificates of deposit
    
    
    2,429
    
    
    
    
    
    
    
    2,429
    
    
    
    Bonds
    
    
    2,947
    
    
    
    2,947
    
    
    
    
    
    
    
    Investment securities
available for sale
    
    
    62,094
    
    
    
    45,930
    
    
    
    16,164
    
    
    
    Total
    
    $
    293,441
    
    
    $
    274,848
    
    
    $
    18,593
    
    
    $
    Liabilities:Fair value of derivatives
embedded within
convertible debt
    
    $
    142,850
    
    
    $
    
    
    
    $
    
    
    
    $
    142,850Fair 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
    -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
  Fair Value Measurements as of September 30, 2009Nine months
    
    
    
    
    
    
    Quoted PricesEnded
    
    
    
    
    
    
    in Active
    
    
    SignificantSeptember 30,
    
    
    
    
    
    
    Markets for
    
    
    Other
    
    
    Significant2009
    
    
    
    
    
    
    Identical
    
    
    Observable
    
    
    UnobservableImpairment
    
    
    
    
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    Charge
    
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Investment in real estate
    
    $
    5,000
    
    
    $
    12,204
    
    
    $
    
    
    
    $
    
    
    
    $
    12,204Investment in non-consolidated
real estate businesses
    
    
    3,500
    
    
    
    1,248
    
    
    
    
    
    
    
    
    
    
    
    1,248Total
    
    $
    8,500
    
    
    $
    13,452
    
    
    $
    
    
    
    $
    
    
    
    $
    13,452
  12. RESTRICTED STOCK AWARD
  13. SEGMENT INFORMATION
  -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
  Vector
    
    Real
    
    CorporateLiggett
    
    Tobacco
    
    Estate
    
    and Other
    
    TotalThree months ended September 30, 2009Revenues
    
    $
    236,335
    
    
    $
    401
    
    
    
    
    
    
    
    
    
    
    $
    236,736Operating income (loss)
    
    
    43,380
    
    
    
    (1,738
    )
    
    
    (194
    )
    
    
    (4,476
    )
    
    
    36,972Depreciation and amortization
    
    
    1,969
    
    
    
    22
    
    
    
    25
    
    
    
    634
    
    
    
    2,650Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    4,712
    
    
    
    
    
    
    
    4,712Three months ended September 30, 2008Revenues
    
    $
    144,841
    
    
    $
    760
    
    
    
    
    
    
    
    
    
    
    $
    145,601Operating income (loss)
    
    
    45,924
    
    
    
    (2,439
    )
    
    
    
    
    
    
    (5,950
    )
    
    
    37,535Depreciation and amortization
    
    
    1,910
    
    
    
    30
    
    
    
    
    
    
    
    588
    
    
    
    2,528Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    5,202
    
    
    
    
    
    
    
    5,202Nine months ended September 30, 2009Revenues
    
    $
    563,293
    
    
    $
    1,453
    
    
    
    
    
    
    
    
    
    
    $
    564,746Operating income (loss)
    
    
    125,100
    (1)
    
    
    (5,885
    )(2)
    
    
    (194
    )
    
    
    (12,042
    )
    
    
    106,979Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    5,528
    
    
    
    
    
    
    
    5,528Identifiable assets
    
    
    301,474
    
    
    
    11,685
    
    
    
    63,374
    
    
    
    398,847
    
    
    
    775,380Depreciation and amortization
    
    
    5,927
    
    
    
    75
    
    
    
    25
    
    
    
    1,741
    
    
    
    7,768Capital expenditures
    
    
    2,117
    
    
    
    12
    
    
    
    876
    
    
    
    
    
    
    
    3,005Nine months ended September 30, 2008Revenues
    
    $
    418,816
    
    
    $
    1,950
    
    
    
    
    
    
    
    
    
    
    $
    420,766Operating income (loss)
    
    
    126,960
    
    
    
    (6,775
    )
    
    
    
    
    
    
    (20,264
    )
    
    
    99,921Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    22,706
    
    
    
    
    
    
    
    22,706Identifiable assets
    
    
    312,188
    
    
    
    2,317
    
    
    
    57,383
    
    
    
    417,807
    
    
    
    789,695Depreciation and amortization
    
    
    5,682
    
    
    
    89
    
    
    
    
    
    
    
    1,757
    
    
    
    7,528Capital expenditures
    
    
    5,341
    
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    5,426
 
 (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. 14. SUBSEQUENT EVENTS
  15. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
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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
   -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
 September 30, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    230,020
    
    
    $
    7,239
    
    
    $
    209
    
    
    $
    
    
    
    $
    237,468Investment securities
available for sale
    
    
    62,016
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    62,094Accounts receivable 
trade
    
    
    
    
    
    
    6,824
    
    
    
    
    
    
    
    
    
    
    
    6,824Intercompany receivables
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    (100
    )
    
    
    Inventories
    
    
    
    
    
    
    100,021
    
    
    
    
    
    
    
    
    
    
    
    100,021Deferred income taxes
    
    
    3,764
    
    
    
    435
    
    
    
    
    
    
    
    
    
    
    
    4,199Income taxes receivable
    
    
    
    
    
    
    9,398
    
    
    
    
    
    
    
    (9,398
    )
    
    
    Restricted assets
    
    
    
    
    
    
    3,545
    
    
    
    
    
    
    
    
    
    
    
    3,545Other current assets
    
    
    271
    
    
    
    2,785
    
    
    
    58
    
    
    
    
    
    
    
    3,114Total current assets
    
    
    296,171
    
    
    
    130,247
    
    
    
    345
    
    
    
    (9,498
    )
    
    
    417,265Property, plant and equipment, net
    
    
    650
    
    
    
    44,351
    
    
    
    850
    
    
    
    
    
    
    
    45,851Investment in real estate
    
    
    
    
    
    
    
    
    
    
    12,204
    
    
    
    
    
    
    
    12,204Long-term investments accounted
for at cost
    
    
    50,333
    
    
    
    
    
    
    
    837
    
    
    
    
    
    
    
    51,170Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    45,628
    
    
    
    
    
    
    
    45,628Investments in consolidated subsidiaries
    
    
    163,603
    
    
    
    
    
    
    
    
    
    
    
    (163,603
    )
    
    
    Restricted assets
    
    
    2,428
    
    
    
    2,158
    
    
    
    
    
    
    
    
    
    
    
    4,586Deferred income taxes
    
    
    41,514
    
    
    
    7,073
    
    
    
    9,624
    
    
    
    
    
    
    
    58,211Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    3,171
    
    
    
    
    
    
    
    
    
    
    
    3,171Other assets
    
    
    15,634
    
    
    
    14,149
    
    
    
    
    
    
    
    
    
    
    
    29,783Total assets
    
    $
    570,333
    
    
    $
    308,660
    
    
    $
    69,488
    
    
    $
    (173,101
    )
    
    $
    775,380LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes
payable and long-term debt
    
    $
    670
    
    
    $
    20,222
    
    
    $
    
    
    
    $
    
    
    
    $
    20,892Current portion of employee
benefits
    
    
    
    
    
    
    1,051
    
    
    
    
    
    
    
    
    
    
    
    1,051Accounts payable
    
    
    1,959
    
    
    
    7,232
    
    
    
    578
    
    
    
    
    
    
    
    9,769Intercompany payables
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    (100
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    12,081
    
    
    
    
    
    
    
    
    
    
    
    12,081Income taxes payable, net
    
    
    20,311
    
    
    
    
    
    
    
    20,199
    
    
    
    (9,398
    )
    
    
    31,112Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    568
    
    
    
    
    
    
    
    
    
    
    
    568Settlement accruals
    
    
    
    
    
    
    46,787
    
    
    
    
    
    
    
    
    
    
    
    46,787Deferred income taxes
    
    
    15,083
    
    
    
    2,120
    
    
    
    
    
    
    
    
    
    
    
    17,203Accrued interest
    
    
    6,861
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,861Other current liabilities
    
    
    3,172
    
    
    
    9,038
    
    
    
    5
    
    
    
    
    
    
    
    12,215Total current liabilities
    
    
    48,056
    
    
    
    99,199
    
    
    
    20,782
    
    
    
    (9,498
    )
    
    
    158,539Notes payable, long-term debt and
other obligations, less current
portion
    
    
    317,907
    
    
    
    15,959
    
    
    
    636
    
    
    
    
    
    
    
    334,502Fair value of derivatives embedded
within convertible debt
    
    
    142,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,850Non-current employee
benefits
    
    
    12,034
    
    
    
    24,899
    
    
    
    
    
    
    
    
    
    
    
    36,933Deferred income
taxes
    
    
    39,112
    
    
    
    22,257
    
    
    
    7,123
    
    
    
    
    
    
    
    68,492Other liabilities
    
    
    352
    
    
    
    22,793
    
    
    
    897
    
    
    
    
    
    
    
    24,042Total liabilities
    
    
    560,311
    
    
    
    185,107
    
    
    
    29,438
    
    
    
    (9,498
    )
    
    
    765,358Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    10,022
    
    
    
    123,553
    
    
    
    40,050
    
    
    
    (163,603
    )
    
    
    10,022Total liabilities and
stockholders equity
    
    $
    570,333
    
    
    $
    308,660
    
    
    $
    69,488
    
    
    $
    (173,101
    )
    
    $
    775,380
 -43-




---



##### 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
 -44-




---



##### 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 September 30, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    236,736
    
    
    $
    
    
    
    $
    
    
    
    $
    236,736Expenses:Cost of goods sold
    
    
    
    
    
    
    177,798
    
    
    
    
    
    
    
    
    
    
    
    177,798Operating, selling,
administrative and
general expenses
    
    
    4,944
    
    
    
    16,756
    
    
    
    266
    
    
    
    
    
    
    
    21,966Management fee expense
    
    
    
    
    
    
    2,055
    
    
    
    
    
    
    
    (2,055
    )
    
    
    Operating income
(loss)
    
    
    (4,944
    )
    
    
    40,127
    
    
    
    (266
    )
    
    
    2,055
    
    
    
    36,972Other income (expenses):Interest and dividend
income
    
    
    43
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    51Interest expense
    
    
    (16,465
    )
    
    
    (332
    )
    
    
    (11
    )
    
    
    
    
    
    
    (16,808
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    (6,054
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,054
    )Equity income on
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    4,712
    
    
    
    
    
    
    
    4,712Equity income in consolidated subsidiaries
    
    
    33,308
    
    
    
    
    
    
    
    
    
    
    
    (33,308
    )
    
    
    Management fee income
    
    
    2,055
    
    
    
    
    
    
    
    
    
    
    
    (2,055
    )
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before
provision for income
taxes
    
    
    7,943
    
    
    
    39,803
    
    
    
    4,435
    
    
    
    (33,308
    )
    
    
    18,873Income tax
benefit (expense)
    
    
    8,276
    
    
    
    (9,238
    )
    
    
    (1,692
    )
    
    
    
    
    
    
    (2,654
    )Net income (loss)
    
    $
    16,219
    
    
    $
    30,565
    
    
    $
    2,743
    
    
    $
    (33,308
    )
    
    $
    16,219
 -45-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Three Months Ended September 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    145,601
    
    
    $
    
    
    
    $
    
    
    
    $
    145,601Expenses:Cost of goods
sold
    
    
    
    
    
    
    84,999
    
    
    
    
    
    
    
    
    
    
    
    84,999Operating,
selling,
administrative
and general
expenses
    
    
    7,554
    
    
    
    16,738
    
    
    
    (1,225
    )
    
    
    
    
    
    
    23,067Management fee
expense
    
    
    
    
    
    
    1,984
    
    
    
    
    
    
    
    (1,984
    )
    
    
    Operating
(loss) income
    
    
    (7,554
    )
    
    
    41,880
    
    
    
    1,225
    
    
    
    1,984
    
    
    
    37,535Other income
(expenses):Interest
and dividend
income
    
    
    977
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    1,094Interest
expense
    
    
    (15,149
    )
    
    
    (366
    )
    
    
    
    
    
    
    
    
    
    
    (15,515
    )Changes in
fair value of
derivatives
embedded
within
convertible
debt
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522Provision for
loss on
investments
    
    
    (3,000
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    
    
    
    
    (7,000
    )Equity income
from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    5,202
    
    
    
    
    
    
    
    5,202Equity income
in consolidated
subsidiaries
    
    
    26,819
    
    
    
    
    
    
    
    
    
    
    
    (26,819
    )
    
    
    Management fee
income
    
    
    1,984
    
    
    
    
    
    
    
    
    
    
    
    (1,984
    )
    
    
    Other, net
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Income before
provision for
income taxes
    
    
    4,598
    
    
    
    41,631
    
    
    
    2,427
    
    
    
    (26,819
    )
    
    
    21,837Income tax
benefit
(expense)
    
    
    10,229
    
    
    
    (16,224
    )
    
    
    (1,015
    )
    
    
    
    
    
    
    (7,010
    )Net income
    
    $
    14,827
    
    
    $
    25,407
    
    
    $
    1,412
    
    
    $
    (26,819
    )
    
    $
    14,827
 -46-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Nine Months Ended September 30, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    564,746
    
    
    $
    
    
    
    $
    
    
    
    $
    564,746Expenses:Cost of goods sold
    
    
    
    
    
    
    398,088
    
    
    
    
    
    
    
    
    
    
    
    398,088Operating, selling, administrative and
general expenses
    
    
    14,596
    
    
    
    48,616
    
    
    
    467
    
    
    
    
    
    
    
    63,679Gain on brand
transaction
    
    
    
    
    
    
    (5,000
    )
    
    
    
    
    
    
    
    
    
    
    (5,000
    )Restructuring
charges
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,000Management fee expense
    
    
    
    
    
    
    6,167
    
    
    
    
    
    
    
    (6,167
    )
    
    
    Operating income (loss)
    
    
    (14,596
    )
    
    
    115,875
    
    
    
    (467
    )
    
    
    6,167
    
    
    
    106,979Other income (expenses):Interest and dividend income
    
    
    180
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    277Interest expense
    
    
    (49,097
    )
    
    
    (860
    )
    
    
    (11
    )
    
    
    
    
    
    
    (49,968
    )Loss on
extinguishment of debt
    
    
    (18,444
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,444
    )Changes in fair value of derivatives
embedded within convertible debt
    
    
    (25,845
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,845
    )Impairment charges
on investments
    
    
    
    
    
    
    
    
    
    
    (8,500
    )
    
    
    
    
    
    
    (8,500
    )Equity income from non-consolidated real
estate businesses
    
    
    
    
    
    
    
    
    
    
    5,528
    
    
    
    
    
    
    
    5,528Equity income in consolidated subsidiaries
    
    
    75,060
    
    
    
    
    
    
    
    
    
    
    
    (75,060
    )
    
    
    Management fee income
    
    
    6,167
    
    
    
    
    
    
    
    
    
    
    
    (6,167
    )
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before provision for income
taxes
    
    
    (26,575
    )
    
    
    115,112
    
    
    
    (3,450
    )
    
    
    (75,060
    )
    
    
    10,027Income tax benefit (expense)
    
    
    37,948
    
    
    
    (38,013
    )
    
    
    1,411
    
    
    
    
    
    
    
    1,346Net income (loss)
    
    $
    11,373
    
    
    $
    77,099
    
    
    $
    (2,039
    )
    
    $
    (75,060
    )
    
    $
    11,373
 -47-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Nine Months Ended September 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    420,766
    
    
    $
    
    
    
    $
    
    
    
    $
    420,766Expenses:Cost of goods
sold
    
    
    
    
    
    
    251,036
    
    
    
    
    
    
    
    
    
    
    
    251,036Operating,
selling,
administrative
and
general
expenses
    
    
    22,725
    
    
    
    47,610
    
    
    
    (526
    )
    
    
    
    
    
    
    69,809Management
fee expense
    
    
    
    
    
    
    5,954
    
    
    
    
    
    
    
    (5,954
    )
    
    
    Operating income
(loss)
    
    
    (22,725
    )
    
    
    116,166
    
    
    
    526
    
    
    
    5,954
    
    
    
    99,921Other income
(expenses):Interest
and dividend
income
    
    
    4,017
    
    
    
    423
    
    
    
    
    
    
    
    
    
    
    
    4,440Interest expense
    
    
    (44,699
    )
    
    
    (1,326
    )
    
    
    
    
    
    
    
    
    
    
    (46,025
    )Changes in fair
value
of derivatives
embedded
within
convertible
debt
    
    
    7,837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,837Provision for
loss on
investments
    
    
    (3,000
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    
    
    
    
    (7,000
    )Equity income
from
non-consolidated real estate businesses
    
    
    
    
    
    
    
    
    
    
    22,706
    
    
    
    
    
    
    
    22,706Equity income
in consolidated
subsidiaries
    
    
    82,036
    
    
    
    
    
    
    
    
    
    
    
    (82,036
    )
    
    
    Management fee
income
    
    
    5,954
    
    
    
    
    
    
    
    
    
    
    
    (5,954
    )
    
    
    Other, net
    
    
    (574
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (578
    )Income before
provision for
income
taxes
    
    
    28,846
    
    
    
    115,263
    
    
    
    19,228
    
    
    
    (82,036
    )
    
    
    81,301Income tax
benefit (expense)
    
    
    19,413
    
    
    
    (44,568
    )
    
    
    (7,887
    )
    
    
    
    
    
    
    (33,042
    )Net income
    
    $
    48,259
    
    
    $
    70,695
    
    
    $
    11,341
    
    
    $
    (82,036
    )
    
    $
    48,259
 -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
 Nine Months Ended September 30, 2009Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided
by operating activities
    
    $
    10,444
    
    
    $
    78,046
    
    
    $
    1,572
    
    
    $
    (80,728
    )
    
    $
    9,334Cash flows from investing
activities:Purchase of
investment
securities
    
    
    (12,300
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,300
    )Proceeds from
sale or liquidation
of long-term
investments
    
    
    1,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,407Purchase of
long-term
investments
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Distributions
from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    5,548
    
    
    
    
    
    
    
    5,548Investments in
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    (467
    )
    
    
    
    
    
    
    (467
    )Investments in
subsidiaries
    
    
    (3,050
    )
    
    
    
    
    
    
    
    
    
    
    3,050
    
    
    
    Increase in
cash surrender
value of life
insurance policies
    
    
    (413
    )
    
    
    (426
    )
    
    
    
    
    
    
    
    
    
    
    (839
    )(Increase)
decrease in
non-current
restricted assets
    
    
    1,417
    
    
    
    552
    
    
    
    
    
    
    
    
    
    
    
    1,969Capital expenditures
    
    
    
    
    
    
    (2,129
    )
    
    
    (876
    )
    
    
    
    
    
    
    (3,005
    )Net cash (used in)
provided by investing
activities
    
    
    (12,939
    )
    
    
    (2,003
    )
    
    
    4,154
    
    
    
    3,050
    
    
    
    (7,738
    )Cash flows from
financing activities:Proceeds from
debt Issuance
    
    
    118,125
    
    
    
    21
    
    
    
    636
    
    
    
    
    
    
    
    118,782Repayments of debt
    
    
    
    
    
    
    (4,516
    )
    
    
    
    
    
    
    
    
    
    
    (4,516
    )Deferred financing charges
    
    
    (5,567
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (5,573
    )Borrowings under revolver
    
    
    
    
    
    
    526,949
    
    
    
    
    
    
    
    
    
    
    
    526,949Repayments on
revolver
    
    
    
    
    
    
    (530,766
    )
    
    
    
    
    
    
    
    
    
    
    (530,766
    )Capital
contributions
received
    
    
    
    
    
    
    3,050
    
    
    
    
    
    
    
    (3,050
    )
    
    
    Intercompany
dividends paid
    
    
    
    
    
    
    (74,575
    )
    
    
    (6,153
    )
    
    
    80,728
    
    
    
    Dividends and
distributions on
common stock
    
    
    (87,451
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,451
    )Proceeds from
exercise of Vector
options and warrants
    
    
    398
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    398Tax benefit of
options exercised
    
    
    6,944
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,944Net cash (used in)
financing activities
    
    
    32,449
    
    
    
    (79,843
    )
    
    
    (5,517
    )
    
    
    77,678
    
    
    
    24,767Net increase
(decrease) in cash and
cash equivalents
    
    
    29,954
    
    
    
    (3,800
    )
    
    
    209
    
    
    
    
    
    
    
    26,363Cash and cash
equivalents, beginning of
period
    
    
    200,066
    
    
    
    11,039
    
    
    
    
    
    
    
    
    
    
    
    211,105Cash and cash
equivalents, end of
period
    
    $
    230,020
    
    
    $
    7,239
    
    
    $
    209
    
    
    $
    
    
    
    $
    237,468
 -49-




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 Nine Months Ended September 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash
provided by operating
activities
    
    $
    54,155
    
    
    $
    97,863
    
    
    $
    4,167
    
    
    $
    (85,750
    )
    
    $
    70,435Cash flows from
investing
activities:Purchase
of investment
securities
    
    
    (5,682
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,682
    )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
    
    
    
    
    
    
    
    
    
    
    17,628
    
    
    
    
    
    
    
    17,628Investment in
non-
consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    (22,000
    )
    
    
    
    
    
    
    (22,000
    )Increase
in cash
surrender value
of life
insurance
policies
    
    
    (386
    )
    
    
    (380
    )
    
    
    
    
    
    
    
    
    
    
    (766
    )Decrease
in non-current
restricted
assets
    
    
    154
    
    
    
    684
    
    
    
    
    
    
    
    
    
    
    
    838Investments in
subsidiaries
    
    
    (26,060
    )
    
    
    
    
    
    
    
    
    
    
    26,060
    
    
    
    Proceeds from
the sale
of fixed
assets
    
    
    
    
    
    
    403
    
    
    
    
    
    
    
    
    
    
    
    403Capital
expenditures
    
    
    
    
    
    
    (5,426
    )
    
    
    
    
    
    
    
    
    
    
    (5,426
    )Net cash used
in investing
activities
    
    
    (23,640
    )
    
    
    (4,719
    )
    
    
    (26,127
    )
    
    
    26,060
    
    
    
    (28,426
    )Cash flows from
financing activities:Proceeds from
debt
    
    
    
    
    
    
    2,830
    
    
    
    
    
    
    
    
    
    
    
    2,830Repayments of
debt
    
    
    
    
    
    
    (4,666
    )
    
    
    
    
    
    
    
    
    
    
    (4,666
    )Deferred financing
charges
    
    
    (137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )Borrowings under
revolver
    
    
    
    
    
    
    386,499
    
    
    
    
    
    
    
    
    
    
    
    386,499Repayments on
revolver
    
    
    
    
    
    
    (397,892
    )
    
    
    
    
    
    
    
    
    
    
    (397,892
    )Capital
contributions
received
    
    
    
    
    
    
    4,100
    
    
    
    21,960
    
    
    
    (26,060
    )
    
    
    Intercompany
dividends paid
    
    
    
    
    
    
    (85,750
    )
    
    
    
    
    
    
    85,750
    
    
    
    Dividends
and
distributions on
common stock
    
    
    (78,581
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,581
    )Proceeds
from exercise of
Vector options
and warrants
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Excess tax
benefit of
options
exercised
    
    
    18,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,304Net cash (used
in) provided by
financing activities
    
    
    (60,388
    )
    
    
    (94,879
    )
    
    
    21,960
    
    
    
    59,690
    
    
    
    (73,617
    )Net decrease in
cash and cash
equivalents
    
    
    (29,873
    )
    
    
    (1,735
    )
    
    
    
    
    
    
    
    
    
    
    (31,608
    )Cash and cash
equivalents,
beginning of period
    
    
    228,901
    
    
    
    9,216
    
    
    
    
    
    
    
    
    
    
    
    238,117Cash and cash
equivalents, end of
period
    
    $
    199,028
    
    
    $
    7,481
    
    
    $
    
    
    
    $
    
    
    
    $
    206,509
 -50-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Dollars in Thousands, Except Per Share Amounts
 Overview
  
    
    the manufacture and sale of cigarettes in the United States through our subsidiary
Liggett Group LLC,
    
    the development 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
relaunched in the second quarter of 2009, and
    
    USA and various Partner Brands and private label brands.
   -51-




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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.
 -52-




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##### Table of Contents



11% Senior Secured Notes due 2015.
 Enacted
and proposed excise tax increases.
 Family Smoking Prevention and Tobacco Control Act (FDA Legislation)
 Long-term Investments.
 -53-




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##### Table of Contents



Philip Morris Brand Transaction.
   Vector Tobacco Restructuring.
  Issuance of Restricted Shares.
 Investment in Real Estate.
  -54-




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##### Table of Contents



Aberdeen Townhomes LLC.
     New Valley Oaktree Chelsea Eleven, LLC.
   -55-




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##### Table of Contents



Sale of St. Regis Hotel.
 Tobacco Settlement Agreements.
   -56-




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##### Table of Contents



Recent Developments in Tobacco-Related Litigation
 Engle
 Schwab [McLaughlin] v. Philip
Morris, Altria Group v. Good
 -57-




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##### Table of Contents



Good
 Engle
 Davis v. Liggett Group, In Ferlanti v. Liggett Group
 Engle v. R.J. Reynolds Tobacco Co. Engle Engle Engle Engle Engle Engle Engle Engle Engle Lukacs v. R. J. Reynolds
Tobacco Company Engle
 -58-




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##### Table of Contents



Engle
  Critical Accounting Policies
  Results of Operations
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30
    
    
    September 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Liggett
    
    $
    236,335
    
    
    $
    144,841
    
    
    $
    563,293
    
    
    $
    418,816Vector Tobacco
    
    
    401
    
    
    
    760
    
    
    
    1,453
    
    
    
    1,950Total revenues
    
    $
    236,736
    
    
    $
    145,601
    
    
    $
    564,746
    
    
    $
    420,766Operating income (loss):Liggett
    
    $
    43,380
    
    
    $
    45,924
    
    
    $
    125,100
    
    
    $
    126,960Vector Tobacco
    
    
    (1,738
    )
    
    
    (2,439
    )
    
    
    (5,885
    )
    
    
    (6,775
    )Total tobacco
    
    
    41,642
    
    
    
    43,485
    
    
    
    119,215
    
    
    
    120,185Real estate
    
    
    (194
    )
    
    
    
    
    
    
    (194
    )
    
    
    Corporate and other
    
    
    (4,476
    )
    
    
    (5,950
    )
    
    
    (12,042
    )
    
    
    (20,264
    )Total operating income
    
    $
    36,972
    
    
    $
    37,535
    
    
    $
    106,979
    
    
    $
    99,921
 -59-




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Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
 Revenues.
 Tobacco Revenues.
    Tobacco Gross Profit.
  -60-




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##### Table of Contents



Expenses.
  Other Income (Expenses).
  Income before income taxes.
 Income
tax provision.
 -61-




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Nine
Months Ended September 30, 2009 Compared to Nine Months Ended
September 30, 2008
 Revenues.
 Tobacco Revenues.
  -62-




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Tobacco Gross Profit.
   Expenses.
  Other Income (Expenses). th
 -63-




---



##### Table of Contents



th
  Income before income taxes.
 Income
tax provision.
  Liquidity and Capital Resources
    -64-




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##### Table of Contents



Liggett
 Engle Engle Engle
 -65-




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##### Table of Contents



Vector
   
    
    cash interest expense of approximately $63,650,
    
    dividends on our outstanding common shares (currently at an annual rate of
approximately $115,000), and
    
    other corporate expenses and taxes, including a tax payment of approximately $25,000 in
connection with the Philip Morris brands transaction.
    -66-




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##### Table of Contents



Market Risk
     -67-




---



##### Table of Contents



New Accounting Pronouncements
 Summary of Significant Accounting Policies New Accounting Pronouncements.
 Legislation and Regulation
  -68-




---



##### Table of Contents




    
    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.
  -69-




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##### Table of Contents




    
    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.
      -70-




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-71-




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    economic outlook,
    
    capital expenditures,
    
    cost reduction,
    
    new legislation,
    
    cash flows,
    
    operating performance,
    
    litigation,
    
    impairment charges and cost savings associated with restructurings of our tobacco
operations, and
    
    related industry developments (including trends affecting our business, financial
condition and results of operations).
   
    
    general economic and market conditions and any changes therein, due to acts of war
and terrorism or otherwise,
    
    impact of current crises in capital and credit markets, including any continued
worsening,
    
    governmental regulations and policies,
    
    effects of industry competition,
    
    impact of business combinations, including acquisitions and divestitures, both
internally for us and externally in the tobacco industry,
    
    impact of restructurings on our tobacco business and our ability to achieve any
increases in profitability estimated to occur as a result of these restructurings,
    
    impact of new legislation on our competitors payment obligations, results of
operations and product costs, i.e. the impact of recent federal legislation
eliminating the federal tobacco quota system,
    
    impact of substantial increases in federal, state and local excise taxes,
 
 -72-




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##### Table of Contents




    
    uncertainty related to litigation and potential additional payment obligations for
us under the Master Settlement Agreement and other settlement agreements with the
states, and
    
    risks inherent in our new product development initiatives.
   -73-




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   -74-




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PART II
 OTHER INFORMATION
 
 Item 1.
    
    Legal ProceedingsReference is made to Note 8., incorporated herein by reference, to our condensed
consolidated financial statements included elsewhere in this report which contains a
general description of certain legal proceedings to which our company, VGR Holding,
Liggett, Vector Tobacco, New Valley or their subsidiaries are a party and certain
related matters. Reference is also made to Exhibit 99.1 for additional information
regarding the pending smoking-related material legal proceedings to which Liggett or us
is a party. A copy of Exhibit 99.1 will be furnished without charge upon written
request to us at our principal executive offices, 100 S.E. Second St., Miami, Florida
33131, Attn. Investor Relations.
 
 Item 1A.
    
    Risk FactorsExcept as set forth below, there are no material changes from the risk factors set forth
in Item 1A, Risk Factors, of our Annual Report on 10-K for the year ended December 31,
2008. Please refer to that section for disclosures regarding the risks and
uncertainties related to our business. The risk factors in the Annual Report on Form
10-K entitled Litigation will continue to harm the tobacco industry, Individual
tobacco-related cases have increased as a result of the Florida Supreme Courts ruling
in Engle and Liggett may have additional payment obligations under the Master
Settlement Agreement and its other settlement agreements with the states are revised to
reflect the updated information concerning the number and status of cases and other
matters discussed under Note 8 to our condensed consolidated financial statements and in
Managements Discussion and Analysis of Financial Condition  Recent Developments 
Tobacco Settlement Agreements,  Recent Developments in Legislation, Regulation and
Tobacco-Related Litigation, and  Legislation and Regulation.
 
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsExcept for approximately 3,326,623 shares of our common stock issued as a stock dividend
on September 29, 2009 and as discussed in our filing on Form 8-K dated September 1, 2009
related to an additional $85,000,000 principal amount of our 11% Senior Secured Notes,
no securities of ours which were not registered under a private
offering of the Securities Act of 1933 have
been issued or sold by us during the three months ended September 30, 2009.Our purchases of our common stock during the three months ended September 30, 2009 were
as follows:
 Total Number
    
    
    Maximum Numberof Shares
    
    
    of Shares thatTotal
    
    
    
    
    
    
    Purchased as
    
    
    May Yet BeNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    Purchased UnderShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    or ProgramsJuly 1 to July 31, 2009
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    August 1 to August 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1 to September
30, 2009
    
    
    2,120,479
    (1)
    
    
    15.43
    
    
    
    
    
    
    
    Total
    
    
    2,120,479
    
    
    $
    15.43
    
    
    
    
    
    
    
    
 
 (1)
    
    Delivery of shares to us in payment of exercise price in connection with
exercise of an employee stock option
for 3,218,998 shares on September 23, 2009. The shares were
subsequently cancelled. -75-




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##### Table of Contents



Item 6.
    
    Exhibits
 4.1
    
    Second Supplemental Indenture, dated as of September 1,
2009, among Vector Group Ltd., the subsidiary guarantors
named therein and U.S. Bank National Association, as
Trustee (incorporated by reference to Exhibit 4.1 of
Vectors Form 8-K dated September 1, 2009).4.2
    
    Registration Rights Agreement, dated as of September 1,
2009, between Vector Group Ltd., the subsidiary
guarantors named therein and Jefferies & Company, Inc.
(incorporated by reference to Exhibit 4.2 of Vectors
Form 8-K dated September 1, 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
 -76-




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##### Table of Contents



SIGNATURE
  VECTOR GROUP LTD.
(Registrant)By:
    /s/ J. Bryant Kirkland IIIJ. Bryant Kirkland IIIVice President, Treasurer and Chief
Financial Officer  -77-