Vector (VGR) 10-K 2009 FY Annual report

Exhibit 99.2

Liggett Group LLC and Subsidiaries
Consolidated Financial Statements
as of December 31, 2009 and 2008,
and for each of the three years
ended December 31, 2009, 2008 and 2007

Liggett Group LLC and Subsidiaries
Index
December 31, 2009 and 2008

	Page(s)
Report of Independent Registered Public Accounting Firm		1
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2009 and 2008		2—3
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007		4
Consolidated Statement of Member’s Investment		5
Consolidated Statements of Cash Flows		6—7
Notes to Consolidated Financial Statements		8—44
Consolidated Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts		45

Report of Independent Registered Public Accounting Firm

To the Managers and the
Member of Liggett Group LLC:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Liggett Group LLC and its subsidiaries (the “Company”), a wholly-owned subsidiary of Vector Group, Ltd., at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for defined benefit and other post retirement plans in 2008.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 1, 2010

1

Liggett Group LLC and Subsidiaries
Consolidated Balance Sheets
December 31, 2009 and 2008

(in thousands of dollars)	2009		2008
Assets
Current assets
Cash and cash equivalents	$	9	$	977
Accounts receivable
Trade, less allowances of $336 and $240, respectively		7,480		9,070
Related parties		10,905		12,233
Other		980		674
Inventories		92,703		87,771
Restricted assets		3,138		2,652
Tax receivable from parent		26,147		—
Deferred taxes		573		746
Other current assets		1,080		1,162
Total current assets		143,015		115,285
Property, plant and equipment, net		37,916		42,642
Prepaid pension costs		8,994		2,901
Restricted assets		2,012		2,580
Due from related parties		1,254		1,335
Deferred taxes		975		870
Other assets		13,091		12,824
Total assets	$	207,257	$	178,437

The accompanying notes are an integral part of these consolidated financial statements.

2

Liggett Group LLC and Subsidiaries
Consolidated Balance Sheets (continued)
December 31, 2009 and 2008

(in thousands of dollars)	2009			2008
Liabilities and Member’s Investment
Current liabilities
Current portion of long-term debt	$	2,551		$	3,944
Revolving credit facility		17,382			19,515
Current portion of pension and post-retirement liabilities		1,029			1,050
Accounts payable — trade		2,462			3,610
Accrued promotional expenses		12,099			9,542
Income taxes payable		266			11,838
Other accrued taxes, principally excise taxes		24,088			6,990
Estimated allowance for sales returns		3,330			3,000
Settlement accruals		16,080			18,577
Deferred taxes		767			10,892
Other current liabilities		1,379			3,108
Total current liabilities		81,433			92,066
Long-term debt, less current portion		9,056			11,653
Non-current employee benefits		19,804			23,178
Deferred income taxes		1,387			884
Other long-term liabilities		19,424			12,829
Total liabilities		131,104			140,610
Commitments and contingencies (Note 10)
Member’s Investment
Contributed capital		67,088			67,088
Accumulated other comprehensive loss		(21,749	)		(29,261	)
Retained earnings		30,814			—
Total member’s investment		76,153			37,827
	$	207,257		$	178,437

The accompanying notes are an integral part of these consolidated financial statements.

3

Liggett Group LLC and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008, and 2007

(in thousands of dollars)	2009			2008			2007
Revenues *	$	762,208		$	529,091		$	515,979
Expenses
Cost of goods sold		563,773			326,682			325,276
Operating, selling, administrative and general expenses		52,827			51,147			50,555
Management fees paid to Vector Group Ltd.		7,723			7,439			7,169
Net (gain)/loss on sale of assets		128			(335	)		(443	)
Gain on sale of trademarks		(5,000	)		—			—
Restructuring and impairment charges		—			(35	)		(78	)
Operating income		142,757			144,193			133,500
Other income (expenses)
Interest income		102			848			1,334
Interest expense		(802	)		(1,595	)		(1,075	)
Income before income taxes		142,057			143,446			133,759
Income tax provision		(52,643	)		(55,074	)		(49,749	)
Net income	$	89,414		$	88,372		$	84,010

* Revenues and cost of goods sold include excise taxes of $325,407, $145,958, and $152,588 for the years ended December 31, 2009, 2008, and 2007, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

4

Liggett Group LLC and Subsidiaries
Consolidated Statement of Member’s Investment
Years Ended December 31, 2009, 2008, and 2007

				Accumulated
				Other
	Contributed			Comprehensive			Retained
(in thousands of dollars)	Capital			Income (Loss)			Earnings			Total
Balance at January 1, 2007	$	69,453		$	(7,370	)	$	3,906		$	65,989
Net income		—			—			84,010			84,010
Pension related minimum liability adjustments, net of taxes		—			10,877			—			10,817
Change in fair value of forward contracts, net of taxes		—			21			—			21
Total comprehensive income		—			—			—			94,908
Other		—			—			(10	)		(10	)
Distributions		—			—			(76,533	)		(76,533	)
Balance at December 31, 2007		69,453			3,528			11,373			84,354
Net income		—			—			88,372			88,372
Change in pension related amounts, net of taxes		—			(32,813	)		—			(32,813	)
Change in fair value of forward contracts, net of taxes		—			35			—			35
Total comprehensive income		—			—			—			55,594
Adoption of SFAS No. 158 measurement date		—			(11	)		740			729
Distributions		(2,365	)		—			(100,485	)		(102,850	)
Balance at December 31, 2008		67,088			(29,261	)		—			37,827
Net income		—			—			89,414			89,414
Change in pension related amounts, net of taxes		—			7,476			—			7,476
Change in fair value of forward contracts, net of taxes		—			36			—			36
Total comprehensive income		—			—			—			96,926
Distributions		—			—			(58,600	)		(58,600	)
Balance at December 31, 2009	$	67,088		$	(21,749	)	$	30,814		$	76,153

     The Membership interests are pledged as collateral for Liggett Group LLC’s guarantee of Parent’s debt. See Note 1.

The accompanying notes are an integral part of these consolidated financial statements.

5

Liggett Group LLC and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008, and 2007

(in thousands of dollars)	2009			2008			2007
Cash flows from operating activities
Net income	$	89,414		$	88,372		$	84,010
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		7,170			6,766			7,129
Deferred income taxes		(9,554	)		(3,684	)		4,027
(Gain)/Loss on sale of assets		127			(335	)		(443	)
Restructuring charges, changes in estimates		—			(35	)		(78	)
Cash payments on restructuring liabilities		(110	)		(88	)		(148	)
Changes in assets and liabilities
Trade accounts receivable		1,590			(6,344	)		12,015
Related party receivable		1,409			(4,927	)		4,670
Other receivables		(306	)		(390	)		541
Inventories		(4,932	)		(5,344	)		311
Income taxes payable		(37,719	)		(258	)		5,850
Other assets		(1,537	)		(1,145	)		(1,040	)
Accounts payable, trade		(1,085	)		(1,085	)		(105	)
Accrued expenses		15,869			12,301			(38,160	)
Employee benefits		(2,012	)		15,893			(9,950	)
Other long-term liabilities		6,595			4,669			4,238
Change in book overdraft		(63	)		198			(179	)
Net cash provided by operating activities		64,856			104,564			72,688
Cash flows from investing activities
Proceeds from sale of property, plant and equipment		70			404			926
Decrease in restricted assets		1,678			1,054			47
Increase in cash surrender value of life insurance policies		(256	)		(230	)		(251	)
Capital expenditures		(2,593	)		(5,453	)		(3,878	)
Net cash used in investing activities		(1,101	)		(4,225	)		(3,156	)

The accompanying notes are an integral part of these consolidated financial statements.

6

Liggett Group LLC and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2009, 2008, and 2007

(in thousands of dollars)	2009			2008			2007
Cash flows from financing activities
Repayments of debt		(3,990	)		(4,631	)		(4,752	)
Proceeds from the issuance of debt		—			2,745			9,576
Deferred finance charges		—			—			(79	)
Borrowings under revolving credit facility		749,476			531,251			537,791
Repayments under revolving credit facility		(751,609	)		(526,518	)		(534,995	)
Distributions to Parent		(58,600	)		(102,850	)		(76,533	)
Net cash used in financing activities		(64,723	)		(100,003	)		(68,992	)
Net increase (decrease) in cash and cash equivalents		(968	)		336			540
Cash and cash equivalents
Beginning of year		977			641			101
End of year	$	9		$	977		$	641
Supplemental disclosures of cash flow information
Cash payments during the period for
Interest	$	804		$	1,595		$	999
Income taxes	$	420		$	39		$	457
Tax sharing payments to Parent	$	104,050		$	39,100		$	457

Supplemental schedule of non-cash investing and financing activities

• Liggett recorded other comprehensive loss of $32,813 (net of tax) in 2008 and other comprehensive income of $7,476 (net of tax) and $10,877 (net of tax) during 2009 and 2007, respectively, in relation to certain of its pension plans (Note 6). In 2009, 2008 and 2007, Liggett recorded $36 (net of taxes), $35 (net of taxes) and $21 (net of taxes), respectively, in comprehensive income in relation to the change in fair value of forward contracts.

The accompanying notes are an integral part of these consolidated financial statements.

7

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

1. Basis of Presentation

Liggett Group LLC (“Liggett” or the “Company”) is a wholly-owned subsidiary of VGR Holding LLC (“VGR”), all of whose membership interests are owned by Vector Group Ltd. (“Vector” or “Parent”). Liggett is engaged primarily in the manufacture and sale of discount cigarettes, principally in the United States. Certain management and administrative functions are performed by affiliates (Notes 12 and 13).

Management believes the assumptions underlying the consolidated financial statements are reasonable. However, the consolidated financial statements included herein may not necessarily reflect the Company’s results of operations, financial position and cash flows in the future or what its results of operations, financial position and cash flows would have been had the Company been a stand-alone company during the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

Liggett Vector Brands Inc. (“Liggett Vector Brands”), a company related through common ownership, coordinates and executes the sales, marketing, administration and manufacturing efforts along with certain support functions for all of Vector’s tobacco operations. In conjunction with the duties performed at Liggett Vector Brands, a portion of its sales, marketing, manufacturing, distribution, and administrative expenses have been allocated to Liggett.

Vector and VGR are holding companies and as a result do not have any operating activities that generate revenues or cash flows. Accordingly, Vector relies on distributions from VGR and its other subsidiaries and investments and VGR relies on distributions from its other subsidiaries, including Liggett, in order to fund its operations and meet its obligations. Vector has certain debt outstanding which will require interest and principal payments over the terms of such debt. Interest and principal to service the debt is expected to be funded by Vector’s cash and cash equivalents, investments, the operations of Vector’s subsidiaries, including Liggett, and proceeds, if any, from Vector’s future financings. During 2009, 2008 and 2007, Liggett made distributions of $58,600, $102,850 and $76,533, respectively, to VGR.

11% Senior Secured Notes due 2015

In August 2007, Vector 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, Vector 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, Vector 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 Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by all of the wholly-owned domestic subsidiaries of Vector that are engaged in the conduct of Vector’s cigarette businesses, including Liggett. Also, Liggett’s guarantee on the Senior Secured Notes is collateralized by a pledge of Liggett’s capital stock. Liggett’s consolidated balance sheet, statement of operations and statement of member’s investment as of December 31, 2009 do not reflect any amounts related to these Notes as the debt is not acquisition related.

8

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

The Senior Secured Notes are due with a lump sum payment of $250,000 in 2015. It is anticipated that the majority of these payments, as well as interest thereon, will be funded by Liggett’s operations.

Additional Parent Company Notes

As of December 31, 2009, Vector has debt with a net amount of approximately $74,437 (face amount $267,530) in addition to the principal amount of Senior Secured Notes previously discussed. These notes are not reflected in Liggett’s consolidated financial statements because they are not collateralized by Liggett’s assets and Liggett has not guaranteed these obligations. It is anticipated that the majority of the payments on these notes will be funded by Liggett’s operations.

In addition to the Senior Secured Notes and these notes, the Company may have to fund certain tax liabilities of Vector (Note 6).

General Corporate Expenses

General corporate expense allocations represent costs related to corporate functions such as executive oversight, risk management, information technology, accounting, legal, investor relations, human resources, tax, other services and employee benefits and incentives Vector provides to the Company. The allocations are based on a reasonable estimation of Vector’s overhead expenses based on the relative specific identification and the relative percentage of the Company’s revenues and headcount to Vector’s total cost. All of these allocations are reflected in management fees paid to Vector in the Company’s consolidated statements of operations of $7,723, $7,439 and $7,169 in 2009, 2008 and 2007, respectively.

The Company and Vector considered these general corporate expense allocations to be a reasonable reflection of the utilization of services provided. The allocations may not, however, reflect the expense the Company would have incurred as a stand-alone company. Actual costs which may have been incurred if the Company had been a stand-alone company in 2007, 2008 and 2009 would depend on a number of factors, including how the Company chose to organize itself, what if any functions were outsourced or performed by Company employees and strategic decisions made in areas such as information technology systems and infrastructure. However, the Company currently does not believe the difference between the cost allocations from Vector and the costs the Company would have incurred on a stand-alone basis would have a material impact on the Company’s statements of operations, balance sheets or statements of cash flows for 2007, 2008, and 2009.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Liggett and its wholly-owned subsidiaries, Eve Holdings Inc., 100 Maple LLC and Liggett & Myers Holdings Inc. All significant intercompany balances and transactions have been eliminated.

Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at December 31, 2009 and 2008 and the reported amounts of revenues and expenses during the three years ended

9

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

December 31, 2009, 2008 and 2007, respectively. Significant estimates subject to material changes in the near term include restructuring and impairment charges, inventory valuation, deferred tax assets, allowance for doubtful accounts, promotional accruals, sales returns and allowances, actuarial assumptions of pension plans, settlement accruals including Master Settlement Agreement (“MSA”) liabilities, and litigation and defense costs. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the statements of cash flows, cash includes cash on hand, cash on deposit in banks and cash equivalents, comprised of short-term investments which have an original maturity of 90 days or less. The carrying value of cash and cash equivalents, restricted assets and short-term loans approximate their fair value. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation (“SIPC”) insure these balances, up to $250 and $500, respectively. The carrying amount of bank deposits, including amounts classified as cash and cash equivalents, were approximately $9 and $977 at December 31, 2009 and 2008, respectively. All bank deposits at December 31, 2009 and approximately $350 at December 31, 2008 are insured by the FDIC. The remaining net balance of approximately $627 at December 31, 2008, was uninsured and uncollateralized.

Accounts Receivable

Accounts receivable-trade are recorded at their net realizable value. The allowance for doubtful accounts and cash discounts was $336 and $240 at December 31, 2009 and 2008, respectively.

Inventories

Tobacco inventories are stated at the lower of cost or market with cost determined using the last-in, first-out method. Although portions of leaf tobacco inventories may not be used or sold within one year because of the time required for aging, they are included in current assets, which is common practice in the cigarette industry. It is not practicable to determine the amount that will not be used or sold within one year.

Restricted Assets

Restricted assets of $3,138 at December 31, 2009 were classified as current assets. This balance consisted of legal bonds posted in connection with ongoing litigation. Long-term restricted assets of $2,012 at December 31, 2009 consisted of deposits associated with financed equipment. Restricted assets of $2,652 at December 31, 2008 were classified as current assets. This balance consisted of cash collateral for bonds posted in connection with the appeal filed in an individual smoker case in 2005 and deposits associated with financed equipment. Long-term restricted assets of $2,580 at December 31, 2008 consisted of deposits associated with financed equipment.

Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets which are 20 years for buildings and four to ten years for machinery and equipment.

Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized. The cost and related accumulated depreciation of

10

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

property, plant and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reflected in operations.

The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of property, plant and equipment against their related future undiscounted cash flows. If the carrying value is greater than such cash flows, then impairment is deemed to exist. The amount of any impairment is determined by comparing the long-lived asset’s carrying value against its fair value, which is determined using discounted future cash flows.

Other Assets

Included in other current assets are point-of-sale materials of $304 and $635 as of December 31, 2009 and 2008, respectively. The remaining balances of $776 and $527 at December 31, 2009 and 2008, respectively, relate to prepaid expenses and deposits.

Other non-current assets include spare parts for property, plant and equipment of $4,744 and $4,685, net of reserves of $1,139 and $1,060, as of December 31, 2009 and 2008, respectively.

Deferred financing charges of $104 and $152 as of December 31, 2009 and 2008, respectively, relate to the Company’s debt agreement with Wachovia Bank, N.A. and have been recorded as other assets. The Company recognized amortization expense of $48 in 2009, $48 in 2008, and $47 in 2007 related to deferred finance charges

The remaining balances of $8,243 and $7,987 at December 31, 2009 and 2008, respectively, relate primarily to other receivables, and pre-paids.

Revenue Recognition

Revenues from sales are recognized upon the shipment of finished goods when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the sale price is determinable and collectibility is reasonably assured. The Company provides an allowance for expected sales returns, net of any related inventory cost recoveries. Certain sales incentives, including buydowns, are classified as reductions of net sales. The Company includes federal excise taxes in revenues and cost of goods sold. Such revenues and cost of goods sold totaled $325,407, $145,958 and $152,588 for the years ended December 31, 2009, 2008 and 2007, respectively. The large increase in 2009 was due to the $6.17 per carton increase implemented on April 1, 2009. Since the Company’s line of business is tobacco, the Company’s financial position and its results of operations and cash flows have been and could continue to be materially adversely affected by significant unit sales volume declines, litigation and defense costs, increased tobacco costs or reductions in the selling price of cigarettes in the near term.

Shipping and Handling Fees and Costs

Shipping and handling fees related to sales transactions are not billed to customers nor recorded as sales revenue. Shipping and handling costs, which were $3,487, $3,914 and $4,083 for 2009, 2008 and 2007, respectively, are recorded in selling, general and administrative expenses.

11

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

Advertising Costs

Advertising and related agency costs are expensed as incurred and were $3,145, $3,255 and $3,045 for the years ended December 31, 2009, 2008 and 2007, respectively. These costs are recorded as selling, general and administrative expenses.

Research and Development Costs

Research and development costs are expensed as incurred, and were $981, $1,028 and $952 for the years ended December 31, 2009, 2008 and 2007, respectively.

Stock-Based Compensation

The Company through an affiliate, accounts for stock compensation plans by measuring compensation cost for share-based payments at fair value.

Employee Benefits

The Company sponsors a postretirement benefit plan and records an actuarially determined liability and charges operations for the estimated cost of postretirement benefits for current employees of Liggett Vector Brands and retirees.

The cost of providing retiree pension benefits, health care and life insurance benefits is actuarially determined and accrued over the service period of the active employee group. The funded status of each defined benefit pension plan, retiree health care and other postretirement benefit plans and postemployment benefit plans is recognized on the balance sheet. The measurement date for determining the funded status of the plans is December 31, 2009 and 2008. (See Note 6.)

Income Taxes

The Company recognizes the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. Any liabilities created for unrecognized deferred tax benefits are presented as a liability and not combined with deferred tax liabilities or assets.

Deferred taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes as well as tax credit carryforwards and loss carryforwards. These deferred taxes are measured by applying currently enacted tax rates. A valuation allowance reduces deferred tax assets when it is deemed more likely than not that future taxable income will be insufficient to realize some portion or all of the deferred tax assets.

Liggett’s U.S. income tax provision and related deferred income tax amounts are determined as if the Company filed tax returns on a standalone basis. The Company’s entities currently join in the filing of a consolidated U.S. tax return with Vector and its other U.S. subsidiaries.

Contingencies

The Company records product liability legal expenses and other litigation costs as selling, general and administrative expenses as those costs are incurred. As discussed in Note 10, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against Liggett.

12

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

The Company records provisions in its consolidated financial statements for pending litigation when it is determined 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, (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any, unless specified in Note 10. Legal defense costs are expensed as incurred. Litigation is subject to many uncertainties, and it is possible that the Company’s consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such smoking-related litigation.

Distributions and Dividends on Common Stock

The Company records distributions on its common stock as dividends in its consolidated statement of member’s investment to the extent of retained earnings. Any amounts exceeding retained earnings are recorded as a reduction to contributed capital.

Comprehensive Income

Other comprehensive income is a component of member’s investment and relates to pension related adjustments and the change in the estimated fair value of forward contracts. The Company’s comprehensive income was $96,926, $55,594 and $94,908 for the years ended December 31, 2009, 2008 and 2007, respectively.

The components of accumulated other comprehensive income (loss), net of taxes, were as follows at December 31:

	2009			2008
Forward contracts adjustment, net of taxes of $165 and $189, respectively	$	(253	)	$	(289	)
Pension-related amounts, net of taxes of $13,038 and $17,939, respectively		(21,496	)		(28,972	)
Accumulated other comprehensive income (loss)	$	(21,749	)	$	(29,261	)

This forward contract relates to a prior contract no longer open at December 31, 2009 and 2008, respectively. It is being amortized over the life of the fixed asset originally associated with the contract.

Fair Value of Financial Instruments

The carrying amount of borrowings outstanding under the variable rate revolving credit facility and other long-term debt is a reasonable estimate of fair value, based upon estimated current borrowing rates for loans with similar terms and maturities. The estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values.

13

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

	December 31,				December 31,
	2009				2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	9	$	9	$	977	$	977
Restricted assets		5,150		5,150		5,232		5,232
Financial liabilities
Notes payable and long-term debt		28,989		29,225		35,112		35,553

14

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (the “Codification”). The Codification is the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. The Codification eliminates the GAAP hierarchy contained in Statement of Financial Accounting Standard and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In response, the Company has used plain English or included the references to the Codification, as appropriate, in these consolidated financial statements.

In January 2008, the FASB issued new accounting guidance on fair value measurement. The guidance does not require any new fair value measurements but provides a definition of fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. On January 1, 2009, the Company adopted the guidance as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. The guidance defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (“GAAP”), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued a staff position providing additional guidance that clarifies the methodology used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. The staff position guidance reaffirms the objective of fair value measurement, as stated in the original guidance which is to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. The adoption of the staff position guidance had no impact on the Company’s consolidated financial statements.

On January 1, 2009, the FASB’s revised guidance on business combinations became effective. The revision is intended to simplify existing guidance and converge rulemaking under U.S. GAAP with international accounting rules. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2009, the FASB’s amended guidance on determining whether instruments granted in share-based payment transactions are participating securities became effective for the Company. The amended guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of the amended guidance had no impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued authoritative guidance on the methodology for determining whether an other-than-temporary impairment exists for debt securities and the amount of the impairment to be recorded in earnings through increased consistency in the timing of impairment recognition and

15

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. The adoption of the guidance did not have an impact on the consolidated financial statements.

In December 2008, the FASB issued authoritative guidance on employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The objective of the guidance is to provide users of financial statements with an understanding of how investment allocation decisions are made, the major categories of plan assets held by the plans, the inputs and valuation techniques used to measure the fair value of plan assets, significant concentration of risk within the company’s plan assets, and for fair value measurements determined using significant unobservable inputs a reconciliation of changes between the beginning and ending balances. The Company adopted the new disclosure requirements in the 2009 annual reporting period.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. The guidance requires additional disclosures for transfers of financial assets and changes the requirements for derecognizing financial assets. The Company will adopt these Statements for annual reporting periods beginning on January 1, 2010. The Company is currently assessing the impact, if any, of the amended guidance on its consolidated financial statements.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities. The amended guidance eliminates exceptions to consolidating qualifying special purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. This guidance also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded. The elimination of the qualifying special-purpose entity concept and its consolidation exception means more entities will be subject to consolidation assessments and reassessments. The Company will adopt these statements for annual reporting periods beginning on January 1, 2010. The Company is currently assessing the impact, if any, the amended guidance on its consolidated financial statements.

In May 2009, the FASB issued guidance which establishes general standards of: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2)

16

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of this guidance did not impact the Company’s consolidated financial statements.

In January 2010, the FASB issued authoritative guidance intended to improve disclosure about fair value measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels and the reasons for the transfers and to present information about purchases, sales, issuances, and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). This guidance is effective for interim and annual periods beginning after December 15, 2009 except for the disclosure about purchases, sales, issuances and settlements in the Level 3 reconciliation, which will be effective for interim and annual periods beginning after December 15, 2010. As this guidance provides only disclosure requirements, the adoption of this standard will not impact the Company’s consolidated financial statements.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables.

Liggett’s customers are primarily candy and tobacco distributors, the military and large grocery, drug and convenience store chains. Excluding related parties, one customer accounted for approximately 9.0%, 10.0% and 9.9% of Liggett’s revenues in 2009, 2008 and 2007, respectively, and accounts receivable of approximately $722 and $3,169 at December 31, 2009 and 2008, respectively. Sales to this customer were primarily in the private label discount segment. Concentrations of credit risk with respect to trade receivables are generally limited due to the large number of customers, located primarily throughout the United States, comprising Liggett’s customer base. Ongoing credit evaluations of customers’ financial condition are performed and, generally, no collateral is required. Liggett maintains reserves for potential credit losses and such losses, in the aggregate, have generally not exceeded management’s expectations.

3.	Inventories
	Inventories consist of the following at December 31:

	2009			2008
Leaf tobacco	$	48,613		$	48,252
Other raw materials		3,497			5,128
Work-in-process		2,388			311
Finished goods		53,826			42,023
Inventories at current cost		108,324			95,714
LIFO adjustment		(15,621	)		(7,943	)
	$	92,703		$	87,771

17

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

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 date of the commitment. Liggett had leaf tobacco purchase commitments of approximately $12,963 at December 31, 2009. 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. The prepaid cost of MSA was $11,909 and $13,893 at December 31, 2009 and 2008, respectively. MSA expense was increased by $598 in 2009 for 2008 and reduced by $1,109 in 2008 for 2007 as a result of a change in estimate to the MSA assessment.

4. Property, Plant and Equipment

Property, plant and equipment consists of the following at December 31:

	2009			2008
Land and land improvements	$	1,418		$	1,418
Buildings		13,722			13,747
Construction-in-progress		923			731
Machinery and equipment		79,789			77,876
Property, plant and equipment		95,852			93,772
Less accumulated depreciation		(57,936	)		(51,130	)
Property, plant and equipment, net	$	37,916		$	42,642

Depreciation expense for the years ended December 31, 2009, 2008, and 2007 was $7,122, $6,718, and $7,080, respectively. Future machinery and equipment purchase commitments were $9,077 at December 31, 2009.

5. Employee Benefits Plans

Defined Benefit Plans

Liggett sponsors three defined benefit pension plans (two qualified and one non-qualified) covering virtually all individuals who were employed by Liggett on a full-time basis prior to 1994. Future accruals of benefits under these three defined benefit plans were frozen between 1993 and 1995. These benefit plans provide pension benefits for eligible employees based primarily on their compensation and length of service. Contributions are made to the pension plans in amounts necessary to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The plans’ assets and benefit obligations were measured at December 31, 2009 and 2008.

18

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

Postretirement Medical and Life Plans

The Company provides certain postretirement medical and life insurance benefits to certain employees. Substantially all manufacturing employees as of December 31, 2009 are eligible for postretirement medical benefits if they reach retirement age while working for Liggett or certain affiliates. Retirees are required to fund 100% of participant medical premiums and, pursuant to union contracts, Liggett reimburses approximately 400 hourly retirees, who retired prior to 1991, for Medicare Part B premiums. In addition, an affiliate provides life insurance benefits to approximately 215 active employees and 475 retirees who reach retirement age and are eligible to receive benefits under one of the Company’s defined benefit pension plans. The Company’s postretirement liabilities are comprised of Medicare Part B and life insurance premiums.

Computation of Defined Benefit and Postretirement Benefit Plan Liabilities

The funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans and postemployment benefit plans is recognized on the Company’s consolidated balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The initial impact of the standard due to unrecognized prior service costs or credit and net actuarial gains or losses as well as subsequent changes in the funded status is recognized as a component of accumulated comprehensive income (loss) in the Company’s consolidated statement of member’s investment.

The following table summarizes amounts in accumulated other comprehensive (income) loss that are expected to be recognized as components of net periodic benefit cost (credit) for the year ended December 31, 2010.

	Defined
	Benefit		Post -
	Pension		Retirement
	Plan		Plans			Total
Actuarial loss (gain)	$	1,358	$	(130	)	$	1,228

19

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

The following provides a reconciliation of benefit obligations, plan assets and the funded status of the pension plans and other postretirement benefits:

							Other
	Pension Benefits						Postretirement Benefits
	2009			2008			2009			2008
Change in benefit obligation
Benefit obligation at January 1	$	(123,850	)	$	(133,179	)	$	(8,743	)	$	(9,836	)
Adjustments due to adoption of FAS 158 measurement date provisions:
Service and interest cost during gap period		—			(2,080	)		—			(151	)
Gap period cash flow		—			3,191			—			194
Service cost		(838	)		(458	)		(15	)		(14	)
Interest cost		(7,895	)		(7,862	)		(567	)		(591	)
Benefits paid (including expenses)		12,551			12,583			596			642
Time contractual termination benefits		—			—			—			—
Actuarial gain/(loss)		(7,568	)		3,955			(677	)		1,013
Benefit obligation at December 31	$	(127,600	)	$	(123,850	)	$	(9,406	)	$	(8,743	)
Change in plan assets
Fair value of plan assets at January 1	$	111,266		$	169,465		$	—		$	—
Adjustments due to adoption of FAS 158 measurement date provisions:
Gap period cash flow		—			(3,278	)		—			—
Actual return on plan assets		26,087			(42,810	)		—			—
Contributions		365			472			596			643
Benefits paid (including expenses)		(12,551	)		(12,583	)		(596	)		(643	)
Fair value of plan assets at December 31	$	125,167		$	111,266		$	—		$	—
Funded status at December 31	$	(2,433	)	$	(12,584	)	$	(9,406	)	$	(8,743	)
Amounts recognized in the balance sheet:
Prepaid pension cost	$	8,994		$	2,901		$	—		$	—
Other accrued expenses		(357	)		(379	)		(680	)		(701	)
Non-current employee benefit liabilities		(11,070	)		(15,106	)		(8,726	)		(8,042	)
Net amounts recognized	$	(2,434	)	$	(12,584	)	$	(9,406	)	$	(8,743	)

										Other
	Pension Benefits									Postretirement Benefits
	2009			2008			2007			2009			2008			2007
Actuarial assumptions
Discount rates — benefit obligation		5.75	%		6.75	%		6.25	%		5.75	%		6.75	%		6.25	%
Discount rates — service cost		6.75	%		6.25	%		5.85	%		6.75	%		6.25	%		5.85	%
Assumed rates of return on invested assets		7.50	%		7.50	%		8.50	%		—			—			—
Salary increase assumptions		N/A			N/A			N/A			3.00	%		3.00	%		3.00	%

											Other
	Pension Benefits										Postretirement Benefits
	2009			2008			2007				2009		2008		2007
Service cost — benefits earned during the period	$	838		$	808		$	789		*	$	15	$	15	$	18
Interest cost on projected benefit obligation		7,895			7,862			7,832				567		591		591
Expected return on assets		(7,817	)		(12,145	)		(12,726	)			—		—		—
Time contractual termination benefits		—			—			632				—		—		—

20

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

									Other
	Pension Benefits								Postretirement Benefits
	2009		2008			2007			2009			2008			2007
Amortization of net loss (gain)		2,136		101			743			(163	)		(180	)		(105	)
Net (income) expense	$	3,052	$	(3,374	)	$	(2,730	)	$	419		$	426		$	504

* $350 of this service cost amount represents the expected administrative expenses of the salaried and hourly pension plans.

As of December 31, 2009, current year accumulated other comprehensive income (loss), before income taxes, consist of the following:

	Defined
	Benefit			Post-
	Pension			Retirement
	Plans			Benefits			Total
Prior year accumulated other comprehensive income (loss)	$	(48,374	)	$	1,843		$	(46,531	)
Amortization of gain (loss)		2,136			(163	)		1,973
Net gain (loss) arising during the year		10,702			(773	)		9,929
Current year accumulated other comprehensive income (loss)	$	(35,536	)	$	907		$	(34,629	)

As of December 31, 2009, there was $35,536 of items not yet recognized as a component of net periodic pension cost, which consisted of future pension costs associated with the amortization of net losses.

As of December 31, 2009, there was $907 of items not yet recognized as a component of net periodic postretirement benefit, which consisted of future benefits associated with the amortization of net gains.

As of December 31, 2009, three of the Company’s four defined benefit plans experienced accumulated benefit obligations in excess of plan assets, for which the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $90,216, $90,216 and $64,385, respectively. As of December 31, 2008, three of the Company’s four defined benefit plans experienced accumulated benefit obligations in excess of plan assets, for which the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $105,677, $105,677 and $57,723, respectively.

Discount rates were determined by a quantitative analysis examining the prevailing prices of high quality bonds to determine an appropriate discount rate for measuring obligations. The aforementioned analysis analyzes the cash flow from each of the Company’s two qualified defined benefit plans as well as a separate analysis of the cash flows from the postretirement medical and life insurance plans sponsored by the Company. The aforementioned analyses then construct a hypothetical bond portfolio whose cash flow from coupons and maturities match the year-by-year, projected benefit cash flow from the respective pension or retiree health plans. The Company uses the lower discount rate derived from the two independent analyses in the computation of the benefit obligation and service cost for each respective retirement liability.

The Company considers input from its external advisors and historical returns in developing its expected rate of return on plan assets. The expected long-term rate of return is the weighted average of the target asset allocation of each individual asset class. The Company’s actual 10-year annual rate of return on its pension plan assets was 3.0%, 2.5% and 6.7% for the years ended December 31, 2009, 2008 and 2007, respectively, and the Company’s actual five-year annual rate

21

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

of return on its pension plan assets was 3.5%, 1.2% and 11.3% for the years ended December 31, 2009, 2008 and 2007, respectively.

Gains and losses result from changes in actuarial assumptions and from differences between assumed and actual experience, including, among other items, changes in discount rates and changes in actual returns on plan assets as compared to assumed returns. These gains and losses are only amortized to the extent that they exceed 10% of the greater of Projected Benefit Obligation and the fair value of assets. For the year ended December 31, 2009, Liggett used a 16.14-year period for its Hourly Plan and a 18.11-year period for its Salaried Plan to amortize pension fund gains and losses on a straight line basis. Such amounts are reflected in the pension expense calculation beginning the year after the gains or losses occur. The amortization of deferred losses negatively impacts pension expense in the future.

Plan assets are invested employing multiple investment management firms. Managers within each asset class cover a range of investment styles and focus primarily on issue selection as a means to add value. Risk is controlled through a diversification among asset classes, managers, styles and securities. Risk is further controlled both at the manager and asset class level by assigning excess return and tracking error targets. Investment managers are monitored to evaluate performance against these benchmark indices and targets.

Allowable investment types include equity, investment grade fixed income, high yield fixed income, hedge funds and short term investments. The equity fund is comprised of common stocks and mutual funds of large, medium and small companies, which are predominantly U.S. based. The investment grade fixed income fund includes managed funds investing in fixed income securities issued or guaranteed by the U.S. government, or by its respective agencies, mortgage backed securities, including collateralized mortgage obligations, and corporate debt obligations. The high yield fixed income fund includes a fund which invests in non-investment grade corporate debt securities. The hedge funds invest in both equity, including common and preferred stock, and debt obligations, including convertible debentures, of private and public companies. The Company generally utilizes its short term investments, including interest-bearing cash, to pay benefits and to deploy in special situations.

In 2008, the Liggett Employee Benefits Committee temporarily suspended its target asset allocation percentages due to the volatility in the financial markets. Even though such allocation percentages were suspended, investment manager performance versus their respective benchmarks was still monitored on a regular basis.

22

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

Liggett’s defined benefit retirement plan allocations at December 31, 2009 and 2008, by asset category, were as follows:

	Plan Assets
	At
	December 31,
	2009			2008
Asset category
Equity securities		50	%		44	%
Investment grade fixed income securities		26	%		26	%
High yield fixed income securities		2	%		5	%
Alternative investments		8	%		8	%
Short-term investments		14	%		17	%
		100	%		100	%

The defined benefit plans’ recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:

	Fair Value Measurements as of December 31, 2009
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Insurance contracts	$	2,684	$	—	$	2,684	$	—
Amounts in individually managed investment accounts:
Cash, mutual funds and common stock		71,726		71,726		—		—
Common collective trusts		40,210		—		38,752		1,458
Investment partnership		10,182		—		—		10,182
Total	$	124,802	$	71,726	$	41,436	$	11,640

	Fair Value Measurements as of December 31, 2008
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Insurance contracts	$	2,280	$	—	$	2,280	$	—
Amounts in individually managed investment accounts:
Cash, mutual funds and common stock		58,634		58,634		—		—
Common collective trusts		39,273		—		33,735		5,538
Investment partnership		9,747		—		—		9,747
Total	$	109,934	$	58,634	$	36,015	$	15,285

The fair value determination disclosed above of assets as Level 3 under the fair value hierarchy was determined based on unobservable inputs and were based on company assumptions, and information obtained from the investments based on the indicated market values of the underlying assets of the investment portfolio.

The changes in the fair value of these Level 3 investments as of December 31, 2009 and 2008 were as follows:

	December 31, 2009			December 31, 2008
Prior year balance	$	15,285		$	34,637
Distributions		(8,978	)		(12,700	)
Unrealized loss on long-term Investments		3,913			(8,307	)
Realized gain on long-term Investments		1,420			1,655
Balance as of December 31, 2008	$	11,640		$	15,285

For 2009 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between (7.2%) and 24.7% between 2009 and 2018 and 4.5% after 2019. For 2008 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between 0.0% and 6.6% between 2008 and 2017 and 4.5% after 2018.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:

	1%		1%
	Increase		Decrease
Effect on total of service and interest cost components	$	9	$	(9	)
Effect on benefit obligation	$	164	$	(151	)

To comply with ERISA’s minimum funding requirements, the Company does not currently anticipate that it will be required to make any funding to the pension plans for the pension plan year beginning on January 1, 2010 and ending on December 31, 2010. Any additional funding obligation that the Company may have for subsequent years is contingent on several factors and is not reasonably estimable at this time.

Estimated future pension and postretirement medical benefits payments are as follows:

			Postretirement
	Pension		Medical
2010	$	12,370	$	680
2011		13,706		756
2012		11,635		703
2013		11,274		687
2014		15,422		674
2015 — 2019		48,386		3,347

Profit Sharing Plans

Liggett Vector Brands maintains 401(k) plans for substantially all employees which allow eligible employees to invest a percentage of their pre-tax compensation. Liggett Vector Brands is

23

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

obligated to match a certain portion of employee contributions to the 401(k) plan. Accordingly, Liggett Vector Brands allocated to Liggett contribution expenses of $979, $957 and $731 for the years ended December 31, 2009, 2008 and 2007, respectively.

6. Income Taxes

Liggett’s operations are included in the consolidated federal income tax return of its indirect parent, Vector. Pursuant to a tax allocation agreement amended in 1999, the amounts provided for as currently payable for federal income taxes are based on the Company’s pre-tax income for financial reporting purposes. Accordingly, federal deferred income taxes which would normally be reflected in the accompanying consolidated financial statements are presented by Vector. The Company expenses and pays Vector its portion of the consolidated income tax expense in accordance with the tax allocation agreement.

The amounts provided for income taxes are as follows:

	2009			2008			2007
Current
Federal	$	43,160		$	46,583		$	43,486
State		19,235			10,263			2,990
Deferred
Federal		—			—			—
State		(9,752	)		(1,772	)		3,273
Total tax provision	$	52,643		$	55,074		$	49,749

Historically, Liggett has paid Vector on a quarterly basis for its tax liabilities. While these payments have been made to the parent they may not have been formally remitted to the Internal Revenue Service and may still represent a liability at the Vector level. The largest Vector deferred tax liability at December 31, 2008 consisted of approximately $75,500 related to the Philip Morris brand transaction which originated in 1998 and 1999 and which was fully paid in 2009. Liggett may be required to fund future tax obligations that exist at the Vector level.

Temporary differences which give rise to a significant portion of deferred tax assets and liabilities are as follows:

	2009				2008
	Deferred Tax				Deferred Tax
	Asset		Liability		Asset		Liability
Sales and product allowances	$	266	$	—	$	206	$	—
Inventories		112		767		93		1,370
Property, plant and equipment		—		1,333		—		1,289
Employee benefit plan accruals		977		54		1,282		—
Tobacco litigation settlements		163		—		—		764
Forward contracts		30		—		35		—
Deferral on Philip Morris Brands Transaction		—		—		—		8,353
Total deferred tax	$	1,548	$	2,154	$	1,616	$	11,776

24

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

Differences between the amounts provided for income taxes and amounts computed at the federal statutory tax rates are summarized as follows:

	2009			2008			2007
Income before income taxes	$	142,057		$	143,446		$	133,759
Federal income tax at statutory rate		49,720			50,206			46,817
State income taxes, net of federal tax benefit		6,164			5,519			6,303
Impact of IRS audit settlement and other		(3,241	)		(651	)		(3,371	)
Income tax expense	$	52,643		$	55,074		$	49,749

In 1998 Liggett contributed three of its premium cigarette brands to Trademarks LLC, a newly-formed limited liability company. In such transaction, Philip Morris acquired an option to purchase the remaining interest in Trademarks for a 90-day period commencing in December 2008. Philip Morris exercised its option to purchase the remaining interest in Trademarks on February 19, 2009. Vector paid approximately $75,500 in taxes on this transaction in 2009.

The following table summarizes the activity related to the unrecognized tax benefits:

Balance at January 1, 2007	$	6,805
Additions based on tax positions related to current year		—
Additions based on tax positions related to prior years		720
Reductions based on tax positions related to prior years		(95	)
Settlements		—
Expirations of the statute of limitations		(3,227	)
Balance at December 31, 2007		4,203
Additions based on tax positions related to current year		—
Additions based on tax positions related to prior years		186
Reductions based on tax positions related to prior years		—
Settlements		—
Expirations of the statute of limitations		(1,686	)
Balance at December 31, 2008		2,703
Additions based on tax positions related to current year		—
Additions based on tax positions related to prior years		378
Reductions based on tax positions related to prior years		(550	)
Settlements		(419	)
Expirations of the statute of limitations		(1,833	)
Balance at December 31, 2009	$	279

In the event the unrecognized tax benefits of $279 at December 31, 2009 were recognized, such recognition would impact the annual effective tax rate. During 2009, the accrual for potential

25

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

penalties and interest related to these unrecognized tax benefits was reduced by $2,383, and in total, as of December 31, 2009, a liability for potential penalties and interest of $142 has been recorded. The Company classifies all tax-related interest and penalties as income tax expense.

The Company believes it is reasonably possible that none of the currently unrecognized tax benefits will be recognized over the next 12 months, pertaining primarily to expiration of statutes of limitations of positions reported on U.S. and state and local income tax returns. The Company files U.S. and state and local income tax returns in jurisdictions with varying statutes of limitations.

7. Long-Term Debt

Long-term debt consists of the following:

	2009			2008
Borrowings outstanding under revolving credit facility	$	17,382		$	19,515
Term loan outstanding under revolving credit facility		6,755			7,290
Equipment loans		4,852			8,307
		28,989			35,112
Less current portion		(19,933	)		(23,459	)
Amount due after one year	$	9,056		$	11,653

The following table sets forth the future principal payment obligations:

Year Ending December 31,
2010	$	19,933
2011		2,256
2012		1,282
2013		895
2014		533
Thereafter		4,090
	$	28,989

Revolving Credit Facility

The Company has a $50,000 credit facility with Wachovia Bank, N.A. (“Wachovia”) under which $17,382 was outstanding at December 31, 2009. Availability as determined under the facility was $18,594 based on eligible collateral at December 31, 2009. The facility is collateralized by all inventories and receivables of the Company and a mortgage on the Company’s manufacturing facility. The facility requires the Company’s compliance with certain financial and other covenants including a restriction on the Company’s ability to pay cash dividends unless the Company’s borrowing availability, as defined, under the facility for the 30-day period prior to the payment of the dividend, and after giving effect to the dividend, is at least $5,000 and no event of default has occurred under the agreement, including the Company’s compliance with the covenants in the credit facility.

The term of the Wachovia facility expires on March 8, 2012, subject to automatic renewal for additional one-year periods unless a notice of termination is given by Wachovia or the Company at least 60 days prior to such date or the anniversary of such date. Prime rate loans under the facility

26

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

bear interest at a rate equal to the prime rate of Wachovia with Eurodollar rate loans bearing interest at a rate of 2.0% above Wachovia’s adjusted Eurodollar rate. The facility contains covenants that provide that the Company’s earnings before interest, taxes, depreciation and amortization, as defined under the facility, on a trailing twelve month basis, shall not be less than $100,000 if the Company’s excess availability, as defined, under the facility, is less than $20,000. The covenants also require that annual capital expenditures, as defined under the facility (before a maximum carryover amount of $2,500), shall not exceed $10,000 during any fiscal year.

In August 2007, Wachovia made an $8,000 term loan to 100 Maple LLC (“Maple”), a subsidiary of the Company, within the commitment under the existing credit facility. The $8,000 term loan is collateralized by the existing collateral securing the credit facility, and is also collateralized by a lien on certain real property (the “Mebane Property”) owned by Maple. The Mebane Property also secures the other obligations of the Company under the credit facility. The $8,000 term loan did not increase the $50,000 borrowing amount of the credit facility, but did increase the outstanding amounts under the credit facility by the amount of the term loan and proportionately reduces the maximum borrowing availability under the facility.

In August 2007, Liggett and Wachovia amended the credit facility to permit the guaranty of the Senior Secured Notes described in Note 1 by each of Liggett and Maple and the pledging of certain assets of Liggett and Maple on a subordinated basis to secure their guarantees. The credit facility was amended to grant to Wachovia a blanket lien on all the assets of Liggett and Maple, excluding any equipment pledged to current or future purchase money or other financiers of such equipment and excluding any real property, other than the Mebane Property and other real property to the extent its value is in excess of $5,000. In connection with the amendment, Wachovia, Liggett, Maple and the collateral agent for the holders of Vector’s Senior Secured Notes entered into an inter-creditor agreement, pursuant to which the liens of the collateral agent on the Liggett and Maple assets will be subordinated to the liens of Wachovia on the Liggett and Maple assets.

Equipment Loans

In October 2005, Liggett purchased equipment for $4,441 through a financing agreement payable in 24 installments of $112 and then 24 installments of $90. Interest is calculated at 4.89%. Liggett was required to provide a security deposit equal to 25% of the funded amount or $1,110. This loan was retired and the security deposit was returned to Liggett during 2009.

In December 2005, Liggett purchased equipment for $2,273 through a financing agreement payable in 24 installments of $58 and then 24 installments of $46. Interest is calculated at 5.05%. Liggett was required to provide a security deposit equal to 25% of the funded amount or $568. This loan was retired and the security deposit was returned to Liggett during 2009.

In August 2006, Liggett purchased equipment for $7,922 through a financing agreement payable in 30 installments of $191 and then 30 installments of $103. Interest is calculated at 5.15%. Liggett was required to provide a security deposit equal to 20% of the funded amount or $1,584.

In May 2007, Liggett purchased equipment for $1,576 through a financing agreement, payable in 60 installments of $32. Interest is calculated at 7.99% per annum.

In August 2008, Liggett purchased equipment for $2,745 through a financing agreement, payable in 60 installments of $53. Interest is calculated at 5.94% per annum. Liggett was required to provide a security deposit equal to approximately 15% of the funded amount or $428.

27

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

At December 31, 2009 and 2008, the Company had approximately $4,852 and $8,307 outstanding under these equipment loans.

All equipment loans are collateralized by the equipment they finance.

See Note 1 for fair value of debt at December 31, 2009.

8. Operating Leases

At December 31, 2009, the Company has operating leases for building space, vehicles and computer equipment. The future minimum lease payments are as follows:

	Lease
Year Ending December 31	Commitments
2010		616
2011		528
2012		319
2013		125
2014		124
	$	1,712

In addition to the above scheduled future minimum lease payments, Liggett expects to receive approximately $2,542 in allocated lease expense over the next five years and thereafter from Liggett Vector Brands, a wholly-owned subsidiary of VGR.

Rental expense for the years ended December 31, 2009, 2008, and 2007 amounted to approximately $1,852, $1,969, and $1,865, respectively.

9. Stock Compensation

The Company’s parent, Vector, offers stock option plans. As of December 31, 2009, there were approximately 3,783,653 shares available for issuance under Vector’s Amended and Restated 1999 Long-Term Incentive Plan (the “1999 Plan”). All employees of Vector’s subsidiaries are eligible to receive grants under such plans. Although Liggett has no employees it received an allocation of non-cash stock compensation from Liggett Vector Brands of $355, $387, and $395 for the years ended December 31, 2009, 2008, and 2007, respectively. These amounts are expense allocations only and do not represent a rollforward of option balances. These amounts have been recorded in selling, general and administrative cost in the Company’s consolidated statement of operations. As of December 31, 2009 Liggett Vector Brands has employees with 639,688 options outstanding.

The fair value of option grants is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including

28

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

expected stock price characteristics which are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based compensation awards.

The assumptions used under the Black-Scholes option pricing model in computing fair value of options are based on the expected option life considering both the contractual term of the option and expected employee exercise behavior, the interest rate associated with U.S. Treasury issues with a remaining term equal to the expected option life and the expected volatility of Vector’s common stock over the expected term of the option. There were no option grants during 2009, 2008 or 2007 to employees of Liggett Vector Brands.

In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted stock grant of 60,775 shares of Vector’s common stock pursuant to the 1999 Plan. Pursuant to his restricted share agreement, one-fourth of the shares vested on November 1, 2006, with an additional one-fourth vesting on each of the three succeeding one-year anniversaries of the first vesting date through November 1, 2009. Vector recorded deferred compensation of $1,018 representing the fair market value of the restricted shares on the date of grant. Liggett recorded an expense of $196, $229 and $229 associated with the grant for each of the years ended December 31, 2009, 2008 and 2007, respectively, for Liggett’s portion of this expense. These amounts have been recorded in selling, general and administrative cost in the Company’s consolidated statement of operations.

10. Commitments and 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 plaintiffs and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits (“Health Care Cost Recovery Actions”). As new cases are commenced, the costs associated with defending these cases and the risks relating to the inherent unpredictability of litigation continue to increase. The future financial impact of the risks and expenses of litigation and the effects of the tobacco litigation settlements discussed below are not quantifiable at this time. For the years ended December 31, 2009, 2008 and 2007, Liggett incurred legal expenses and other litigation costs totaling approximately $6,000, $8,800 and $7,800, 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

29

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

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 reduced given that 43 states now limit the dollar amount of bonds or require no bond at all. Liggett has secured approximately $3,130 in bonds as of December 31, 2009, although $2,000 of the bonds were subsequently released.

Liggett records provisions in its consolidated financial statements for pending litigation when it determines 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: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be vigorously defended. However, Liggett may enter into settlement discussions in particular cases if it believes it is in the best interest of the Company to do so.

Individual Actions

As of December 31, 2009, there were 41 individual cases pending against Liggett 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 7,160Engleprogeny cases (defined below) pending against Liggett 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 December 31, 2009 (excludingEngleprogeny cases and the cases consolidated in West Virginia):

	Number
State	of Cases
Florida		15
New York		9
Maryland		8
Louisiana		5
West Virginia		2
Missouri		1
Ohio		1

Liggett Only Cases.There are currently five cases pending where Liggett is the only tobacco company defendant. Cases where Liggett is the only defendant could increase substantially as a result of theEngleprogeny cases. In July 2009, inDavis v. Liggett Group,a Florida state trial court jury awarded awarded approximately $1,650 in legal fees, inclusive of interest and costs, which has been paid by Liggett.In Ferlanti v. Liggett Group, anEngleprogeny case, 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

30

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

in expenses. Punitive damages were not awarded. Liggett appealed the award. In May 2009, the court granted plaintiff’s motion for an award of attorneys’ fees but the amount has not yet been determined. InHausrath v. Philip Morris, a case pending in New York state court, plaintiffs recently dismissed all defendants other than Liggett. The other three individual actions, where Liggett is the only tobacco company defendant, are dormant.

The plaintiffs’ allegations of liability in those cases in which individuals seek recovery for injuries allegedly caused by cigarette smoking are based on various theories of recovery, including negligence, gross negligence, breach of special duty, strict liability, fraud, concealment, misrepresentation, design defect, failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, indemnity and violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.

Defenses raised 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 inDavisandFerlanti,, 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, may be for both compensatory and punitive damages. There are several significant jury awards against other cigarette manufacturers which are currently on appeal and several awards which are final and have been paid.

Engle Progeny Cases. In 2000, a jury inEngle 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 inEngle, 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 inEngle, are attempting to avail themselves of theEngleruling. Lawsuits by individuals requesting the benefit of theEngle ruling, whether filed before or after the January 11, 2007 deadline, are referred to as the “Engleprogeny cases.” Liggett has been named in approximately 7,160Engleprogeny 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 3,860 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 inEnglewas unconstitutional. The number ofEngleprogeny cases will likely increase as the courts may require multi-plaintiff cases to be severed into

31

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

individual cases. The total number of plaintiffs may also increase as a result of attempts by existing plaintiffs to add additional parties.

As of December 31, 2009, 42 allegedEngleprogeny cases where Liggett is currently named as a defendant, were scheduled for trial in 2010. As of December 31, 2009, tenEngleprogeny cases have been tried resulting in eight plaintiff verdicts and two defense verdicts. In one of these cases, theCampbell case,the jury awarded $7,800 in compensatory damages against all defendents, $156 of which was awarded against Liggett. For further information on theEngle case and onEngleprogeny cases, including a description of theLukacscase, see “Class Actions —EngleCase,” below.

Class Actions

As of December 31, 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 two alleged price fixing cases. 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, inCastano 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 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.

Defenses raised in individual cases include lack of proximate cause, individual issues predominate, assumption of the risk, comparative fault and/or contributory negligence, statute of limitations, and federal preemption

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.

32

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

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) all 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 filed 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 formerEngleclass members have cases pending against Liggett as well as other cigarette manufacturers.

Three federal district courts (in theMerlob, BrownandBurrcases) have ruled that the findings in the Phase I of theEngleproceedings cannot be used to satisfy elements of plaintiffs’ claims, and two of those rulings (BrownandBurr, 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 was held in January 2010. A decision is pending.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 theEnglefindings to establish elements of their claims and required certain defenses to be stricken.

Lukacs Case.In June 2002, the jury in a Florida state court action entitledLukacs 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. TheLukacscase was the first case to be tried as an individualEngleprogeny case, but was tried almost five years prior to the Florida Supreme Court’s final decision inEngle. In November 2008, the court entered final judgment in the amount of $24,835 (for which Liggett is 50% responsible), plus interest from June 2002 which as of December 31, 2009, was in excess of $15,000 (for which Liggett is 50% responsible). Defendants filed a notice of appeal in December 2008. Oral argument is scheduled for March 1, 2010. 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.

In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies to allEngleprogeny lawsuits in the aggregate and establishes individual bond caps for individualEngleprogeny cases in amounts that vary depending on the number of judgments in effect at a given time. The legislation, which became effective in June 2009. applies to judgments entered after the effective date and remains in effect until December 31, 2012.

33

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

Other Class Actions.InSmith v. Philip Morris,a Kansas state court case filed in February 2000, plaintiffs allege that cigarette manufacturers conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs seek to recover an unspecified amount in actual and punitive damages. Class certification was granted in Smith in 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. In December 2008, the United States Supreme court, inAltria 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 has resulted in the filing of additional “lights” class action cases in other states. Although Liggett is not a defendant in theGoodcase, an adverse ruling or commencement of additional “lights” related class actions could have a material adverse effect on the Company.

In November 1997, inYoung 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 inScott v. American Tobacco Co.(see discussion below).

In June 1998, inCleary 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 seek disgorgement of all profits unjustly received through defendants’ sale of cigarettes to plaintiffs and the class. In March 2009, plaintiffs filed a third amended complaint adding, among other things, allegations regarding defendants’ sale of “light” cigarettes. In September 2009, the court granted summary judgment to all defendants other than Philip Morris as to the “lights” claims. In November 2009, plaintiffs filed a revised motion for class certification which was denied by the court in February 2010. Defendants moved for summary judgment on plaintiff’s youth marketing claims, which was granted by the court. In February 2010, the court denied plaintiff’s motion for class certification, but allowed plaintiffs an opportunity to reinstate the motion as to the conspiring claim if a new class representative is identified.

In April 2001, inBrown 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 the case to the trial court for further proceedings regarding whether the class representatives have, or can, demonstrate standing. In August 2009, the California Supreme Court denied defendants’ rehearing petition and issued its

34

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

mandate. In September 2009, plaintiffs advised the court that they intend to seek reconsideration of the court’s previous order finding that plaintiffs’ allegations regarding “lights” cigarettes were preempted by federal law, in light of the recent United States Supreme Court decision inAltria Group v. Good.

Although not technically a class action, inIn 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 June 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, includingScott.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. Oral argument on the appeal occurred in September 2009. A decision is pending.

Health Care Cost Recovery Actions

As of December 31, 2009, there were three Health Care Cost Recovery Actions pending against Liggett. Other cigarette manufacturers are also named in these matters. The claims asserted in health care cost recovery actions vary. Although, typically, no specific damage amounts are pled, it is possible that requested damages might be in the billions of dollars. In these cases, plaintiffs 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. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.

Other claims asserted 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.

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. In May 2009, the United States Court of Appeals for the District of Columbia affirmed most of the district court’s decision. Both the

35

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

government and all defendants, other than Liggett, have filed petitions for writ of certiorari to the United States Supreme Court. In its petition for writ of certiorari, the govement is seeking reinstatement of its claims for remedies, including disgorgement of industry profits. 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.

InCity 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 2009, the defendants filed a motion for partial summary judgment on the plaintiff’s claims for future damages and for fraud. In December 2009, the defendants filed motions for summary judgment based upon other things, plaintiffs’ failure to prove unreimbursed costs and plaintiffs’ failure to show fact of injury or damage. These motions are pending before the court. Trial is scheduled to commence January 10, 2011.

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, inNational 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 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 granted the defendants’ motion and dismissed the case. Plaintiffs appealed the decision. In September 2009, defendants filed a motion for summary disposition of the appeal and for a stay of the briefing schedule. The stay was granted. In January 2010, the Second Circuit of Appeals referred the motion for summary affirmance to the Merits Panel and ordered briefing on the motion.

Upcoming Trials

In addition to the June 2010 trial in theCity of St. Louiscase discussed above, as of December 31, 2009, there were currently approximately 42Engleprogeny that are scheduled for trial in 2010.

36

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

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 Agreements

In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related litigation with 45 states and territories. The settlements released Liggett from all smoking-related claims within those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors.

In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the “Original Participating Manufacturers” or “OPMs”) and Liggett (together with any other tobacco product manufacturer that becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”) (the OPMs and SPMs are hereinafter referred to jointly as the “Participating Manufacturers”) entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Mariana Islands (collectively, the “Settling States”) to settle the asserted and unasserted health care cost recovery and certain other claims of the Settling States. The MSA received final judicial approval in each Settling State.

As a result of the MSA, the Settling States released Liggett from:

• all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and

• all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business.

The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco advertising and promotion; limits each Participating Manufacturer to one tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits Participating Manufacturers from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits Participating Manufacturers from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities.

The MSA also requires Participating Manufacturers to affirm corporate principles to comply with the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf of Participating Manufacturers. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.

37

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

Under the payment provisions of the MSA, the Participating Manufacturers are required to make annual payments of $9,000,000 (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, obligation of each Participating Manufacturer and are not the responsibility of any parent or affiliate of a Participating Manufacturer.

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. According to data from Management Science Associates, Inc., domestic shipments by Liggett accounted for approximately 2.2%, 2.2% and 2.3% of the total cigarettes shipped in the United States in 2007, 2008 and 2009 respectively. If Liggett’s market share exceeds its respective market share exemption in a given year, then on April 15 of the following year, Liggett must pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year. Liggett paid $33,495 for its 2007 MSA obligations, and paid $39,760 for its 2008 MSA obligations. Liggett has expensed $58,662 for its estimated MSA obligations for 2009 as part of cost of goods sold. In December 2009, Liggett prepaid $40,000 of its estimated 2009 MSA obligations. Additional amounts may be due for 2009 but will not be determined by the Independent Auditor until April 2010.

Certain MSA Disputes

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 to non-participating manufacturers for 2003. This is known as the “NPM Adjustment.” 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 Settleing 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 Settling State.

For 2003 through 2009, Liggett disputed that they owe the Settling States the NPM Adjustments as calculated by the Independent Auditor. As permitted by the MSA, Liggett has withheld payment associated with these NPM Adjustment amounts. The total amount withheld or paid into a disputed payment account by Liggett for 2003 through 2009 is $20,321. In 2003, Liggett paid the NPM adjustment amount of $9,304 to the Settling States although the Company continues to dispute this amount. At December 31, 2009, included in “Other assets” on the Company’s consolidated balance sheet was a noncurrent receivable of $6,513 relating to such payment.

The following amounts have not been expensed in the accompanying consolidated financial statements as they relate to Liggett’s claim for an NPM adjustment: $6,513 for 2003, $3,789 for 2004 and $800 for 2005.

Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation was filed in 49 Settling States over the issue of whether the application of the NPM Adjustment for 2003 is to be

38

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

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. This decision has been appealed. In response to a proposal from each of the OPMs and many of the SPMs, 45 of the Settling States have 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 commence in 2010. There can be no assurance that Liggett will receive any adjustment as a result of these proceedings.

Gross v. Net Calculations.In October 2004, the independent auditor notified Liggett and all other Participating Manufacturers that their payment obligations under the MSA, dating from the agreement’s execution in late 1998, had been recalculated using “net” unit amounts, rather than “gross” unit amounts (which had been used since 1999).

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.

The change in the method of calculation could, among other things, result in at least approximately $9,500, plus interest, of additional MSA payments for prior years, plus interest, by Liggett because the proposed change from “gross” to “net” units would serve to lower Liggett’s market share exemption under the MSA. The Company currently estimates that future MSA payments would be approximately $2,250 higher per year if the method of calculation is changed. No amounts have been expensed or accrued in the accompanying consolidated financial statements for any potential liability relating to the “gross” versus “net” dispute.

Litigation Challenging the MSA.InFreedom 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

39

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

dissolving the preliminary injunction. Plaintiffs appealed the decision. Oral argument on the appeal occurred in December 2009. A decision is pending.

InGrand River Enterprises Six Nations, Ltd. v. King, 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, violate federal antitrust and constitutional law. In January 2009, the court issued a memorandum opinion and order granting the defendants’ motions and dismissing Vibo’s lawsuit. On January 5, 2010, the court entered judgment in favor of the defendants. On January 13, 2010, Vibo appealed to the United States Court of Appeals, Sixth Circuit. Briefing is underway.

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, 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. In September 2009, Vibo filed a notice of appeal which they voluntarily withdrew in January 2010.

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

40

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

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. 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. During 2009, Liggett reversed a previously recorded accrual of $2,500 with respect to this matter.

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 theDaviscase, plus legal fees, and $816 awarded in theFerlanti case, plus legal fees, in June 2002, the jury in theLukacscase, an individual case brought under the third phase of theEnglecase, 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 December 31, 2009, exceeded $15,000. Recently, Liggett was found liable in anEngleprogeny case and its portion of the total award is $156. It is possible that additional cases could be decided unfavorably against Liggett. As a result of theEngledecision, approximately 8,585 formerEngleclass members have claims pending against Liggett and other cigarette manufacturers. Liggett may enter into discussions in an attempt to settle particular cases, if it believes it is in its best interests to do so.

Management cannot predict the cash requirements related to any future defense costs, settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. An unfavorable outcome of a pending smoking and health case could encourage the commencement of additional similar litigation, or could lead to multiple adverse decisions in theEngleprogeny cases. Management is unable to make a reasonable estimate with respect to the amount or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not provided any amounts in its 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 management is unaware of any material environmental conditions affecting their existing facilities. Liggett’s management believe that current operations are conducted in material compliance

41

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

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.

Other Matters:

In December 2009, a complaint was filed against Liggett in Alabama state court by the estate of a deceased woman who died in 2007 in a house fire allegedly caused by the ignition of contents of the house by a Liggett product. Plaintiff is suing under the Alabama Extended Manufacturers Liability Doctrine and for breach of warranty and negligence. The plaintiff seeks both punitive and compensatory damages.

There may be several other proceedings, lawsuits and claims pending against the Liggett 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.

11. Related Party Transactions

Liggett is a party to an agreement dated February 26, 1991, as amended June 30, 2001, with Vector to provide various management and administrative services to Liggett in consideration for an annual management fee of $900 paid in monthly installments and annual overhead reimbursements of $864 paid in monthly installments. The charges for services under this agreement amounted to $1,764 in 2009, 2008 and 2007.

In addition, Liggett has entered into an annually renewable Corporate Services Agreement with VGR wherein VGR agreed to provide corporate services to Liggett at an annual fee paid in monthly installments. Corporate services provided by VGR under this agreement include the provision of administrative services related to Liggett’s participation in its parent company’s multi-employer benefit plan, external publication of financial results, preparation of consolidated financial statements and tax returns and such other administrative and managerial services as may be reasonably requested by Liggett. The charges for services rendered under the agreement amounted to $5,959 in 2009, $5,675 in 2008 and $5,405 in 2007.

Liggett is party to a tax sharing agreement with Vector and certain other entities pursuant to which Liggett will pay taxes on an estimated basis to Vector as if it were filing a separate company tax

42

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

return, except that the agreement effectively limits the ability of Liggett to carry back losses for refunds. Liggett is entitled to recoup overpayments in a given year out of future payments due under the agreement and is required to fund underpayments.

On January 1, 2004 Liggett entered into a manufacturing agreement with Vector Tobacco whereby Liggett agreed to provide handling, storage, manufacturing, preparation, record-keeping, remittance of federal excise tax payments, processing of returns and other services relating to the manufacture of Vector Tobacco brands. The Agreement expired December 31, 2005, but is automatically renewed for a successive one-year term unless otherwise terminated by either party. Pricing is set forth in the Agreement based on previously determined standard costs and invoices are sent to Vector Tobacco monthly. In 2009, 2008 and 2007, Liggett manufactured approximately 1.2, 1.1 and 1.2 billion units of Vector Tobacco brands respectively, and realized $67,161, $34,577 and $32,845, respectively, in net receipts from these sales and $1,349, $1,158 and $1,028, respectively, in profit from the Agreement.

As of December 31, 2009 and 2008, Liggett has a receivable from Vector Tobacco totaling $6,304 and $4,361, respectively. This overall net receivable position is related to the manufacturing agreement between Liggett and Vector Tobacco in 2009 and 2008.

The remaining related party net receivable balances of $5,855 and $9,207 at December 31, 2009 and 2008, respectively, relate primarily to transactions with Liggett’s affiliate, Liggett Vector Brands.

Liggett Vector Brands coordinates and executes the sales, marketing and manufacturing efforts along with certain support functions for all of Vector’s tobacco operations. In conjunction with the duties performed at Liggett Vector Brands, a portion of sales, marketing, manufacturing, distribution, and administrative expenses have been allocated to Liggett. During 2009, 2008 and 2007, Liggett expensed $55,549, $55,602 and $53,346, respectively, for services provided by Liggett Vector Brands of which $(35) and $(78) related to restructuring costs in 2008 and 2007, respectively. The remaining expenses have been classified as selling, general and administrative ($31,553, $31,612 and $30,771 for the years ended December 31, 2009, 2008 and 2007, respectively) and cost of goods sold ($23,996, $24,025 and $22,653 for the years ended December 31, 2009, 2008 and 2007, respectively).

12. Restructuring

			Asset
			Impairment,
	Severance		Contract
	and		Termination,
	Benefits		and Exit Costs			Totals
Balance at December 31, 2006		—		764			764
Change in Estimate		—		(78	)		(78	)
Utilized in 2007		—		(148	)		(148	)
Balance at December 31, 2007		—		538			538
Change in Estimate		—		(35	)		(35	)
Utilized in 2008		—		(88	)		(88	)

43

Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007

(in thousands of dollars)

			Asset
			Impairment,
	Severance		Contract
	and		Termination,
	Benefits		and Exit Costs			Totals
Balance at December 31, 2008	$	—	$	415		$	415
Utilized in 2009		—		(110	)		(110	)
Balance at December 31, 2009	$	—	$	305		$	305

Liggett Vector Brands Restructurings

During April 2004, Liggett Vector Brands adopted a restructuring plan in its continuing effort to adjust the cost structure of the business and improve operating efficiency. As part of the plan, Liggett Vector Brands eliminated 83 positions and consolidated operations, subletting its New York office space and relocating several employees.

On October 6, 2004, Vector announced an additional plan to further restructure the operations of Liggett Vector Brands, its sales, marketing and distribution agent for its Liggett and Vector Tobacco subsidiaries. Liggett Vector Brands has realigned its sales force and adjusted its business model to more efficiently serve its chain and independent accounts nationwide. Liggett Vector Brands is seeking to expand the portfolio of private and control label partner brands by utilizing a pricing strategy that offers long-term list price stability for customers. In connection with the restructuring, the Company eliminated approximately 330 full-time positions and 135 part-time positions as of December 15, 2004.

13. Subsequent Events

The Company has evaluated events that occurred subsequent to December 31, 2009, through the financial statement issue date of March 1, 2010 and determined that there were no recordable or reportable subsequent events.

44

Schedule II — Valuation and Qualifying Accounts

			Additions
			Charged
	Balance		to
	at		Costs				Balance
	Beginning		and				at End of
	of Period		Expenses		Deductions		Period
Description
Year ended December 31, 2009
Allowance for:
Doubtful accounts	$	46	$	105	$	1	$	150
Cash discounts		194		17,347		17,355		186
Sales returns		3,000		2,997		2,667		3,330
Total	$	3,240	$	20,449	$	20,023	$	3,666
Year ended December 31, 2008
Allowance for:
Doubtful accounts	$	46	$	—	$	—	$	46
Cash discounts		61		12,980		12,847		194
Sales returns		2,600		2,355		1,955		3,000
Total	$	2,707	$	15,335	$	14,802	$	3,240
Year ended December 31, 2007
Allowance for:
Doubtful accounts	$	50	$	13	$	17	$	46
Cash discounts		529		16,015		16,483		61
Sales returns		2,557		1,380		1,337		2,600
Total	$	3,136	$	17,408	$	17,837	$	2,707

45