UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

VECTOR GROUP LTD.

(Exact name of registrant as specified in its charter)

Delaware		1-5759		65-0949535
(State or other jurisdiction of incorporation or organization)		Commission File Number		(I.R.S. Employer Identification No.)

100 S.E. Second Street
Miami, Florida 33131
305/579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

þ Large accelerated filer		o Accelerated filer		o Non-accelerated filer (Do not check if a smaller reporting company)		o Smaller reporting company

     Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. o Yes þ No

     At August 10, 2009, Vector Group Ltd. had 66,527,070 shares of common stock outstanding.

 

 

VECTOR GROUP LTD.

FORM 10-Q

TABLE OF CONTENTS

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

VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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

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

VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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

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

VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Dollars in Thousands, Except Share Amounts)
Unaudited

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

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

VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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

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

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

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Basis of Presentation:

		The condensed consolidated financial statements of Vector Group Ltd. (the “Company” or “Vector”) include the accounts of VGR Holding LLC (“VGR Holding”), Liggett Group LLC (“Liggett”), Vector Tobacco Inc. (“Vector Tobacco”), Liggett Vector Brands Inc. (“Liggett Vector Brands”), New Valley LLC (“New Valley”) and other less significant subsidiaries. All significant intercompany balances and transactions have been eliminated.
		Liggett is engaged in the manufacture and sale of cigarettes in the United States. Vector Tobacco is engaged in the marketing of low nicotine and nicotine-free cigarette products and the development of reduced risk cigarette products. New Valley is engaged in the real estate business and is seeking to acquire additional operating companies and real estate properties.
		The interim condensed consolidated financial statements of the Company are unaudited and, in the opinion of management, reflect all adjustments necessary (which are normal and recurring) to state fairly the Company’s consolidated financial position, results of operations and cash flows. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission. The consolidated results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the entire year.

(b)

Distributions and Dividends on Common Stock:

The Company records distributions on its common stock as dividends in its condensed consolidated statement of stockholders’ equity to the extent of retained earnings. Any amounts exceeding retained earnings are recorded as reductions to additional paid-in capital.

(c)

Earnings Per Share (“EPS”):

Information concerning the Company’s common stock has been adjusted to give retroactive effect to the 5% stock dividend paid to Company stockholders on September 29, 2008. All per share amounts have been presented as if the stock dividends had occurred on January 1, 2008.

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

The Company has stock option awards which provide for common stock dividends at the same rate as paid on the common stock with respect to the shares underlying the unexercised portion of the options. As a result, in its calculation of basic EPS for the three and six months ended June 30, 2009 and 2008, the Company has adjusted its net income for the effect of its participating securities as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Net (loss) income		$	(7,946	)		$	19,125			$	(4,846	)		$	33,432
Loss (income) attributable to participating securities			364				(871	)			222				(1,553	)
Net (loss) income available to common stockholders		$	(7,582	)		$	18,254			$	(4,624	)		$	31,879

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding.

Diluted EPS is computed by dividing net income available to common stockholders by the diluted weighted-average number of shares outstanding, which includes dilutive non-vested restricted stock grants, stock options and convertible securities. Diluted EPS includes the dilutive effect of stock options, unvested restricted stock grants and convertible securities. However, in its calculation of diluted EPS for the three and six months ended June 30, 2009 and 2008, the Company has adjusted its net income for the effect of the participating securities, stock options, unvested restricted stock grants and convertible securities as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Net (loss) income		$	(7,946	)		$	19,125			$	(4,846	)		$	33,432
(Income) expenses attributable to 3.875% convertible debentures			—				(1,500	)			—				2,527
Income attributable to participating securities			364				(803	)			222				(1,670	)
Net income available to common stockholders		$	(7,582	)		$	16,822			$	(4,624	)		$	34,289

Basic and diluted EPS were calculated using the following shares for the three and six months ended June 30, 2009 and 2008:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Weighted-average shares for basic EPS			65,812,958				63,496,622				65,807,960				63,234,165
Plus incremental shares related to stock options and non-vested restricted stock			—				1,296,157				—				1,471,471

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Plus incremental shares related to convertible debt			—				5,923,077				—				5,923,077
Weighted-average shares for fully diluted EPS			65,812,958				70,715,856				65,807,960				70,628,713

The Company’s non-vested restricted share grants contain rights to receive forfeitable dividends, and thus are not participating securities requiring the two class method of computing EPS.

The following stock options, non-vested restricted stock and shares issuable upon the conversion of convertible debt were outstanding during the three and six months ended June 30, 2008 but were not included in the computation of diluted EPS because the exercise prices of the options and the per share expense associated with the restricted stock were greater than the average market price of the common shares during the respective periods, and the impact of common shares issuable under the convertible debt were anti-dilutive to EPS. Amounts presented for the three and six months ended June 30, 2009 were not included in the computation of diluted EPS because the Company reported a loss during such period and the impact was anti-dilutive.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Number of stock options			5,271,881				516,147				5,271,881				516,147
Weighted-average exercise price		$	11.59			$	19.25			$	11.59			$	19.25
Weighted-average shares of non-vested restricted stock			658,156				407,920				428,662				118,514
Weighted-average expense per share		$	14.17			$	17.09			$	14.83			$	17.59
Weighted-average number of shares issuable upon conversion of debt			14,380,320				7,008,186				13,660,437				7,008,186
Weighted-average conversion price		$	16.92			$	15.96			$	16.63			$	15.96

(d)

Comprehensive Income:

Other comprehensive income is a component of stockholders’ equity and includes such items as the unrealized gains and losses on investment securities available for sale, forward foreign contracts and minimum pension liability adjustments. The Company’s comprehensive loss was $3,882 and $5,095 for the three and six months ended June 30, 2009. The Company’s comprehensive income was $14,463 and $25,444 for the three and six months ended June 30, 2008.

(e)

Fair Value of Derivatives Embedded within Convertible Debt:

The Company has estimated the fair market value of the embedded derivatives based principally on the results of a valuation model. The estimated fair value of the derivatives embedded within the convertible debt is based principally on the present value of future dividend payments expected to be received by the convertible debt

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

holders over the term of the debt. The discount rate applied to the future cash flows is estimated based on a spread in the yield of the Company’s debt when compared to risk-free securities with the same duration; thus, a readily determinable fair market value of the embedded derivatives is not available. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads for secured to unsecured debt, unsecured to subordinated debt and subordinated debt to preferred stock to determine the fair value of the derivatives embedded within the convertible debt. The valuation also considers other items, including current and future dividends and the volatility of Vector’s stock price. The range of estimated fair market values of the Company’s embedded derivatives was between $134,269 and $139,419. The Company recorded the fair market value of its embedded derivatives at the midpoint of the inputs at $136,796 as of June 30, 2009. The estimated fair market value of the Company’s embedded derivatives could change significantly based on future market conditions. (See Note 6.)

(f)

Capital and Credit Market Crisis

During the recent capital and credit market crisis, the Company has performed additional assessments to determine the impact, if any, of market developments, on the Company’s consolidated condensed financial statements. The Company’s additional assessments have included a review of access to liquidity in the capital and credit markets, counterparty creditworthiness, value of the Company’s investments (including long-term investments, mortgage receivable and employee benefit plans) and macroeconomic conditions. The recent unprecedented volatility in capital and credit markets may create additional risks in the upcoming months and possibly years and the Company will continue to perform additional assessments to determine the impact, if any, on the Company’s condensed consolidated financial statements. Thus, future impairment charges may occur.

On a quarterly basis, the Company evaluates its investments to determine whether an impairment has occurred. If so, the Company also makes a determination of whether such impairment is considered temporary or other-than-temporary. The Company believes that the assessment of temporary or other-than-temporary impairment is facts and circumstances driven. However, among the matters that are considered in making such a determination are the period of time the investment has remained below its cost or carrying value, the likelihood of recovery given the reason for the decrease in market value and the Company’s original expected holding period of the investment.

(g)

Contingencies:

The Company records Liggett’s product liability legal expenses and other litigation costs as operating, selling, general and administrative expenses as those costs are incurred. As discussed in Note 8, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against Liggett.

The Company and its subsidiaries record provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management is unable to make a reasonable estimate with respect to the amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation or the costs of defending such cases, and the Company has not provided any amounts in its consolidated financial statements for unfavorable outcomes, if any, unless specified in Note 8. Litigation is subject to many uncertainties, and it is possible that the Company’s consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation.

(h)

New Accounting Pronouncements:

On January 1, 2008, Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) for financial assets and financial liabilities became effective for the Company. SFAS No. 157 does not require any new fair value measurements but provides a definition of fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. On January 1, 2009, the Company adopted SFAS No. 157 as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or

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

disclosed at fair value in the financial statements on at least an annual basis. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (“GAAP”), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of SFAS No. 157 did not have a material impact on the Company’s condensed consolidated financial statements. (See Note 11.)

On January 1, 2009, SFAS No. 141(R), a revised version of SFAS No. 141, “Business Combinations” and FSP No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” became effective for the Company. The revision is intended to simplify existing guidance and converge rulemaking under U.S. GAAP with international accounting rules. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

On January 1, 2009, SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” became effective for the Company. SFAS No. 161 seeks qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in hedged positions. SFAS No. 161 also seeks enhanced disclosure around derivative instruments in financial statements, accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and how hedges affect an entity’s financial position, financial performance and cash flows. The adoption of SFAS No. 161 did not have a material impact on the Company’s condensed consolidated financial statements.

On January 1. 2009, FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP No. APB 14-1”) became effective for the Company. The adoption of FSP No. APB 14-1 had no impact on the Company’s condensed consolidated financial statements.

On January 1, 2009, FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” (FSP EITF 03-6-1) became effective for the Company. FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of FSP EITF 03-6-1 had no impact on the Company’s condensed consolidated financial statements.

In April 2009, FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are not Orderly” became effective for the Company. FSP FAS No. 157-4 clarifies the methodology used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. FSP FAS No. 157-4 also reaffirms the objective of fair value measurement, as stated in FAS No. 157, “Fair Value Measurements,” which is to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. The adoption of FSP SFAS 157-4 had no impact on the Company’s condensed consolidated financial statements.

In April 2009, FSP FAS No. 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. 115-2 and FAS No. 124-2”) became effective for the Company. FSP FAS No. 115-2 and FAS No. 124-2 modifies the other-than-temporary impairment guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. The adoption of FSP FAS No. 115-2 and FAS No. 124-2 did not have a material impact on the condensed consolidated financial statements.

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

In April 2009, FSP FAS No. 107-1 and APB Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB Opinion No. 28-1”) became effective for the Company. FSP FAS No. 107-1 and APB Opinion No. 28-1 requires fair value disclosures for financial instruments that are not reflected in the condensed consolidated balance sheets at fair value. Prior to the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, the fair values of those assets and liabilities were disclosed only once each year. With the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, the Company will now be required to disclose this information on a quarterly basis, providing quantitative and qualitative information about fair value estimates for all financial instruments not measured in the condensed consolidated balance sheets at fair value. The adoption of FSP FAS No. 107-1 and APB Opinion No. 28-1 did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2008, the Financial Accounting Standards Board (“FASB”) issued FSP SFAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP amends the disclosure requirements for employer’s disclosure of plan assets for defined benefit pensions and other postretirement plans. The objective of this FSP is to provide users of financial statements with an understanding of how investment allocation decisions are made, the major categories of plan assets held by the plans, the inputs and valuation techniques used to measure the fair value of plan assets, significant concentration of risk within the company’s plan assets, and for fair value measurements determined using significant unobservable inputs a reconciliation of changes between the beginning and ending balances. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Company will adopt the new disclosure requirements in the 2009 annual reporting period.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (the Codification) (“SFAS No. 168”). The Codification, which was launched on July 1, 2009, became the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. The Codification eliminates the GAAP hierarchy contained in SFAS No. 162 and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will adopt this Statement for its quarter ending September 30, 2009. The Company is evaluating the impact of SFAS No. 168 on its condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” and SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 167 amends FASB Interpretation 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 166 amends SFAS No. 140 by removing the exemption from consolidation for Qualifying Special Purpose Entities (QSPEs). This Statement also limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. The Company will adopt these Statements for interim and annual reporting periods beginning on January 1, 2010. The Company is currently assessing the impact, if any, of SFAS No. 167 on its condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. This Statement sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Statement is effective for interim and annual periods ending after June 15, 2009. The Company adopted this Statement in the quarter ended June 30, 2009. This Statement did not impact the Company’s condensed consolidated financial statements.

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

2.

RESTRUCTURING

In March 2009, Vector Tobacco eliminated nine full-time positions in connection with the decision by the Company’s Board of Directors in 2006 to discontinue the genetics operation and not to pursue FDA approval of QUEST as a smoking cessation aide, due to the projected significant additional time and expense involved in seeking such approval.

The Company recognized pre-tax restructuring charges of $1,000, during the first quarter of 2009. The restructuring charges primarily related to employee severance and benefit costs. The remaining balance of the severance and benefit costs restructuring charges was $789 as of June 30, 2009. Approximately $211 was utilized during the three and six months ended June 30, 2009, respectively.

The only remaining component of the 2004 Liggett Vector Brands restructuring at June 30, 2009 and December 31, 2008 was contract termination and exit costs of $396 and $461, respectively. Approximately $22 and $65 was utilized during the three and six months ended June 30, 2009, respectively.

3.

INVESTMENT SECURITIES AVAILABLE FOR SALE

Investment securities classified as available for sale are carried at fair value, with net unrealized gains or losses included as a component of stockholders’ equity, net of income taxes. The components of investment securities available for sale at June 30, 2009 were as follows:

						Gross				Gross
						Unrealized				Unrealized				Fair
		Cost				Gain				Loss				Value
Marketable equity securities		$	39,621			$	9,548			$	(6,950	)		$	42,219

In October 2008, the Company purchased 320,000 shares of Castle Brands, Inc. (“Castle Brands”) Series A Convertible Preferred Stock for $4,000. Castle Brands is a publicly-traded developer and importer of premium branded spirits. The purchase was accounted for at historical cost and included with “Other Assets” on the condensed balance sheet at December 31, 2008. In January 2009, the Series A Preferred Stock of Castle Brands were converted into 11,428,576 shares of Common Stock. Effective with the conversion, the Castle Brands shares have been accounted for as an investment held for sale. These shares were carried at $2,514 as of June 30, 2009.

In May and June 2009, the Company purchased 3,683,526 common shares of Strategic Hotels & Resorts, Inc. (“Strategic Hotels”) for approximately $5,553, excluding commissions. The shares were carried at $4,089 as of June 30, 2009. The Company purchased an additional 1,650,000 shares in July 2009 for approximately $1,584, excluding commissions. On July 20, 2009, the Company reported that it owned approximately 7.1% of the stock of Strategic Hotels.

Investment securities available for sale as of June 30, 2009 and December 31, 2008 include New Valley’s 13,891,205 shares of Ladenburg Thalmann Financial Services Inc. (“LTS”) common stock, which were carried at $7,500 and $10,000, respectively. Investment securities available for sale as of June 30, 2009 and December 31, 2008 also include 10,057,110 and 5,057,110 shares, respectively, of Opko Health Inc. (“Opko”) common stock, which were carried at $17,801 and $8,193, respectively. In May 2009, the Company purchased an additional 5,000,000 shares of Opko in a private placement for $5,000. These shares have not been registered for resale but are expected to be freely tradable within one year.

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

In 2008, the Company acquired 2,259,796 shares of Cardo Medical, Inc. for $500. The shares were carried at $2,825 and $3,277 as of June 30, 2009 and December 31, 2008. These shares are now freely tradable.

4.

INVENTORIES

Inventories consist of:

		June 30,				December 31,
		2009				2008
Leaf tobacco		$	50,163			$	48,880
Other raw materials			5,661				5,128
Work-in-process			1,034				314
Finished goods			57,701				46,202
Inventories at current cost			114,559				100,524
LIFO adjustments			(12,393	)			(7,943	)
		$	102,166			$	92,581

The Company has a leaf inventory management program whereby, among other things, it is committed to purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of anticipated requirements and are at prices, including carrying costs, established at the commitment date. At June 30, 2009, Liggett had leaf tobacco purchase commitments of approximately $16,633. There were no leaf tobacco purchase commitments at Vector Tobacco at that date. During 2007, the Company entered into a single source supply agreement for fire safe cigarette paper through 2012.

The Company capitalizes the incremental prepaid cost of the Master Settlement Agreement in ending inventory. For the six months ended June 30, 2009 and 2008, the Company’s MSA expense was increased by approximately $650 for 2008 and reduced by approximately $1,300 for 2007, respectively, as a result of a change in estimate to the MSA assessment.

LIFO inventories represent approximately 94% and 95% of total inventories at June 30, 2009 and December 31, 2008, respectively.

5.

LONG-TERM INVESTMENTS

Long-term investments consist of investments in the following:

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Investment partnerships accounted for at cost		$	51,118			$	63,072			$	51,118			$	54,997

The principal business of these investment partnerships is investing in investment securities and real estate. The estimated fair value of the investment partnerships was provided by the partnerships based on the indicated market values of the underlying assets or investment portfolio. The investments in these investment partnerships are illiquid and the ultimate realization of these investments is subject to the performance of the underlying partnership and its management by the general partners.

The long-term investments are carried on the condensed consolidated balance sheet at cost. The fair value determination disclosed above would be classified as Level 3 under the SFAS 157 hierarchy disclosed in Note 11

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

if such assets were recorded on the condensed consolidated balance sheet at fair value. The fair values were determined based on unobservable inputs and were based on company assumptions, and information obtained from the partnerships based on the indicated market values of the underlying assets of the investment portfolio.

The changes in the fair value of these investments as of June 30, 2009 were as follows:

		Investment
		Partnerships
		Accounted for at Cost
Balance as of January 1, 2009		$	54,997
Unrealized loss on long-term Investments			(357	)
Realized gain (loss) on long-term Investments			—
Balance as of March 31, 2009			54,640
Unrealized gain on long-term Investments			8,432
Realized gain (loss) on long-term investments			—
Balance as of June 30, 2009		$	63,072

The changes in the fair value of these investments as of June 30, 2008 were as follows:

						Investment
		Investment				Partnerships
		Partnerships				Accounted for on the
		Accounted for at Cost				Equity Method
Balance as of January 1, 2008		$	89,007			$	10,495
Unrealized loss on long-term Investments			(2,034	)			(675	)
Realized loss on long-term Investments			—				(567	)
Balance as of March 31, 2008			86,973				9,253
Contributions (distributions)			47				(8,328	)
Unrealized loss on long-term Investments			(3,767	)			—
Realized gain on long-term Investments			14				—
Receivable classified as “Other currents assets”			—				(925	)
Balance as of June 30, 2008		$	83,267			$	—

The Company will continue to perform additional assessments of the investments and the current condition of capital and credit markets to determine the impact, if any, on the Company’s condensed consolidated financial statements. Thus, future impairment charges may occur.

In the future, the Company may invest in other investments, including limited partnerships, real estate investments, equity securities, debt securities, derivatives and certificates of deposit, depending on risk factors and potential rates of return.

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

6.

NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS

Notes payable, long-term debt and other obligations consist of:

		June 30,				December 31,
		2009				2008
Vector:
11% Senior Secured Notes due 2015		$	165,000			$	165,000
6.75% Variable Interest Senior Convertible Note due 2014, net of unamortized discount of $40,245 and $0*			9,755				—
6.75% Variable Interest Senior Convertible Exchange Notes due 2014, net of unamortized discount of $71,292 and $0*			35,648				—
3.875% Variable Interest Senior Convertible Debentures due 2026, net of unamortized discount of $83,785 and $83,993*			26,215				26,007
5% Variable Interest Senior Convertible Notes due 2011, net of unamortized net discount of $270 and $39,565*			645				72,299
Liggett:
Revolving credit facility			20,135				19,515
Term loan under credit facility			7,022				7,290
Equipment loans			6,403				8,307
V.T. Aviation:
Note payable			4,580				5,266
VGR Aviation:
Note payable			3,873				4,053
Other			70				62
Total notes payable, long-term debt and other obligations			279,346				307,799
Less:
Current maturities			(25,665	)			(97,498	)
Amount due after one year		$	253,681			$	210,301

		11% Senior Secured Notes due 2015 — Vector:
		In August 2007, the Company sold $165,000 in 11% Senior Secured Notes due 2015 (the “Senior Secured Notes”) in a private offering to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. On May 28, 2008, the Company completed an offer to exchange the Senior Secured Notes for an equal amount of newly issued 11% Senior Secured Notes due 2015. The new Senior Secured Notes have substantially the same terms as the original notes, except that the new Senior Secured Notes have been registered under the Securities Act.
		The indenture contains covenants that restrict the payment of dividends by the Company if the Company’s consolidated earnings before interest, taxes, depreciation and amortization (“Consolidated EBITDA”), as defined in the indenture, for the most recently ended four full quarters is less than $50,000. The indenture also restricts the incurrence of debt if the Company’s Leverage Ratio and its Secured Leverage Ratio, as defined in the indenture, exceed 3.0 and 1.5, respectively. The Company’s Leverage Ratio is defined in the indenture as the ratio of the Company’s and the guaranteeing subsidiaries’ total debt less the fair market value of the Company’s cash, investments in marketable securities and long-term investments to Consolidated EBITDA, as defined in the indenture. The Company’s Secured Leverage Ratio is defined in the indenture in the same manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness.

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

The following table summarizes the requirements of these financial covenants and the results of the calculation, as defined by the indenture.

		Indenture		June 30,		December 31,
Covenant		Requirement		2009		2008
Consolidated EBITDA, as defined		$50,000		$160,014		$154,053
Leverage ratio, as defined		<3.0 to 1		Negative		0.1 to 1
Secured leverage ratio, as defined		<1.5 to 1		Negative		Negative

Variable Interest Senior Convertible Debt — Vector:

Vector has issued four series of variable interest senior convertible debt. All four series of debt pay interest on a quarterly basis at a stated rate plus an additional amount of interest on each payment date. The additional amount is based on the amount of cash dividends paid during the prior three-month period ending on the record date for such interest payment multiplied by the total number of shares of its common stock into which the debt would be convertible on such record date.

5% Variable Interest Senior Convertible Notes due November 2011:

Between November 2004 and April 2005, the Company sold $111,864 principal amount of its 5% Variable Interest Senior Convertible Notes due November 15, 2011 (the “5% Notes”). In May 2009, the holder of $11,005 principal amount of the 5% Notes exchanged its 5% Notes for $11,775 principal amount of the Company’s 6.75% Variable Interest Senior Convertible Note due 2014 (the “6.75% Note”) as discussed below. In June 2009, certain holders of $99,944 principal amount of the 5% Notes exchanged their 5% Notes for $106,940 principal amount of the Company’s 6.75% Variable Interest Senior Convertible Exchange Notes due 2014 of the Company (the “6.75% Exchange Notes”). As of June 30, 2009, a total of $915 principal amount of the 5% Notes remained outstanding after these exchanges.

6.75% Variable Interest Senior Convertible Note due 2014:

On May 11, 2009, the Company issued in a private placement the 6.75% Note in the principal amount of $50,000. The purchase price was paid in cash ($38,225) and by tendering $11,005 principal amount of the 5% Notes, valued at 107% of principal amount. The note pays interest (“Total Interest”) on a quarterly basis at a rate of 3.75% per annum plus additional interest, which is based on the amount of cash dividends paid during the prior three-month period ending on the record date for such interest payment multiplied by the total number of shares of its common stock into which the debt will be convertible on such record date. Notwithstanding the foregoing, however, the interest payable on each interest payment date shall be the higher of (i) the Total Interest and (ii) 6.75% per annum. The note is convertible into the Company’s common stock at the holder’s option. The conversion price of $15.04 per share (approximately 66.4894 shares of common stock per $1,000 principal amount of the note) is subject to adjustment for various events, including the issuance of stock dividends. The note will mature on November 15, 2014. The Company will redeem on May 11, 2014 and at the end of each interest accrual period thereafter an additional amount, if any, of the note necessary to prevent the note from being treated as an “Applicable High Yield Discount Obligation” under the Internal Revenue Code. If a fundamental change (as defined in the note) occurs, the Company will be required to offer to repurchase the note at 100% of its principal amount, plus accrued interest.

The purchaser of the 6.75% Note is an entity affiliated with Dr. Phillip Frost, who reported, after the consummation of the sale, beneficial ownership of approximately 11.5% of the Company’s common stock.

6.75% Variable Interest Senior Convertible Exchange Notes due 2014:

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

In June 2009, the Company entered into agreements with certain holders of the 5% Notes to exchange their 5% notes for the Company’s 6.75% Exchange Notes. On June 30, 2009, the Company accepted for exchange $99,944 principal amount of the 5% Notes for $106,940 of its 6.75% Exchange Notes. The Company issued its 6.75% Exchange Notes to the holders in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 3(a)(9) thereof. The notes pay interest (“Total Interest”) on a quarterly basis beginning August 15, 2009 at a rate of 3.75% per annum plus additional interest, which is based on the amount of cash dividends paid during the prior three-month period ending on the record date for such interest payment multiplied by the total number of shares of its common stock into which the debt will be convertible on such record date. Notwithstanding the foregoing, however, the interest payable on each interest payment date shall be the higher of (i) the Total Interest and (ii) 6.75% per annum. The notes are convertible into the Company’s common stock at the holder’s option. The conversion price of $17.06 per share (approximately 58.6063 shares of common stock per $1,000 principal amount of notes) is subject to adjustment for various events, including the issuance of stock dividends. The notes will mature on November 15, 2014. The Company will redeem on June 30, 2014 and at the end of each interest accrual period thereafter an additional amount, if any, of the notes necessary to prevent the notes from being treated as an “Applicable High Yield Discount Obligation” under the Internal Revenue Code. If a fundamental change (as defined in the indenture) occurs, the Company will be required to offer to repurchase the notes at 100% of their principal amount, plus accrued interest and, under certain circumstances, a “make whole” payment.

Embedded Derivatives on the Variable Interest Senior Convertible Debt:

The portion of the interest on the Company’s convertible debt which is computed by reference to the cash dividends paid on the Company’s common stock is considered an embedded derivative within the convertible debt, which the Company is required to separately value. Pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, the Company has bifurcated these embedded derivatives and estimated the fair value of the embedded derivative liability including using a third party valuation. The resulting discount created by allocating a portion of the issuance proceeds to the embedded derivative is then amortized to interest expense over the term of the debt using the effective interest method. Changes to the fair value of these embedded derivatives are reflected quarterly in the Company’s consolidated statements of operations as “Change in fair value of derivatives embedded within convertible debt.” The value of the embedded derivative is contingent on changes in interest rates of debt instruments maturing over the duration of the convertible debt as well as projections of future cash and stock dividends over the term of the debt.

A summary of non-cash interest expense associated with the amortization of the debt discount created by the embedded derivative liability associated with the Company’s variable interest senior convertible debt for the three and six months ended June 30, 2009 and 2008 is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
6.75% Note		$	70			$	—			$	70			$	—
3.875% convertible debentures			113				90				225				180
5% convertible notes			1,712				1,293				3,369				2,481
Interest expense associated with embedded derivatives		$	1,895			$	1,383			$	3,664			$	2,661

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

A summary of non-cash changes in fair value of derivatives embedded within convertible debt is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
6.75% Note		$	(1,809	)		$	—			$	(1,809	)		$	—
3.875% convertible debentures			(15,577	)			6,132				(17,329	)			2,882
5% convertible notes			(2,102	)			3,627				(653	)			4,433
(Loss) gain on changes in fair value of derivatives embedded within convertible debt		$	(19,488	)		$	9,759			$	(19,791	)		$	7,315

The following table reconciles the fair value of derivatives embedded within convertible debt at June 30, 2009.

						6.75%				3.875%				5%
		6.75%				Exchange				Convertible				Convertible
		Note				Notes				Debentures				Debentures				Total
Balance at December 31, 2008		$	—			$	—			$	51,829			$	25,416			$	77,245
Loss (gain) from changes in fair value of embedded derivatives			—				—				1,752				(1,449	)			303
Balance at March 31, 2009			—				—				53,581				23,967				77,548
Issuance of 6.75% Note			21,567				—				—				(2,485	)			19,082
Issuance of 6.75% Exchange Notes			—				44,070				—				(23,392	)			20,678
Loss from changes in fair value of embedded derivatives			1,809				—				15,577				2,102				19,488
Balance at June 30, 2009		$	23,376			$	44,070			$	69,158			$	192			$	136,796

Beneficial Conversion Feature on Variable Interest Senior Convertible Debt:

After giving effect to the recording of the embedded derivative liability as a discount to the convertible debt, the Company’s common stock had a fair value at the issuance date of the debt in excess of the conversion price resulting in a beneficial conversion feature. EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Convertible Ratios”, requires that the intrinsic value of the beneficial conversion feature be recorded to additional paid-in capital and as a discount on the debt. The discount is then amortized to interest expense over the term of the debt using the effective interest method.

In accordance with EITF Issue No. 05-8, the beneficial conversion feature has been recorded, net of income taxes, as an increase to stockholders’ equity.

A summary of non-cash interest expense associated with the amortization of the debt discount created by the beneficial conversion feature on the Company’s variable interest senior convertible debt for the three and six months ended June 30, 2009 and 2008 is as follows:

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Amortization of beneficial conversion feature:
6.75% Note		$	60			$	—			$	60			$	—
3.875% convertible debentures			(10	)			(11	)			(17	)			(19	)
5% convertible notes			951				717				1,870				1,373
Interest expense associated with beneficial conversion feature		$	1,001			$	706			$	1,913			$	1,354

Unamortized Debt Discount:

The following table reconciles unamortized debt discount at June 30, 2009:

						6.75%				3.875%				5%
		6.75%				Exchange				Convertible				Convertible
		Note				Notes				Debentures				Notes				Total
Balance at December 31, 2008		$	—			$	—			$	83,993			$	39,565			$	123,558
Amortization of embedded derivatives			—				—				(112	)			(1,657	)			(1,769	)
Amortization of beneficial conversion feature			—				—				7				(919	)			(912	)
Balance at March 31, 2009											83,888				36,989				120,877
Issuance of convertible notes — embedded derivative			21,567				44,070				—				—				65,637
Issuance of convertible notes — beneficial conversion feature			18,808				27,222				—				—				46,688
Issuance of 6.75% Note — write-off of unamortized debt discount															(3,311	)			(3,311	)
Issuance of 6.75% Exchange Notes — write-off of unamortized debt discount			—				—				—				(30,745	)			(30,745	)
Amortization of embedded derivatives			(70	)			—				(113	)			(1,712	)			(1,895	)
Amortization of beneficial conversion feature			(60	)			—				10				(951	)			(1,001	)
Balance at June 30, 2009		$	40,245			$	71,292			$	83,785			$	270			$	196,250

Loss on Extinguishment of Debt:

The exchange of the 5% Notes for the 6.75% Notes and the 6.75% Exchange Notes qualifies as extinguishment of debt due to the significant change in terms. A summary of the Company’s loss on the extinguishment of the 5% Notes for the three and six months ended June 30, 2009 is as follows:

						6.75%
		6.75%				Exchange
		Note				Notes				Total
Issuance of additional notes payable		$	770			$	6,996			$	7,766
Termination of embedded derivative			(2,485	)			(23,392	)			(25,877	)
Write-off of deferred finance costs			257				2,242				2,499
Write-off of unamortized debt discount, net			3,311				30,745				34,056
Loss on extinguishment of debt		$	1,853			$	16,591			$	18,444

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

Revolving Credit Facility — Liggett:

Liggett has a $50,000 credit facility with Wachovia Bank, N.A. under which $20,135 was outstanding at June 30, 2009. Availability as determined under the facility was approximately $16,843 based on eligible collateral at June 30, 2009.

Fair Value of Notes Payable and Long-term Debt:

The estimated fair value of the Company’s notes payable and long-term debt has been determined by the Company using available market information and appropriate valuation methodologies described in Note 1. However, considerable judgment is required to develop the estimates of fair value and, accordingly, the estimate presented herein are not necessarily indicative of the amount that could be realized in a current market exchange.

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Notes payable and long-term debt		$	279,346			$	466,442			$	307,799			$	447,520

Scheduled Maturities:

Scheduled maturities of long-term debt as of June 30, 2009 are as follows:

						Unamortized
		Principal				Discount				Net
Year Ending December 31:
2009		$	23,714			$	270			$	23,444
2010			4,425				—				4,425
2011			16,131				8,379				7,752
2012			103,211				75,406				27,805
2013			5,516				—				5,516
Thereafter			321,939				111,535				210,404
Total		$	474,936			$	195,590			$	279,346

The scheduled maturities of $103,211 (principal amount) in 2012 reflect $99,000 (principal amount), which may be required to be redeemed in 2012 in accordance with the terms of its 3.875% Variable Interest Senior Convertible Debentures due 2026.

7.

EMPLOYEE BENEFIT PLANS

Defined Benefit and Postretirement Plans:

Net periodic benefit cost for the Company’s pension and other postretirement benefit plans for the three and six months ended June 30, 2009 and 2008 consists of the following:

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

		Pension Benefits
		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2009				2008				2009				2008
Service cost — benefits earned during the period		$	330			$	1,035			$	660			$	2,070
Interest cost on projected benefit obligation			1,441				2,381				3,787				4,762
Expected return on plan assets			(1,954	)			(3,036	)			(3,908	)			(6,072	)
Amortization of prior service cost			200				350				400				700
Amortization of net loss			534				25				1,068				50
Net expense		$	551			$	755			$	2,007			$	1,510

		Other
		Postretirement Benefits
		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2009				2008				2009				2008
Service cost — benefits earned during the period		$	4			$	4			$	8			$	8
Interest cost on projected benefit obligation			142				148				284				296
Amortization of net loss			(41	)			(45	)			(82	)			(90	)
Net expense		$	105			$	107			$	210			$	214