2.2.0.7falseContingencies0205 - Disclosure - Contingenciestruefalsefalsefalse1USDfalsefalseUSDStandardhttp://www.xbrl.org/2003/iso4217USDiso42170USDEPSDividehttp://www.xbrl.org/2003/iso4217USDiso4217http://www.xbrl.org/2003/instancesharesxbrli0$20vgr_ContingenciesAbstractvgrfalsenadurationContingencies.falsefalsefalsefalsefalsetruefalsefalsefalsefalsefalsefalse1falsefalsefalsefalse00falsefalsefalsexbrli:stringItemTypestringContingencies.false31us-gaap_CommitmentsAndContingenciesDisclosureTextBlockus-gaaptruenadurationNo definition available.falsefalsefalsefalsefalsefalsefalsefalsefalsefalsefalseverboselabelfalse1falsefalsefalsefalse00<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
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<td width="3%" nowrap="nowrap" align="left"><b>5.</b></td>
<td width="1%"> </td>
<td><b><u>CONTINGENCIES</u></b></td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
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<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td><b>Tobacco-Related Litigation:</b></td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td><i>Overview</i></td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>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”); and
(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 three months ended September 30, 2010 and 2009, Liggett incurred legal
expenses and other litigation costs totaling approximately $4,792 and
$1,326, respectively. For
the nine months ended September 30, 2010 and 2009, Liggett
incurred legal expenses and other litigation costs totaling
approximately $22,418 (which includes payment of the $14,361 Lukacs
judgment discussed below) and $4,286, respectively.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>Litigation is subject to uncertainty and it is possible that there
could be adverse developments in pending or future cases. An
unfavorable outcome or settlement of pending tobacco-related or
other litigation could encourage the
commencement of additional
litigation. Damages claimed in some tobacco-related or other
litigation are or can be significant.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>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 are on appeal,
there remains a risk that such relief may not be obtainable in all
cases. This risk has been reduced given that a majority of states
now limit the dollar amount of bonds or require no bond at all.
Liggett has secured approximately $3,826 in bonds as of September
30, 2010.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>In June 2009, Florida amended its existing bond cap statute by
adding a $200,000 bond cap that applies to all <i>Engle </i>progeny cases
(defined below) in the aggregate and establishes individual bond
caps for individual <i>Engle </i>progeny cases in amounts that vary
depending on the number of judgments in effect at a given time.
The legislation applies to judgments entered after the effective
date and remains in effect until December 31, 2012.</td>
</tr>
</table>
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<b>
<u>
</u>
</b>
</div>
<div style="margin-top: 6pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>Certain plaintiffs have challenged the constitutionality of the bond cap
statute. Although the Company cannot predict the outcome of such
challenges, it is possible that the Company’s financial position,
results of operations, or cash flows could be materially affected
by an unfavorable outcome of such challenges.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>The Company and its subsidiaries record provisions in their
consolidated financial statements for pending litigation when they
determine that an unfavorable outcome is probable and the amount
of loss can be reasonably estimated. At the present time, while
it is reasonably possible that an unfavorable outcome in a case
may occur: (i) management has concluded that it is not probable
that a loss has been incurred in any of the pending
tobacco-related cases; or (ii) management is unable to estimate
the possible loss or range of loss that could result from an
unfavorable outcome of any of the pending tobacco-related cases
and, therefore, management has not provided any amounts in the
consolidated financial statements for unfavorable outcomes, if
any. Liggett believes, and has been so advised by counsel, that it
has valid defenses to the litigation pending against it, as well
as valid bases for appeal of adverse verdicts. All such cases
are, and will continue to be vigorously defended. However,
Liggett may enter into settlement discussions in particular cases
if it believes it is in its best interest to do so.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td><i>Individual Actions</i></td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>As of September 30, 2010, there were 36 individual cases pending against Liggett and/or
the Company, where one or more individual plaintiffs allege injury resulting from
cigarette smoking, addiction to cigarette smoking or exposure to secondary smoke and seek
compensatory and, in some cases, punitive damages. In addition, there were approximately
7,031 <i>Engle </i>progeny cases pending against Liggett and the Company, in state and federal
courts in Florida, and approximately 100 individual cases pending in West Virginia state
court as part of a consolidated action. The following table lists the number of individual
cases by state that are pending against Liggett or its affiliates as of September 30, 2010
(excluding <i>Engle </i>progeny cases in Florida and the consolidated cases in West Virginia):</td>
</tr>
</table>
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<td width="88%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>Number</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000"><b>State</b></td>
<td style="border-bottom: 1px solid #000000"> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>of Cases</b></td>
</tr>
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<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Florida
</div></td>
<td> </td>
<td> </td>
<td align="right">15</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">New York
</div></td>
<td> </td>
<td> </td>
<td align="right">9</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Louisiana
</div></td>
<td> </td>
<td> </td>
<td align="right">5</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Maryland
</div></td>
<td> </td>
<td> </td>
<td align="right">3</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">West Virginia
</div></td>
<td> </td>
<td> </td>
<td align="right">2</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Missouri
</div></td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Ohio
</div></td>
<td> </td>
<td> </td>
<td align="right">1</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div style="margin-top: 6pt">
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<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td><i>Liggett Only Cases. </i>There are currently six cases pending where Liggett is the only tobacco
company defendant. Cases where Liggett is the only defendant could increase substantially as a
result of the <i>Engle </i>progeny cases. In February 2009, <i>in Ferlanti v. Liggett Group</i>, a Florida
state court jury awarded compensatory damages of $1,200 as well as $96 in expenses, but found
that the plaintiff was 40% at fault. Therefore, plaintiff’s award was reduced to $720 in
compensatory damages. Punitive damages were not awarded. Liggett appealed the award. In
September 2010, the court awarded plaintiff’s attorneys’ fees of $996. In <i>Hausrath v. Philip
Morris</i>, a case pending in New York state court, where two individuals are suing, plaintiffs
dismissed all defendants other than Liggett. There has been no recent activity in the case. In
<i>Blitch v. Liggett Group</i>, an <i>Engle </i>progeny case, trial is scheduled for March 2011. The other
three individual actions, in which Liggett is the only tobacco company defendant, are dormant.
In <i>Davis v. Liggett</i> Group, another Liggett only case, judgment was
entered against Liggett in the amount of $540 plus attorneys’
fees. The judgment was paid by Liggett and this matter is concluded.
</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>The plaintiffs’ allegations of liability in 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.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>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.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>In addition to several adverse verdicts against Liggett, 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.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td><i>Engle Progeny Cases</i>. In 2000, a jury in <i>Engle v. R.J. Reynolds Tobacco Co. </i>rendered a
$145,000,000 punitive damages verdict in favor of a “Florida Class” against certain cigarette
manufacturers, including Liggett. Pursuant to the Florida Supreme Court’s July 2006 ruling in
<i>Engle</i>, which decertified the class on a prospective basis, and affirmed the appellate court’s
reversal of the punitive damages award, former class members had one year from January 11, 2007
in which to file individual lawsuits. In addition, some individuals who filed suit prior to
January 11, 2007, and who claim they meet the conditions in <i>Engle</i>, are attempting to avail
themselves of the <i>Engle </i>ruling. Lawsuits by individuals requesting the benefit of the <i>Engle</i>
ruling, whether filed before or after the January 11, 2007 deadline, are referred to as the
“<i>Engle </i>progeny cases.” Liggett and the Company have been named in approximately 7,031 <i>Engle</i>
progeny cases in both federal (3,862 cases) and state (3,169 cases) courts in Florida. Other
cigarette manufacturers have also been named as defendants in these cases, although as a case
proceeds, one or more defendants may ultimately be dismissed from the action. These cases
include approximately 8,172 plaintiffs, approximately 3,862 of whom have claims pending in
federal court and 4,970 state court. Duplicate cases were filed in federal and state court
on behalf of approximately 660 plaintiffs. The number of state court <i>Engle </i>progeny cases will likely
increase as the courts may require multi-plaintiff cases to be severed into individual cases.
The total number of plaintiffs may also increase as a result of attempts by existing plaintiffs
to add additional parties.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>As of October 31, 2010, in addition to the <i>Lukacs </i>case described below, the following <i>Engle</i>
progeny cases have resulted in judgments against Liggett:</td>
</tr>
</table>
</div>
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<tr valign="bottom">
<td width="22%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="31%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><font style="font-variant: small-caps"><b>Compensatory</b></font></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><font style="font-variant: small-caps"><b>Punitive Damages</b></font></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000"><font style="font-variant: small-caps"><b>Date</b></font></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><font style="font-variant: small-caps"><b>Case Name</b></font></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><font style="font-variant: small-caps"><b>County</b></font></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><font style="font-variant: small-caps"><b>Damages Against Liggett</b></font></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><font style="font-variant: small-caps"><b>Against Liggett</b></font></td>
</tr>
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<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">August 2009
</div></td>
<td> </td>
<td colspan="3" align="left"><i>Campbell v. R.J. Reynolds</i></td>
<td> </td>
<td colspan="3" align="left">Escambia</td>
<td> </td>
<td align="right">$</td>
<td align="right">156</td>
<td> </td>
<td> </td>
<td colspan="3" align="center">None</td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">March 2010
</div></td>
<td> </td>
<td colspan="3" align="left"><i>Douglas v. R.J. Reynolds</i></td>
<td> </td>
<td colspan="3" align="left">Hillsborough</td>
<td> </td>
<td align="right">$</td>
<td align="right">1,350</td>
<td> </td>
<td> </td>
<td colspan="3" align="center">None</td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">April 2010
</div></td>
<td> </td>
<td colspan="3" align="left"><i>Clay v. R.J. Reynolds</i></td>
<td> </td>
<td colspan="3" align="left">Escambia</td>
<td> </td>
<td align="right">$</td>
<td align="right">349</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">1,000</td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">April 2010
</div></td>
<td> </td>
<td colspan="3" align="left"><i>Putney v. R.J. Reynolds</i></td>
<td> </td>
<td colspan="3" align="left">Broward</td>
<td> </td>
<td align="right">$</td>
<td align="right">3,008</td>
<td> </td>
<td> </td>
<td colspan="3" align="center">None</td>
</tr>
<!-- End Table Body -->
</table>
</div>
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<td>These judgments are currently on appeal or will be appealed. As of September 30, 2010,
there were 38 <i>Engle </i>progeny cases scheduled for trial in 2010 and 2011, where Liggett and the
Company are named defendants. For further information on the <i>Engle </i>case and on <i>Engle </i>progeny
cases, see “<i>Class Actions </i>— <i>Engle Case</i>,” below.</td>
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<td><i>Lukacs Case</i>. In June 2002, the jury in a Florida state court action entitled <i>Lukacs v. R.J.
Reynolds Tobacco Co., </i>awarded $37,500 in compensatory damages, jointly and severally, in a case
involving Liggett and two other cigarette manufacturers, which amount was subsequently reduced
by the court. The jury found Liggett 50%
responsible for the damages incurred by the plaintiff.
The <i>Lukacs </i>case was the first case to be tried as an individual <i>Engle </i>progeny case, but was
tried almost five years prior to the Florida Supreme Court’s final decision in <i>Engle</i>. In
November 2008, the court entered final judgment in the amount of $24,835 (for which Liggett was
50% responsible), plus interest from June 2002. Plaintiff filed a motion seeking an award of
attorneys’ fees from Liggett based on plaintiff’s prior proposal for settlement. In March
2010, the Third District Court of Appeal affirmed the decision, <i>per curiam. </i>In June 2010,
Liggett paid its share of the judgment and settled claims for attorneys’ fees and accrued
interest for a total payment of approximately $14,361.</td>
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<td>As of September 30, 2010, there were six actions pending for which either a class had been
certified or plaintiffs were seeking class certification, where Liggett is a named defendant,
including one alleged price fixing case. Other cigarette manufacturers are also named in these
actions.</td>
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<td>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.</td>
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<td>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,
statute of limitations and federal preemption.</td>
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<td><i>Engle Case</i>. In May 1994, <i>Engle </i>was 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.</td>
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<td>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.</td>
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<td>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 determined that the
following Phase I findings are entitled to <i>res judicata </i>effect in <i>Engle </i>progeny cases: (i) that
smoking causes lung cancer, among other diseases; (ii) that nicotine in cigarettes is
addictive; (iii) that defendants placed cigarettes on the market that were defective and
unreasonably dangerous; (iv) that 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) that 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) that defendants
sold or supplied cigarettes that were defective; and (vii) that 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. In
October 2007, the United States Supreme Court denied defendants’ petition for <i>writ of
certiorari</i>. As a result of the <i>Engle </i>decision,
approximately 8,172 former <i>Engle </i>class
members have claims pending against the Company and Liggett and other cigarette manufacturers.</td>
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<td>Three federal district courts (in the <i>Merlob, Brown </i>and <i>Burr </i>cases) ruled that the findings in
Phase I of the <i>Engle </i>proceedings could not be used to satisfy elements of plaintiffs’ claims,
and two of those rulings (<i>Brown </i>and <i>Burr) </i>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 the appeals were consolidated (in February 2009, the appeal in <i>Burr </i>was dismissed
for lack of prosecution). In July 2010, the Eleventh Circuit ruled that plaintiffs do not have
an unlimited right to use the findings from the original <i>Engle </i>trial to meet their burden of
establishing the elements of their claims at trial. Rather, plaintiffs may only use the
findings to establish specific facts that they demonstrate with a reasonable degree of
certainty were actually decided by the original <i>Engle </i>jury. The Eleventh Circuit remanded the
case to the district court to determine what specific factual findings the <i>Engle </i>jury actually
made.</td>
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<td><i>Other Class Actions. </i>In <i>Smith v. Philip Morris, </i>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 November 2001. Discovery is ongoing.</td>
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<td>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. In December 2008, the United States
Supreme Court, in <i>Altria Group v. Good</i>, 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 against other
cigarette manufacturers. Although Liggett was not a defendant in the <i>Good </i>case, and is not a
defendant in a substantial majority of other “lights” class actions, an adverse ruling or
commencement of additional “lights” related class actions could have a material adverse effect
on the Company.</td>
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<td>In November 1997, in <i>Young v. American Tobacco Co., </i>a purported personal injury class action
was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who,
though not themselves cigarette smokers, are alleged to have been exposed to secondhand smoke
from cigarettes which were manufactured by the defendants, and who suffered injury as a result
of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and
punitive damages. In October 2004, the trial court stayed this case pending the outcome of the
appeal in <i>Scott v. American Tobacco Co. </i>(see discussion below).</td>
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<td>In June 1998, in <i>Cleary v. Philip Morris, </i>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 sought 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 “lights” cigarettes. The case was then removed to
federal court on the basis of this new claim. In November 2009, plaintiffs filed a revised
motion for class certification as to the three proposed classes, which motion was denied by the
court. In February 2010, the court granted summary judgment in favor of defendants as to all
claims, other than a “lights” claim involving another cigarette manufacturer. The court
granted leave to the plaintiffs to reinstate the motion as to the addiction claims. Plaintiffs
filed a Fourth Amended Complaint in an attempt to resurrect their addiction claims. In June
2010, the court granted defendants’ motion to dismiss the Fourth Amended Complaint and in July
2010, the court denied plaintiffs’ motion for reconsideration. Plaintiffs appealed to the
United States Court of Appeals for the Seventh Circuit in August 2010.</td>
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<td>In April 2001, in <i>Brown v. Philip Morris USA, </i>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 mandate. In September 2009, plaintiffs sought
reconsideration of the court’s September 2004 order finding that plaintiffs’ allegations
regarding “lights” cigarettes are preempted by federal law, in light of the recent United
States Supreme Court decision in <i>Altria Group v. Good</i>. In March 2010, the trial court granted
reconsideration of its September 2004 order granting partial summary judgment to defendants
with respect to plaintiffs’ “lights” claims on the basis of judicial decisions issued since its
order was issued, including the United States Supreme Court’s ruling in <i>Altria v Good</i>, thereby
reinstating plaintiffs’ “lights” claims. Since the trial court’s prior ruling decertifying the
class was reversed on appeal by the California Supreme Court, the parties and the court are
treating all claims currently being asserted by the plaintiffs as certified, subject, however,
to defendants’ challenge to the class representatives standing to assert their claims. In June
2010, plaintiffs filed a motion seeking collateral estoppel effect from the findings in the
case brought by the Department of Justice (see <i>DOJ Lawsuit </i>described below). Trial is scheduled
to start on May 6, 2011.</td>
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<td>Although not technically a class action, in <i>In Re: Tobacco Litigation (Personal Injury Cases)</i>,
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 commenced in June 2010 and ended in a
mistrial. If the case were to proceed against Liggett, it is estimated that Liggett could be a
defendant in approximately 100 of the individual cases.</td>
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<td>In July 2010, an action entitled <i>Calistro v. Altria Group </i>was commenced against Liggett and
other cigarette manufacturers, in the U.S. Virgin Islands, on behalf of a putative class of
smokers who, although have no personal injury, contend they were injured by the defendants’
alleged fraudulent concealment and other purported misconduct regarding the addictive nature of
nicotine and the promotion of “light” cigarettes. The plaintiffs seek equitable relief,
compensatory and punitive damages, including, without limitation, damages for medical
monitoring and nicotine rehabilitation programs. In September 2010, Liggett and its affiliates
were voluntarily dismissed from the action.</td>
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<td>In addition to the cases described above, numerous class actions remain certified against other
cigarette manufacturers, including <i>Scott. </i>In that case, in May 2004 a Louisiana jury awarded
plaintiffs approximately
$590,000 against other cigarette manufacturers to fund a statewide 10-year smoking
cessation program for members of the class. In April 2010, the Louisiana Fourth Circuit Court
of Appeal affirmed in part prior decisions ordering the defendants to fund a statewide 10-year
smoking cessation program. The court of appeal reduced the amount of the judgment to
approximately $241,000, plus interest from July 2008.</td>
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<td><i>Health Care Cost Recovery Actions</i></td>
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<td>As of September 30, 2010, there were four Health Care Cost Recovery Actions pending against
Liggett. Other cigarette manufacturers are also named in these cases. 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.</td>
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<td>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.</td>
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<td><i>DOJ Lawsuit. </i>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.</td>
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<td>In August 2006, the trial court entered a Final Judgment 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. In February 2010, the
government and all defendants, other than Liggett, filed petitions for <i>writ of certiorari </i>to
the United States Supreme Court. In June 2010, the United States Supreme Court, without
comment, denied review. As a result, the cigarette manufacturing defendants, other than
Liggett, are now subject to the trial court’s Final Judgment which ordered the following
relief: (i) an injunction against “committing any act of racketeering” relating to the
manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United
States; (ii) an injunction against participating directly or indirectly in the management or
control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor
Air Research, or any successor or affiliated entities of each (iii) an injunction against
“making, or causing to be made in any way, any material false, misleading, or deceptive
statement or representation or engaging in any public relations or marketing endeavor that is
disseminated to the United States public and that misrepresents or suppresses information
concerning cigarettes”; (iv) an injunction against conveying any express or implied health
message though use of descriptors on cigarette packaging or in cigarette advertising or
promotional material, including “lights,” “ultra lights,” and “low tar,” which the court found
could cause consumers to believe one cigarette brand is less hazardous that another brand; (v)
the issuance of “corrective statements” in various media regarding the adverse health effects
of smoking, the addictiveness of smoking and nicotine, the lack of any significant health
benefit from smoking “low tar” or “light” cigarettes, defendants’ manipulation of cigarette
design to ensure optimum nicotine delivery and the adverse health effects of exposure to
environmental tobacco smoke; (vi) the disclosure of defendants’ public document websites and in
the Minnesota document repository of all documents produced to the government in the lawsuit or
produced in any future court or administrative action concerning smoking and health until 2021,
with certain additional requirements as to documents withheld from production under a claim or
privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the
government in the same form and on
the same schedules as defendants now follow in disclosing such data to the Federal
Trade Commission (“FTC”) for a period of ten years; (viii) certain restrictions on the sale or
transfer by defendants of any cigarette brands, brand names, formulas or cigarette business
within the United States; and (ix) payment of the government’s costs in bringing the action.</td>
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<td>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.</td>
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<td>In <i>City of St. Louis v. American Tobacco Company</i>, a case pending in Missouri state court
since December 1998, the City of St. Louis and approximately 38 hospitals and former 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. In April 2010, the court further determined that each plaintiff is
barred from seeking damages which accrued more than five years prior to the time that
plaintiff joined the suit. In that same order, the court granted partial summary judgment for
defendants barring plaintiffs’ claims for future damages. In July 2010, the court dismissed
certain other claims brought by plaintiffs, on the grounds they were preempted. Defendants
have filed other summary judgment motions that remain pending. Trial is scheduled to start on
January 10, 2011.</td>
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<td>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. The other
defendants’ appeal of the district court’s denial of their motion to dismiss was heard by the
Israel Supreme Court in March 2005 and the parties are awaiting the court’s decision.</td>
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<td>In May 2008, in <i>National Committee to Preserve Social Security and Medicare v. Philip Morris
USA, </i>a case pending in the United States District Court for the Eastern District of New York,
plaintiffs commenced an action to recover damages equal to twice the amount paid by Medicare
for the smoking-related health care services provided from May 21, 2002 to the present, for
which treatment defendants’ allegedly were required to make payment under the Medicare
Secondary Payer provisions of the Social Security Act. In July 2008, defendants’ filed a
motion to dismiss plaintiffs’ claims and plaintiffs filed a motion for partial summary
judgment. In March 2009, the court granted defendants’ motion and dismissed the case. In May
2009, plaintiffs noticed an appeal to the United States Court of Appeals for the Second Circuit
and in September 2010, the court vacated the District Court’s decision, and remanded the case
with instructions for the District Court to dismiss the complaint on other grounds.</td>
</tr>
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<td><i>Upcoming Trials</i></td>
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<td>In addition to the January 2011 trial in the <i>City of St. Louis </i>case and the May 2011 trial in
the <i>Brown </i>case, both discussed above, as of September 30,
2010, there were 38 <i>Engle </i>progeny
cases that are scheduled for trial in 2010 and 2011.
Additionally, a Palm Beach County Florida individual case is on the
February – April 2011 trial calender.
The Company and/or Liggett and other
cigarette manufacturers are currently named as defendants in each of these cases, although as a
case proceeds, one or more defendants may ultimately be dismissed from the action. Cases
against other cigarette manufacturers are also currently scheduled for trial in 2010 and 2011.
Trial dates are subject to change.</td>
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<td><i>MSA and Other State Settlement Agreements</i></td>
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<td>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 made by those states and territories, including claims for
health care cost reimbursement and claims concerning sales of cigarettes to minors.</td>
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<td>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.</td>
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<td>As a result of the MSA, the Settling States released Liggett from:</td>
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<td>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</td>
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<td width="1%"> </td>
<td>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.</td>
</tr>
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<td>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.</td>
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<td>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.</td>
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<td style="font-size: 6pt"> </td>
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<td>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.</td>
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<td>Liggett has no payment obligations under the MSA except to the extent its market share exceeds
a market share exemption of approximately 1.65% of total cigarettes sold in the United States.
Vector Tobacco has no payment obligations under the MSA except to the extent its market share
exceeds a market share exemption of approximately 0.28% of total cigarettes sold in the United
States. According to data from Management Science Associates, Inc., domestic shipments by
Liggett and Vector Tobacco accounted for approximately 2.7% of the
total cigarettes sold in the United States in 2009. For the nine month period ending
September 30, 2010, Liggett and Vector Tobacco’s domestic shipments accounted for
approximately 3.4% of the total cigarettes sold in the United States. If Liggett’s or Vector
Tobacco’s market share exceeds their respective market share exemption in a given year, which
it has each year since 2000, then on April 15 of the following year, Liggett and/or Vector
Tobacco, as the case may be, must pay on each excess unit an amount equal (on a per-unit
basis) to that due from the OPMs for that year. Liggett and Vector Tobacco paid $54,435 for
their 2009 MSA obligations.</td>
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<td><i>Certain MSA Disputes</i></td>
</tr>
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<td><i>NPM Adjustment. </i>In March 2006, an economic consulting firm selected pursuant to the MSA
determined 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 and 2005. In March 2009, a different economic consulting firm made the same
determination for 2006. As a result, the manufacturers are entitled to potential NPM
Adjustments to their 2003, 2004, 2005 and 2006 MSA payments. The Participating Manufacturers
may also be entitled to potential NPM Adjustments to their 2007, 2008 and 2009 payments
pursuant to an agreement entered into in June 2009 between the OPMs and the Settling States
under which the OPMs agreed to make certain payments for the benefit of the Settling States, in
exchange for which the Settling States stipulated that the MSA was a “significant factor
contributing to” the loss of market share of Participating Manufacturers in 2007, 2008 and
2009. A Settling State that has diligently enforced its qualifying escrow statute in the year
in question may be able to avoid application of the NPM Adjustment to the payments made by the
manufacturers for the benefit of that Settling State.</td>
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<td>For 2003 — 2009, Liggett and Vector Tobacco disputed that they owed the Settling States
the NPM Adjustments as calculated by the Independent Auditor. As permitted by the MSA, Liggett
and Vector Tobacco withheld payment associated with these NPM Adjustment amounts. The total
amount withheld or paid into a disputed payment account by Liggett and Vector Tobacco for 2003
— 2009 was $29,236. In 2003, Liggett and Vector Tobacco paid the NPM adjustment amount of
$9,345 to the Settling States although both companies continue to dispute this amount is owed.
At September 30, 2010, included in “Other assets” on the Company’s condensed consolidated
balance sheet was a noncurrent receivable of $6,542 relating to such payment.</td>
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<td>The following amounts have not been expensed by the Company as they relate to Liggett and
Vector Tobacco’s NPM Adjustment claims for 2003 — 2005: $6,542 for 2003, $3,789 for 2004 and
$800 for 2005. Liggett and Vector Tobacco have expensed all disputed amounts related to the
NPM Adjustment since 2005.</td>
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<td>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 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 the OPMs and many of the SPMs, 45 of
the Settling States, representing approximately 90% of the allocable share of the Settling
States, entered into an agreement providing for a nationwide arbitration of the dispute with
respect to the NPM Adjustment for 2003. In June 2010, the three person arbitration panel was
selected and procedural hearings have commenced. 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. There can be no assurance that Liggett or Vector Tobacco will
receive any adjustment as a result of these proceedings.</td>
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<td width="1%"> </td>
<td><i>Gross v. Net Calculations. </i>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).</td>
</tr>
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<td>Liggett objected to this retroactive change and disputed the change in methodology.
Liggett contends that the retroactive change from “gross” to “net” unit amounts is
impermissible for several reasons, including:</td>
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</table>
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<div style="margin-top: 6pt">
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<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>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);</td>
</tr>
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<td>such a change is not authorized without the consent of affected parties to the
MSA;</td>
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<td style="font-size: 6pt"> </td>
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<td width="3%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>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</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
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<td width="1%"> </td>
<td>Liggett and others have relied upon the calculations based on “gross” unit
amounts since 1998.</td>
</tr>
</table>
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<div style="margin-top: 6pt">
<table width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; text-align: left">
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<td>The change in the method of calculation could result in Liggett owing, at a minimum,
approximately $9,500, plus interest, of additional MSA payments for prior years, because the
proposed change from “gross” to “net” units would serve to lower Liggett’s market share
exemption under the MSA. The Company estimates that Liggett’s future MSA payments would be at
least approximately $2,250 higher if the method of calculation is changed. No amounts have been
expensed or accrued in the accompanying condensed consolidated financial statements for any
potential liability relating to the “gross” versus “net” dispute. There can be no assurance
that Liggett will not be required to make additional payments, which payments could adversely
affect the Company’s consolidated financial position, results of operations or cash flows.</td>
</tr>
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<td><i>Litigation Challenging the MSA. </i>In <i>Freedom Holdings Inc. v. Cuomo</i>, litigation pending in
federal court in New York, certain importers of cigarettes allege that the MSA and certain
related New York statutes violate federal antitrust and constitutional law. The district court
granted New York’s motion to dismiss the complaint for failure to state a claim. On appeal,
the United States Court of Appeals for the Second Circuit held that if all of the allegations
of the complaint were assumed to be true, plaintiffs had stated a claim for relief on antitrust
grounds. In January 2009, the district court granted New York’s motion for summary judgment,
dismissing all claims brought by the plaintiffs, and dissolving the preliminary injunction.
Plaintiffs appealed the decision.
In October 2010, the Second Circuit affirmed the district
court’s decision.
</td>
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<td>In <i>Grand River Enterprises Six Nations, Ltd. v. King</i>, 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. After discovery, the parties cross-moved for
summary judgment; briefing concluded in December 2009 and oral argument took place in April
2010.</td>
</tr>
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<td style="font-size: 6pt"> </td>
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<td width="3%" nowrap="nowrap" align="left"> </td>
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<td>Similar challenges to the MSA and MSA-related state statutes are pending in several other
states. 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.</td>
</tr>
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<td style="font-size: 6pt"> </td>
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<td>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, including Liggett and Vector Tobacco.
Vibo alleged, among other things, that the market share exemptions (i.e., grandfathered shares)
provided to certain SPMs under the MSA, including Liggett and Vector Tobacco, violate federal
antitrust and constitutional law. In January 2009, the district court dismissed
the complaint. In January 2010, the court entered final judgment in favor of the
defendants. Vibo appealed to the United States Court of Appeals for
the Sixth Circuit. A decision is pending.</td>
</tr>
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<td style="font-size: 6pt"> </td>
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<td><i>Other State Settlements. </i>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.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
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<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>In 2003, in order to resolve any potential issues with Minnesota as to Liggett’s ongoing
economic settlement obligations, Liggett negotiated a $100 a year payment to Minnesota, to be
paid any year cigarettes manufactured by Liggett are sold in that state. In 2004, the
Attorneys General for Florida, Mississippi and Texas advised Liggett that they believed that
Liggett had failed to make required payments under the respective settlement agreements with
these states from 1998 through 2003 and that additional payments may be due for 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. Liggett
entered into a Memorandum of Understanding with Florida providing for a good faith payment by Liggett of
$250 and an agreement to mediate the dispute. In October 2010, the parties mediated the dispute and reached an agreement in
principle,
subject to definitive documentation.
The agreement provides for an additional $950 payment and payments of
$250 per year over a period of 21 years. The payments in years 12 –
20 will be subject to an inflation adjustment. The Company has
accrued for this potential settlement.
There can be no assurance that the settlement with Florida will be
finalized, that Liggett will resolve the other matters set forth above or that Liggett will not be
required to make additional payments, which payments could adversely affect the Company’s
consolidated financial position, results of operations or cash flows.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td><i>Cautionary Statement</i>. Management is not able to predict the outcome of the litigation pending
or threatened against Liggett. Litigation is subject to many uncertainties. For example, the
jury in the <i>Lukacs </i>case, an <i>Engle </i>progeny case tried in 2002, awarded $24,835 in compensatory
damages plus interest against Liggett and two other defendants and found Liggett 50%
responsible for the damages. The verdict was affirmed on appeal and
Liggett paid $14,361 in
June 2010. To date, Liggett has been found liable in four other <i>Engle </i>progeny cases, which
are currently on appeal or will be appealed. As a result of the <i>Engle </i>decision, approximately
8,172 former <i>Engle </i>class members have claims pending against the Company and Liggett and other
cigarette manufacturers. It is possible that other cases could be decided unfavorably against
Liggett and that Liggett will be unsuccessful on appeal. Liggett may enter into discussions in
an attempt to settle particular cases if it believes it is in its best interest to do so.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="3%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>Management cannot predict the cash requirements related to any future defense costs,
settlements or judgments, including cash required to bond any appeals, and there is a risk that
those requirements will not be able to be met. An unfavorable outcome of a pending smoking and
health case could encourage the commencement of additional similar litigation, or could lead to
multiple adverse decisions in the <i>Engle </i>progeny cases. Management is unable to make a
reasonable estimate with respect to the amount or range of loss that could result from an
unfavorable outcome of the cases pending against Liggett or the costs of defending such cases
and as a result has not provided any amounts in its condensed consolidated financial statements
for unfavorable outcomes. The complaints filed in these cases rarely detail alleged damages.
Typically, the claims set forth in an individual’s complaint against the tobacco industry seek
money damages in an amount to be determined by a jury, plus punitive damages, costs and legal
fees.</td>
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<td>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.</td>
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<td>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.</td>
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<td>Liggett’s and Vector Tobacco’s management are unaware of any material environmental conditions
affecting their existing facilities. Liggett’s and Vector Tobacco’s management believe that
current operations are conducted in material compliance with all environmental laws and
regulations and other laws and regulations governing cigarette manufacturers. Compliance with
federal, state and local provisions regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, has not had a material effect on
the capital expenditures, results of operations or competitive position of Liggett or Vector
Tobacco.</td>
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<td><u><b>Other Matters</b></u><b>:</b></td>
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<td>In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five
year agreement with a subsidiary of the American Wholesale Marketers Association to support a
program to permit certain tobacco distributors to secure, on reasonable terms, tax stamp bonds
required by state and local governments for the distribution of cigarettes. This agreement has
been extended through February 2014. Under the agreement, Liggett Vector Brands has agreed to
pay a portion of losses, if any, incurred by the surety under the bond program, with a maximum
loss exposure of $500 for Liggett Vector Brands. To secure its potential obligations under the
agreement, Liggett Vector Brands has delivered to the subsidiary of the association a $100
letter of credit and agreed to fund up to an additional $400. Liggett Vector Brands has
incurred no losses to date under this agreement, and the Company believes the fair value of
Liggett Vector Brands’ obligation under the agreement was immaterial at September 30, 2010.</td>
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<td>In December 2009, a complaint was filed against Liggett in Alabama state court by the estate of
a woman who died, in 2007, in a house fire allegedly caused by the ignition of contents of the
house by a Liggett cigarette. 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. In January 2010, Liggett removed the case to federal court.
In February 2010, Liggett filed a motion to dismiss the case and plaintiff filed a motion to
remand. In September 2010, the court granted plaintiff’s motion to remand, but the order has
been stayed pending non-binding mediation of the dispute.</td>
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<td>There may be several other proceedings, lawsuits and claims pending against the Company
and certain of its consolidated subsidiaries unrelated to tobacco or tobacco product
liability. Management is of the opinion that the liabilities, if any, ultimately
resulting from such other proceedings, lawsuits and claims should not materially affect
the Company’s financial position, results of operations or cash flows.</td>
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