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<td width="2%" nowrap="nowrap" align="left"><b>5.</b></td>
<td width="1%"> </td>
<td><u><b>CONTINGENCIES</b></u></td>
</tr>
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<td><u><b>Tobacco-Related Litigation:</b></u></td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
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<td width="2%" nowrap="nowrap" align="left"> </td>
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<td><i>Overview</i></td>
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<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
</td>
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<b>
</b>
<u>
<b>
</b>
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<div align="left" style="font-size: 10pt; margin-top: 0pt; margin-left: 3%">
are not quantifiable at this time. For the three months ended March 31, 2011, and 2010, Liggett
incurred legal expenses and other litigation costs totaling
approximately $1,969 and $1,648,
respectively.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">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 litigation could encourage the commencement of additional litigation. Damages
claimed in some tobacco-related litigation are or can be significant.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">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 $5,059 in bonds as of March 31, 2011.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">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 of the legislation and remains in effect until December 31, 2012. Certain
plaintiffs have challenged the constitutionality of the bond cap statute. In one of these
cases, the court upheld the constitutionality of the statute which was recently affirmed on
appeal. 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.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">The Company and its subsidiaries record provisions in their consolidated financial statements
for pending litigation when they determine that an unfavorable outcome is probable and the
amount of loss can be reasonably estimated. At the present time, while it is reasonably
possible that an unfavorable outcome in a case may occur, except as disclosed in this Note 5:
(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.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%"><i>Individual Actions</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">As of March 31, 2011, 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. These cases do not include <i>Engle</i>
progeny cases (described below) or the 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 March 31, 2011 (excluding <i>Engle </i>progeny cases in Florida and the consolidated cases in
West Virginia):
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<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Number</b></td>
<td> </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> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>of Cases</b></td>
<td> </td>
</tr>
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<td>
<div style="margin-left:15px; text-indent:-15px">Florida
</div></td>
<td> </td>
<td> </td>
<td align="center">16</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="center">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="center">3</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="center">3</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Missouri
</div></td>
<td> </td>
<td> </td>
<td align="center">2</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">West Virginia
</div></td>
<td> </td>
<td> </td>
<td align="center">2</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="center">1</td>
<td> </td>
</tr>
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<u>
</u>
</b>
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<td width="1%"> </td>
<td><i>Liggett Only Cases. </i>There are currently seven 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.</td>
</tr>
</table>
</div>
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<td width="1%"> </td>
<td>In February 2009, in <i>Ferlanti v. Liggett Group</i>, a Florida state court jury awarded compensatory
damages and a judgment, in the amount of $816, was entered by the court. That judgment was
affirmed on appeal and was paid by Liggett in March 2011. In September 2010, the court awarded
plaintiff’s attorneys’ fees of $996. The parties appealed the attorneys’ fee award and the
appeal is pending. Liggett previously accrued $2,000 for the <i>Ferlanti </i>case. In <i>Blitch v. R.J.
Reynolds</i>, an <i>Engle </i>progeny case, trial commenced on March 14, 2011 and on March 23, 2011, the
jury returned a defense verdict. The time for plaintiff to notice an appeal has not yet run. In
<i>Katz v. R.J. Reynolds</i>, another <i>Engle </i>progeny case, trial was set for April 2011, but was
recently continued. There has been no recent activity in <i>Hausrath v. Philip Morris</i>, a case
pending in New York state court, where two individuals are suing. The other three individual
actions, in which Liggett is the only tobacco company defendant, are dormant.</td>
</tr>
</table>
</div>
<div style="margin-top: 6pt">
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<td width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>In <i>Davis v. Liggett Group</i>, which was another Liggett only individual case, judgment was entered
against Liggett in the amount of $540 plus attorneys’ fees and was affirmed on appeal. The
judgment was paid by Liggett in 2009 and this matter is concluded.</td>
</tr>
</table>
</div>
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<td width="1%" 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>
</table>
</div>
<div style="margin-top: 6pt">
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<td width="1%" 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>
</table>
</div>
<div style="margin-top: 6pt">
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<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="1%" 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. 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 final awards, have been paid.</td>
</tr>
</table>
</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="1%" 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 are named in 6,717 <i>Engle </i>progeny cases in both
federal (3,694 cases) and state (3,023 cases) courts in Florida. Other cigarette manufacturers
are also 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 8,960
plaintiffs, 671 of which represent state court consortium claims. The number of state court
<i>Engle </i>progeny cases may increase
as multi-plaintiff cases continue 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>
</table>
</div>
<div style="margin-top: 6pt">
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<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>As of April 13, 2011, 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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<td width="28%"> </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>
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<td width="3%"> </td>
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<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>
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<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" style="border-bottom: 0px solid #000000"><font style="font-variant: small-caps"><b>Compensatory</b></font></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"> </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</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>Punitive Damages</b></font></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 0px solid #000000"><font style="font-variant: small-caps"><b>Status</b></font></td>
</tr>
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<td>
<div style="margin-left:15px; text-indent:-15px">August 2009
</div></td>
<td> </td>
<td colspan="3" align="center" nowrap="nowrap"><i>Campbell v. R.J.</i> <i>Reynolds</i></td>
<td> </td>
<td colspan="3" align="center">Escambia</td>
<td> </td>
<td align="right">$</td>
<td align="right">156</td>
<td> </td>
<td> </td>
<td colspan="3" align="center">None</td>
<td> </td>
<td colspan="3" align="center">Affirmed by</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
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<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td colspan="3" align="center">DCA, Defendants</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
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<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td colspan="3" align="center">filed Motion with</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
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<td> </td>
<td> </td>
<td colspan="3" align="center">DCA for</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td colspan="3" align="center" nowrap="nowrap"> </td>
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<td> </td>
<td> </td>
<td colspan="3" align="center" nowrap="nowrap">certification to FL</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
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<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td colspan="3" align="center">Sup. Ct.</td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
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<td> </td>
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<td> </td>
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<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="center" nowrap="nowrap"><i>Douglas v. R.J. Reynolds</i></td>
<td> </td>
<td colspan="3" align="center">Hillsborough</td>
<td> </td>
<td align="right">$</td>
<td align="right">1,350</td>
<td> </td>
<td> </td>
<td colspan="3" align="center">None</td>
<td> </td>
<td colspan="3" align="center">On appeal</td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
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<td> </td>
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<td> </td>
<td> </td>
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<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">April 2010
</div></td>
<td> </td>
<td colspan="3" align="center"><i>Clay v. R.J. Reynolds</i></td>
<td> </td>
<td colspan="3" align="center">Escambia</td>
<td> </td>
<td align="right">$</td>
<td align="right">349</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">1,000</td>
<td> </td>
<td> </td>
<td colspan="3" align="center">On appeal</td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
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<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">April 2010
</div></td>
<td> </td>
<td colspan="3" align="center"><i>Putney v. R.J. Reynolds</i></td>
<td> </td>
<td colspan="3" align="center">Broward</td>
<td> </td>
<td align="right">$</td>
<td align="right">3,008</td>
<td> </td>
<td> </td>
<td colspan="3" align="center">None</td>
<td> </td>
<td colspan="3" align="center">On appeal</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>
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<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 2011
</div></td>
<td> </td>
<td colspan="3" align="center"><i>Tullo v. R.J. Reynolds</i></td>
<td> </td>
<td colspan="3" align="center">Palm Beach</td>
<td> </td>
<td align="right">$</td>
<td align="right">225</td>
<td> </td>
<td> </td>
<td colspan="3" align="center">None</td>
<td> </td>
<td colspan="3" align="center">Will be appealed</td>
</tr>
<!-- End Table Body -->
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>Through March 31, 2011, there were 25 plaintiffs’ verdicts in <i>Engle </i>progeny cases,
including the five referenced above, and 13 defense verdicts. Other cases have been dismissed
by the court on summary judgment. 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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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, 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 $14,361.</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td><i>Class Actions</i></td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>As of March 31, 2011, 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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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>
</tr>
</table>
</div>
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</div>
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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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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 8,960 plaintiffs have claims
pending against the Company and Liggett and other cigarette manufacturers.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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. All federal cases were stayed pending review by the Eleventh Circuit. On December 22,
2010, stays were lifted in 12 cases selected by plaintiffs.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>In December 2010, in the <i>Martin </i>case, a case against R.J. Reynolds, the Florida District Court
of Appeals issued the first ruling by a Florida intermediate appellate court to address the
<i>Brown </i>decision discussed above. The panel held that the trial court correctly construed the
Florida Supreme Court’s 2006 decision in <i>Engle </i>in instructing the jury on the preclusive effect
of the Phase I <i>Engle </i>proceedings, expressly disagreeing with certain aspects of the <i>Brown</i>
decision. This decision could lead to other adverse rulings by state appellate courts.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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 most of the 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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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 an
appeal in another matter.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>In February 1998, in <i>Parsons v. AC & S Inc.</i>, a case pending in West Virginia, the personal
injury class was commenced on behalf of all West Virginia residents who allegedly have personal
injury claims arising from exposure to cigarette smoke and asbestos fibers. The complaint
seeks to recover unspecified damages. The case has been stayed as a result of the December
2000 bankruptcy of three of the defendants.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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. In August 2010, plaintiffs appealed to the United States Court of
Appeals for the Seventh Circuit. Oral argument occurred on April 7, 2011.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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 United States
Supreme Court decision in <i>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 <i>Good</i>, thereby reinstating plaintiffs’ “lights” claims.</td>
</tr>
</table>
</div>
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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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>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 December 2010, defendants filed a
motion for a determination that the class representatives, as set forth in plaintiffs’ tenth
amended complaint, lack standing to pursue the claims. The court granted defendants’ motion
and scheduled a hearing for June 21, 2011 on plaintiffs’ motion for leave to amend and
defendants’ motion to dismiss.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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. A new trial is scheduled for October 17, 2011. 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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>In addition to the cases described above, numerous class actions remain certified against other
cigarette manufacturers. Adverse decisions in these cases could have a material adverse affect
on Liggett’s sales volume, operating income and 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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td><i>Health Care Cost Recovery Actions</i></td>
</tr>
</table>
</div>
<div style="margin-top: 6pt">
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<td width="1%"> </td>
<td>As of March 31, 2011, there were three 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>
</tr>
</table>
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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>
</tr>
</table>
</div>
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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>
</tr>
</table>
</div>
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<td width="1%"> </td>
<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 than 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
the production of all documents produced to the government or produced in any future court or
administrative action concerning smoking and health; (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 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>
</tr>
</table>
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<td width="1%"> </td>
<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>
</tr>
</table>
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<td width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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 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. In October
2010, the trial court granted defendants summary judgment with respect to plaintiffs’ fraud and
negligent misrepresentation claims. Trial commenced on January 31, 2011. On April 29, 2011,
the jury returned a defense verdict on all claims.</td>
</tr>
</table>
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<td width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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. Motions
filed by defendants are pending.</td>
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</table>
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<td width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>In <i>Crow Creek Sioux Tribe v. American Tobacco Company</i>, a South Dakota case filed in 1997, the
plaintiff seeks to recover damages based on various theories of recovery as a result of alleged
sales of tobacco products to minors. The case is dormant.</td>
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<td style="font-size: 6pt"> </td>
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<td width="1%"> </td>
<td><i>Upcoming Trials</i></td>
</tr>
</table>
</div>
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<td width="1%"> </td>
<td>In addition to the trial in the <i>City of St. Louis </i>case, which concluded in April 2011, as
discussed above, as of March 31, 2011, there were 31 <i>Engle </i>progeny cases scheduled for trial in
2011. Several other <i>Engle</i> progeny cases are scheduled for trial in 2012. Additionally, a Florida individual case
is scheduled for trial on September 12, 2011. 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 2011. Trial dates are
subject to change.</td>
</tr>
</table>
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<td><i>MSA and Other State Settlement Agreements</i></td>
</tr>
</table>
</div>
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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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</table>
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<td width="1%"> </td>
<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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</table>
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<td>As a result of the MSA, the Settling States released Liggett from:</td>
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<td width="2%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<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="2%" nowrap="nowrap" align="left"><b>•</b></td>
<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>
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<td width="1%"> </td>
<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>
</tr>
</table>
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<td width="1%"> </td>
<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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</table>
</div>
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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 width="1%"> </td>
<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., Liggett and Vector Tobacco’s domestic shipments accounted
for approximately 3.5%, of the total cigarettes sold in the United States in 2010. If Liggett’s
or Vector Tobacco’s market share exceeds their respective market share exemption in a given
year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may
be, must pay on each excess unit an amount equal (on a per-unit basis) to that due from the
OPMs for that year. On December 31, 2010, Liggett and Vector Tobacco paid $96,500 of the
approximately $144,200 of 2010 MSA payment obligations determined by the independent auditor.
On April 15, 2011, Liggett and Vector Tobacco paid an additional approximately $26,700. Liggett
and Vector Tobacco disputed the balance of approximately $21,000.</td>
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<td><i>Certain MSA Disputes</i></td>
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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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</table>
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<td width="1%"> </td>
<td>For 2003 — 2010, Liggett and Vector Tobacco, as applicable, 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. For 2003, Liggett and Vector Tobacco paid the NPM adjustment amount of $9,345 to the
Settling States although both companies continue to dispute that this amount is owed. The
total amount withheld (or paid into a disputed payment account) by Liggett and Vector Tobacco
for 2004 — 2010 was $46,917. At March 31, 2011, included in “Other assets” on the Company’s
condensed consolidated balance sheet was a noncurrent receivable of $6,542 relating to the
$9,345 payment.</td>
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</table>
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<td width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td>The following amounts have not been expensed by the Company as they relate to Liggett and
Vector Tobacco’s NPM Adjustment claims: $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>
</tr>
</table>
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<td width="1%"> </td>
<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. One court, the Montana Supreme Court, ruled
that Montana’s claim of diligent enforcement must be litigated. The United States Supreme Court
denied <i>certiorari </i>with respect to that opinion. 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, discovery and briefing on legal issues
of general application 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>
</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 width="1%" nowrap="nowrap" align="left"> </td>
<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>
</table>
</div>
<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 width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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>
</tr>
</table>
</div>
<div style="margin-top: 6pt">
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<td width="2%" 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>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="6%" style="background: transparent"> </td>
<td width="2%" nowrap="nowrap" align="left"><b>•</b></td>
<td width="1%"> </td>
<td>such a change is not authorized without the consent of affected parties to the
MSA;</td>
</tr>
<tr>
<td style="font-size: 6pt"> </td>
</tr>
<tr valign="top" style="font-size: 10pt; color: #000000; background: transparent">
<td width="6%" style="background: transparent"> </td>
<td width="2%" 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>
</tr>
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<td width="6%" style="background: transparent"> </td>
<td width="2%" nowrap="nowrap" align="left"><b>•</b></td>
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<td>Liggett and others have relied upon the calculations based on “gross” unit
amounts since 1998.</td>
</tr>
</table>
</div>
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<td>The change in the method of calculation could result in Liggett owing, at a minimum,
approximately $10,500, 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 $2,300 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>
</table>
</div>
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<td width="1%" nowrap="nowrap" align="left"> </td>
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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 alleged 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. Plaintiffs appealed the decision. In October
2010, the Second Circuit affirmed. The United States Supreme Court declined to review the
decision.</td>
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</table>
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<td width="1%"> </td>
<td>In <i>Grand River Enterprises Six Nations, Ltd. v. King</i>, another proceeding pending in federal
court in New York, plaintiffs sought 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, in November 2009,
the parties cross-moved for summary judgment. In March 2011, the United States District Court
for the Southern District of New York granted defendants’ motion for summary judgment.</td>
</tr>
</table>
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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>
</table>
</div>
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<td width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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 sought damages from Participating Manufacturers under antitrust laws. 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>
</table>
</div>
<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 width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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. Except as described below, Liggett’s agreements with
these states remain in full force and effect. 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>
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</table>
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<td width="1%"> </td>
<td>In 2003, as a result of a dispute with Minnesota regarding the settlement agreement described
above, Liggett agreed to pay $100 a year, in any year cigarettes manufactured by Liggett are
sold in that state. In 2003 and 2004, the Attorneys General for Florida, Mississippi and Texas
advised Liggett that they believed that Liggett had failed to make certain required payments
under the respective settlement agreements with these states. In December 2010, Liggett settled
with Florida and agreed to pay $1,200 and to make further annual payments of $250 for a period
of 21 years, starting in March 2011. The payments in years 12 — 21 will be subject to an
inflation adjustment. These payments are in lieu of any other payments allegedly due to Florida
under the original settlement agreement. The Company accrued approximately $3,200 for this
matter in 2010. There can be no assurance that Liggett will be able to resolve the matters with Texas
and Mississippi or that Liggett will not be required to make additional payments which could
adversely affect the Company’s consolidated financial position, results of operations or cash
flows.</td>
</tr>
</table>
</div>
<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 width="1%" 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 five other <i>Engle </i>progeny cases, which are
currently on appeal. As a result of the <i>Engle </i>decision, over 6,700 lawsuits are pending
against the Company and Liggett and other cigarette manufacturers. Liggett has also had
verdicts entered against it in other individual cases, which verdicts were affirmed on appeal.
It is possible that other cases could be decided unfavorably against Liggett and that Liggett
will be unsuccessful on appeal. Liggett may attempt to settle particular cases if it believes
it is in its best interest to do so.</td>
</tr>
</table>
</div>
<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 width="1%" 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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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 litigation or legislation.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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>
</tr>
</table>
</div>
<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 width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<td><u><b>Other Matters</b></u><b>:</b></td>
</tr>
</table>
</div>
<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 width="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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 March 31, 2011.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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. The plaintiff sued under the Alabama Extended Manufacturers
Liability Doctrine and for breach of warranty and negligence. The plaintiff sought both
compensatory and punitive 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 was
stayed pending non-binding mediation of the dispute, which occurred in January 2011. The matter
was settled for $30.</td>
</tr>
</table>
</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="1%" nowrap="nowrap" align="left"> </td>
<td width="1%"> </td>
<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>
</tr>
</table>
</div>
</div>
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