SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


(a)	Basis of Presentation:

The condensed consolidated financial statements of Vector Group Ltd. (the “Company” or “Vector”) include the accounts of VGR Holding LLC (“VGR Holding”), Liggett Group LLC (“Liggett”), Vector Tobacco Inc. (“Vector Tobacco”), Liggett Vector Brands LLC (“Liggett Vector Brands”), New Valley LLC (“New Valley”) and other less significant subsidiaries. All significant intercompany balances and transactions have been eliminated.

Liggett and Vector Tobacco are engaged in the manufacture and sale of cigarettes in the United States. New Valley is engaged in the real estate business and is seeking to acquire additional operating companies and real estate properties.

The accompanying unaudited, interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and, in management's opinion, contain all adjustments, consisting only of normal recurring items, necessary for a fair statement of the results for the periods presented. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission. The consolidated results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the entire year.

Certain reclassifications have been made to the 2012 financial information to conform to the 2013 presentation.


(b)	Distributions and Dividends on Common Stock:

The Company records distributions on its common stock as dividends in its condensed consolidated statement of stockholders' equity to the extent of retained earnings and accumulated paid-in capital. Any amounts exceeding retained earnings are recorded as a reduction to additional paid-in capital. Any amounts then exceeding accumulated paid-in capital are recorded as an increase to accumulated deficit.


(c)	Earnings Per Share (“EPS”):

Information concerning the Company's common stock has been adjusted to give retroactive effect to the 5% stock dividend paid to Company stockholders on September 28, 2012. All per share amounts and references to share amounts have been updated to reflect the retrospective effect of the stock dividends.

Net income (loss) for purposes of determining basic and diluted EPS was as follows:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Net income (loss) attributed to Vector Group Ltd.	$	13,511		$	3,895		$	11,830		$	(3,795	)
Income attributed to participating securities	(374		)	(79		)	(328		)	—
Net income (loss) available to common stockholders	$	13,137		$	3,816		$	11,502		$	(3,795	)

Basic and diluted EPS were calculated using the following shares:



	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2013	2012	2013	2012
Weighted-average shares for basic EPS	86,826,428	83,345,002	86,824,463	83,179,283
Plus incremental shares related to stock options and non-vested restricted stock	206,562	203,118	195,925	—
Weighted-average shares for basic and fully diluted EPS	87,032,990	83,548,120	87,020,388	83,179,283

The following stock options, non-vested restricted stock and shares issuable upon the conversion of convertible debt were outstanding during the three and six months ended June 30, 2013 and 2012 but were not included in the computation of diluted EPS because the effect was anti-dilutive.



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Number of stock options	N/A		N/A		N/A		2,299,640
Weighted-average exercise price	N/A		N/A		N/A		$	13.09
Weighted-average shares of non-vested restricted stock	53,500		3,500		53,500		383,587
Weighted-average expense per share	16.36		$	17.12	$	16.36	$	10.86
Weighted-average number of shares issuable upon conversion of debt	26,962,402		17,854,218		26,962,402		18,017,309
Weighted-average conversion price	$	15.98	$	14.09	$	15.98	$	14.10


(d)	Fair Value of Derivatives Embedded within Convertible Debt:

The Company has estimated the fair market value of the embedded derivatives based principally on the results of a valuation model. The estimated fair value of the derivatives embedded within the convertible debt is based principally on the present value of future dividend payments expected to be received by the convertible debt holders over the term of the debt. The discount rate applied to the future cash flows is estimated based on a spread in the yield of the Company's debt when compared to risk-free securities with the same duration; thus, a readily determinable fair market value of the embedded derivatives is not available. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads for secured to unsecured debt, unsecured to subordinated debt and subordinated debt to preferred stock to determine the fair value of the derivatives embedded within the convertible debt. The valuation also considers other items, including current and future dividends and the volatility of the Company's stock price. The range of estimated fair market values of the Company's embedded derivatives was between $163,949 and $169,391. The Company recorded the fair market value of its embedded derivatives at the midpoint of the inputs at $166,629 as of June 30, 2013. At December 31, 2012, the range of estimated fair market values of the Company's embedded derivatives was between $169,424 and $174,909. The Company recorded the fair market value of its embedded derivatives at the midpoint of the inputs at $172,128 as of December 31, 2012. The estimated fair market value of the Company's embedded derivatives could change significantly based on future market conditions. (See Note 5.)


(e)	Other Income, Net:

Other income, net consists of:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013		2012
(Loss) gain on warrants	$	(28	)	$	(210	)	$	37	$	(853	)
Interest income	826			499			1,476		1,041
Accretion of interest income of debt discount on notes receivable	588			32			623		63
Gain on long-term investment	142			135			142		135
Other (loss) income	(57		)	127			2		129
Other income, net	$	1,471		$	583		$	2,280	$	515


(f)	New Accounting Pronouncements:

In July 2012, the FASB issued amendments to the indefinite-lived intangible asset impairment guidance which provides an option for companies to use a qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012 (early adoption was permitted). The implementation of the amended accounting guidance is not expected to have a material impact on the Company's consolidated financial statements.

In February 2013, the FASB issued amendments to the accounting guidance for presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income, but do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where the net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about these amounts. For public companies, these amendments are effective prospectively for reporting periods beginning after December 15, 2012. The implementation of the amended accounting guidance did not have a material impact on the Company's consolidated financial statements.