STOCK COMPENSATION

The Company granted equity compensation under its Amended and Restated 1999 Long-Term Incentive Plan (the “1999 Plan”) until the 1999 Plan expired on December 31, 2013.

Stock Options. The Company accounts for stock compensation by valuing unvested stock options granted prior to January 1, 2006 under the fair value method of accounting and expensing this amount in the statement of operations over the stock options’ remaining vesting period.

The Company recognized compensation expense of $2,212, $1,755 and $1,715 related to stock options in the years ended December 31, 2013, 2012 and 2011, respectively.

All awards have a contractual term of ten years and awards vest over a period of three to five years depending upon each grant. The fair value of option grants is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price characteristics which are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based compensation awards.

The assumptions used under the Black-Scholes option pricing model in computing fair value of options are based on the expected option life considering both the contractual term of the option and expected employee exercise behavior, the interest rate associated with U.S. Treasury issues with a remaining term equal to the expected option life and the expected volatility of the Company’s common stock over the expected term of the option. There were no new grants in the year ended December 31, 2012. The assumptions used for grants in the years ended December 31, 2013 and 2011 were as follows:



	2013		2011
Risk-free interest rate	0.6% – 1.8%		1.4% – 1.9%
Expected volatility	20.05% – 24.08%		24.78% – 25.02%
Dividend yield	0.0	%	0.0% - 10.08%
Expected holding period	4.00 – 10.00 years		4.00 – 4.75 years
Weighted-average grant date fair value	$2.72 – $5.80		$0.90 – $3.81

A summary of employee stock option transactions follows:



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value(1)
Outstanding on January 1, 2011	2,664,481		$	12.13	6.0	$	11,208
Granted	529,035		$	14.84
Exercised	(557,887	)	$	10.33
Canceled	(212,225	)	$	—
Outstanding on December 31, 2011	2,423,404		$	12.48	7.6	$	11,187
Granted	—		$	—
Exercised	(16,883	)	$	8.25
Canceled	(6,599	)	$	14.35
Outstanding on December 31, 2012	2,399,922		$	12.50	6.6	$	4,371
Granted	787,500		$	15.36
Exercised	(40,175	)	$	13.54
Canceled	(13	)	$	—
Outstanding on December 31, 2013	3,147,234		$	13.21	6.5	$	9,959
Options exercisable at:
December 31, 2011	411,452
December 31, 2012	418,359
December 31, 2013	1,777,158

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(1)	The aggregate intrinsic value represents the amount by which the fair value of the underlying common stock ($16.37, $14.16 and $16.10 at December 31, 2013, 2012 and 2011, respectively) exceeds the option exercise price.

Additional information relating to options outstanding at December 31, 2013 follows:



			Options Outstanding				Options Exercisable
Range of Exercise Prices			Outstanding as of	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price		Exercisable as of	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price		Aggregate Intrinsic Value
Range of Exercise Prices			12/31/2013	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price		12/31/2013	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price		Aggregate Intrinsic Value
$0.00	-	$12.13	1,679,616	5.3	$	11.64	1,679,616	5.3	$	11.64	$	—
$12.13	-	$14.55	180,024	5.7	$	13.61	97,542	5.0	$	13.64	—
$15.28	-	$16.98	1,287,594	8.3	$	15.19	—		$	—	—
$17.82	-	$19.40	—	—	$	—	—		$	—	—
$20.37	-	$21.83	—	—	$	—	—		$	—	—
$22.91	-	$24.25	—	—	$	—	—		$	—	—
$0.00	-	$0.00	—	—	$	—	—		$	—	—
$0.00	-	$0.00	—	—	$	—	—		$	—	—
			3,147,234	6.5	$	13.21	1,777,158	5.3	$	11.75	$	8,203

As of December 31, 2013, there was $2,577 of total unrecognized compensation cost related to unvested stock options. The cost is expected to be recognized over a weighted-average period of approximately 2.78 years at December 31, 2013.

The Company reflects the tax savings resulting from tax deductions in excess of expense reflected in its financial statements as a component of “Cash Flows from Financing Activities.”

Non-qualified options for 787,500 shares of common stock were issued during 2013. The exercise price of the options granted was $15.36 in 2013. The exercise price of the options granted in 2013 were at the fair value on the date of the grants.

No non-qualified options for shares of common stock were issued during 2012.

Non-qualified options for 529,035 shares of common stock were issued during 2011. The exercise price of the options granted were between $13.72 and $14.90 in 2011. The exercise prices of the options granted in 2011 were at the fair value on the dates of the grants.

The Company has elected to use the long-form method under which each award grant is tracked on an employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for such award. The Company then compares the fair value expense to the tax deduction received for each grant and aggregates the benefits and deficiencies to establish its hypothetical APIC Pool.

The Company recognizes windfall tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by the Company upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that the Company had recorded.

The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $93, $129 and $2,051, respectively. Tax benefits related to option exercises of $38, $52 and $821 were recorded as increases to stockholders’ deficiency for the years ended December 31, 2013, 2012 and 2011, respectively.

Restricted Stock Awards. In May 2013, the Company granted 10,500 restricted shares of the Company’s common stock (the "May 2013 Grant") pursuant to the 1999 Plan to each of its five outside directors. The shares vest over three years and the Company will recognize $815 of expense over the vesting period of the May 2013 Grant. The Company recognized expense of $161 for the year ended December 31, 2013.

In June 2010, the Company granted 12,155 restricted shares of the Company’s common stock (the "June 2010 Grant") pursuant to the 1999 Plan to each of its five outside directors. In November 2011, one of the outside directors resigned from the board and 8,104 of the restricted shares granted in June 2010 were forfeited and canceled. The remaining shares vested over three years and the Company recognized $749 of expense over the vesting period of the June 2010 Grant. In November 2011, the Company also granted 7,350 restricted shares of the Company's stock (the "November 2011 grant") pursuant to the 1999 Plan to the replacement director. The shares granted to the replacement director vested over approximately 19 months. The Company recognized $120 of expense over the vesting period for the November 2011 Grant. The Company recognized expense of $133 and $280 of expense for the years ended December 31, 2013 and 2012, respectively.

In October 2013, the President and Chief Executive Officer of Liggett Group LLC and Liggett Vector Brands LLC was awarded a restricted stock grant of 27,500 shares of Vector’s common stock pursuant to the 1999 Plan. The shares will vest on the earlier of March 15, 2019, contingent upon performance-based targets being achieved by the Company's tobacco segment, or October 31, 2020, if the performance-based targets are not achieved. He will receive dividends on the restricted shares as paid. In the event that his employment with the Company is terminated for any reason other than his death, his disability or a change of control (as defined in this Restricted Share Agreement) of the Company, any remaining balance of the shares not previously vested will be forfeited by him. The fair market value of the restricted shares on the date of grant was $458 and is being amortized over the vesting period as a charge to compensation expense.

In April 2009, the President of the Company was awarded a restricted stock grant ("April 2009 Award Agreement") of 638,142 shares of Vector’s common stock pursuant to the 1999 Plan ("April 2009 Award Shares") . Under the terms of the April 2009 Award Agreement, one-fifth of the shares vest on September 15, 2010, with an additional one-fifth vesting on each of the four succeeding one-year anniversaries of the first vesting date through September 15, 2014. In the event that his employment with the Company is terminated for any reason other than his death, his disability or a change of control (as defined in this Restricted Share Agreement) of the Company, any remaining balance of the shares not previously vested will be forfeited by him. The fair market value of the restricted shares on the date of grant was $6,467 and was being amortized over the vesting period as a charge to compensation expense.

On December 11, 2012, the Compensation Committee of the Board of Directors of the Company approved an acceleration of the vesting to December 11, 2012 of an aggregate 255,256 shares of restricted stock that were previously scheduled to vest in equal parts on September 15, 2013 and September 15, 2014.

In connection with, and as a condition to, the acceleration of the vesting schedule, the President of the Company entered into an Amendment to the April 2009 Award Agreement and an Agreement (the “Agreement”) with the Company, effective as of December 11, 2012. Pursuant to the Agreement, he agreed, in the event his employment with the Company terminates prior to September 15, 2014, to repay to the Company, in either shares of the Company's common stock or cash, the fair market value on the termination date of that portion of the Award Shares that he would have otherwise had to forfeit under the April 2009 Award Agreement had the vesting of the April 2009 Award Shares not been accelerated, plus cash in the amount of any Accrued Dividends and any additional dividends declared on such shares.

The Company recognized expense of $2,381 for the year ended December 31, 2012 that included additional compensation expense of $288 related to the modified requisite service period of the accelerated vesting and the recognition of the unamortized compensation costs related to the accelerated vesting of $2,093. The Company recorded an expense of $1,188 for the year ended December 31, 2011.

As of December 31, 2013, there was $1,100 of total unrecognized compensation costs related to unvested restricted stock awards. The cost is expected to be recognized over a weighted-average period of approximately 1.24 years at December 31, 2013.

As of December 31, 2012, there was $134 of total unrecognized compensation costs related to unvested restricted stock awards. The cost is expected to be recognized over a weighted-average period of approximately 0.44 years at December 31, 2012.

The Company’s accounting policy is to treat dividends paid on unvested restricted stock as a reduction to additional paid-in capital on the Company’s consolidated balance sheet.