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. On May 16, 2014, the Company's stockholders approved the 2014 Management Incentive Plan (the “2014 Plan”). The 2014 Plan replaces the 1999 Plan. Like the 1999 Plan, the 2014 Plan provides for the Company to grant stock options, stock appreciation rights and restricted stock. Unlike the 1999 Plan, the 2014 Plan provides for cash incentives to be awarded based on a multi-year performance period and for annual short-term cash incentives based on a twelve-month performance period. The available share reserve under the 2014 Plan is 10,500,000 shares. The Company may satisfy its obligations under any award granted under the 2014 plan by issuing new shares or Treasury shares. Awards previously granted under the 1999 Plan remain outstanding in accordance with their terms.

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 $1,573, $2,212 and $1,755 related to stock options in the years ended December 31, 2014, 2013 and 2012, 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, 2014 and 2013 were as follows:



	2014		2013
Risk-free interest rate	1.1% -2.6%		0.6% – 1.8%
Expected volatility	18.51% - 22.37%		20.05% – 24.08%
Dividend yield	0.0	%	0.0	%
Expected holding period	4.00 – 10.00 years		4.00 – 10.00 years
Weighted-average grant date fair value	$3.28 - $7.32		$2.72 – $5.80

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, 2012	2,544,574		$	11.89	7.6	$	11,187
Granted	—		$	—
Exercised	(17,727	)	$	7.86
Canceled	(6,929	)	$	13.67
Outstanding on December 31, 2012	2,519,918		$	11.90	6.6	$	4,371
Granted	826,875		$	14.63
Exercised	(42,184	)	$	12.90
Canceled	(14	)	$	—
Outstanding on December 31, 2013	3,304,595		$	12.58	6.5	$	9,959
Granted	406,875		$	18.71
Exercised	(421,657	)	$	11.98
Canceled	(11	)	$	—
Outstanding on December 31, 2014	3,289,802		$	13.41	6.4	$	25,977
Options exercisable at:
December 31, 2012	439,277
December 31, 2013	1,866,016
December 31, 2014	1,522,748

_____________________________


(1)	The aggregate intrinsic value represents the amount by which the fair value of the underlying common stock ($21.31, $15.59 and $13.49 at December 31, 2014, 2013 and 2012, respectively) exceeds the option exercise price.

Additional information relating to options outstanding at December 31, 2014 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			12/31/2014	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price		12/31/2014	Weighted-Average Remaining Contractual Life (Years)	Weighted-Average Exercise Price		Aggregate Intrinsic Value
$0.00	-	$11.55	1,496,029	4.8	$	11.07	1,496,029	4.8	$	11.07	$	—
$11.55	-	$13.86	73,822	5.4	$	12.98	26,719	5.1	$	13.04	—
$13.86	-	$16.17	1,313,076	7.4	$	14.47	—		$	—	—
$16.17	-	$18.48	—	—	$	—	—		$	—	—
$18.48	-	$20.79	406,875	9.2	$	18.71	—		$	—	—
$20.79	-	$23.10	—	—	$	—	—		$	—	—
			3,289,802	6.4	$	13.41	1,522,748	4.8	$	11.10	$	15,544

As of December 31, 2014, there was $2,829 of total unrecognized compensation cost related to unvested stock options. The cost is expected to be recognized over a weighted-average period of approximately 1.76 years at December 31, 2014.

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 406,875 shares of common stock were issued during 2014. The exercise price of the options granted was $18.71 in 2014. The exercise price of the options granted in 2014 were at the fair value on the date of the grants.

Non-qualified options for 826,875 shares of common stock were issued during 2013. The exercise price of the options granted was $14.63 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.

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, 2014, 2013 and 2012 was $3,539, $93 and $129, respectively. Tax benefits related to option exercises of $1,178, $38 and $52 were recorded as increases to stockholders’ deficiency for the years ended December 31, 2014, 2013 and 2012, respectively.

Restricted Stock Awards. On July 23, 2014, the Company granted its President and Chief Executive Officer an award of 1,050,000 shares of its Common Stock subject to service and performance-based vesting. The Award Shares will be issued pursuant to the terms of an agreement that provides that both a performance requirement and a continued employment requirement must be met over a seven-year performance period to earn vested rights with respect to the Award Shares. The maximum potential amount of the Award Shares reflects recognition of the CEO’s contributions as CEO since January 1, 2006 and the value of his management and real estate expertise to the Company. The fair market value of the restricted shares on the date of grant was $20,780 and is being amortized over the performance period as a charge to compensation expense. The Company recognized expense of $1,320 for the year ended December 31, 2014.

In May 2013, the Company granted 11,025 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 $271 and $161 for the year ended December 31, 2014 and 2013, respectively.

In June 2010, the Company granted 12,763 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 7,718 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 28,875 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. The Company recognized expense of $86 and $14 for the years ended December 31, 2014 and 2013, respectively.

In April 2009, the President of the Company was awarded a restricted stock grant (“April 2009 Award Agreement”) of 670,049 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 268,019 shares of restricted stock that were previously scheduled to vest in equal parts on September 15, 2013 and September 15, 2014.

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.

As of December 31, 2014, there was $20,181 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 3.45 years at December 31, 2014.

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 3.15 years at December 31, 2013.

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.