Note 13 — Stock Plans
As of December 31, 2013, RAI had two stock plans, the Equity Incentive Award Plan for Directors of RAI, referred to as the EIAP, and the Omnibus Plan.
Under the EIAP, RAI currently provides grants of deferred stock units to eligible directors on a quarterly and annual basis, with the annual grant being made generally on the date of RAI’s annual shareholders’ meeting. Prior to September 13, 2012, upon election to RAI’s board of directors, an eligible director received an initial grant of 3,500 deferred stock units under the EIAP. After September 13, 2012, grants are no longer made to directors upon their initial election to the board of directors, but eligible directors initially elected to RAI’s board of directors after such date on a date other than the annual meeting date, and who therefore are not eligible to receive the annual stock award for such year, now receive a pro rata portion of the annual award upon election. Directors may elect to receive shares of common stock in lieu of their initial and annual grants of deferred stock units. A maximum of 2,000,000 shares of common stock may be issued under this plan, of which 1,036,806 shares were available for grant as of December 31, 2013. Deferred stock units granted under the EIAP have a value equal to, and bear dividend equivalents at the same rate as, one share of RAI common stock, and have no voting rights. The dividends are paid as additional units in an amount equal to the number of shares of RAI common stock that could be purchased with the dividends on the date of payment. Generally, distribution of a director’s deferred stock units will be made on January 2 following his or her last year of service on the board; however, for all grants made under the EIAP after December 31, 2007, a director may elect to receive his or her deferred stock units on the later of January 2 of a specified year or January 2 following his or her last year of service on the board. At the election of a director, distribution may be made in one lump sum or in up to ten annual installments. A director is paid in cash for the units granted quarterly and in common stock for the units granted initially and annually, unless the director elects to receive cash for the initial and annual grants. Cash payments are based on the average closing price of RAI common stock during December of the year preceding payment. Compensation expense related to the EIAP was $7 million, $4 million and $5 million during 2013, 2012 and 2011, respectively.
Awards to key employees under the Omnibus Plan may be in the form of cash awards, incentive or non-incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units or other awards. Subject to adjustments as set forth in the Omnibus Plan, the number of shares of RAI common stock that may be issued with respect to awards under the Omnibus Plan will not exceed 38,000,000 shares in the aggregate. Upon retirement, a holder’s grant under the Omnibus Plan generally vests on a pro rata basis for the portion of the vesting service period that has elapsed, thereby maintaining an appropriate approximation of forfeitures related to retirement.
Information regarding restricted stock unit awards outstanding as of December 31, 2013, under the Omnibus Plan was as follows:
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Grant Year |
Number of Shares Granted |
Grant Price | Vesting Date | Number of Shares Cancelled |
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2011 |
1,561,331 | $ | 33.99 | March 1, 2014 | 174,074 | |||||||||||
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2011 |
3,874 | $ | 39.59 | March 1, 2014 | 3,874 | |||||||||||
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2012 |
1,222,534 | $ | 42.16 | March 1, 2015 | 108,128 | |||||||||||
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2013 |
1,112,436 | $ | 43.36 | March 1, 2016 | 19,505 | |||||||||||
The grant date fair value was based on the per share closing price of RAI common stock on the date of grant. The actual number of shares granted is fixed. The grants are accounted for as equity-based and compensation expense includes the vesting period elapsed. There were no shares issued during 2013 with respect to awards outstanding as of December 31, 2013.
The restricted stock unit grants will be settled exclusively in shares of RAI common stock. Upon settlement, each grantee will receive a number of shares of RAI’s common stock equal to the product of the number of vested units and a percentage up to 150% based on the average RAI annual incentive award plan score over the three-year period ending on December 31 of the year prior to the vesting date.
Dividends paid on shares of RAI common stock will accumulate on the restricted stock units and be paid to the grantee on the vesting date. If RAI fails to pay its shareholders cumulative dividends of at least $6.36 per share for the three-year performance period ending December 31, 2013 (in the case of the 2011 restricted stock unit grants), $6.72 per share for the three-year performance period ending December 31, 2014 (in the case of the 2012 restricted stock unit grants), or $7.08 per share for the three-year performance period ending December 31, 2015 (in the case of the 2013 restricted stock unit grants), then each award will be reduced by an amount equal to three times the percentage of the dividend underpayment, up to a maximum reduction of 50%. Dividends accrued on the 2011 grants are included in other current liabilities and the dividends accrued on the 2012 and 2013 grants are included in other noncurrent liabilities in the consolidated balance sheet as of December 31, 2013.
The changes in RAI restricted stock units during 2013 were as follows:
| Stock Units | Weighted Average Grant Date Fair Value |
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Outstanding at beginning of year |
4,131,852 | $ | 33.36 | |||||
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Granted |
1,112,436 | 43.36 | ||||||
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Forfeited |
(45,417 | ) | 40.91 | |||||
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Vested |
(1,604,277 | ) | 26.63 | |||||
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Outstanding at end of year |
3,594,594 | 39.37 | ||||||
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Total compensation expense related to stock-based compensation and the related tax benefits recognized in selling, general and administrative expenses in the consolidated statements of income were as follows:
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Grant/Type |
2013 | 2012 | 2011 | |||||||||
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2008 restricted stock |
$ | — | $ | — | $ | 1 | ||||||
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2009 restricted stock units |
— | 2 | 12 | |||||||||
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2010 restricted stock units |
2 | 13 | 12 | |||||||||
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2011 restricted stock units |
20 | 14 | 13 | |||||||||
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2012 restricted stock units |
18 | 13 | — | |||||||||
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2013 restricted stock units |
15 | — | — | |||||||||
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Total compensation expense |
$ | 55 | $ | 42 | $ | 38 | ||||||
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Total related tax benefits |
$ | 19 | $ | 15 | $ | 13 | ||||||
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The amounts related to the unvested Omnibus Plan restricted stock unit grants were included in the consolidated balance sheets as of December 31 as follows:
| 2013 | 2012 | |||||||
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Other current liabilities |
$ | 10 | $ | 10 | ||||
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Other noncurrent liabilities |
9 | 8 | ||||||
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Paid-in capital |
94 | 80 | ||||||
As of December 31, 2013, there were $55 million of unrecognized compensation costs related to restricted stock units, calculated at the grant-date price, which are expected to be recognized over a weighted-average period of 1.79 years. The excess tax benefits related to stock-based compensation were $14 million, $39 million and $1 million in 2013, 2012 and 2011, respectively.
RAI has a policy of issuing new shares of common stock to satisfy share option exercises. There was no stock option activity during 2013. The aggregate intrinsic value of fully vested outstanding and exercisable options at December 31, 2011, was $1 million. The changes in RAI’s stock options during 2012 and 2011 were as follows:
| 2012 | 2011 | |||||||||||||||
| Options | Weighted Average Exercise Price |
Options | Weighted Average Exercise Price |
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Outstanding at beginning of year |
40,000 | $ | 17.45 | 40,000 | $ | 17.45 | ||||||||||
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Expired |
(40,000 | ) | 17.45 | — | — | |||||||||||
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Exercised |
— | — | — | — | ||||||||||||
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Outstanding at end of year |
— | — | 40,000 | 17.45 | ||||||||||||
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Exercisable at end of year |
— | — | 40,000 | 17.45 | ||||||||||||
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Equity compensation plan information as of December 31, 2013, was as follows:
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Plan Category |
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights |
Number of
Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
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| (a) | (b) | (c) | ||||||||||
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Equity Compensation Plans Approved by Security Holders |
5,391,891 | (2) | $ | — | 31,610,104 | |||||||
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Equity Compensation Plans Not Approved by Security Holders(1) |
— | — | 1,036,806 | |||||||||
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Total |
5,391,891 | (2) | — | 32,646,910 | ||||||||
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| (1) |
The EIAP was approved by RJR’s sole shareholder, NGH, prior to RJR’s spin-off on June 15, 1999. |
| (2) |
Consists of restricted stock units. These restricted stock units represent the maximum number, 150%, of shares to be awarded under the best-case targets that may not be achieved, and accordingly, may overstate expected dilution. |