Notes to Consolidated Financial Statements
(Continued)
Note 12.
Stock Plans:
In 2005, Altria Group, Inc.’s Board of Directors adopted, and the stockholders approved, the Altria Group, Inc. 2005 Performance Incentive Plan (the “2005 Plan”). The 2005 Plan replaced the 2000 Performance Incentive Plan when it expired in May 2005. Under the 2005 Plan, Altria Group, Inc. may grant to eligible employees stock options, stock appreciation rights, restricted stock, restricted and deferred stock units, and other stock-based awards, as well as cash-based annual and long-term incentive awards. Up to 50 million shares of common stock may be issued under the 2005 Plan. Also, in 2005, Altria Group, Inc.’s Board of Directors adopted, and the stockholders approved, the 2005 Stock Compensation Plan for Non-Employee Directors (the “2005 Directors Plan”). The 2005 Directors Plan replaced the 2000 Stock Compensation Plan for Non-Employee Directors. Under the 2005 Directors Plan, Altria Group, Inc. may grant up to one million shares of common stock to members of the Board of Directors who are not employees of Altria Group, Inc. Shares available to be granted under the 2005 Plan and the 2005 Directors Plan at December 31, 2005, were 48,527,341 and 998,158, respectively.
In addition, Kraft may grant stock options, stock appreciation rights, restricted stock, restricted and deferred stock units, and other awards of its Class A common stock to its employees under the terms of the Kraft 2005 Performance Incentive Plan (the “Kraft Plan”). Up to 150 million shares of Kraft’s Class A common stock may be issued under the Kraft Plan, of which no more than 45 million shares may be awarded as restricted stock. At December 31, 2005, Kraft’s employees held options to purchase 15,145,840 shares of Kraft’s Class A common stock.
Concurrent with Kraft’s Initial Public Offering (“IPO”) in June 2001, certain Altria Group, Inc. employees received a one-time grant of options to purchase shares of Kraft’s Class A common stock held by Altria Group, Inc. at the IPO price of $31.00 per share. At December 31, 2005, employees held options to purchase approximately 1.4 million shares of Kraft’s Class A common stock from Altria Group, Inc. In order to completely satisfy the obligation, Altria Group, Inc. purchased 1.6 million shares of Kraft’s Class A common stock in open market transactions during 2002.
Altria Group, Inc. and Kraft apply the intrinsic value-based methodology in accounting for the various stock plans. Accordingly, no compensation expense has been recognized other than for restricted stock awards. In 2004, the FASB issued SFAS No. 123R, which requires companies to measure compensation cost for share-based payments at fair value. Altria Group, Inc. will adopt this new standard prospectively, on January 1, 2006.
Altria Group, Inc. has not granted stock options to employees since 2002. The amount included below as stock-based compensation expense in 2005 and 2004 relates primarily to EOSOs. Under certain circumstances, senior executives who exercise outstanding stock options using shares to pay the option exercise price and taxes, receive EOSOs equal to the number of shares tendered. During the years ended December 31, 2005, 2004 and 2003, Altria Group, Inc. granted 2.0 million, 1.7 million and 1.3 million EOSOs, respectively. EOSOs are granted at an exercise price of not less than fair value on the date of the grant.
Had compensation cost for stock option awards been determined by using the fair value at the grant date, Altria Group, Inc.’s net earnings and basic and diluted EPS would have been $10,420 million, $5.03 and $4.98, respectively, for the year ended December 31, 2005; $9,404 million, $4.59 and $4.56, respectively, for the year ended December 31, 2004; and $9,185 million, $4.53 and $4.51, respectively, for the year ended December 31, 2003. The foregoing impact of compensation cost was determined using a modified Black-Scholes methodology and the following assumptions for Altria Group, Inc. common stock:
Altria Group, Inc. stock option activity was as follows for the years ended December 31, 2003, 2004 and 2005:
The weighted average exercise prices of Altria Group, Inc. stock options exercisable at December 31, 2005, 2004 and 2003, were $41.32, $39.82 and $38.78, respectively.
The following table summarizes the status of Altria Group, Inc. stock options outstanding and exercisable as of December 31, 2005, by range of exercise price:
Altria Group, Inc. and Kraft may grant shares of restricted stock and rights to receive shares of stock to eligible employees, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares and rights. Such shares and rights are subject to forfeiture if certain employment conditions are not met. During 2005, 2004 and 2003, Altria Group, Inc. granted 1,246,970; 1,392,380; and 2,327,320 shares, respectively, of restricted stock to eligible U.S.-based employees and Directors, and during 2005, 2004 and 2003, also issued to eligible non-U.S. employees and Directors rights to receive 955,682; 1,011,467; and 1,499,920 equivalent shares, respectively. The market value per restricted share or right was $61.99, $55.42 and $36.61 on the respective dates of the 2005, 2004 and 2003 grants. At December 31, 2005, restrictions on such stock and rights, net of forfeitures, lapse as follows: 2006–3,001,130 shares; 2007–2,261,060 shares; 2008–2,386,760 shares; and 2011 and thereafter – 190,849 shares. During 2005, 2004 and 2003, Kraft granted 4,230,625; 4,129,902; and 3,659,751 restricted Class A shares to eligible U.S.-based employees and issued rights to receive 1,783,711; 1,939,450; and 1,651,717 restricted Class A equivalent shares to eligible non-U.S. employees, respectively. Restrictions on the Kraft Class A shares lapse as follows: 2006–4,140,552 shares; 2007–5,079,097 shares; 2008–5,596,297 shares; 2009–100,000 shares; 2010–69,170 shares; and 2012–100,000 shares.
The fair value of the restricted shares and rights at the date of grant is amortized to expense ratably over the restriction period, which is generally three years. Altria Group, Inc. recorded pre-tax compensation expense related to restricted stock and other stock awards of $263 million (including $148 million related to Kraft awards), $185 million (including $106 million related to Kraft awards) and $99 million (including $57 million related to Kraft awards) for the years ended December 31, 2005, 2004 and 2003, respectively. The unamortized portion of restricted stock and rights awards to employees of Altria Group, Inc. and Kraft, which is reported as a reduction of stockholders’ equity, was $348 million at December 31, 2005. This amount included $202 million related to Kraft and $146 million related to Altria Group, Inc.
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