PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the
Registrant þ
Filed by a Party other than the
Registrant o
Check the appropriate box:
C:
C:
o Preliminary
Proxy Statement
o Confidential,
For Use of the Commission Only (as permitted by Rule
14a-6(e)(2)) þ Definitive
Proxy Statement
o Definitive
Additional Materials
o Soliciting
Material Under
Rule 14a-12
REYNOLDS AMERICAN INC.
(Name of Registrant as Specified In
Its Charter)
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
PAYMENT OF FILING FEE (Check the appropriate box):
þ
No fee required.
o
Fee computed on table below per Exchange Act
Rules 14a-6(i)(4)
and 0-11.
1)
Title of each class of securities to which transaction applies:
2)
Aggregate number of securities to which transaction applies:
3)
Per unit price or other underlying value of transaction computed
pursuant to Exchange Act
Rule 0-11
(set forth the amount on which the filing fee is calculated and
state how it was determined):
4)
Proposed maximum aggregate value of transaction:
5)
Total Fee Paid:
o
Fee paid previously with preliminary materials:
o
Check box if any part of the fee is offset as provided by
Exchange Act
Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
You are cordially invited to attend the 2008 annual meeting of
shareholders of Reynolds American Inc. The meeting will be held
at 9:00 a.m. (Eastern Time), on Tuesday, May 6, 2008,
in the Reynolds American Plaza Building Auditorium at RAI’s
corporate offices, 401 North Main Street, Winston-Salem, North
Carolina.
The matters to be acted on at the annual meeting are described
in the accompanying notice of meeting and proxy statement.
Please give careful attention to these proxy materials.
Pursuant to new rules promulgated by the Securities and Exchange
Commission, we are providing to most of our shareholders access
to our proxy materials over the Internet through a process
informally called
“e-proxy.”
We believe the new rules will allow us to deliver proxy
materials to our shareholders in a cost-efficient and an
environmentally sensitive manner, while preserving the ability
of shareholders to receive paper copies of these materials if
they wish.
It is important that your shares be represented and voted at the
annual meeting regardless of the size of your holdings. Whether
or not you plan to attend the annual meeting, we encourage you
to vote your shares in advance of the annual meeting by using
one of the methods described in the accompanying proxy materials.
Attendance at the annual meeting will be limited to our
shareholders as of the record date of March 10, 2008, and
to guests of RAI. Admittance tickets will be required. If you
are a shareholder and plan to attend, you MUST request an
admittance ticket by writing to the Office of the Secretary,
Reynolds American Inc., 401 North Main Street,
P.O. Box 2990, Winston-Salem, North Carolina27102-2990.
If your shares are not registered in your own name, evidence of
your stock ownership as of March 10, 2008, must accompany
your letter. You can obtain this evidence from your bank or
brokerage firm, typically in the form of your most recent
monthly statement. An admittance ticket will be held in your
name at the registration desk, not mailed to you in advance of
the meeting.
We anticipate that a large number of shareholders will attend
the meeting. Seating is limited, so we suggest that you arrive
early. The auditorium will open at 8:30 a.m.
If you have questions or need assistance in voting your shares,
please contact our Shareholder Services Department at
(866) 210-9976
(toll-free).
Thank you for your support and continued interest in RAI.
The 2008 annual meeting of shareholders of Reynolds American
Inc. will be held at 9:00 a.m. (Eastern Time) on Tuesday,
May 6, 2008, in the Reynolds American Plaza Building
Auditorium at RAI’s corporate offices, 401 North Main
Street, Winston-Salem, North Carolina. At the meeting,
shareholders will be asked to take the following actions:
(1)
to elect three Class I directors to serve until the 2011
annual meeting of shareholders and one Class III director
to serve until the 2010 annual meeting of shareholders;
(2)
to ratify the appointment of KPMG LLP as independent auditors
for RAI’s 2008 fiscal year;
(3)
to act on three shareholder proposals, if presented by their
proponents; and
(4)
to transact any other business as may be properly brought before
the meeting or any adjournment or postponement thereof.
Only holders of record of RAI’s common stock as of the
close of business on March 10, 2008, are entitled to notice
of, and to vote at, the 2008 annual meeting of shareholders of
RAI.
Whether or not you plan to attend the meeting, we urge you to
vote your shares using a toll-free telephone number or the
Internet, or by completing, signing and mailing the proxy card
that either is included with these materials or will be sent to
you at your request. Instructions regarding the different voting
methods are contained in the accompanying proxy statement.
The Board of Directors of Reynolds American Inc. is soliciting
your proxy to vote at our 2008 annual meeting of shareholders
(or any adjournment or postponement of the annual meeting).
(References in this proxy statement to “RAI,”“we,”“our,” or “us” are
references to Reynolds American Inc.). This proxy statement
contains important information for you to consider when deciding
how to vote on the matters brought before the 2008 annual
meeting. Please read it carefully.
In accordance with new rules, referred to as
e-proxy, of
the Securities and Exchange Commission, referred to as the SEC,
we are making our proxy materials (consisting of this proxy
statement, our 2007 Annual Report on
Form 10-K
and a letter from our Chairman) available over the Internet,
rather than mailing a printed copy of our proxy materials to
every shareholder. We began mailing a Notice of Internet
Availability of Proxy Materials, referred to as the Notice, on
or about March 24, 2008, to all shareholders entitled to
vote, except shareholders who had already requested a printed
copy of our proxy materials and except participants in our CIP
and SIP, defined below, to whom we began mailing proxy materials
(including a proxy card) on or about March 24, 2008. More
information about
e-proxy is
provided in the following set of questions and answers,
including information on, if you have received the Notice, how
to receive by mail, free of charge, paper copies of the proxy
materials.
Attendance at our 2008 annual meeting will be limited to our
shareholders as of the record date of March 10, 2008, and
to guests of RAI. Admittance tickets will be required. If you
are a shareholder and plan to attend, you MUST request an
admittance ticket by writing to the Office of the Secretary,
Reynolds American Inc., P.O. Box 2990, Winston-Salem,
North Carolina,
27102-2990.
If your shares are not registered in your own name, evidence of
your stock ownership as of March 10, 2008, must accompany
your letter. You can obtain this evidence from your bank or
brokerage firm, typically in the form of your most recent
monthly statement. An admittance ticket will be held in your
name at the registration desk, but not mailed to you in advance
of the meeting.
We anticipate that a large number of shareholders will attend
the meeting. Seating is limited, so we suggest you arrive early.
The auditorium will open at 8:30 a.m.
If you have a disability, we can provide reasonable assistance
to help you participate in the meeting. If you plan to attend
the meeting and require assistance, please write or call the
Office of the Secretary of RAI at least one week before our
meeting at P.O. Box 2990, Winston-Salem, NorthCarolina27102-2990;
telephone number
(336) 741-5162.
At our 2008 annual meeting, shareholders will vote upon the
matters outlined in the notice of meeting — the
election of directors, ratification of the selection of our
independent auditors, and three shareholder proposals, if such
proposals are presented by their proponents at the meeting.
Also, RAI’s management will report on RAI’s
performance during the last fiscal year and respond to questions
from shareholders.
E-proxy
refers to new rules adopted by the SEC permitting companies to
make their proxy materials available over the Internet, instead
of mailing paper copies of the proxy materials to every
shareholder. We are using
e-proxy to
distribute proxy materials to most of our shareholders because
it will be cost effective for the company and the shareholders
(by lowering printing and mailing costs), reduce the consumption
of paper and other resources, and provide shareholders with more
choices for accessing proxy information.
Yes. In addition to providing instructions on accessing the
proxy materials on the Internet (by visiting a web site referred
to in the Notice), the Notice has instructions on how to request
paper copies by phone,
e-mail or on
the Internet. You will be sent, free of charge, printed
materials by first class mail within three business days of your
request. Once you request paper copies, you will continue to
receive the materials in paper form until you instruct us
otherwise.
Yes. The
e-proxy
rules work in harmony with the existing rules allowing
shareholders to consent to electronic delivery of proxy
materials. If you have already registered to receive materials
electronically, you will continue to receive them that way. If
you have not already done so, but desire now to consent to
electronic delivery, please see the question below “Can I
receive future proxy materials from RAI electronically?”
Shareholders who owned RAI common stock at the close of business
on March 10, 2008, the record date, are entitled to vote.
As of the record date, we had 295,328,475 shares of RAI
common stock outstanding. Each outstanding share of RAI common
stock is entitled to one vote. The number of shares you own is
reflected on your Notice
and/or proxy
card.
Yes. If your shares are registered directly in your name with
RAI’s transfer agent (BNY Mellon Shareowner Services), then
you are considered to be the shareholder “of record”
with respect to those shares, and the Notice
and/or these
proxy materials are being sent directly to you by RAI. If your
shares are held in the name of a bank, broker or other nominee,
then you are considered to hold those shares in “street
name” or to be the “beneficial owner” of such
shares. If you are a beneficial owner, then the Notice
and/or these
proxy materials are being forwarded to you by your nominee who
is considered the shareholder of record with respect to the
shares.
A quorum of shareholders is necessary to hold a valid meeting.
The holders of record, present in person or by proxy at the
meeting, of a majority of the shares entitled to vote constitute
a quorum. Once a share is represented for any purpose at the
meeting, it is considered present for quorum purposes for the
remainder of the meeting. Abstentions, shares that are withheld
as to voting with respect to one or more of the director
nominees and “broker non-votes” will be counted in
determining the existence of a quorum. A “broker
non-vote” occurs on an item when a nominee is not permitted
to vote without instructions from the beneficial owner of the
shares and the beneficial owner fails to provide the nominee
with such instructions.
You may vote in person at our 2008 annual meeting or you may
designate another person — your proxy — to
vote your stock. The written document used to designate someone
as your proxy also is called a proxy or proxy card. We urge you
to vote your shares by proxy even if you plan to attend the
annual meeting. You can always change your vote at the meeting.
If you are a shareholder of record, then you can vote by proxy
over the Internet by following the instructions in the Notice,
or, if you request printed copies of the proxy materials by
mail, you can also vote by mail or telephone.
If you are a beneficial owner and you want to vote by proxy,
then you may vote by proxy over the Internet, or if you request
printed copies of the proxy materials by mail, you can also vote
by mail or by telephone by following the instructions in the
Notice.
If you plan to attend the meeting and vote in person and you
hold your shares directly in your own name, then we will give
you a ballot when you arrive. However, if you hold your shares
in street name, then you must obtain a legal proxy assigning to
you the right to vote your shares from the nominee who is the
shareholder of record. The legal proxy must accompany your
ballot to vote your shares in person.
If you participate in the Reynolds American Capital Investment
Plan, referred to as the CIP, or in the Savings and Investment
Plan for Employees of R. J. Reynolds Tobacco in Puerto Rico,
referred to as the SIP, then your proxy card will serve as
voting instructions for the trustee of the CIP or the custodian
of the SIP for shares of RAI common stock allocated to your
account under the CIP or the SIP. Shares for which no
instructions are received will be voted by the trustee of the
CIP and the custodian of the SIP in the same proportion as the
shares for which instructions are received by each of them.
You may specify whether your shares should be voted for all,
some or none of the director nominees. You also may specify
whether your shares should be voted for or against, or whether
you abstain from voting with respect to, each of the other
proposals.
If you sign and return a proxy card, one of the individuals
named on the card (your proxy) will vote your shares as you have
directed. If you are a shareholder of record and return a signed
proxy card, or if you give your proxy by telephone or over the
Internet, but do not make specific choices, your proxy will vote
your shares in accordance with the Board’s recommendations
listed above. Please see the discussion below under
“— How many votes are required to elect directors
and adopt the other proposals?” for further information on
the voting of shares.
If any other matter is presented at our 2008 annual meeting,
then your proxy will vote in accordance with his or her best
judgment. At the time this proxy statement went to press, we
knew of no other matters that had been properly presented to be
acted upon at the annual meeting.
The required number of votes depends upon the particular item to
be voted upon:
Item
Vote Necessary*
• Item 1: Election of
Directors
Directors are elected by a “plurality” of the votes
cast at the meeting, meaning that the director nominee with the
most votes for a particular slot is elected for that slot.
Director nominees do not need a majority to be elected.
• Item 2: Ratification of
appointment of independent auditors
Approval requires the affirmative vote of a majority of the
votes cast at the meeting.
• Items 3-5: Shareholder proposals
Approval requires the affirmative vote of a majority of the
votes cast at the meeting.
*
Under rules of the New York Stock Exchange, referred to as the
NYSE, if you hold your shares in street name, then your broker
is permitted to vote your shares on Items 1 and 2 even if
it does not receive voting instructions from you. Under NYSE
rules, your broker may not vote your shares on
Items 3-5
without instructions from you. Without your voting instructions,
a broker non-vote will occur on
Items 3-5.
Abstentions, shares that are withheld as to voting with respect
to nominees for director and broker non-votes will not be
counted as votes cast in favor of or against a proposal.
We will retain an independent party, Broadridge Financial
Solutions, Inc., to receive and tabulate the proxies, and to
serve as an inspector of election to certify the results.
Preliminary voting results will be announced at the 2008 annual
meeting, and will be set forth in a press release that we intend
to issue after the annual meeting. The press release will be
available on our web site at www.reynoldsamerican.com.
Final voting results will be published in our Quarterly Report
on
Form 10-Q
for the quarter ending June 30, 2008, which we will file
with the SEC. A copy of this Quarterly Report on
Form 10-Q
will be available on our web site after its filing with the SEC.
Yes. Shareholders can elect to receive an
e-mail that
will provide electronic links to these materials in the future.
If you are a registered shareholder, and have not already
elected to view documents issued by us over the Internet, then
you can choose to receive these documents electronically by
following the appropriate prompts when you vote using the
Internet. (If you hold your RAI common stock in nominee name,
then you should review the information provided by your nominee
for instructions on how to elect to view future proxy materials
and annual reports using the Internet.) By choosing to receive
shareholder materials electronically, you support us in our
effort to control escalating printing and postage costs, and to
protect the environment. We hope that our shareholders find this
service convenient and useful. Costs normally associated with
electronic access, such as usage and telephonic charges, will be
your responsibility.
If you elect to view our annual reports and proxy materials
using the Internet, we will send you a notice at the
e-mail
address provided by you explaining how to access these
materials, but we will not send you paper copies of these
materials unless you request them. We also may choose to send
one or more items to you in paper form even though you elected
to receive them electronically. Your consent to receive
materials electronically rather than by mail will be effective
until you revoke it by terminating your registration by going to
the web sitewww.enrollicsdelivery.com/rai, writing to
the Office of the Secretary, Reynolds American Inc.,
P.O. Box 2990, Winston-Salem, North Carolina27102-2990,
or calling us at
(336) 741-5162.
If at any time you would like to receive a paper copy of the
annual report, proxy statement or other documents issued by us,
you may request any of these documents by writing to the address
above, calling us at
(336) 741-5162
or going to the web sitewww.reynoldsamerican.com.
By consenting to electronic delivery, you are stating to us that
you currently have access to the Internet and expect to have
access to the Internet in the future. If you do not have access
to the Internet, or do not expect to have access in the future,
please do not consent to electronic delivery because we may rely
on your consent and not deliver paper copies of documents,
including, for example, future annual meeting materials or other
documents issued by us.
Yes. SEC rules allow us to send a single Notice or copy of our
proxy materials to two or more of our shareholders sharing the
same address, subject to certain conditions, in a process called
“householding.” To take advantage of the cost savings
offered by householding, we have delivered only one Notice or
copy of proxy materials to multiple shareholders who share an
address, unless we received contrary instructions from the
impacted shareholders prior to the mailing date. We agree to
deliver promptly, upon written or oral request, a separate copy
of the Notice or proxy materials, as requested, to any
shareholder at the shared address to which a single copy of
those documents was delivered. If you prefer to receive separate
copies of the Notice, proxy statement or
Form 10-K,
contact Broadridge Financial Solutions, Inc. at
1-800-542-1061
or in writing at Broadridge, Householding Department, 51
Mercedes Way, Edgewood, New York11717.
If you are currently a shareholder sharing an address with
another shareholder and wish to receive only one copy of future
Notices, proxy statements and
Forms 10-K
for your household, please contact Broadridge at the above phone
number or address.
We are soliciting this proxy on behalf of your Board of
Directors and will bear the solicitation expenses. We are making
this solicitation by mail, but our directors, officers and
employees also may solicit by telephone, telecopy or in person.
We will pay for the cost of these solicitations, but these
individuals will receive no additional compensation for their
solicitation services. We will reimburse nominees, if they
request, for their expenses in forwarding proxy materials to
beneficial owners.
Yes, an alphabetical list of the names of all shareholders of
record, as of the close of business on the record date, will be
available for inspection by any shareholder or his or her
representative, upon written demand, during the period from
March 26, 2008, to May 6, 2008. This list can be
viewed at RAI’s corporate offices located at 401 North Main
Street, Winston-Salem, North Carolina27101 between the hours of
8:30 a.m. and 5:00 p.m. Under applicable North
Carolina law, a shareholder or his or her representative may,
under certain circumstances and at the shareholder’s
expense, copy the list during the period it is available for
inspection. A shareholder desiring to inspect
and/or copy
the shareholder list should contact RAI’s Secretary at 401
North Main Street, Winston-Salem, North Carolina27101 (phone:
(336) 741-5162),
to make necessary arrangements. In addition, we will make the
shareholders’ list available for inspection to any
shareholder or his or her representative during the 2008 annual
meeting.
The business and affairs of RAI are managed under the direction
of your Board of Directors. The Board currently consists of
12 directors who are divided into three classes, with each
class having four directors serving staggered terms of three
years. The Class I directors have a term ending on the date
of the 2008 annual meeting, the Class II directors have a
term ending on the date of the 2009 annual meeting, and the
Class III directors, except as otherwise noted below, have
a term ending on the date of the 2010 annual meeting. Pursuant
to the Articles of Incorporation, each class is to consist, as
nearly as may reasonably be possible, of one-third of the total
number of directors constituting the Board.
Currently, our Class I directors are Betsy S. Atkins, John
T. Chain, Jr., Nana Mensah and John J. Zillmer. Pursuant to
our Corporate Governance Guidelines, the Board expects that no
director will be nominated for election to the Board following
his or her 70th birthday. General Chain turned
70 years old during his term as a Class III director,
a term which ended at last year’s annual meeting.
Therefore, he would not have been eligible for re-election to
the Board at that time, unless an exception had been made to the
Governance Guidelines. To retain the benefit of his service on
the Board for an additional year beyond the 2007 annual meeting,
the Board, upon the recommendation of the Board’s Corporate
Governance, Nominating and Leadership Development Committee,
referred to as the Governance Committee, approved an exception
to the above provision of the Governance Guidelines, and
nominated him for re-election to the Board at the 2007 annual
meeting, to serve in Class I. The shareholders, at their
2007 annual meeting, approved such re-election. General Chain
has elected to retire from the Board effective with the 2008
annual meeting, coincident with the expiration of his term as a
Class I director.
The remaining persons currently serving on the Board as a
Class I director — Betsy S. Atkins, Nana Mensah
and John J. Zillmer — have been nominated for
re-election to such class at the 2008 annual meeting. If
re-elected at the 2008 annual meeting, Ms. Atkins and
Messrs. Mensah and Zillmer will hold office until the 2011
annual meeting or until their successors have been elected and
qualified. In addition to the foregoing persons’ nomination
for re-election as Class I directors, Lionel
L. Nowell, III has been nominated for re-election to
Class III at the 2008 annual meeting. Mr. Nowell was
first elected to serve as a director at the Board’s
September 2007 meeting, when he was elected to Class III.
Although the term of the other Class III directors ends on
the date of the 2010 annual meeting, Mr. Nowell’s
current term as a Class III director is scheduled to expire
on the date of the 2008 annual meeting because, under the law of
North Carolina (the state in which RAI is incorporated) he was
elected to fill a vacancy on the Board. If re-elected at the
2008 annual meeting, Mr. Nowell, like the other current
Class III directors, will hold office until the 2010 annual
meeting.
Pursuant to the terms of the Governance Agreement, dated
July 30, 2004, as amended, referred to as the Governance
Agreement, by and among RAI, Brown & Williamson
Holdings, Inc. (formerly known as Brown & Williamson
Tobacco Corporation), referred to as B&W, and British
American Tobacco p.l.c., the parent corporation of B&W and
referred to as BAT, B&W has designated Ms. Atkins as a
nominee for re-election as a Class I director. (The
material terms of the Governance Agreement relating to the
nomination of directors are described below under
“— Governance Agreement.”) The Governance
Committee also has recommended Messrs. Mensah and Zillmer
as nominees for re-election to the Board as Class I
directors and Mr. Nowell as a nominee for re-election to
the Board as Class III director. The other persons who have
been designated by B&W pursuant to the Governance Agreement
as directors of RAI are Messrs. Feinstein and Withington
(Class III directors), and Antonio Monteiro de Castro and
H.G.L. (Hugo) Powell (Class II directors).
Your proxy will vote for each of the nominees for directors
unless you specifically withhold authority to vote for a
particular nominee. If any such nominee is unable to serve, your
proxy may vote for another nominee proposed by the Board, or the
Board may reduce the number of directors to be elected.
Your Board of Directors recommends a vote FOR the election of
each of the three Class I director nominees and the one
Class III director nominee.
Certain biographical information regarding the persons nominated
for election to the Board at our 2008 annual meeting and
regarding the other persons serving on the Board (other than
General Chain who will retire effective with the 2008 annual
meeting) is set forth below:
Director
Nominees
Name
Age
Business Experience
Class I
Directors
(terms expiring in 2011)
Betsy S. Atkins
53
Ms. Atkins has been the Chief Executive Officer of Baja
Ventures, an independent venture capital firm focused on the
technology and life sciences industry, since 1994. Previously,
Ms. Atkins served as Chairman and Chief Executive Officer of
NCI, Inc., a functional food/nutraceutical company, from 1991
through 1993. Ms. Atkins was a co-founder of Ascend
Communications, Inc. in 1989 and a member of its Board of
Directors, and served as its Worldwide Sales, Marketing and
International Executive Vice President prior to its acquisition
by Lucent Technologies in 1999. Ms. Atkins commenced
serving on the Board of RAI as of July 30, 2004. Ms. Atkins
also serves on the boards of directors of Polycom, Inc.,
Chico’s FAS Inc. and SunPower Corporation, as well as a
number of private companies (including the board of directors of
The NASDAQ Stock Market LLC), and is an advisor to British
Telecom. Ms. Atkins also was a Presidential-appointee to the
Pension Benefit Guaranty Corporation advisory committee and is a
Governor-appointed member of the Florida International
University Board of Trustees.
Nana Mensah
55
Mr. Mensah has been the Chairman and Chief Executive Officer of
’XPORTS, Inc., a privately held company that exports food
packaging and food processing equipment and pharmaceuticals to
foreign markets, since January 2005, and previously served in
those same positions from April 2003 until July 2003 and from
October 2000 until December 2002. He had served as the Chief
Operating Officer — Domestic of Church’s Chicken,
a division of AFC Enterprises, Inc. and one of the world’s
largest quick-service restaurant chains, from August 2003 to
December 2004, when it was sold to a private equity firm. Mr.
Mensah was President, U.S. Tax Services of H&R Block
Inc., a tax, mortgage and financial services company, from
January 2003 until March 2003. He also was a management
consultant from October 1999 to September 2000. Previously, Mr.
Mensah served as President and Chief Operating Officer of Long
John Silver’s Restaurants, Inc., the world’s largest
chain of seafood quick-service restaurants, from 1997 until it
was sold under his auspices in October 1999. Mr. Mensah worked
for PepsiCo from 1990 to 1994 and for PepsiCo Restaurants
International from 1994 to 1997, in a variety of senior
executive positions. Mr. Mensah commenced serving on the Board
of RAI as of July 30, 2004, and served on the board of directors
of R. J. Reynolds Tobacco Holdings, Inc., a wholly owned
subsidiary of RAI and formerly a publicly traded company,
referred to as RJR, from June 1999 to July 2004. Mr. Mensah is a
Distinguished Fellow at Georgetown College in Kentucky. He also
is a member of the boards of trustees of the Lexington
Philharmonic Society, the Children’s Miracle Network and
the Kentucky Children’s Hospital.
Mr. Zillmer has served as Chairman and Chief Executive Officer
of Allied Waste Industries, Inc., the nation’s
second-largest waste management company, since May 2005. Prior
to joining Allied Waste, Mr. Zillmer had been retired since
January 2004. From May 2000 until January 2004, he served as
Executive Vice President of ARAMARK Corporation. During the
same period, he also served as President of ARAMARK’s Food
and Support Services Group. From August 1999 to May 2000, he
served as President of ARAMARK’s Food and Support Services
International division, and from May 1995 to August 1999, he
served as President of ARAMARK’s Business Services
division. Mr. Zillmer commenced serving on the Board of RAI as
of July 12, 2007. He also is a member of the boards of
directors of Allied Waste Industries, Inc., Ecolab Inc. and
United Stationers Inc.
Class III
Director
(term expiring in 2010)
Lionel L. Nowell, III
53
Mr. Nowell has been Senior Vice President and Treasurer of
PepsiCo, the world’s fourth-largest food and beverage
company, since August 2001. Prior to that, he served as Chief
Financial Officer for The Pepsi Bottling Group, a position he
assumed in 2000 after serving as Controller for PepsiCo since
July 1999. Mr. Nowell joined PepsiCo in July 1999 from RJR
Nabisco, Inc. (now known as RJR), where he was Senior Vice
President, Strategy and Business Development from January 1998
to July 1999. From 1991 to 1998, Mr. Nowell held a variety of
senior financial roles at the Pillsbury division of Diageo PLC.
Prior to joining Pillsbury, Mr. Nowell spent eight years as
a finance executive at Pizza Hut, which at the time was a
division of PepsiCo. Mr. Nowell commenced serving on the
Board of RAI as of September 26, 2007. Mr. Nowell also is a
member of the board of directors of American Electric Power
Company, and serves on the Dean’s Advisory Board at The
Ohio State University Fisher College of Business. He is an
active member of the Executive Leadership Council, Financial
Executive Institute, American Institute of Certified Public
Accountants and the Ohio Society of CPAs.
Continuing
Directors
Class II
Directors
(terms expiring in 2009)
Antonio Monteiro de Castro
62
Mr. Monteiro de Castro retired on December 31, 2007, as Chief
Operating Officer of BAT, the world’s second largest
publicly traded tobacco group. He had held that position since
January 2004, having served as a director of BAT since March
2002. He joined BAT in 1996 as the Regional Director for Latin
America and the Caribbean. Previously, Mr. Monteiro de
Castro served as Vice President of Souza Cruz SA, the Brazilian
subsidiary of BAT, beginning in 1989. He became President and
CEO of Souza Cruz SA in 1991, and served in such capacity until
1995. Mr. Monteiro de Castro commenced serving on the Board of
RAI as of July 30, 2004. He also is President of the
Administrative Council, Souza Cruz SA and a member of the boards
of directors of the Getulio Vargas Foundation, Clean Energy
Brazil Plc and Merrill Lynch Latin American Trust Plc.
Mr. Powell retired in 2002 from Interbrew S.A., an international
brewer that in 2004 became part of InBev S.A., where he served
as Chief Executive Officer since 1999. During Mr. Powell’s
tenure as Chief Executive Officer, he led Interbrew through a
crucial period in its expansion and evolution, including the
completion of 33 acquisitions. Between 1984 and 1999, Mr. Powell
held various operational positions within John Labatt Ltd. and
Interbrew, including Chief Executive Officer of Interbrew
Americas since 1995. Mr. Powell commenced serving on the Board
of RAI as of July 30, 2004.
Joseph P. Viviano
69
Mr. Viviano served as the Vice Chairman of Hershey Foods
Corporation, a chocolate and confectionery manufacturer, from
January 1999 until his retirement in April 2000. Previously,
Mr. Viviano had been President and Chief Operating Officer
of Hershey Foods Corporation from 1994 through 1998.
Mr. Viviano commenced serving on the Board of RAI as of
July 30, 2004, and served on the board of directors of RJR from
June 1999 to July 2004. He also is a member of the boards of
directors of Chesapeake Corporation, Harsco Corporation and RPM
International Inc.
Thomas C. Wajnert
64
Mr. Wajnert has been self-employed since July 2006, providing
advisory services, including acting as a Senior Advisor to Bear
Stearns Merchant Banking. From January 2002 to June 2006, he had
been Managing Director of Fairview Advisors, LLC, a merchant
bank he co-founded. Mr. Wajnert retired as Chairman of the
Board and Chief Executive Officer of AT&T Capital
Corporation, a commercial finance and leasing company, where he
was employed from November 1984 until December 1997. He was
self-employed and participated in several private equity
transactions in the technology and human resources outsourcing
areas from December 1997 to December 2001. Mr. Wajnert
commenced serving on the Board of RAI as of July 30, 2004, and
served on the board of directors of RJR from June 1999 to July
2004. Mr. Wajnert also serves on the boards of directors of
NYFIX, Inc., United Dominion Realty Trust, Inc., Alter Moneta
Corporation and Churchill Financial Corp., and is Non-Executive
Chairman of FGIC, Inc., a privately held financial guarantee
insurance company.
Mr. Feinstein was the Chairman of Farmers Group, Inc. and
Farmers New World Life Insurance Company from 1997 to July 2005,
and served as the Chief Executive Officer of Farmers Group, Inc.
from 1997 to April 2005 and as President and Chief Operating
Officer of Farmers Group, Inc. from 1995 to 1996. He retired
from Farmers Group, Inc. in July 2005. Prior to 1995, Mr.
Feinstein held various management positions with Farmers Group,
Inc., including Senior Vice President —
Property/Casualty Operations, Senior Vice President —
Chief Information Officer and Senior Vice President —
Chief Marketing Officer from 1980 to 1994. Farmers Group, Inc.
is a holding company of Farmers New World Life Insurance
Company. Farmers Group, Inc. was an indirect, wholly owned
subsidiary of B.A.T. Industries p.l.c., an affiliate of BAT,
from 1988 to 1998. Mr. Feinstein was a member of the board of
directors of B.A.T. Industries p.l.c. from January 1997 to
September 1998, and was a member of the Group Management Board
of Zurich Financial Services from 1998 to April 2005.
Mr. Feinstein commenced serving on the Board of RAI as of
November 30, 2005. He also is a member of the boards of
directors of GeoVera Holdings, Inc. and Almin p.l.c.
Susan M. Ivey
49
Ms. Ivey has been President and Chief Executive Officer of RAI
since January 2004, and was elected the Chairman of the Board of
RAI effective January 1, 2006. Since July 2004, she has been
Chairman of the Board of R. J. Reynolds Tobacco Company, a
wholly owned operating subsidiary of RAI, referred to as RJR
Tobacco. From July 2004 to December 2006, she also served as
Chief Executive Officer of RJR Tobacco. She served as President
and Chief Executive Officer of B&W from 2001 to 2004.
Ms. Ivey also served as a director of B&W from 2000 to
2004 and Chairman of the Board of B&W from January 2003 to
2004. Ms. Ivey joined B&W in 1981 as a trade marketing
representative. After holding a number of trade and brand
positions, she accepted an international assignment with BAT in
1990. While overseas, Ms. Ivey held a number of positions,
including Director of Marketing in China and Head of
International Brands at BAT. She returned to B&W in 1999 as
Vice President of Marketing and subsequently became Senior Vice
President of Marketing, a position that she held until her
appointment in 2001 as President and Chief Executive Officer of
B&W. Ms. Ivey commenced serving on the Board of RAI as
of January 2004. She also is a member of the boards of directors
of the Forsyth County United Way and the Winston-Salem YWCA, and
is a member of the boards of trustees of the University of
Florida Foundation and Wake Forest University.
Neil R. Withington
51
Mr. Withington has been Director, Legal and Security, and Group
General Counsel of BAT, the world’s second largest publicly
traded tobacco group, since August 2000. Mr. Withington
joined BAT in 1993 as a Senior Lawyer and served in that
capacity until 1995. He was named as the Assistant General
Counsel and Head of Product Liability Litigation Group of BAT in
1996. Mr. Withington then served as the Deputy General
Counsel of BAT from 1998 until 2000. Mr. Withington
commenced serving on the Board of RAI as of July 30, 2004.
In connection with the business combination transactions,
collectively referred to as the Business Combination,
consummated on July 30, 2004, pursuant to which, among
other things, the U.S. cigarette and tobacco business of
B&W was combined with the business of RJR Tobacco, RAI,
B&W and BAT entered into the Governance Agreement, which
sets forth the parties’ agreement regarding various aspects
of the governance of RAI, including the nomination of RAI
directors. As noted above, under “— Item 1:
Election of Directors,” the Board currently consists of
12 persons. Under the terms of the Governance Agreement,
the Board is nominated as follows:
Nominator
Nominee
B&W
B&W has the right to designate for nomination five
directors, at least three of whom are required to be independent
directors and two of whom may be executive officers of BAT or
any of its subsidiaries.
Governance Committee
The Governance Committee will recommend to the Board for
nomination:
• the chief executive officer of RAI or an
equivalent senior executive officer, and
• the remaining directors, each of whom is
required to be an independent director.
The number of directors B&W is entitled to designate for
nomination to the Board will be affected by the amount of RAI
common stock which B&W owns. (As of the date of this proxy
statement, B&W owns approximately 42% of RAI common stock.)
Specifically, the Governance Agreement provides that
designations by B&W will be subject to the following
limitations prior to the recommendation of nominees by the
Governance Committee:
If B&W’s ownership interest in RAI as of a
specified date is:
B&W will have the right to designate:
• less than 32% but greater than or equal to 27%
• two independent directors, and
• two directors who may be executive officers of BAT
or any of its subsidiaries.
• less than 27% but greater than or equal to 22%
• two independent directors, and
• one director who may be an executive officer of BAT
or any of its subsidiaries.
• less than 22% but greater than or equal to 15%
• one independent director, and
• one director who may be an executive
officer of BAT or any of its subsidiaries.
• less than 15%
• no directors.
In addition, the Governance Agreement provides that in no event
will the number of directors designated by B&W divided by
the total number of directors then comprising the Board, exceed
the number of directors which B&W is then entitled to
designate pursuant to the terms of the Governance Agreement
divided by 12, rounded up to the nearest whole number.
For purposes of the Governance Agreement, an independent
director means a director who would be considered an
“independent director” of RAI under the NYSE listing
standards, as such listing standards may be amended from time to
time, and under any other applicable law that imposes as a
condition to any material benefit to RAI or any of its
subsidiaries, the independence of one or more members of the
Board, excluding, in each case, requirements that relate to
“independence” only for members of a particular
committee or directors fulfilling a particular function. In no
event will any person be deemed to be an “independent
director” if such person is, or at any time during the
three years preceding the date of determination was, a
director, officer or employee of BAT or any of its subsidiaries,
other than RAI and its subsidiaries, if applicable. In addition,
no person will be deemed to be an “independent
director” unless such person also would be considered to be
an “independent director” of BAT under the NYSE
listing standards, whether or not such person is in fact a
director of BAT, assuming the NYSE listing standards were
applicable to BAT. Under the Governance Agreement, the fact that
a person has been designated by B&W for nomination will not
by itself disqualify that person as an “independent
director.”
Pursuant to the Governance Agreement, because the Board has
included all of B&W’s designees on management’s
slate of nominees, and because the Board will include the number
of directors designated by B&W in accordance with the terms
of the Governance Agreement following the election of directors
at the 2008 annual meeting, BAT and its subsidiaries will vote,
pursuant to an irrevocable proxy, their shares of RAI common
stock in favor of management’s slate of nominees
(consisting of Ms. Atkins and Messrs. Mensah and
Zillmer for Class I, and Mr. Nowell for
Class III) at the 2008 annual meeting. Under the
Governance Agreement, BAT and its subsidiaries will not be
required to vote in favor of management’s slate of nominees
at a particular shareholders’ meeting if a third party has
made a material effort to solicit proxies in favor of a
different slate of directors for that meeting.
The NYSE listing standards require that all listed companies
have a majority of independent directors. For a director to be
“independent” under the NYSE listing standards, the
board of directors of a listed company must affirmatively
determine that the director has no material relationship with
the company, or its subsidiaries or affiliates, either directly
or as a partner, shareholder or officer of an organization that
has a relationship with the company or its subsidiaries or
affiliates. In accordance with the NYSE listing standards,
RAI’s Board has adopted the following standards to assist
it in its determination of director independence; a director
will be determined not to be independent under the following
circumstances:
•
The director is, or has been within the last three years, an
employee of RAI, or an immediate family member is, or has been
within the last three years, an executive officer, of RAI,
•
The director has received, or has an immediate family member who
has received, during any
12-month
period within the last three years, more than $100,000 in direct
compensation from RAI, other than director and committee fees
and pension or other forms of deferred compensation for prior
service (provided such compensation is not contingent in any way
on continued service),
•
(1) The director or an immediate family member is a current
partner of a firm that is RAI’s internal or external
auditor; (2) the director is a current employee of such a
firm; (3) the director has an immediate family member who
is a current employee of such a firm and who participates in the
firm’s audit, assurance or tax compliance (but not tax
planning) practice; or (4) the director or an immediate
family member was within the last three years (but is no longer)
a partner or employee of such a firm and personally worked on
RAI’s audit within that time,
•
The director or an immediate family member is, or has been
within the last three years, employed as an executive officer of
another company where any of RAI’s present executive
officers at the same time serves or served on that
company’s compensation committee, or
•
The director is a current employee, or an immediate family
member is a current executive officer, of a company that has
made payments to, or received payments from, RAI for property or
services in an amount which, in any of the last three fiscal
years, exceeds the greater of $1,000,000 or 2% of such other
company’s consolidated gross revenues.
The foregoing director independence standards are set forth in
the Governance Guidelines, which can be found in the
“Governance” section of the
www.reynoldsamerican.comweb site, or can be requested,
free of charge, by writing to the Office of the Secretary,
Reynolds American Inc., P.O. Box 2990, Winston-Salem,
North Carolina27102-2990.
The Board has determined that the following directors are
independent within the meaning of the foregoing NYSE listing
standards: Betsy S. Atkins, John T. Chain, Jr., Martin D.
Feinstein, Nana Mensah, Lionel L. Nowell, III, H.G.L.
(Hugo) Powell, Joseph P. Viviano, Thomas C. Wajnert and John J.
Zillmer. None of the foregoing independent directors has any
relationship with RAI, other than being a director
and/or
shareholder of RAI.
The standing committees of the Board are the Audit Committee,
the Compensation Committee and the Governance Committee. From
2006 until mid-2007, the Board also had an ad hoc special
committee, the purpose of which was to evaluate, and provide
feedback regarding, long-range strategic plans and initiatives
proposed by management. All of the current committees of the
Board are comprised of non-management directors, who are
independent as defined by applicable NYSE listing standards as
discussed above under “— Determination of
Independence of Directors.” Pursuant to the Governance
Agreement, each of the Board committees will have at least five
members, though currently the Audit Committee has one vacancy.
The Governance Agreement also provides that the directors
designated by B&W will have proportionate representation on
each Board committee, with at least one director designated by
B&W serving on each Board committee so long as any
directors designated by B&W serve on the Board. B&W,
which has designated one member to serve on the Audit Committee,
has provided a revocable waiver with respect to its right to
have an additional B&W designee serve on the Audit
Committee. Notwithstanding the foregoing, a director designated
by B&W may not serve on any Board committee if such service
would violate mandatory legal or exchange listing requirements
or any other applicable law that requires committee member
independence as a condition to a material benefit to RAI or any
of its subsidiaries.
Each of the Board’s three standing committees operates in
accordance with the terms of a written charter. Copies of each
such charter can be found in the “Governance” section
of the www.reynoldsamerican.comweb site, or can be
requested, free of charge, by writing to the Office of the
Secretary, Reynolds American Inc., P.O. Box 2990,
Winston-Salem, North Carolina27102-2990.
Information regarding the membership of each Board committee is
set forth in the table below, and information regarding the
activities of each standing Board committee is presented
following the table.
RAI Board Committees
Audit
Compensation
Governance
Special
Director(1)
Committee
Committee
Committee
Committee
Betsy S. Atkins(2)
X
X
John T. Chain, Jr.
X
X
X
(3)
Martin D. Feinstein(2)
X
X
Nana Mensah
X
Lionel L. Nowell, III
X
H.G.L. (Hugo) Powell(2)
X
X
(3)
X
Joseph P. Viviano
X
(3)
X
Thomas C. Wajnert
X
(3)(4)
X
X
John J. Zillmer
X
Number of Meetings in
2007
12
7
5
4
(1)
Only non-management directors serve on committees of the Board.
(2)
A B&W designee.
(3)
Chairperson of committee.
(4)
The Board has determined that Mr. Wajnert meets the
definition of an “audit committee financial expert,”
within the meaning of Item 407(d)(5) of
Regulation S-K.
The Audit Committee, established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
as amended, is responsible for assisting the Board of Directors
in fulfilling its oversight responsibilities by overseeing:
•
that management has maintained the reliability and integrity of
RAI’s accounting policies, financial reporting and
disclosure practices and financial statements,
•
that management has established and maintained processes to
assure that an adequate system of internal control is
functioning within RAI,
•
that management has established and maintained processes to
assure compliance by RAI with all applicable laws, regulations
and RAI policies,
•
that management has established and maintained processes to
ensure adequate enterprise risk management,
•
the integrity of RAI’s financial statements and RAI’s
compliance with legal and regulatory requirements, and
•
the qualifications, independence and performance of RAI’s
independent auditors and internal audit department.
The Audit Committee is directly responsible for the appointment,
termination, compensation, retention, evaluation and oversight
of RAI’s independent auditors for the purpose of preparing
or issuing an audit report or performing other audit, review or
attest services for RAI. The Audit Committee also serves as a
qualified legal compliance committee, within the meaning of the
Sarbanes-Oxley Act of 2002, responsible for, among other things,
reviewing reports by RAI’s attorneys of any material
violations of securities laws and any material breaches of
fiduciary duties under applicable law.
approves, or makes recommendations to the Board with respect to,
compensation and grants of restricted stock, performance shares,
performance units and other long-term incentives to management
employees,
•
administers plans and programs relating to employee benefits,
incentives and compensation, and
•
approves, or makes recommendations to the Board with respect to,
the base salary and annual incentives payable to all of
RAI’s executive officers, including the Chief Executive
Officer.
For 2006, the Compensation Committee evaluated the performance
of RAI’s Chief Executive Officer and made a recommendation
to the Board concerning an increase in her base salary.
Commencing in 2007, the Governance Committee assumed
responsibility for evaluating the Chief Executive Officer’s
performance. Based on such evaluation, the Compensation
Committee recommends to the independent directors for their
approval any changes in the Chief Executive Officer’s
annual compensation. For a discussion of the Compensation
Committee’s policies relating to executive compensation,
see “Executive Compensation — Compensation
Discussion and Analysis” below.
RAI’s Chief Executive Officer has an indirect role in
determining the annual base salary increase for certain
executive officers, in that the Chief Executive Officer assigns
the individual performance ratings for such persons. With
respect to the other executive officers named in the Summary
Compensation Table below (each officer named in such table,
including Ms. Ivey, is referred to as a named executive
officer), Ms. Ivey, as Chief Executive Officer, assigns the
performance rating for Ms. Neal and Messrs. Delen and
Eckmann.
E. Julia (Judy) Lambeth, RAI’s Executive Vice
President — Corporate Affairs, General Counsel and
Assistant Secretary, assigns the performance rating for
Mr. Payne. Ms. Ivey also assigns the performance
rating for certain other executive officers who are her direct
reports and are not named in the Summary Compensation Table.
The individual performance rating and the general merit increase
determine the amount of a person’s proposed base salary
increase; before the proposed base salary increase becomes
effective for any named executive officer, however, the
Compensation Committee or the other independent members of the
Board, must approve such increase. Similarly, certain of the
named executive officers, other than the Chief Executive
Officer, assign annual performance ratings for other executive
officers of RAI who are not named in the Summary Compensation
Table; the Compensation Committee approves, without further
Board action, the base salary increase for such other officers.
No executive officer has any role in determining or recommending
the compensation of the Chief Executive Officer, whose
compensation is determined generally by the independent members
of the Board based upon recommendations from the Compensation
Committee. No executive officer of RAI has a direct role in
approving or recommending any stock-based awards to any other
executive officer; instead, such awards are approved either by
the Board or the Compensation Committee. See “Executive
Compensation — Compensation Discussion and
Analysis” for additional information regarding the process
for determining executive officer compensation.
The Governance Committee, with the assistance of an independent
compensation consultant, periodically evaluates and recommends
changes to the compensation program for RAI’s non-employee
directors. No executive officer is involved in approving, or
recommending changes to, any elements of the director
compensation program.
Associates provides the Compensation Committee with market or
benchmark data to assist the Committee in making determinations
concerning senior management base salary and annual incentive
levels, and long-term incentive awards. A representative of
Hewitt Associates generally attends each meeting of the
Compensation Committee. The Compensation Committee has requested
that Hewitt Associates work with RAI’s management in
preparing appropriate executive compensation proposals for the
Committee’s review and consideration; provide independent,
candid advice to the Committee; and help ensure that the
Committee receives the information and counsel necessary to make
well-informed, reasoned decisions in the best interests of
RAI’s shareholders.
The Human Resources departments of RAI and certain of its
operating subsidiaries from time to time engage Hewitt
Associates to provide compensation advice on matters not
pertaining to the compensation of RAI’s executive officers.
Pursuant to procedures established by the Compensation Committee
in February 2007, management of RAI or its operating
subsidiaries may retain the same compensation consulting firm
retained by the Committee, provided the firm furnishes
management with market pricing and other compensation consulting
services for officer level positions, the compensation for which
the Committee does not determine. Further, management of RAI and
its operating subsidiaries are required to obtain the prior
approval of the Compensation Committee before engaging the same
compensation consulting firm then retained by the Committee, if
management expects that the fees payable to such firm for
consulting services provided at management’s direction will
exceed $1 million for such engagement or in the aggregate
during any fiscal year.
a former officer of an issuer serving as a member of that
issuer’s compensation committee, and
•
an executive officer of an issuer serving as a director of
another entity, one of whose executive officers serves on that
issuer’s compensation committee.
During 2007, there were no compensation committee interlocks or
insider participation at RAI.
reviews the qualifications of candidates for nomination to the
Board and its committees,
•
recommends to the Board nominees for election as directors,
•
may nominate an independent director to serve as a lead director
under the circumstances described below under
“— Lead Director,”
•
reviews periodically the compensation of the Board in relation
to comparable companies and recommends any changes needed to
maintain appropriate and competitive Board compensation,
•
evaluates and recommends the processes and practices through
which the Board conducts its business,
•
reviews and evaluates annually the assignment of the various
oversight responsibilities and activities of the Board
committees,
•
reviews and reports to the Board on succession planning for
RAI’s Chief Executive Officer and other top executive
management positions,
•
reviews RAI’s corporate governance policies and considers
the adequacy of such policies in response to shareholder
concerns, and
initiates and oversees annually an appraisal of the performance
of the Board, the Board Committees, the Lead Director and, in
conjunction with the Lead Director, the individual directors in
meeting their respective corporate governance responsibilities.
professional third-party search firms, which provide candidate
names, biographies and background information,
•
the Governance Committee’s, the Board’s and
management’s networks of contacts, and
•
shareholder recommendations.
In connection with its process of identifying, screening and
recommending candidates for Board membership, the Governance
Committee evaluates each potential candidate against the
qualifications set forth in its committee charter and the
Governance Guidelines, and reviews the appropriate skills and
characteristics required of directors in the context of
prevailing business conditions and the then-existing composition
of the Board. The qualifications considered in the selection of
director nominees include the following:
•
experience as a director of a publicly traded company,
•
extent of experience in business, finance or management,
•
overall judgment to advise and direct RAI and its operating
subsidiaries in meeting their responsibilities to shareholders,
customers, employees and the public, and
•
the interplay of a candidate’s experience with the
experience of the other Board members and the extent to which
the candidate would be a desirable addition to the Board and any
of its committees.
The objective is a diverse Board that brings to RAI a variety of
perspectives and skills derived from high quality business and
professional experience.
Additional policies regarding Board membership, as set forth in
the Governance Guidelines, include the following:
•
a majority of the Board must be independent within the meaning
of the Governance Guidelines and the NYSE listing standards,
•
the Executive Chairman of the Board, if there is one, and the
Chief Executive Officer normally will be the only management
directors,
•
a Board member, other than a non-independent designee of
B&W pursuant to the Governance Agreement, who ceases to be
active in his or her principal business or profession, or
experiences other changed circumstances that could diminish his
or her effectiveness as a Board member, is expected to offer his
or her resignation to the Board, which will determine whether
such member should continue to serve as a director, and
•
the Board expects that no director will be nominated for
election or re-election to the Board following his or her
70th birthday.
As described above under “— Item 1: Election
of Directors,” in 2007, the Board approved an exception to
the immediately preceding policy, allowing General Chain to
serve on the Board for an additional year. General
Chain will retire from the Board as of the 2008 annual meeting,
upon the expiration of his term as a Class I director.
Incumbent directors are reviewed for suitability for continued
service on the Board by the Governance Committee and the full
Board prior to their nomination for re-election.
Candidates are recommended to the full Board for nomination for
election as directors only upon the affirmative vote of a
majority of the members of the Governance Committee.
the candidate’s name, age, business address and, if known,
residence address,
•
the candidate’s principal occupation or employment,
•
the number of shares of RAI common stock owned by the candidate,
•
the written consent of the candidate to be named in the proxy
statement as a nominee, if applicable, and to serve as a
director if elected, and
•
a description of all arrangements or understandings between the
shareholder, the candidate and any other person or persons
(naming such person or persons), pursuant to which the
recommendation is being made by the shareholder.
The Governance Committee will evaluate any director candidate
recommended by a shareholder based upon the facts and
circumstances at the time of the receipt of such recommendation.
Applicable considerations would include:
•
whether the Governance Committee currently is looking to fill a
new position created by an expansion of the number of directors,
or a vacancy that may exist on the Board,
•
whether nomination of a particular candidate would be consistent
with the Governance Agreement,
•
whether the current composition of the Board is consistent with
the criteria described in the Governance Guidelines,
•
whether the candidate submitted possesses the requisite
qualifications that generally are the basis for selection for
candidates to the Board, as described in the Governance
Guidelines and as described above, and
•
whether the candidate would be considered independent under the
Governance Guidelines and the NYSE listing standards.
The Governance Committee will not alter the manner in which it
evaluates a candidate based on whether the candidate was
recommended by a shareholder or otherwise.
A shareholder also may nominate a person for election to the
Board at the 2009 annual meeting of shareholders by providing
notice and the other required information described in
RAI’s Bylaws, in writing, to the Office of the Secretary,
Reynolds American Inc., P. O. Box 2990, Winston-Salem, NorthCarolina27102-2990,
for receipt between October 25, 2008, and November 24,2008. RAI’s Bylaws can be found in the
“Governance” section of the
www.reynoldsamerican.comweb site or may be obtained,
free of charge, from the Office of the Secretary.
During 2005, the Board amended the Governance Guidelines,
allowing the independent directors to elect, upon nomination by
the Governance Committee, an independent director to serve as
Lead Director if the positions of Chairman of the Board and
Chief Executive Officer are held by the same person. Following
the retirement of Andrew J. Schindler, effective
December 31, 2005, as Non-Executive Chairman of the Board,
Ms. Ivey, RAI’s Chief Executive Officer and President,
assumed the additional position of Chairman of the Board,
effective January 1, 2006. Pursuant to the Governance
Guidelines, the Board elected General Chain to serve as Lead
Director, commencing January 1, 2006. In 2007, the Board
modified the Governance Guidelines to provide that the term of
any future Lead Director would be one year, instead of three
years.
The Lead Director is responsible for:
•
presiding over executive sessions of the non-management
directors and the independent directors,
•
calling meetings of the non-management directors and the
independent directors as he or she deems necessary,
•
facilitating communications and serving as a liaison between the
non-management directors and the Chairman of the Board and Chief
Executive Officer, though each director is free to communicate
directly with the Chairman of the Board and Chief Executive
Officer,
•
consulting with the Chairman of the Board, the Chief Executive
Officer and the Secretary on the agenda for Board meetings and
on the need for special meetings of the Board,
•
together with the Chair of the Governance Committee,
communicating to the Chief Executive Officer the results of the
evaluation of his or her performance,
•
in conjunction with the Governance Committee, overseeing the
evaluation process of individual directors,
•
meeting with any director who is not adequately performing his
or her duties as a member of the Board or any Board
committee, and
•
otherwise consulting with the Chairman of the Board on matters
relating to management effectiveness and Board performance.
The Governance Guidelines provide that each Board meeting agenda
shall include time for an executive session with only directors
and the Chief Executive Officer present, and an executive
session with only non-employee directors present. In addition,
the Governance Guidelines provide that at the Board meeting
following each annual meeting of shareholders, the Board shall
have an executive session with only independent directors
present. The Lead Director, if one has been appointed, is
responsible for presiding over executive sessions of the
non-management directors and the independent directors. In the
absence of the Lead Director, if one has been appointed, the
Chair of the Governance Committee shall preside over executive
sessions of the non-management directors and the independent
directors. Similarly, if no Lead Director has been appointed,
and the Chairman of the Board is an employee of RAI or a
subsidiary of RAI, then the Chair of the Governance Committee
shall preside over executive sessions with only non-employee
directors or independent directors present. As noted above,
General Chain has served as Lead Director since January 1,2006. Currently, Mr. Powell serves as the Chair of the
Governance Committee.
During 2007, there were seven meetings of the RAI Board. Each
director attended at least 75% of the total meetings of the
Board and committees of which he or she was a member, except
that Mr. Monteiro de Castro attended approximately 71% of
the Board meetings held. The Governance Guidelines provide that
Board members are expected to attend annual meetings of
shareholders, barring unavoidable circumstances that prevent
attendance. All of our current directors who were directors on
May 11, 2007, other than Mr. Mensah, attended our
annual shareholders’ meeting held on that date.
We provide to our non-employee directors (other than
Messrs. Monteiro de Castro and Withington, both of whom
were full-time employees of BAT during 2007) compensation
for their service on the Board in the form of retainers and
meeting fees, and certain equity awards, all as described in
greater detail below. See “— Payment for Services
of Certain Board Designees” below for a discussion of the
compensation RAI pays for the service of Messrs. Monteiro
de Castro and Withington as directors of RAI. (Our non-employee
directors, other than Messrs. Monteiro de Castro and
Withington, are collectively referred to as Outside Directors).
RAI does not compensate any director who is an employee of RAI
or any of its subsidiaries in his or her capacity as a director,
except that RAI does reimburse all directors for actual expenses
incurred in connection with attendance at Board and committee
meetings, including transportation, food and lodging expenses.
If a guest accompanies a director on a trip to a Board meeting
and the guest was not invited by RAI, then charges associated
with that guest will not be reimbursed by RAI. Transportation,
food and lodging expenses that are incurred by a guest and paid
for by RAI will be imputed as income to the director. RAI also
reimburses Outside Directors for the fees and expenses incurred
by them in connection with their attendance at one director
education program per year.
The following table shows the annual compensation paid by RAI to
the Outside Directors for their service on the Board during 2007.
As an employee director, Ms. Ivey receives no compensation
for her service on the Board. See “Executive
Compensation” below for information regarding the
compensation that she receives in her capacity as RAI’s
Chief Executive Officer and President. During 2007, RAI did not
pay any compensation directly to Messrs. Monteiro de Castro
or Withington for serving as directors. See
“— Payment for Services of Certain Board
Designees” below for information regarding the compensation
RAI pays for the Board service of such persons.
On September 26, 2007, the Board elected Mr. Nowell to
serve as a director.
(4)
On July 12, 2007, the Board elected Mr. Zillmer to
serve as a director.
(5)
The amounts in this column represent Board and Board committee
retainers paid for service in 2007, fees paid for Board and
Board committee meetings attended in 2007 and, in the case of
General Chain, the supplemental retainer paid for service as
Lead Director. Amounts are shown in this column notwithstanding
a director’s election to defer his or her retainers and
meeting fees pursuant to the plan described
below under “— Deferred Compensation Plan.”
For additional information regarding director meeting fees and
retainers, see “— Annual Retainers and Meetings
Fees” below.
(6)
The amounts shown in this column represent the amount recognized
as compensation expense in 2007 (pursuant to Statement of
Financial Accounting Standards No. 123 (Revised 2004),
“Share-Based Payment,” referred to as FAS 123(R))
by RAI for financial statement reporting purposes with respect
to awards made during 2007, and in previous years, under the
Equity Incentive Award Plan for Directors of Reynolds American
Inc., referred to as the EIAP. The amounts shown in this column
do not equal the value that any director actually received
during 2007 with respect to his or her EIAP awards. Certain
Outside Directors have elected to receive RAI common stock, in
lieu of RAI common stock equivalents (which also are referred to
as deferred stock units), with respect to their initial and/or
annual awards under the EIAP. Under FAS 123(R), the amount
of compensation expense recognized for RAI common stock awarded
under the EIAP is less than the compensation expense recognized
for deferred stock units awarded under the EIAP. The assumptions
upon which the amounts in this column are based are set forth in
note 16 to consolidated financial statements contained in
our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, filed with the
SEC on February 27, 2008. No Outside Director forfeited any
stock awards during 2007.
The amounts in this column do not include any dividends paid on
shares of RAI common stock issued under the EIAP, or dividend
equivalents earned on deferred stock units awarded under the
EIAP or credited under the Amended and Restated Deferred
Compensation Plan for Directors of Reynolds American Inc.,
referred to as the DCP. See “— Equity
Awards” below for a discussion of the material terms of the
EIAP and DCP. The amount of dividend equivalents earned or
credited on directors’ deferred stock units, and charged to
expense, in 2007 was as follows — Ms. Atkins:
$43,459; General Chain: $53,794; Mr. Feinstein: $38,558;
Mr. Goings: $58,647; Mr. Mensah: $11,191;
Mr. Nowell: $578; Mr. Powell: $53,794;
Mr. Viviano: $53,794; Mr. Wajnert: $53,794; and
Mr. Zillmer: $0.
(7)
The grant date fair value, as determined in accordance with
FAS 123(R), of the stock awards made in 2007, under the
EIAP, to Messrs. Nowell and Zillmer was $233,143 and
$250,084, respectively, and to each other Outside Director was
$169,480. The aggregate number of outstanding stock awards
(representing deferred stock units awarded under the EIAP or
credited under the DCP) and stock options held by the Outside
Directors as of December 31, 2007, are set forth below:
Name
Units (#)
Options (#)
Betsy S. Atkins
13,322
0
John T. Chain, Jr.
20,701
0
Martin D. Feinstein
13,322
0
E.V. (Rick) Goings
20,425
20,000
Nana Mensah
4,955
0
Lionel L. Nowell, III
3,656
0
H.G.L. (Hugo) Powell
20,977
0
Joseph P. Viviano
18,651
0
Thomas C. Wajnert
17,519
0
John J. Zillmer
285
0
(8)
The amounts in this column reflect the interest earned on the
cash accounts of the Outside Directors who participate in the
DCP to the extent such interest is considered
“above-market” within the meaning of applicable SEC
rules.
(9)
The amounts in this column include the value of matching gifts
made on behalf of Ms. Atkins and Messrs. Chain, Powell
and Viviano pursuant to the program described below under
“Other Benefits — Matching Grants Program;”
and the cost of life insurance premiums, for all Outside
Directors other than Ms. Atkins and Mr. Powell, and
excess liability insurance premiums, for all Outside Directors,
paid by RAI for certain insurance offered to the Outside
Directors, as described below under “Other
Benefits — Insurance Benefits.”
Each Outside Director receives an annual retainer of $60,000.
•
The Lead Director, if one is elected, receives a supplemental
annual retainer of $20,000.
•
Each Outside Director who is a Chair of one of the standing
committees of the Board receives a supplemental annual retainer
as follows — Audit Committee Chair: $20,000;
Compensation Committee Chair: $10,000; and Governance Committee
Chair: $10,000.
•
Each Outside Director receives an attendance fee of $1,500 for
each Board meeting attended, and members of each Board committee
(all of whom are Outside Directors) receive an attendance fee of
$1,500 for each committee meeting attended. In addition, each
director who is not a member of the special committee, but who
attends a meeting of this committee receives the same meeting
fee as committee members.
Under the DCP, Outside Directors may defer payment of their
retainers and meeting fees until termination of service as a
director or until a selected year in the future. Participating
directors may elect, on an annual basis, to direct RAI to defer
their retainers and meeting attendance fees in 25% increments to
a cash account, a stock account or a combination of both. The
plan provides that amounts deferred to a cash account earn
interest at the prime rate as set by JPMorgan Chase Bank, and
amounts deferred to a stock account mirror the performance of,
and receive dividend equivalents based on, RAI common stock.
Participating directors are entitled to receive a distribution,
only in the form of cash, of their account balances either in
full on the deferral date or in up to ten annual installments
commencing on a selected future date.
RAI provides its Outside Directors with certain stock-based
awards pursuant to the terms of the EIAP. Upon election to the
Board, an Outside Director receives under the EIAP an initial
grant of 3,500 deferred stock units or, at the director’s
election, 3,500 shares of RAI common stock. Upon
appointment as a Non-Executive Chairman of the Board, such
director receives a grant of 3,500 deferred stock units or, at
such person’s election, 3,500 shares of RAI common
stock, so long as such director previously did not receive an
initial grant upon his or her election to the Board. In
addition, pursuant to the EIAP, each Outside Director receives
on the date of each annual meeting of shareholders (provided the
Outside Director remains on the Board after the date of such
meeting), a grant of 2,000 (or, in the case of a Non-Executive
Chairman of the Board, 4,000) deferred stock units or, at the
director’s election, 2,000 (or, in the case of a
Non-Executive Chairman, 4,000) shares of RAI common stock. If
RAI does not hold an annual meeting of shareholders in any year,
then the annual award under the EIAP will be made to Outside
Directors on the anniversary of the preceding year’s annual
meeting of shareholders. Shares of RAI common stock awarded to
Outside Directors in lieu of deferred stock awards upon a
director’s initial award or any annual award under the EIAP
will not bear any transfer restrictions, other than any
restrictions arising generally by virtue of federal and state
securities laws. Each Outside Director also is entitled to
receive a quarterly award of deferred stock units on the last
day of each calendar quarter, with the number of units being
equal to: $10,000 (or, in the case of a Non-Executive Chairman
of the Board, $20,000) divided by the average closing price of a
share of RAI common stock for each business day during the last
month of such calendar quarter. If a director has served for
less than the entire quarter, the number of units granted will
be prorated based upon the period of such person’s actual
Board service during the quarter.
The deferred stock units granted under the EIAP receive
dividends at the same rate as RAI common stock, but the
dividends are credited in the form of additional deferred stock
units. The deferred stock units have no voting rights.
Distribution of deferred stock units will be made after the
participant ceases to be a director, at the participating
director’s election, either in a single lump sum or in up
to ten annual, equal installments. At the election of the
director, the payment of the initial and annual deferred stock
unit grants
may be made in cash or in RAI common stock, which shares of
stock will not bear transfer restrictions other than any
restrictions arising generally by virtue of federal and state
securities laws. Distribution of the deferred stock units
received in connection with a quarterly award will be made only
in cash. Cash distributions of deferred stock units generally
are based on the average closing price of RAI common stock
during December of the year preceding payment. Notwithstanding
the foregoing, upon the death of a participating director
(whether before or after ceasing to serve as a director), any
deferred stock units then outstanding in such director’s
account will be distributed in a single lump sum cash amount to
the director’s designated beneficiary or estate, as the
case may be. Such distribution will be made after the end of the
quarter in which the plan administrator is notified of the
participant’s death and will be based upon the average
closing price of RAI common stock during that month.
An aggregate of 1,000,000 shares of RAI common stock have
been authorized for issuance under the EIAP. Shares relating to
awards under the EIAP that are forfeited, terminated or settled
in cash in lieu of stock will become available for future
grants. The EIAP also affords its administrator, the Governance
Committee, the discretion to grant Outside Directors options to
acquire shares of RAI common stock. Any such options will have
an exercise price equal to the per share closing price of RAI
common stock on the date of grant, will vest and become
exercisable in full six months after the date of grant and will
have a ten-year term. No options were granted to Outside
Directors in 2007.
In consideration for the services of Messrs. Monteiro de
Castro and Withington as RAI directors during 2007, RAI paid BAT
$237,500 for each such director. Beginning in 2008, RAI will pay
the foregoing fee associated with Mr. Monteiro de
Castro’s Board service directly to Mr. Monteiro de
Castro, instead of to BAT. RAI will continue to pay directly to
BAT the fee relating to Mr. Withington’s Board
service. Such amounts are
paid to BAT in lieu of any other compensation (other than the
reimbursement of certain expenses) to which
Messrs. Monteiro de Castro and Withington otherwise would
be entitled in their capacities as members of RAI’s Board.
After completion of five years of service as a member of
RAI’s Board of Directors, each director is expected to hold
and retain a minimum of 10,000 shares of RAI common stock.
It is generally expected that a director will not dispose of RAI
common stock during the first five years of service on the
Board, unless the director holds and retains RAI common stock in
excess of the minimum threshold level of 10,000 shares. For
purposes of the foregoing ownership guidelines, RAI common stock
includes:
•
shares of RAI common stock beneficially owned by the director,
•
deferred stock units or shares of RAI common stock granted to
the director under the EIAP, and
•
deferred stock units received by the director as deferred
compensation under the DCP.
Shares of RAI common stock subject to unexercised stock options
held by a director are not counted toward an individual
director’s stock ownership target. These stock ownership
guidelines do not apply to any director who is also an officer
or employee of BAT so long as such director does not participate
in any equity compensation plan made available to RAI’s
non-employee directors.
RAI has adopted a Code of Conduct that applies to all directors,
officers and employees of RAI and its subsidiaries, including
RAI’s Chief Executive Officer, Chief Financial Officer and
Chief Accounting Officer. The Code of Conduct is intended to
constitute a “code of ethics” within the meaning of
Item 406(b) of
Regulation S-K.
Any amendment to, or waiver from, a provision of RAI’s Code
of Conduct (other than technical, administrative or other
non-substantive amendments) that applies to RAI’s Chief
Executive Officer, Chief Financial Officer or Chief Accounting
Officer, or persons performing similar functions for RAI, will
be disclosed on the www.reynoldsamerican.comweb site
within four business days following the date of the amendment or
waiver. The Code of Conduct can be found in the
“Governance” section of the
www.reynoldsamerican.comweb site, or can be requested,
free of charge, by writing to the Office of the Secretary,
Reynolds American Inc., P.O. Box 2990, Winston-Salem,
North Carolina27102-2990.
Shareholders and other constituencies may communicate directly
with the Board or individual members of the Board by submitting
written correspondence to Reynolds American Inc.,
P.O. Box 2990, Winston-Salem, North Carolina27102-2990.
Shareholders and other constituencies may communicate directly
with the non-management directors as a group by writing to the
Lead Director or, if a Lead Director has not been appointed, to
the Chair of the Governance Committee at the foregoing address.
We have been notified by the persons in the following table that
they are beneficial owners (as defined by the rules of the SEC)
of more than 5% of RAI common stock.
Based upon a Schedule 13G filed with the SEC on
February 9, 2005, and upon information furnished to RAI by
Brown & Williamson Holdings, Inc. and by British
American Tobacco p.l.c. on March 17, 2008,
(a) Brown & Williamson Holdings, Inc. and British
American Tobacco p.l.c. hold sole dispositive and sole voting
power over these shares and (b) Brown &
Williamson Holdings, Inc. is the record and beneficial owner of
these shares, and British American Tobacco p.l.c. is the
beneficial owner of such shares by virtue of its indirect
ownership of all of the equity and voting power of
Brown & Williamson Holdings, Inc.
(2)
According to a Schedule 13G/A filed by Invesco Ltd., on
behalf of itself and certain investment advisory subsidiaries,
with the SEC on February 14, 2008, Invesco Asset Management
Limited, Invesco Asset Management (Japan) Limited, Invesco
Institutional (N.A.), Inc., PowerShares Capital Management LLC,
PowerShares Capital Management Ireland LTD and Invesco
Management S.A. held, with respect to these shares, sole voting
and dispositive power over 28,833,503 shares;
112,336 shares; 2,889 shares; 99,800 shares;
229 shares; and 1,500 shares, respectively, as of
December 31, 2007.
(3)
See footnote 2 for additional information.
(4)
According to a Schedule 13G filed by Capital Research
Global Investors, referred to as CRGI, with the SEC on
February 11, 2008, CRGI, a division of Capital Research and
Management Company, referred to as CRMC, is deemed to be the
beneficial owner of these shares as a result of CRMC acting as
an investment advisor to various investment companies. CRGI held
sole dispositive power over these shares, and sole voting power
over 7,850,280 of these shares, as of December 31, 2007.
(5)
Information in this column is based on 295,328,475 shares
of RAI common stock outstanding on March 10, 2008, the
record date for the 2008 annual meeting.
The following table indicates the number of shares of RAI common
stock beneficially owned as of March 10, 2008, by each
director, each named executive officer and all directors and
executive officers as a group, based on information provided to
RAI by these individuals. In general, “beneficial
ownership” includes those shares a director or executive
officer has the power to vote, or the power to transfer, and
stock options that are exercisable currently or become
exercisable within 60 days. Except as described in the
footnotes to the table, each person has sole investment and
voting power over the shares for which he or she is shown as
beneficial owner.
Amount and Nature of
Name of Beneficial Owner
Beneficial Ownership
Percent of Class(7)
Betsy S. Atkins(1)
0
*
John T. Chain, Jr.(1)
3,958
*
Daniel M. Delen(2)
28,697
*
Jeffrey A. Eckmann(3)
32,513
*
Martin D. Feinstein(1)
355
*
Susan M. Ivey(3)
141,566
*
Nana Mensah(1)
5,820
*
Antonio Monteiro de Castro
0
*
Dianne M. Neal(3)(4)
35,527
*
Lionel L. Nowell, III(1)
8,287
*
Tommy J. Payne(3)
26,414
*
H.G.L. (Hugo) Powell(1)(5)
7,600
*
Joseph P. Viviano(1)
6,500
*
Thomas C. Wajnert(1)
0
*
Neil R. Withington
0
*
John J. Zillmer(1)
3,500
*
All directors, director nominees and executive officers as a
group (consisting of 24 persons)(6)
454,685
*
*
Less than 1%
(1)
The shares beneficially owned do not include the following
deferred common stock units, which are RAI common stock
equivalents awarded under the EIAP or credited under the DCP:
(a) 13,493 units for Ms. Atkins;
(b) 20,965 units for General Chain;
(c) 13,492 units for Mr. Feinstein;
(d) 5,017 units for Mr. Mensah;
(e) 3,701 units for Mr. Nowell;
(f) 21,242 units for Mr. Powell;
(g) 18,890 units for Mr. Viviano;
(h) 17,743 units for Mr. Wajnert; and
(i) 287 units for Mr. Zillmer. Neither
Ms. Ivey nor Messrs. Monteiro de Castro or Withington
participate in the EIAP or DCP.
(2)
The shares beneficially owned do not include 22,894 performance
shares granted to Mr. Delen under the LTIP, which shares
are paid in cash upon vesting, but the value of which is derived
from the value of RAI common stock.
(3)
The shares beneficially owned include the following shares of
restricted stock granted under the LTIP, which shares are
subject to prohibitions against transfer, but carry voting and
dividend rights, prior to vesting: (a) 126,871 shares
of restricted stock for Ms. Ivey;
(b) 23,017 shares of restricted stock for
Ms. Neal; (c) 23,697 shares of restricted stock
for Mr. Delen; (d) 30,113 shares of restricted
stock for Mr. Eckmann; and (e) 16,976 shares of
restricted stock for Mr. Payne.
(4)
Ms. Neal retired as RAI’s Executive Vice President and
Chief Financial Officer effective as of December 31, 2007.
Since that date, Ms. Neal has remained employed by RAI on
an interim basis; her employment with RAI is expected to end on
March 31, 2008.
(5)
The shares owned by Mr. Powell have been pledged as
collateral to a third party.
The shares beneficially owned by all directors, director
nominees and executive officers as a group: (a) do not
include an aggregate of 22,984 performance shares granted to
Mr. Delen under the LTIP as described in note
(2) above; (b) do not include an aggregate of 114,833
deferred common stock units awarded to directors under the EIAP
or credited to directors under the DCP; (c) include an
aggregate of 308,918 shares of restricted stock granted to
executive officers under the LTIP, which shares are subject to
prohibitions against transfer, but carry voting and dividend
rights, prior to vesting; (d) include an aggregate of
40,000 shares subject to outstanding options; and
(e) include 1,788 shares (as to which beneficial
ownership is disclaimed) held by the spouse of an executive
officer.
(7)
The information in this column is based on
295,328,475 shares of RAI common stock outstanding on
March 10, 2008, the record date for the 2008 annual
meeting. For purposes of computing the percentage of outstanding
shares held by each person named in the table, any security that
such person has the right to acquire within 60 days is
deemed to be held by such person, but is not deemed to be
outstanding for the purpose of computing the percentage
ownership of any other person.
In addition to provisions relating to the nomination and
election of directors to RAI’s Board, the Governance
Agreement, among other things, prohibits BAT and its
subsidiaries from acquiring, or making a proposal to acquire,
beneficial ownership of additional shares of RAI common stock
until the earlier of July 30, 2014 (the tenth anniversary
of the Governance Agreement) and the date on which a significant
transaction is consummated (such period is referred to as the
Standstill Period). For purposes of the Governance Agreement, a
significant transaction means any sale, merger, acquisition or
other business combination involving RAI or its subsidiaries
pursuant to which more than 30% of the voting power or the total
assets of RAI would be received by any person or group. Under
the Governance Agreement, BAT and its subsidiaries also are
prohibited during the Standstill Period from taking certain
actions, including, without limitation, participating in certain
proxy solicitations with respect to RAI common stock and seeking
additional representation on RAI’s Board. The Governance
Agreement provides several exceptions to the foregoing
prohibitions, including, without limitation, permitting BAT and
its subsidiaries to acquire additional shares of RAI common
stock in connection with certain BAT counteroffers made in
response to a third party’s offer to enter into a
significant transaction involving RAI.
The Governance Agreement also restricts the ability of BAT and
its subsidiaries to sell or transfer shares of RAI common stock.
Specifically, during the term of the Governance Agreement, BAT
and its subsidiaries may not:
•
sell or transfer RAI common stock if, to B&W’s
knowledge, the acquiring party would beneficially own 7.5% or
more of the voting power of all of RAI’s voting stock after
giving effect to such sale or transfer, or
•
in any six-month period, and except in response to certain
tender or exchange offers, sell or transfer RAI common stock
representing more than 5% of the voting power of all of
RAI’s voting stock without first obtaining the consent of a
majority of the independent members of RAI’s Board not
designated by B&W.
Notwithstanding these restrictions, B&W may transfer any of
its shares of RAI common stock to BAT or its subsidiaries, and
any such transferee may make similar transfers, provided the
transferee agrees to be bound by the terms of the Governance
Agreement and, provided further, that all shares of RAI common
stock held by B&W and a permitted transferee will be taken
into account for purposes of calculating any ownership
thresholds applicable to B&W
and/or its
affiliates under the Governance Agreement. The Governance
Agreement will terminate upon the occurrence of various events,
including, without limitation, B&W’s ownership
interest in RAI falling below 15%, and the election by BAT and
B&W to terminate the Governance Agreement, which election
may be made in the event of RAI’s material breach of
certain provisions of the Governance Agreement (and RAI’s
failure to cure such breach in a timely manner). In other cases,
each of BAT and B&W, on the one hand, and RAI, on the other
hand, may terminate certain provisions of the Governance
Agreement upon the material breach of the Governance Agreement
by the other (subject to the
breaching party’s right to cure the breach in a timely
manner), except that other provisions of the Governance
Agreement will remain in effect.
In addition to the provisions of the Governance Agreement
described in the preceding three paragraphs and under the
heading “The Board of Directors” above, the Governance
Agreement also grants BAT and its subsidiaries the right to have
shares of RAI common stock held by them to be registered under
the securities laws in certain circumstances, requires the
approval of a majority of the directors designated by B&W
to authorize certain issuances or repurchases of RAI securities,
and requires the approval of B&W, as a shareholder of RAI,
for RAI to effect certain transactions.
A copy of the Governance Agreement and Amendment No. 1 to
the Governance Agreement are included as Exhibits 10.16 and
10.17, respectively, to our 2007 Annual Report on
Form 10-K.
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires RAI’s directors and executive officers,
and any persons holding more than 10% of RAI’s equity
securities, to file with the SEC reports disclosing their
initial ownership of RAI’s equity securities, as well as
subsequent reports disclosing changes in such ownership. To
RAI’s knowledge, based solely on a review of such reports
furnished to it and written representations by certain reporting
persons that no other reports were required, during the 2007
fiscal year, RAI’s directors, executive officers and
greater than 10% beneficial owners complied with all
Section 16(a) filing requirements, except that
(1) Frederick W. Smothers, RAI’s Senior Vice President
and Chief Accounting Officer, inadvertently was late in
reporting a total of 1,244 shares of restricted RAI common
stock that had been granted to him under the LTIP in connection
with his joining RAI, and (2) Mr. Feinstein
inadvertently reported late three purchases aggregating
355 shares of RAI common stock.
RAI’s executive compensation programs serve two primary
objectives — to attract, motivate, and retain
exceptional management talent, and to reward our management for
strong performance and the successful execution of RAI’s
business plans and strategies. Consistent with these objectives,
a meaningful portion of the annual compensation, and all of the
long-term compensation, of each named executive officer is
variable or “at risk,” in that the receipt or value of
that compensation is dependent upon the attainment of specific
performance goals by RAI
and/or its
operating subsidiaries. In addition, RAI’s executive
compensation programs are designed to provide adequate
incentives to overcome the reluctance that some people may have
to work in a controversial industry, such as the tobacco
industry.
The Board’s Compensation Committee, comprised solely of
independent directors, is responsible for, among other things,
structuring and administering the compensation programs and
plans in which our named executive officers participate. The
table below lists the name, title and employer of each of our
named executive officers:
Name
Title
Employer
Susan M. Ivey
Chairman of the Board, Chief Executive Officer and President
RAI
Dianne M. Neal(1)
Executive Vice President and Chief Financial Officer
RAI
Daniel M. Delen
President and Chief Executive Officer
RJR Tobacco
Jeffrey A. Eckmann(2)
RAI Group President
RAI
Tommy J. Payne
Executive Vice President — Public Affairs
RAI
(1)
Ms. Neal resigned as Executive Vice President and Chief
Financial Officer on December 31, 2007, but remains
employed with RAI on an interim basis; her employment is
expected to end on March 31, 2008.
(2)
Mr. Eckmann will retire from RAI effective May 1, 2008.
In performing its duties, the Compensation Committee regularly
obtains the advice of an outside compensation consultant, who is
retained by, and reports directly to, the Committee. Since May
2005, the Compensation Committee has retained Hewitt Associates
to provide it with compensation consulting services and to
assist it in establishing competitive, cost-effective executive
compensation programs. Hewitt also provides compensation
consulting services to management on projects not related to the
compensation of the named executive officers. Information
regarding the Compensation Committee’s other duties,
responsibilities and activities, and the policy governing
management’s use of compensation consultants, is set forth
above under “Committees and Meetings of the Board of
Directors — Compensation Committee; Compensation
Committee Interlocks and Insider Participation.”
In determining appropriate levels of annual and long-term
compensation for the named executive officers, the Compensation
Committee compares the compensation paid to executives holding
similar positions at a peer group of companies. This peer group
is selected by the Committee and consists of the following
30 companies operating in the food, beverage, tobacco or
consumer products industries:
Altria Group, Inc.
Hormel Foods Corporation
Anheuser-Busch Companies, Inc.
Kellogg Company
Avery Dennison Corporation
Kimberly-Clark Corporation
Avon Products, Inc.
Land O’Lakes
Cadbury Schweppes, plc
Lorillard, Inc.
Campbell Soup Company
Miller Brewing Company
Colgate-Palmolive Company
Molson Coors Brewing Company
ConAgra Foods, Inc.
Nestle Purina PetCare Company
Constellation Brands, Inc.
Nestle USA
Eastman Kodak Company
Sara Lee Corporation
Fortune Brands, Inc.
S.C. Johnson Consumer Products
General Mills, Inc.
Sherwin-Williams Company
H. J. Heinz Company
Unilever United States, Inc.
Hallmark Cards, Inc.
UST, Inc.
Hershey Company
Wm. Wrigley Jr. Company
In selecting the peer group, the Compensation Committee included
not only those companies that compete directly with our
operating subsidiaries in the tobacco business —
Altria Group, Inc., Lorillard, Inc. and UST, Inc., but also
certain companies outside of the tobacco industry that sell
brand-focused consumer products. RAI’s revenues for 2007
were $9.023 billion, and the annual revenues of those peer
group companies operating outside of the tobacco industry range
from one-half to two times that amount, with the median annual
revenues of the entire peer group being approximately
$7.6 billion.
The Compensation Committee believes that the peer group
represents companies that RAI and its operating subsidiaries are
most likely to compete against for senior executive talent. If
our competition for talent changes, then the composition of our
peer group might change. In addition, changes to our peer group
may be necessary to reflect the impact of mergers, acquisitions
and similar events involving companies within our peer group, or
because compensation survey data for a peer group company ceases
to be available. Beginning in 2008, the Compensation Committee
excluded the following companies from the peer group, either
because compensation survey data was no longer available from
the Committee’s compensation consultant for them or because
they were no longer within the revenue range of the other peer
group companies: Clorox Company, Diageo North America, Inc.,
Levi Strauss & Co. and L’Oreal USA, Inc. In light
of these deletions from the peer group, the Compensation
Committee elected to add the following companies to the peer
group: Cadbury Schweppes, plc, Constellation Brands, Inc., Sara
Lee Corporation, UST, Inc. and Wm. Wrigley Jr. Company.
In connection with overseeing RAI’s executive compensation
programs, the Compensation Committee annually reviews tally
sheets that set forth the total amount of compensation,
including base salary, short-term and long-term incentives, and
amounts payable upon the termination of employment under various
scenarios, payable to certain of RAI’s executive officers.
Tally sheets include gains that executives have realized from
prior LTIP awards, as well as projected gains from such awards.
Tally sheets assist the Committee in assessing the cumulative
effect of its various executive compensation decisions. The
Compensation Committee believes that periodic reviews of tally
sheets help to prevent decisions from being made in isolation,
without considering how a change in one compensation program may
impact another compensation program or an individual’s
overall compensation.
The material components of the compensation program for named
executive officers consist of annual base pay and perquisites;
an annual cash incentive; long-term incentive compensation;
severance benefits payable upon the occurrence of a designated
qualifying termination of employment; and retirement benefits.
Each of these components is discussed below, together with
information regarding other compensation policies.
In determining the annual base salary of any of our executive
officers for the first time, that is, upon a person being hired
as, or promoted to, an executive officer, the Compensation
Committee generally targets the officer’s salary at
approximately the 50th percentile of those persons in the
peer group holding a comparable position. An individual’s
base salary level is intended to provide a basic degree of
financial security. The Compensation Committee considers other
relevant factors as well in setting an executive officer’s
base salary for the first time, such as the person’s
experience and, in the case of a new hire, whether such person
is employed elsewhere (and, if so, at what rate). Depending upon
the existence of such factors, the Compensation Committee may
target a particular officer’s salary either above or below
the 50th percentile of the comparable peer group position.
Under its charter, the Compensation Committee approves the
initial determination of an executive officer’s base
salary, except that in the case of the initial base salary
determination for the Chief Executive Officer, Chief Financial
Officer, RJR Tobacco President, RAI Group President and General
Counsel, the Committee makes a recommendation to the independent
members of the Board for their approval. After an executive
officer’s base salary is set for the first time, an
executive officer, like all other employees, is eligible to
receive annually a base salary increase based upon individual
performance and the target merit increase generally applicable
to all employees of RAI and its subsidiaries, all as described
below.
All employees, including our named executive officers, are
required at the beginning of the year to establish specific
individual objectives for the year. The Compensation Committee
reviewed and recommended to the Board for approval the
individual objectives for Ms. Ivey for 2007, and
Ms. Ivey approved the individual objectives for the other
named executive officers for 2007 and 2008, other than for
Mr. Payne, whose objectives were approved by E. Julia
(Judy) Lambeth, RAI’s Executive Vice President —
Corporate Affairs, General Counsel and Assistant Secretary. The
Compensation Committee reviewed and approved, without further
Board action, the individual objectives against which
Ms. Ivey’s performance for 2008 will be measured.
Each employee’s objectives are designed to be consistent
with our fundamental core values (principled, creative, dynamic
and passionate behavior) and our strategic and operational
goals. Each employee is assigned a performance rating based upon
the extent to which the employee has met his or her objectives.
In February 2007, the responsibility for overseeing succession
planning for the Chief Executive Officer shifted from the
Compensation Committee to the Governance Committee, which
oversees succession planning and leadership development for
RAI’s senior management. Accordingly, for 2007, the
Governance Committee, rather than the Compensation Committee,
evaluated the Chief Executive Officer’s performance and
recommended to the entire Board an appropriate performance
rating for the Chief Executive Officer. Ms. Ivey assigned
the performance
rating for the other named executive officers, other than for
Mr. Payne whose rating was assigned by Ms. Lambeth.
Depending upon an employee’s performance rating, he or she
will receive a merit increase in base salary, generally
effective April 1 of each year, in an amount equal to:
•
.5 times the target merit increase (for an individual who meets
some, but not all, expectations),
•
the target merit increase (for an individual who fully meets
expectations),
•
1.25 times the target merit increase (for an individual who
outperforms some expectations and fully meets remaining
expectations), or
•
2 times the target merit increase (for an individual who
consistently and significantly exceeds expectations).
An employee whose performance does not meet expectations is not
eligible to receive a merit increase.
The Compensation Committee recommends to the independent
directors for approval the base salary increase for the Chief
Executive Officer, Chief Financial Officer, RJR Tobacco
President, RAI Group President and General Counsel. The
Compensation Committee approves, without further Board action,
the base salary increase for the other officers of RAI and its
subsidiaries who are at the Senior Vice President level or
above. Generally, any employee’s base salary increase will
not exceed two times the target merit increase. The target merit
increase in any year is based upon prevailing market practices
and economic conditions. The amount of each named executive
officer’s base salary increase (and the target merit
increase) for 2007 and 2008, expressed as a percentage of such
officer’s base salary immediately prior to such increase,
is shown in the table below:
Base Salary Increase (%)(1)
Executive
2007
2008
Susan M. Ivey(2)
6.50
4.10
Dianne M. Neal(3)
4.06
—
Daniel M. Delen(4)
—
4.06
Jeffrey A. Eckmann
6.50
3.25
Tommy J. Payne
4.06
4.06
Target Merit
Increase
3.25
3.25
(1)
The increase is effective on April 1 of each year.
(2)
As described in more detail in the paragraph immediately
following this table, a portion of Ms. Ivey’s annual
base salary increase for 2008 will be paid in a lump sum.
(3)
Ms. Neal remains employed with RAI following her retirement
as Executive Vice President and Chief Financial Officer on
December 31, 2007, but such interim employment is expected
to end at the conclusion of the first quarter of 2008.
Therefore, she did not receive a base salary increase in 2008.
(4)
Mr. Delen did not receive a base salary increase during
2007 because he joined RJR Tobacco on January 1, 2007.
To ensure that base salary levels do not become too costly and
do not escalate above a range that is competitive in the market,
we generally impose a cap on the amount of the annual base
salary of any salaried employee, including the base salary of
any named executive officer. If the increase in annual base
salary resulting from the annual merit review process, or from a
promotion, would cause the base salary to exceed the
65th percentile for those persons in the peer group holding
a comparable position, then the employee or named executive
officer will receive (in the pay period immediately following
the effective date of the increase) the amount of such excess in
a lump sum cash payment. Any such lump sum cash payment is not
taken into account for purposes of calculating amounts payable
under the annual incentive plan, described below, but is
considered in determining benefits under other plans, such as
our defined contribution and defined benefit plans.
Ms. Ivey’s 2008 base salary increase placed her above
the 65th percentile cap and, as a result, the portion of
the increase in excess of the cap (approximately $26,000) will
be paid to her in a lump sum. With the exception of
Ms. Ivey’s 2008 base salary increase, no other named
executive officer exceeded the 65th percentile cap in
connection with his or her respective base salary increases
reflected in the table above.
As noted below, a significant portion of the annual compensation
of each named executive officer is linked directly to the
attainment of specific corporate financial and operating
targets. The Compensation Committee believes that managers, such
as the named executive officers, who hold positions affording
them the authority to make critical decisions affecting the
overall performance of RAI should have a material percentage of
their annual compensation contingent upon the performance of RAI
and/or its
operating subsidiaries. Moreover, the greater the
responsibilities a particular named executive officer has, the
greater his or her annual cash bonus opportunity should be. The
named executive officers’ annual cash incentive and annual
base salary, together, are targeted at the mid-point between the
50th and 75th percentiles of the peer group. The
Compensation Committee believes this level is reasonable from a
financial perspective, and also allows RAI to be competitive in
the market for executive talent. Further, as noted above, in
evaluating whether RAI’s annual incentive (or any other
element of RAI’s executive compensation program) provides
an adequate inducement to attract highly qualified executive
talent, the Compensation Committee is mindful of the reluctance
that certain persons may have to work for RAI or its operating
subsidiaries given the decline in the social acceptability of
smoking and the controversial nature of the tobacco industry.
Each named executive officer is eligible to receive an annual
cash incentive, with his or her target incentive expressed as a
percentage of base salary, though an individual’s actual
annual incentive received may be higher or lower than the
targeted amount, as explained in further detail below. The table
below shows each named executive officer’s target annual
incentive, and actual annual incentive payout, for 2007,
expressed as a percentage of annual base salary:
Actual Incentive
Target Incentive as %
Payout as
Executive
of Base Salary(1)
% of Base Salary(1)
Susan M. Ivey
125
%
126.2
%
Dianne M. Neal
75
%
75.7
%
Daniel M. Delen
85
%
86.6
%
Jeffrey A. Eckmann
75
%
75.7
%
Tommy J. Payne
65
%
65.6
%
(1)
The dollar amount of the 2007 annual incentive paid to each
named executive officer is included in the “Non-Equity
Incentive Plan Compensation” column of the Summary
Compensation Table below.
A named executive officer’s actual cash bonus is equal to
the product of his or her:
•
target bonus percentage,
•
annual base salary, and
•
a score based upon the performance of RAI and/or one or more RAI
operating subsidiaries against designated performance metrics.
Generally, eligible employees receive cash bonuses pursuant to
our Annual Incentive Award Plan, referred to as the AIAP, except
that the named executive officers (other than Mr. Payne) do
not participate in the AIAP. Instead, in an effort to take
advantage of the performance-based exception to the tax
deduction limitation of
Section 162(m) of the Code, the Compensation Committee
denominated the cash bonus opportunity of the named executive
officers (other than Mr. Payne) in the form of performance
units granted under the LTIP. The performance metrics used to
determine benefits under the AIAP are the same as the
performance metrics used to determine the value of such
performance units. For 2007, Mr. Payne’s compensation
did not exceed the tax deduction limit set forth in
Section 162(m) of the Code. See “Other Compensation
Policies — Deductibility of Compensation” below
for additional information about taxes and structuring executive
compensation.
The Compensation Committee approves the selection of performance
metrics that are believed to have a positive correlation with
shareholder returns. For 2007, the performance metrics,
applicable to employees of RAI and RJR Tobacco, used to
determine the score for purposes of the annual cash bonus
calculation consisted of the following components:
Performance Metric
RAI Employees
RJR Tobacco Employees
RAI Net Income
ü
—
RJR Tobacco Operating Income
—
ü
Camel Market Share
ü
ü
Kool Market Share
ü
ü
Pall Mall Box Market Share
ü
ü
RJR Tobacco Total Market Share
ü
ü
Conwood Moist Snuff Market Share
ü
—
Natural American Spirit Shipment Volume
ü
—
The selection of RAI net income and RJR Tobacco operating income
brings a heightened focus to creating shareholder value as such
measures help to drive RAI’s stock price. Such measures
also have a direct impact on the amount of dividends paid to
RAI’s shareholders, given the Board’s stated policy of
returning approximately 75% of RAI’s net income to
shareholders in the form of dividends. Moreover, RJR
Tobacco’s business is dependent on the U.S. cigarette
business, and cigarette consumption in the United States has
been declining and is expected to continue to decline. As a
result, increasing RJR Tobacco’s market share is a key
factor to RJR Tobacco’s, and thus RAI’s, future
success. The market share component applicable to the 2007
annual bonus reflects the importance of the successful execution
of RJR Tobacco’s current brand portfolio strategy, a
strategy designed to reverse the recent trend of declining
market share of RJR Tobacco’s brands.
At the beginning of 2007, RJR Tobacco further refined its brand
portfolio strategy. Pursuant to that strategy, the Camel and
Kool brands have been categorized as growth brands, and will
continue to be managed for long-term growth and profit. The Pall
Mall brand, which had been categorized as a selective support
brand under the former strategy, was elevated to the growth
brand category as part of RJR Tobacco’s new brand portfolio
strategy. Prior to 2007, metrics relating to the performance of
Conwood and Santa Fe Natural Tobacco Company, Inc.,
referred to as Santa Fe, had not been included as factors
in the determination of the annual incentives for the named
executive officers. (The term Conwood refers collectively to
Conwood Company LLC and its affiliated companies, all of which
are engaged in the smokeless tobacco business and were acquired
by RAI in 2006.) The Compensation Committee believed that it was
appropriate to add these metrics for employees of RAI (including
Mmes. Ivey and Neal, and Messrs. Eckmann and Payne, all of
whom are employed by RAI) given that Conwood is the only
operating subsidiary of RAI, other than RJR Tobacco, that is
separately reportable for financial statement purposes, and
because of the significance Natural American Spirit, a brand
sold by Santa Fe and referred to as NAS, has in connection
with RAI’s strategy of promoting premium tobacco brands.
The table below provides, with respect to the 2007 annual cash
bonuses, the performance metrics used to calculate the score for
these bonus payments, the weights assigned to each metric in the
calculation, the final score for each metric and the overall
bonus score:
Final (Weighted/Adjusted)
Performance Metric Weighting (%)
Score (%)
RAI
RJR Tobacco
Score (%)
RAI
RJR Tobacco
Performance Metric(1)
Employees(2)
Employees(3)
Initial(4)
Adjusted(5)
Employees
Employees
RAI Net Income
50
—
146.4
146.6
73.3
—
RJR Tobacco Operating Income
—
50
165.8
157.6
—
78.8
Camel Market Share
15
20
65.0
67.5
10.1
13.5
Kool Market Share
10
15
0
0
0
0
Pall Mall Box Market Share
5
7.5
43.8
43.8
2.2
3.3
RJR Tobacco Total Market Share
5
7.5
20.0
83.3
4.2
6.2
Conwood Moist Snuff Market Share
10
—
57.0
80.5
8.1
—
NAS Shipment Volume
5
—
60.8
60.8
3.0
—
100.9
101.8
Overall Score
(1)
Each metric in the above table has a minimum, target and maximum
score associated with it. If the minimum score relating to a
particular metric is not met, then such metric is assigned a
score of zero in determining the overall bonus score. The
maximum score that can be assigned to any metric is two times
the target. An initial score is assigned to each metric based
upon actual performance for the year. In calculating the score
for any performance metric, the Compensation Committee may
consider unanticipated, unusual or material events that have
affected such metric; see note 5 below for a discussion of
the adjustments made to the 2007 performance metrics. The
adjusted score for each metric is then multiplied by its
applicable percentage weighting; the resulting product yields a
final score for the particular metric, which is then added to
all other final metric scores (calculated in the same fashion),
resulting in an overall score. As noted above, a named executive
officer’s annual cash bonus is equal to the product of such
overall score, the named executive officer’s base salary
and the named executive officer’s target bonus percentage.
(2)
The performance metric weighting in this column is used to
calculate bonus amounts payable to all RAI employees, including
the named executive officers employed by RAI — Mmes.
Ivey and Neal, and Messrs. Eckmann and Payne.
(3)
The performance metric weighting in this column is used to
calculate bonus amounts payable to all RJR Tobacco employees,
including Mr. Delen, the only named executive officer
employed by RJR Tobacco.
(4)
The scores reflected in this column are before the effect of
certain adjustments approved by the Compensation Committee, as
described in more detail in note 5 below.
(5)
As described in this footnote, the Compensation Committee made
adjustments, consistent with the manner in which the targets
were established, in calculating the score for certain
performance metrics. In calculating the adjusted scores for RAI
net income and RJR Tobacco operating income as shown in this
column, the Compensation Committee excluded the impact of a
pre-tax, non-cash trademark impairment charge recorded by RJR
Tobacco in the fourth quarter of 2007 relating to the Winston
brand. In addition, the Compensation Committee excluded, in
determining the adjusted score for RAI net income, the impact of
a pre-tax, non-cash trademark impairment charge recorded by
Conwood in the fourth quarter of 2007 relating to certain of its
loose leaf and little cigar brands. Further, the effect of net
gains on pension plan investments, and expenses associated with
the implementation of operational efficiency programs, were
excluded from the determination of the adjusted score for both
RAI net income and RJR Tobacco operating income. The adjusted
score for RAI net income also excludes the charges related to
RAI’s 2007 debt refinancing and costs associated with the
December 2007 termination of the R. J. Reynolds-Gallaher
International Sarl joint venture. Finally, the market share
targets in this column were adjusted (a) to reflect changes
made by Information Resources Inc./Capstone Research, Inc.
during 2007 to the methodology that such third-party firm uses
in calculating the relative market share of participants in the
tobacco industry and (b) in recognition of RJR
Tobacco’s increased focus on its growth and support brands.
For 2007, the RAI net income target was $1.289 billion, and
the RJR Tobacco operating income target was $1.845 billion.
The preceding table does not include the actual market share
targets or the NAS shipment volume target, given the
competitively sensitive nature of that information. The 2007
market share target for each of the specific brands listed in
the table, and the 2007 NAS shipment volume target, represented
an increase in the actual market share or shipment volume, as
the case may be, achieved by each listed brand in 2006. The
Compensation Committee established the target for each
performance metric after considering the past performance of RAI
and its operating subsidiaries and management’s 2007
business plan. In addition, the Compensation Committee
established each target based upon the belief that the
likelihood of actual performance exceeding the target was the
same as the likelihood of actual performance not reaching the
target. The Committee believes that the foregoing approach
strikes a proper balance, as a particular target should be set
high enough so that executives are rewarded for achieving a
level of performance that requires considerable individual
effort, but not so unrealistically high that the compensation
program ceases to be an effective incentive device.
RJR Tobacco’s brands, collectively, have experienced
declining market share for several years. Although RJR
Tobacco’s brand portfolio strategy is designed ultimately
to reverse such decline and result in share growth for the
company’s collection of brands, such growth is not expected
to occur in the short term. Rather, management of RJR Tobacco
anticipates that the total market share of RJR Tobacco’s
cigarette brands will continue to decline, but that the rate of
decline will decrease, and that eventually gains on RJR
Tobacco’s growth brands will more than offset declines
among its other brands. As a result, the RJR Tobacco total
market share target for 2007 represented a decline from the
actual 2006 market share. RJR Tobacco’s total market share
target for 2007, however, reflected a rate of market share
decline from the actual 2006 market share that was less than the
rate of actual market share decline experienced by RJR
Tobacco’s brands from 2005 to 2006.
The Compensation Committee, at its February 2008 meeting,
approved the performance metrics, and the weight for each
metric, to be used in calculating the score for the 2008 annual
cash bonus payments to all employees, including the named
executive officers, as shown in the table below:
Performance Metric
Weighting (%)
RAI
RJR Tobacco
Performance Metric
Employees
Employees
RAI Net Income
60
—
RJR Tobacco Operating Income
—
50
Market Share:
RJR Tobacco Growth Brands(1)
15
35
Total Moist Snuff
5
—
RJR Tobacco
—
7.5
Shipment Volume:
NAS(2)
10
—
Smokeless Tobacco Products(3)
10
7.5
(1)
For RAI employees, this metric is based on market share targets
for all of RJR Tobacco’s growth brands, collectively, and,
for RJR employees, this metric is based on market share targets
for each individual RJR Tobacco growth brand. RJR Tobacco’s
growth brands are Camel, Kool and Pall Mall.
(2)
With respect to this performance metric, a 5% weighting will be
given to both domestic and international NAS shipment volume.
(3)
This item refers collectively to one or more separate
performance metrics relating to products within the smokeless
tobacco category.
The Committee approved the performance metrics based upon a
consideration of the 2008 business plan and the past performance
of RAI and its operating subsidiaries. As noted in the above
table, with respect to
RAI employee participants in the 2008 annual incentive program,
the Committee elected to place, consistent with RAI’s role
as a holding company, more weighting on the financial metric of
RAI net income than on the market share or volume metrics of
RAI’s operating companies. The Compensation Committee had
used a different approach in 2007 for RAI employee participants
in the annual incentive program, placing equal weighting on RAI
financial metrics and operating company metrics. The specific
market share and shipment volume targets for the performance
metrics listed in the preceding table have not been disclosed
because management believes that disclosure of such information
would result in competitive harm to RAI and its operating
subsidiaries; each of these 2008 targets, though, represents an
increase over the actual market share or shipment volume for
2007. The RAI net income target for 2008 was established within
the range of EPS guidance publicly announced by RAI in February
2008. At such time, RAI forecasted mid-single digit EPS growth
for 2008. The RJR Tobacco operating income target for 2008 would
support RAI obtaining its forecasted 2008 EPS growth. The
Compensation Committee established all of the 2008 annual
incentive targets, shown in the above table, based on the same
philosophy it used in establishing the 2007 annual incentive
targets described above — that the likelihood of
exceeding the targets is the same as the likelihood of not
reaching the targets. The Committee believes that the targets
have been set at levels to motivate management to achieve
financial and operating results that are expected to enhance
shareholder value.
We have eliminated many of the perquisites that previously had
been offered to senior management. We do provide, however, to
each named executive officer, other than Mr. Delen, and to
a group of approximately 35 other executives, an annual
supplemental cash payment in lieu of participating in our former
perquisites program, as described in more detail in footnote 9
to the Summary Compensation Table below. These supplemental cash
payments are not taken into account in calculating benefits
under any of our plans, including our defined contribution and
defined benefit plans. With the exception of certain
grandfathered executives, including the named executive officers
other than Mr. Delen, RAI ceased providing such annual
supplemental payments in 2004 (RAI instead provides
non-grandfathered executives such as Mr. Delen with an
annual financial planning allowance of $6,000). To remain
competitive in the market, we also provide our named executive
officers and other executives with the following other benefits:
personal excess liability insurance of up to $10 million;
an annual physical exam; a tax
gross-up
relating to the foregoing insurance benefit and physical exam;
and reimbursement of up to $30,000 for the cost of joining a
country club.
The Compensation Committee believes that an executive
compensation program should have an appropriate mix between
short-term and long-term incentive compensation. Although the
performance of RAI and its operating subsidiaries over a
one-year period helps drive shareholder returns, the
Compensation Committee also believes that an overemphasis on
short-term results ultimately will impair shareholder value. As
a result, the Compensation Committee’s practice has been to
award LTIP grants the value of which is dependent upon
RAI’s performance over a three-year period, a measurement
period commonly used by peer group companies. Consistent with
the philosophy of allocating a significant portion of an
executive’s total compensation to variable or
performance-based compensation, the grant date value of LTIP
grants to named executive officers is targeted to be at the
mid-point between the 50th and 75th percentiles of the
peer group. As discussed in greater detail below, beginning with
the 2007 LTIP grant, a portion of each participant’s target
LTIP award is subject to increase or decrease based upon
RAI’s AIAP score for the preceding year.
In 2007, the Compensation Committee determined that for RAI to
remain within the targeted 50th and 75th percentiles
of the peer group with respect to LTIP awards, the amount of the
annual LTIP award for certain positions should be adjusted (in
one case upward, and in other cases downward). For some
positions, this adjustment was made in part with the 2007 LTIP
grant, with the balance of such adjustment reflected in the 2008
LTIP grant. The table below provides for each named executive
officer the targeted grant date value of the annual LTIP award,
expressed as a multiple of annual base salary (but before any
adjustment to the multiple, as discussed below, for prior year
AIAP performance), for 2006, 2007 and 2008. For each person
whose LTIP multiple has decreased, RAI provided on
March 31, 2007, and will provide on March 31, 2008, a
cash payment in an amount equal to 25% of his or her annual base
salary.
LTIP Target as Multiple
of Base Salary
Executive
2006
2007
2008
Susan M. Ivey
5X
6X
6X
Dianne M. Neal(1)
3X
2.75X
—
Daniel M. Delen(2)
—
3X
3X
Jeffrey A. Eckmann(3)
3X
2.75X
2.5X
Tommy J. Payne
2.5X
2.25X
2X
(1)
Ms. Neal will not receive any LTIP grants in 2008. She is
eligible to receive on March 31, 2008, the supplemental
cash payment described in the sentence immediately preceding
this table. See “Other Compensation Policies —
Special Incentives” below for a discussion of the agreement
she entered into with RAI in connection with her retirement.
(2)
Mr. Delen joined RJR Tobacco effective January 1,2007, and he received his first LTIP grant on that date; he is
not eligible to receive the supplemental cash payment described
above.
(3)
The Board approved an LTIP grant to Mr. Eckmann in 2008.
See “— 2008 LTIP Grants” below for more
information about that grant. Mr. Eckmann is eligible to
receive on March 31, 2008, the supplemental cash payment
mentioned above.
Generally, in February of each year, the Compensation Committee,
at its first regularly scheduled meeting of the year, approves a
broad-based LTIP grant to key employees, and recommends to the
Board for approval an LTIP grant to the Chief Executive Officer,
Chief Financial Officer, RJR Tobacco President, RAI Group
President and General Counsel. The actual grant date of the LTIP
awards is generally effective in early March of each year, after
the public announcement of RAI’s financial results, and
after the filing with the SEC of the Company’s Annual
Report on
Form 10-K,
for the prior year. In addition to the regular annual LTIP
grants, the Compensation Committee, depending upon the
particular circumstances (such as the hiring or promotion of an
executive officer, or as a retention device), may approve or
recommend to the Board for approval, as the case may be, a
supplemental LTIP grant outside of the normal annual grant
cycle. See “Other Compensation Policies — Special
Incentives” below for a discussion of the LTIP grant made
to Mr. Delen in 2007 upon his joining RJR Tobacco.
At its February 2007 meeting, the Board, based upon the
Compensation Committee’s recommendation, approved LTIP
grants, effective March 6, 2007, to the Chief Executive
Officer, Chief Financial Officer, RJR Tobacco President and RAI
Group President. The Compensation Committee approved LTIP
grants, also effective March 6, 2007, to a group of
approximately 450 employees of RAI and its operating
subsidiaries, including Mr. Payne. Of the total 2007 LTIP
grant to each named executive officer, approximately 70% was in
the form of performance units and approximately 30% was in the
form of restricted common stock. In determining the aggregate
size of the LTIP grant approved in February 2007, the
Compensation Committee decided that the overall 2006 AIAP score
should be taken into account. Given that the overall AIAP score
for 2006 was greater than 124%, the Compensation Committee
elected to increase by 10% the number of shares of restricted
stock that otherwise would have been granted to participants in
connection with the 2007 LTIP grant. Similarly, the Committee
has determined to increase the restricted stock portion of each
year’s LTIP grant by 10% if the AIAP score for the
immediately preceding year is greater than 124%. The Committee
intends to decrease the restricted stock portion of each
year’s LTIP grant by 10% if the AIAP score is less than
75%. No adjustment will be made to the restricted stock
component of the annual LTIP grant if the AIAP score for the
immediately preceding year is equal to or greater than 75% and
equal to or less than 124%.
The Compensation Committee believes that the 2007 LTIP awards,
the grant date value of which was weighted more heavily toward
performance units than restricted stock, provides an even
stronger link between
each executive’s long-term compensation and RAI’s
overall performance, than the 2006 LTIP awards, the grant date
value of which was split equally between performance units and
restricted stock. The vesting of both the performance unit and
restricted stock awards approved in February 2007 is conditioned
upon the payment over a three-year period of a minimum quarterly
dividend of $.75 per share (the amount of the quarterly dividend
declared by the Board at its February 6, 2007 meeting). The
performance units generally will vest on December 31, 2009,
and the shares of restricted stock generally will vest on
March 6, 2010, subject, in the case of each such LTIP
award, to the satisfaction of the foregoing vesting condition,
unless the agreements evidencing the awards otherwise are
modified. The value of each share of restricted stock will be
equal to the fair market value of RAI common stock on the
vesting date.
The performance metric used to value the performance unit grants
approved in February 2007 will be RAI’s EPS for 2009. The
Committee believes that the selection of an EPS target several
years in the future will motivate executives to focus on
RAI’s long-term results to an even greater extent than the
use of an average annual performance metric, a metric which had
been used for the performance units granted by RAI in 2006. Upon
normal scheduled vesting, each grantee will receive a cash
payment equal to the product of $1.00 and the number of vested
units. The number of vested units will be equal to the number of
original performance units granted multiplied by 0% to 200%
based on RAI’s actual 2009 EPS compared with certain goals.
The Compensation Committee approved the targeted 2009 EPS goal
(and the targeted 2010 EPS goal applicable to the three-year
performance units granted in 2008, described below under
“— 2008 LTIP Grants”) based upon
consideration of RAI’s five-year operating and strategic
plan. As with the annual incentive targets described above,
under “Annual Compensation — Annual
Incentives,” the targeted EPS goals are established based
upon the belief that there is an equal likelihood of RAI’s
actual EPS exceeding the targeted goal as there is of RAI’s
actual EPS not reaching the targeted goal. An additional
adjustment will be made to the number of vested units up to +/-
10%, subject to the 200% cap, based on RAI’s total
shareholder return, referred to as TSR, over the three-year
period ending December 31, 2009, compared with the TSR of
the companies within the Standard & Poor’s Food
and Beverage Index as of the grant date, plus Altria Group,
Inc., Carolina Group and UST Inc. TSR is a measurement of a
shareholder’s return on investment that includes both stock
price appreciation and dividends paid (which are assumed to be
reinvested in the issuer’s stock).
During 2007, each of the named executive officers, other than
Mr. Delen, vested in LTIP grants that had been made before
2007. One such grant consisted of three-year performance units
granted on March 2, 2005, the vesting of which had been
conditioned upon RAI’s payment of a minimum quarterly
dividend of $.475 per share (adjusted to reflect RAI’s 2006
two-for-one stock split) during the three-year period ended
December 31, 2007. This vesting condition was satisfied,
and the performance units were settled in cash during the first
quarter of 2008. The value of these performance units was
determined based upon the average annual AIAP score for 2005,
2006 and 2007 for RAI employee participants, or a score of
135.87%, based on AIAP scores in those years of 150%, 156.7% and
100.9%, respectively. For more information on the payments in
settlement of these three-year performance units, see footnote 7
to the Summary Compensation Table below. In addition, in August
2007, each of the named executive officers, other than
Mr. Delen, vested in the final installment of a performance
share award which had been granted on August 31, 2004, the
vesting of which also had been subject to the payment of a
minimum quarterly dividend of $.475 per share. The value of each
such performance share that vested in 2007 was equal to the
closing price of RAI common stock on the vesting date. For more
information regarding these performance shares, see the 2007
Option Exercises and Stock Vested table below.
The Compensation Committee, at its February 2008 meeting,
approved LTIP grants, effective March 6, 2008, to a group
of approximately 450 employees of RAI and its operating
subsidiaries, including Mr. Payne. The Board, upon the
Compensation Committee’s recommendation, approved LTIP
grants, also effective March 6, 2008, to the Chief
Executive Officer, Chief Financial Officer, RJR Tobacco
President and RAI Group President. As described below, these
LTIP grants consisted of performance units and shares of
restricted RAI common stock. Although Mr. Eckmann will
retire in the second quarter of 2008, it is RAI’s general
policy to make LTIP grants to an otherwise eligible employee in
connection with RAI’s regular, annual broad-based grants,
even if the employee has already announced his or her intention
to retire on a date certain. In the absence of this policy, it
is believed that an
employee who was contemplating retirement in the short-term
would be inclined to postpone announcing his or her retirement
until after the LTIP grant date, thus depriving RAI or its
subsidiary of valuable time to locate a successor and plan a
smooth transition. The Board also believed it was appropriate to
include Mr. Eckmann in the pool of LTIP grantees for the
2008 grant due to the significant contributions he has made to
RAI, especially during the period since the Fall of 2006, when
Mr. Eckmann agreed to defer his planned retirement. In his
role as RAI Group President, he played a critical role in
devising the long-term business strategies of RAI’s
operating subsidiaries, the same strategies that will impact the
value of the performance units. Mr. Eckmann also was
instrumental to the successful integration of Conwood into
RAI’s corporate structure. (Pursuant to his employment
offer letter with RAI, described below under “Severance
Benefits — Severance Agreements,”
Mr. Eckmann will vest, upon his termination of employment
other than for cause, in his outstanding LTIP awards (other than
one-year performance units), subject to the other terms
governing such LTIP awards.
Similar to the 2007 LTIP grant, approximately 70% of each named
executive officer’s total 2008 LTIP grant was in the form
of performance units and approximately 30% was in the form of
restricted common stock. Based upon the overall AIAP score for
2007, as reflected in the table under “Annual Incentives
— 2007 Annual Incentives” above, RAI made no
adjustment to the restricted stock portion of the March 2008
LTIP grant. The vesting of both the performance unit and
restricted stock awards approved in February 2008 is conditioned
upon the payment of a minimum dividend of $.85 per share (the
amount of the quarterly dividend declared by the Board at its
February 5, 2008 meeting), except that the Board retains
the discretion, with respect to LTIP awards granted to persons
who are not “covered employees” within the meaning of
Section 162(m) of the Code, to waive that condition.
Subject to the foregoing, the performance units generally will
vest on December 31, 2010, and the shares of restricted
stock generally will vest on March 6, 2011. The value of
the performance units will be determined in the same fashion as
the value of the performance units granted in March 2007, as
described above, except that the performance metric applicable
to the performance units granted in March 2008 will be
RAI’s EPS for 2010, and the TSR adjustment will be based on
the three-year period ending December 31, 2010.
RAI maintains severance arrangements with its executives,
including the named executive officers. The Compensation
Committee believes that providing these benefits in appropriate
circumstances is necessary for RAI to remain competitive in the
marketplace for executive talent. Given the senior positions
they hold in the organization and the limited number of similar
positions available in the market, senior executives are more
likely than other employees in the organization to encounter
difficulties in finding comparable employment following the end
of their employ with RAI or its subsidiaries. The severance
benefits offered to these executives are designed to provide
them, following certain terminations of employment, with a level
of economic security that would be sufficient for them to find
comparable employment elsewhere.
RAI has entered into a standard form of severance agreement,
referred to as the severance agreement, with each of Mmes. Ivey
and Neal, and Messrs. Eckmann and Payne. Ms. Neal is
not entitled to any severance benefits in connection with her
retirement as RAI’s Executive Vice President and Chief
Financial Officer, effective December 31, 2007. See
“Other Compensation Policies — Special
Incentives” below for a description of the benefits offered
to Ms. Neal in consideration for her remaining employed
with RAI on an interim basis after her retirement as Chief
Financial Officer. Mr. Delen is not a party to the
severance agreement, but instead participates in RAI’s
Executive Severance Plan, the terms of which are described below
under “— Executive Severance Plan.”
Under the terms of the severance agreement, upon an
executive’s qualifying termination, namely, if the
executive’s employment is involuntarily terminated other
than for “cause” or if the executive terminates his or
her employment for “good reason,” then he or she will
receive (1) in the case of Ms. Ivey, three years base
salary plus target bonus, and benefit continuation for three
years, and (2) in the case of Ms. Neal and
Messrs. Eckmann and Payne, two years base salary plus
target bonus, and benefit continuation for three years.
Currently, the base salary and target bonus amounts under the
severance agreement are payable in monthly installments over a
three-year period. In the third quarter of 2007, the Board, upon
the recommendation of the Compensation Committee,
modified the severance agreement to provide that the base salary
and target bonus amounts payable thereunder for qualifying
terminations occurring after December 31, 2009, will be
made in a lump sum, instead of in installments. Also, in the
third quarter of 2007, the Board, upon the recommendation of the
Compensation Committee, approved certain amendments to the
severance agreement so that the severance agreement would comply
with newly adopted regulations under the Code. In the absence of
an amendment to an executive’s severance agreement, such as
the amendment described below which RAI has entered into with
Mr. Eckmann, no executive is entitled to receive severance
benefits if the executive retires or otherwise voluntarily
terminates his or her employment unless such termination
satisfies the agreement’s definition of “good
reason.”
Pursuant to the severance agreement, each of Mmes. Ivey and
Neal, and Messrs. Eckmann and Payne also is entitled to
certain benefits upon a change of control of RAI. The benefits
potentially payable in connection with a change of control event
are designed to motivate senior management to advise the Board
about a potential transaction in the best interests of
shareholders in general, rather than being unduly influenced or
distracted by personal considerations, such as the fear of job
loss due to the transaction. See the Potential Payments Upon
Termination of Employment
and/or a
Change of Control table below, and related footnotes, for
further information about these change in control benefits, and
for definitions of “cause,”“good reason”
and “change of control.”
Under the terms of his employment offer letter entered into with
RAI in connection with the Business Combination, as such letter
has been amended, Mr. Eckmann will receive certain payments
upon his termination of employment other than for cause, given
that he remained employed with RAI through August 31, 2006.
Specifically, Mr. Eckmann will, upon his termination of
employment other than for cause, be entitled to receive the
payments and benefits set forth in the severance agreement, and
vest fully in any outstanding grants made under the LTIP, other
than any outstanding one-year performance units granted under
the LTIP.
In 2006, the Compensation Committee, with the assistance of
Hewitt and RAI’s outside counsel, undertook a comprehensive
review of RAI’s severance and change of control benefits
offered to executives. Based on such review, RAI determined to
revise these benefits for persons who at any time after
July 1, 2006, are newly hired or promoted into executive
level positions, and adopted the Executive Severance Plan,
referred to as the ESP. Such executives participate in the ESP,
instead of being offered benefits under a severance agreement.
As a result, Mr. Delen, who joined RJR Tobacco effective
January 1, 2007, participates in the ESP and is not a party
to a severance agreement. Mr. Delen is the only named
executive officer who participates in the ESP.
The severance and change of control benefits under the ESP are
similar to, but not the same as, the benefits payable under the
severance agreement. Although both the severance agreement and
the ESP serve the same objectives, the Committee believes that
the ESP is more consistent with currently prevailing executive
compensation practices. RAI also has greater flexibility to
amend, if appropriate, the terms of the ESP than the terms of
the severance agreement. Under the terms of a severance
agreement, RAI generally is not able to amend such agreement
without the consent of the individual executive who is a party
to the agreement. In contrast, RAI is free to amend the ESP
without the consent of the participants in the plan, except that
any modification to the ESP adopted by RAI during either the
two-year period after a change in control or the one-year period
prior to a change in control will not be enforceable against a
participant, unless he or she agrees to the modification in
writing.
The benefits payable under the ESP generally are less generous
than the benefits which an executive otherwise would have been
entitled to under a severance agreement. Under the ESP, upon a
qualifying termination, a participant who is a
“Tier II Executive” for purposes of the Plan
(including Mr. Delen) is entitled to receive an amount
equal to one and one-half times his or her base salary and
target bonus, generally payable in 18 monthly installments,
plus benefit continuation for 18 months. Prior to the
adoption of the ESP, an executive officer at
Mr. Delen’s job level would have been entitled under a
severance agreement to a payment in an amount equal to two times
his base salary and target bonus, and benefit continuation for
three years. The ESP provides that upon certain qualifying
terminations in connection with a change in control, a
participant at Mr. Delen’s job level would be entitled
to receive an amount equal to two times base salary and target
bonus (like the provisions of a severance agreement), generally
payable in 24 monthly installments, and
benefit continuation for two years (instead of benefit
continuation for three years, as under a severance agreement).
In the third quarter of 2007, the Board, upon the recommendation
of the Compensation Committee, approved certain amendments to
the ESP so that the ESP would comply with newly adopted
regulations under the Code. For further information about the
benefits under the ESP, see the Potential Payments Upon
Termination of Employment
and/or a
Change of Control table below, and related footnotes.
The payment of benefits to any named executive officer pursuant
to his or her severance agreement or the ESP is conditioned upon
the executive complying with certain non-compete and
confidentiality obligations owing to RAI and its subsidiaries,
and cooperating with RAI and its subsidiaries in the prosecution
or defense of any litigation.
Generally, the retirement benefits provided by RAI and its
subsidiaries, summarized below, are targeted to replace
approximately one-third of an employee’s final annual cash
compensation, provided that the employee retires at age 55
or older with at least 30 years of service. We expect each
employee, upon retirement, to be responsible for replacing the
remainder of his or her final cash compensation through a
combination of personal savings and social security benefits.
RAI sponsors a defined contribution plan which is qualified
under Sections 401(a) and 401(k) of the Code, and which is
available generally to eligible employees of RAI and certain of
its operating subsidiaries, including the named executive
officers. RAI also sponsors non-qualified excess benefit plans
which provide benefits to those employees, including the named
executive officers, whose benefits under the 401(k) plan are
limited by virtue of certain provisions of the Code. Under the
foregoing plans, RAI provides a matching contribution in an
amount equal to either 50% or 100% (depending upon, among other
things, whether an individual is eligible to participate in one
of RAI’s defined benefit plans) of the first 6% of a
participant’s pre-tax contribution. In addition to the
matching contribution, RAI contributes on behalf of each
eligible participant in the 401(k) plan an amount ranging from
3% to 9% of such participant’s annual cash compensation.
The eligibility to receive such supplemental contribution and
the amount of such contribution depend upon, among other
factors, whether an employee participates in certain of our
defined benefit plans and the employee’s years of service.
All of the named executive officers, other than Ms. Ivey
and Mr. Eckmann, are eligible to receive RAI’s
supplemental contribution under the 401(k) plan. See footnote 9
to the Summary Compensation Table below for additional
information regarding RAI’s contributions to the accounts
of the named executive officers under the foregoing plans. In
addition to such plans, the named executive officers, other than
Mr. Delen, participate in certain noncontributory defined
benefit retirement plans maintained by RAI. Subject to certain
limited exceptions, employees hired on or after January 1,2004, are not eligible to participate in these defined benefit
plans. Ms. Ivey and Mr. Eckmann also participate in a
B&W retirement plan, the obligations of which, with respect
to Ms. Ivey, Mr. Eckmann and certain other former
B&W employees, were assumed by RAI in connection with the
Business Combination. See “— Retirement
Benefits” below for more information about the defined
benefit plans in which the named executive officers participate.
In certain circumstances, the Compensation Committee may provide
a key executive with compensation elements in addition to, or
different than, those described above in this Compensation
Discussion and Analysis. For example, special compensation may
be offered to attract an executive to join RAI or to retain the
services of an existing executive. The Compensation Committee
believes that the flexibility to structure compensation
arrangements to address individual situations is necessary,
because a one-size fits all approach to executive compensation
is neither practical nor desirable.
To induce Mr. Delen to join RJR Tobacco and to compensate
him for the benefits that he forfeited from his previous
employer by joining RJR Tobacco, RAI made a special LTIP grant
to him coincident with his appointment as President of RJR
Tobacco on January 1, 2007. The terms of that grant are
described in footnote 4 to the 2007 Grants of Plan-Based Awards
table below. The terms of Mr. Delen’s March 2007 LTIP
grant, made as part of RAI’s regular annual LTIP grant to
key employees, are described under “Long-Term Incentive
Compensation” above. RAI also provided Mr. Delen a
sign-on bonus of $125,000 in connection with his appointment as
President of RJR Tobacco.
In accordance with our December 2007 announcement, Ms. Neal
retired as RAI’s Executive Vice President and Chief
Financial Officer effective December 31, 2007. Since
January 1, 2008, Ms. Neal has remained employed with
RAI on a transition basis, and has continued to earn the same
base salary, and to participate in the same employee benefit
programs, as she did immediately prior to such date. The
Compensation Committee believed that it would be in the interest
of RAI for Ms. Neal to remain an employee of RAI for an
interim period following her resignation as Chief Financial
Officer to assist her successor and aid in a smooth transition
of her responsibilities. In consideration for Ms. Neal
agreeing to remain employed with RAI for this interim period,
and agreeing to comply with non-compete and confidentiality
covenants, RAI’s Board, upon the Compensation
Committee’s recommendation, approved the payment to
Ms. Neal of a $180,000 retention bonus, provided she
remains employed with RAI through March 31, 2008. Also,
subject to Ms. Neal remaining employed through
March 31, 2008, and complying with the other terms of the
above mentioned covenants, RAI’s Board agreed to treat
Ms. Neal’s resignation as a retirement solely for
purposes of the LTIP, thus entitling her to vest in a pro
rata portion of her LTIP awards that remain outstanding on
the last day of her employment. The terms and conditions that
otherwise apply to these awards will remain in effect, except
that as a result of an amendment approved by RAI’s Board,
the performance units granted to Ms. Neal in March 2007
will be paid on a pro rata basis to Ms. Neal as soon
as practicable after her employment termination date based upon
the initial value of these performance units. In the absence of
the amendment, these performance units would have been paid in
early 2010 based upon RAI’s 2009 EPS. The value of
Ms. Neal’s other outstanding performance units awarded
under the LTIP, which were granted in March 2006, generally will
be determined and paid only after the conclusion of the
three-year performance period ending on December 31, 2008.
Ms. Neal will receive no severance or salary continuation
payments in connection with her retirement.
The Board believes that executives, such as the named executive
officers, whose business decisions have a profound and direct
impact on the operations and results of RAI, should have a
reasonable equity stake in RAI. Further, the greater the
responsibilities an executive has, the greater his or her equity
stake should be. As a result, the Board established stock
ownership guidelines for the named executive officers and other
senior management. (We also maintain stock ownership guidelines
for our directors, which are described above under “The
Board of Directors — Equity Ownership
Guidelines.”) Pursuant to the current stock ownership
guidelines for the named executive officers, which became
effective as of January 1, 2006, each executive is expected
to own, within seven years after the later of January 1,2006, and his or her appointment as an executive officer, an
amount of RAI common stock valued at a multiple of his or her
annual base salary as follows — three times annual
base salary for Ms. Ivey, two and one-half times annual
base salary for Ms. Neal and Messrs. Eckmann and
Delen, and two times annual base salary for Mr. Payne. Any
stock options or unvested shares of restricted stock held by a
named executive officer are not counted toward satisfaction of
the stock ownership guidelines. Pursuant to amendments to the
Compensation Committee’s charter, which the Board approved
in November 2007, the Compensation Committee now is responsible
for approving any amendments to the executive stock ownership
guidelines. The Committee periodically reviews each
executive’s progress towards satisfying the stock ownership
guidelines. If any executive were to fail to satisfy the
applicable stock ownership guidelines, then the Compensation
Committee would consider such failure as one factor in
determining the extent to which such executive should receive
any stock-based awards in the future.
Section 162(m) of the Code generally disallows a federal
income tax deduction to publicly traded companies for
compensation paid to certain executives to the extent such
compensation exceeds $1 million per executive in any fiscal
year. The deduction limit does not apply to compensation that
satisfies Section 162(m)’s requirements for
performance-based compensation. The Committee has structured
certain components of RAI’s
executive compensation program (for example, the one-year
performance units granted to certain named executive officers
under the LTIP in lieu of their participation in the AIAP, the
three-year performance units the value of which is based upon
RAI’s future EPS, as well as the restricted stock grants)
in an effort to satisfy this performance-based exception.
Although the Committee plans to continue taking actions intended
to limit the impact of Section 162(m), the Committee also
believes that the tax deduction is only one of several relevant
considerations in setting compensation. The Committee believes
that the tax deduction limitation should not be permitted to
compromise RAI’s ability to design and maintain executive
compensation arrangements that will attract and retain the
executive talent to compete successfully. Accordingly, achieving
the desired flexibility in the design and delivery of
compensation occasionally may result in some compensation that
is not deductible for federal income tax purposes.
The Compensation Committee has reviewed and discussed the above
Compensation Discussion and Analysis with RAI’s management.
Based on that review and discussion, the Compensation Committee
recommended to the Board that the Compensation Discussion and
Analysis be included in this proxy statement.
The following table shows the annual and long-term compensation
paid or accrued by RAI and its subsidiaries to RAI’s Chief
Executive Officer, Chief Financial Officer and its other three
most highly compensated executive officers for the fiscal years
ended December 31, 2007 and 2006.
Summary
Compensation Table
Change in
Pension
Value and
Nonqualified
Non-Equity
Deferred
Stock
Incentive Plan
Compensation
All Other
Salary
Bonus
Awards
Compensation
Earnings
Compensation
Total
Name and Principal Position(1)
Year
($)
($)
($)(6)
($)(7)
($)(8)
($)(9)
($)
Susan M. Ivey
2007
1,190,350
0
3,114,421
4,243,000
688,848
231,241
9,467,860
Chairman of the Board, Chief Executive Officer and President
2006
1,135,000
0
3,604,102
2,223,000
1,000,923
206,897
8,169,922
Dianne M. Neal
2007
553,250
0
926,711
1,340,325
120,231
341,593
3,282,110
Executive Vice President and Chief Financial Officer(2)
2006
532,675
0
1,155,807
631,000
357,827
180,180
2,857,489
Daniel M. Delen
2007
760,000
125,000
(4)
1,743,949
658,000
0
212,532
3,499,481
President and Chief
Executive Officer,
RJR Tobacco(3)
Jeffrey A. Eckmann
2007
629,250
0
985,602
1,401,325
887,663
269,821
4,173,661
RAI Group
2006
512,675
125,000
(5)
1,755,463
705,000
1,681,259
189,861
4,969,258
President
Tommy J. Payne
2007
383,725
0
493,984
730,064
43,139
227,425
1,878,337
Executive Vice President – Public Affairs
2006
369,475
0
615,402
379,308
151,779
126,623
1,642,587
(1)
All of the named executive officers, other than Mr. Delen
who is employed by RJR Tobacco, are employed by RAI.
(2)
Ms. Neal retired as RAI’s Executive Vice President and
Chief Financial Officer on December 31, 2007. Since that
date, she has remained employed with RAI on a transition basis,
earning the same base salary and participating in the same
employee benefit programs as she did immediately prior to
January 1, 2008. Her transitional employment is expected to
end on March 31, 2008. See “Compensation Discussion
and Analysis — Other Compensation Policies —
Special Incentives” above for information regarding the
agreement Ms. Neal and RAI entered into in connection with
her retirement.
This amount represents a sign-on bonus paid to Mr. Delen in
connection with his joining RJR Tobacco as President, effective
January 1, 2007.
(5)
This amount represents a retention bonus paid to
Mr. Eckmann, in October 2006, in consideration for his
agreeing to extend his projected employment termination date
through at least April 2008. In February 2008, RAI announced
that Mr. Eckmann will retire effective May 1, 2008.
(6)
The amounts shown in this column represent the amount of
compensation expense RAI recorded in its financial statements
(pursuant to FAS 123(R)), with respect to each year shown, for
the stock-based LTIP awards that have been made to each named
executive officer during such year and (for the named executive
officers other than Mr. Delen) in previous years. The
assumptions upon which these amounts are based are set forth in
note 16 to consolidated financial statements contained in
our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, filed with the
SEC on February 27, 2008. The amounts
shown in this column do not equal the actual value that any
named executive officer received during either year shown with
respect to his or her LTIP awards. For the value that the named
executive officers actually received in 2007 in connection with
the vesting of certain performance shares, see the 2007 Option
Exercises and Stock Vested table below. None of the named
executive officers vested in any shares of restricted stock
during 2007. Subject otherwise to the terms of the grant
documentation and of any person’s employment agreement, any
outstanding, unvested performance shares and restricted RAl
common stock held by the named executive officers will be
cancelled if the minimum dividend condition is not satisfied,
unless the condition is waived by the Board. If any named
executive officer does vest in his or her outstanding, unvested
performance shares or restricted RAI common stock, then the
actual value such officer will receive upon vesting may differ
significantly from the amounts shown in this column.
The value of dividends or dividend equivalents on
executives’ LTIP awards is not included in this table. The
dividend equivalents charged to expense during 2007 and 2006
with respect to the executives’ performance shares were as
follows:
Name
2007 ($)
2006 ($)
Ms. Ivey
171,482
211,991
Ms. Neal
57,873
71,554
Mr. Delen
111,440
—
Mr. Eckmann
57,873
71,554
Mr. Payne
30,024
37,118
(7)
The amounts in this column for 2007 were paid in the first
quarter of 2008 and represent (a) annual incentive payments
with respect to 2007 performance (payments upon vesting of
one-year performance units in the case of the named executive
officers other than Mr. Payne, and payment in connection
with participation in the AIAP in the case of Mr. Payne)
and (b) the cash settlement of performance units granted on
March 2, 2005, to each named executive officer (other than
Mr. Delen who joined RJR Tobacco in 2007), with the
units’ value based on the average AIAP scores for the
three-year period ended December 31, 2007. The amount of
each of the foregoing payments made to each named executive
officer is shown below:
2007 Annual
Performance
Name
Incentives ($)
Units ($)
Ms. Ivey
1,525,000
2,718,000
Ms. Neal
423,000
917,325
Mr. Delen
658,000
—
Mr. Eckmann
484,000
917,325
Mr. Payne
254,142
475,922
For information regarding the foregoing annual incentives, see
“Compensation Discussion and Analysis — Annual
Compensation — Annual Incentives” above, and for
further information regarding the one-year performance units in
which the annual incentive opportunity for each named executive
officer (other than Mr. Payne) was denominated, see
footnote 2 to the 2007 Grants of Plan-Based Awards table below.
The amounts in this column for 2006 represent annual incentive
payments made in the first quarter of 2007 with respect to
performance during 2006 (payments upon vesting of one-year
performance units in the case of Mmes. Ivey and Neal, and
Mr. Eckmann, and payment in connection with participation
in the AIAP in the case of Mr. Payne).
(8)
The amounts in this column for each named executive officer
represent the total change in the actuarial present value of the
executive’s accumulated benefit under all defined benefit
plans, including supplemental plans, from December 31, 2005
to December 31, 2006, with respect to 2006, and from
December 31, 2006 to December 31, 2007, with respect
to 2007. For additional information regarding the defined
benefit plans in which the named executive officers participate,
see the 2007 Pension Benefits table below.
The amounts shown in this column for 2007 include, among other
items:
(a)
contributions made by RAI to the named executive officers under
RAI’s qualified defined contribution plans, and amounts
credited by RAI to the accounts of the named executive officers
in RAI’s non-qualified excess benefit plans (with such
excess benefit plans described in greater detail in the
footnotes to the 2007 Non-Qualified Deferred Compensation table
below), as follows:
Qualified Plan
Non-Qualified Plan
Contribution
Credit
Name
($)
($)
Ms. Ivey
4,912
96,725
Ms. Neal
22,499
95,925
Mr. Delen
20,249
48,150
Mr. Eckmann
6,750
33,277
Mr. Payne
22,499
53,803
(b)
the perquisites described below:
•
a payment of $79,000 to Ms. Ivey, a payment of $70,200 to
each of Ms. Neal and Mr. Eckmann and a payment of
$54,300 to Mr. Payne, in each case in lieu of such
person’s participation in RAI’s former executive
perquisites program,
•
a payment to Mr. Delen of $6,000, representing a financial
planning allowance,
•
the cost of a physical examination in the case of Mmes. Ivey and
Neal, and Mr. Payne,
•
the cost of premiums paid by RAI for certain excess liability
insurance covering each of the named executive officers (and a
related tax
gross-up
amount), and
•
the value (based upon the aggregate incremental cost to RJR
Tobacco) ascribed to personal flights taken by Mmes. Ivey and
Neal, and Mr. Eckmann or their respective guests, on
aircraft owned or leased by RJR Tobacco (with such value, in
Ms. Ivey’s case, being $38,331) (the aggregate
incremental cost for purposes of the foregoing calculation
includes the variable costs of operating the aircraft, such as
fuel costs, airport handling fees and catering costs, plus the
amount associated with RAI’s lost tax deduction due to the
personal usage of the aircraft, but excludes fixed costs, such
as labor costs of the aircraft crew and hangar lease payments);
(c)
in the case of Ms. Ivey and Mr. Eckmann, the change in
the value of the accrued post-retirement health benefit from
December 31, 2006 to December 31, 2007, as
follows — Ms. Ivey: $7,123; and Mr. Eckmann:
$1,527;
(d)
in the case of Mr. Delen, moving and relocation benefits in
the amount of $135,552 in connection with his move from Japan,
the location of his prior employment, to RJR Tobacco’s
headquarters in North Carolina; and
(e)
in the case of Ms. Neal and Messrs. Eckmann and Payne,
an amount designed to compensate them for the reduction in the
multiple on which their respective annual LTIP grant is based
(as described above under “Compensation Discussion and
Analysis — Long-Term Incentive Compensation”) as
follows — Ms. Neal: $134,200; Mr. Eckmann:
$150,000; and Mr. Payne: $93,100.
These awards represent performance units granted under the LTIP.
Upon vesting of the performance units, each grantee will receive
a cash payment equal to the product of $1 and the number of
vested units. Except with respect to Ms. Neal, as described
below, the number of units, if any, that will vest will depend
upon RAI’s actual EPS for 2009 compared with certain
pre-established EPS goals. If RAI’s actual 2009 EPS were to
equal the targeted EPS goal, then each grantee would vest in
100% of his or her performance units (subject to the adjustment
described below). If RAI’s actual EPS were to equal or
exceed the maximum EPS goal, then each grantee would vest in two
times the number of his or her performance units (subject to
adjustment). If RAI’s actual 2009 EPS were to be below the
pre-established EPS floor, then no grantee would vest in any of
his or her performance units. If RAI’s actual 2009 EPS were
between the pre-established EPS floor and the maximum EPS goal,
then the number of performance units each grantee would vest in
would be determined using interpolation. The number of vested
performance units, if any, are subject to further adjustment
based upon the TSR of RAI over the three-year period ending
December 31, 2009, compared with the TSR of the companies
within the Standard & Poor’s Food and Beverage
Index as of the grant date, plus Altria Group, Inc., Carolina
Group and UST Inc. as shown in the table below:
RAI TSR Relative to
Adjustment
TSR of
to #
Comparator
of Vested
Companies
Units
Top Third
+10
%
Middle Third
0
Bottom Third
−10
%
Notwithstanding RAI’s actual 2009 EPS, no grantee will vest
in any of his or her performance units, unless RAI pays a
quarterly dividend of at least $.75 per share (the amount of the
quarterly dividend declared by
the Board at its February 6, 2007 meeting) during the
three-year period ending December 31, 2009 (unless the
Board otherwise modifies the foregoing minimum dividend vesting
condition).
In the event of a grantee’s death, permanent disability,
and (other than in the case of Mr. Eckmann) retirement or
involuntary termination of employment without cause, any
outstanding performance units will vest on a pro rata
basis, with payment of such units to be made after the
performance period. Notwithstanding the foregoing, in the event
of a change of control of RAI, any outstanding performance units
will vest on a pro rata basis and will be paid as soon as
practicable after the change of control. Upon vesting after a
change of control, each grantee will receive a cash payment
equal to the product of (1) the number of vested units and
(2) the greater of (a) $1.00 and (b) $1.00
multiplied by (i) an amount representing the hypothetical
percentage (from 0 to 200%) of RAI’s targeted 2009 EPS goal
that would have been met based upon the assumption that
RAI’s EPS growth from the grant date through the change of
control event continued at the same rate from the change of
control event through December 31, 2009, and (ii) an
amount determined in accordance with the table set forth in the
preceding paragraph based upon RAI’s TSR compared with the
TSR of the peer group companies described in that paragraph from
the grant date through the change of control event. In the event
of a grantee’s voluntary termination of employment (other
than in the case of Ms. Neal and Mr. Eckmann) or
termination of employment for cause, such grantee’s
outstanding performance units will be cancelled. The vesting
provisions described in this paragraph are subject to the terms
of any employment contract between RAI and the grantee.
The Board agreed to treat Ms. Neal’s resignation as a
retirement for purposes of the LTIP and, therefore, she will
vest on a pro rata basis in these performance units.
Further, pursuant to a Board approved amendment to her
March 6, 2007 performance unit grant, the pro rata
vesting of such performance units will be based on the
initial $1.00 value of such units, rather than determined in
accordance with the provisions described in the first paragraph
of this footnote. See “Compensation Discussion and
Analysis — Other Compensation Policies —
Special Incentives” for more information regarding certain
compensation decisions the Board made in connection with
Ms. Neal’s resignation. As described above under
“Compensation Discussion and Analysis — Severance
Agreements,” pursuant to his amended employment offer
letter, Mr. Eckmann will vest fully in any outstanding LTIP
awards (other than any one-year performance units) upon his
termination of employment with RAI other than for cause; the
payment of these performance units, however, will be made after
the completion of the performance period ending
December 31, 2009.
(2)
These awards represent performance units, each of which has an
initial value of $1,000, granted under the LTIP to Mmes. Ivey
and Neal, and Messrs. Delen and Eckmann in lieu of their
participation in the AIAP. The ultimate value of such awards is
based upon the performance metrics described under
“Compensation Discussion and Analysis — Annual
Compensation — Annual Incentives” above. The
payment with respect to each executive’s award was made, in
accordance with its terms, in the first quarter of 2008. The
amounts shown with respect to these awards in the
“Threshold,”“Target” and
“Maximum” columns represent hypothetical payouts; the
actual payments made by RAI relating to these performance units
are included in the “Non-Equity Incentive Plan
Compensation” column in the Summary Compensation Table
above.
(3)
Unlike the other named executive officers, Mr. Payne
received his annual incentive benefit for 2007 pursuant to the
AIAP, and not in the form of performance units, described in
footnote 2, granted to the other named executive officers
pursuant to the LTIP. The performance metrics used to determine
Mr. Payne’s benefit under the AIAP, however, were the
same performance metrics used to determine the value of the
performance units granted to the other named executive officers
who are employed by RAI. The payment Mr. Payne received
under the AIAP, in the first quarter of 2008, with respect to
2007 performance is included in the “Non-Equity Incentive
Plan Compensation” column in the Summary Compensation Table
above. See “Compensation Discussion and
Analysis — Annual Compensation — Annual
Incentives” above for further information regarding the
annual incentive benefit.
(4)
This award represents performance shares granted on
January 1, 2007, pursuant to the LTIP, in connection with
Mr. Delen joining RJR Tobacco as President. Of the total
award, 11,841 performance shares, or 34%, vested on
December 31, 2007, with such vesting having been
conditioned on RAI’s payment of a quarterly dividend of at
least $.75 per share during 2007; such minimum dividend is equal
to the per share amount
of the last dividend paid by RAI prior to the grant of the
performance shares. The balance of the award is scheduled to
vest on December 31, 2008, subject to the payment of the
above minimum quarterly dividend through 2008 (unless the Board
elects to waive the minimum dividend as a vesting condition).
Upon the vesting date of the performance shares, Mr. Delen
is entitled to a cash payment in an amount equal to the product
of the number of shares vesting and the per share closing price
of RAI common stock on the vesting date. Prior to the vesting
date of the performance shares, Mr. Delen receives dividend
equivalents with respect to the outstanding unvested shares to
the same extent that any dividends generally are paid by RAI on
outstanding shares of RAI common stock.
(5)
These awards represent shares of restricted RAI common stock
awarded under the LTIP. These shares will vest on March 6,2010, provided RAI pays to its shareholders a quarterly dividend
of at least $.75 per share during the three-year period ending
on December 31, 2009. If RAI fails to pay the minimum
dividend in any fiscal quarter during such period, then the
restricted stock will be cancelled, unless RAI’s Board
otherwise approves the non-cancellation of the restricted stock.
Prior to the vesting of the restricted stock, a grantee will
receive dividends with respect to his or her outstanding
unvested restricted stock to the same extent that any dividends
generally are paid by RAI on outstanding shares of RAI’s
common stock. Prior to the vesting of the restricted stock, each
grantee will be prohibited from selling, pledging or otherwise
transferring, but will have voting rights with respect to, the
restricted stock. Upon vesting, the restrictions will lapse and
the restricted stock will become freely transferable by the
grantee, subject to any restrictions arising under applicable
federal or state securities laws.
In the event of a grantee’s death or permanent disability,
or a change of control of RAI, any outstanding unvested
restricted stock will immediately vest. Except in the case of
Mr. Eckmann, in the event of a grantee’s involuntary
termination of employment without cause or retirement, any
outstanding unvested restricted stock will vest pro rata.
In the event of a grantee’s voluntary termination of
employment (other than in the case of Ms. Neal and
Mr. Eckmann) or termination of employment for cause, such
grantee’s outstanding restricted stock will be cancelled.
The vesting provisions described in this paragraph will be
subject to the terms of any employment contract between RAI and
the grantee. For the reasons described above under
“Compensation Discussion and Analysis — Other
Compensation Policies — Special Incentives,” the
Board agreed to treat Ms. Neal’s resignation as a
retirement for purposes of the LTIP, thus entitling her to vest
pro rata in her outstanding restricted stock awards. As
described above under “Compensation Discussion and
Analysis — Severance Agreements,” pursuant to his
amended employment offer letter, Mr. Eckmann will vest
fully in any outstanding LTIP award (other than any one-year
performance units) upon his termination of employment with RAI
other than for cause.
(6)
The amounts in this column represent (a) for the restricted
stock granted on March 6, 2007, the product of $59.50, the
closing price of RAI common stock on that date, and the number
of shares of such restricted stock awarded to the executive and
(b) for the performance shares granted to Mr. Delen on
January 1, 2007, the product of $65.47, the closing price
of RAI common stock on December 29, 2006, the last trading
day prior to the grant date, and 34,825, the number of
performance shares granted to him on January 1, 2007.
The following table sets forth certain information concerning
equity incentive plan awards outstanding as of the end of 2007
for each named executive officer.
These amounts represent shares of restricted RAI common stock
granted on March 6, 2007, pursuant to the LTIP. The
material terms governing such awards are described in footnote 5
to the 2007 Grants of Plan-Based Awards table above.
(2)
These awards represent shares of restricted RAI common stock
granted, under the LTIP, on March 6, 2006. These shares
will vest on March 6, 2009, provided RAI pays to its
shareholders a dividend of at least $.625 per share during the
three-year period ending on December 31, 2008. If RAI fails
to pay the minimum dividend in any fiscal quarter during such
period, then the restricted stock will be cancelled, unless
RAI’s Board otherwise approves the non-cancellation of the
restricted stock. Prior to the vesting of the restricted stock,
a grantee will receive dividends with respect to his or her
outstanding unvested restricted stock to the same extent that
any dividends generally are paid by RAI on outstanding shares of
RAI’s common stock. Prior to the vesting of the restricted
stock, each grantee will be prohibited from selling, pledging or
otherwise transferring, but will have voting rights with respect
to, the restricted stock. Upon vesting, the restrictions will
lapse and the restricted stock will become freely transferable
by the grantee, subject to any restrictions arising under
applicable federal or state securities laws.
The terms governing these shares of restricted stock with
respect to such events as termination of employment and a change
of control of RAI are the same as the terms governing the shares
of restricted RAI common stock granted on March 6, 2007,
which are set forth in the second paragraph of footnote 5 to the
2007 Grants of Plan-Based Awards table above.
(3)
These amounts represent performance shares granted on
March 2, 2005, pursuant to the LTIP. The performance shares
vested, in accordance with their terms, on March 2, 2008.
The vesting of such shares had been subject to the condition
(which was satisfied) that RAI pay to its shareholders a
quarterly dividend of at least $.475 per share during the
three-year period ended December 31, 2007. Such minimum
dividend, which was adjusted to reflect RAI’s 2006
two-for-one
stock split, is equal to the per share amount of the last
dividend paid by RAI prior to the grant of these performance
shares. Upon the vesting date of the performance shares, each
named executive officer became entitled to a cash payment in an
amount equal
to the product of the number of shares vested and the per share
closing price of RAI common stock on the vesting date. Prior to
the vesting of his or her performance shares, each named
executive officer received dividends with respect to his or her
outstanding unvested shares to the same extent that any
dividends generally were paid by RAI on outstanding shares of
RAI common stock.
(4)
This amount represents performance shares granted to
Mr. Delen on January 1, 2007, pursuant to the LTIP.
The material terms governing such award are described in
footnote 4 to the 2007 Grants of Plan-Based Awards Table above.
(5)
The amounts shown in this column represent the product of
$65.96, the per share closing price of RAI common stock on
December 31, 2007, and the number of shares of restricted stock
or performance shares, as the case may be, not yet vested and
held by the executive on December 31, 2007.
The following table provides information concerning the
performance shares which the named executive officers vested in
during 2007.
None of the named executive officers beneficially owned at any
time during 2007 any options to acquire shares of RAI common
stock. None of the named executive officers vested in any shares
of restricted RAI common stock during 2007.
(2)
The amounts in this column represent the number of performance
shares that the named executive officers vested in during 2007.
The vesting of the performance shares entitled each named
executive officer to receive a cash payment equal to the number
of vested shares multiplied by the per share closing price of
RAI common stock on the vesting date; no actual shares of RAI
common stock were delivered upon the vesting of the performance
shares. For all the named executive officers, other than
Mr. Delen, the amounts shown in this column represent
performance shares that vested on August 31, 2007, with
such shares being the final one-third tranche to vest from a
grant made on August 31, 2004. The vesting of each tranche
had been subject to the condition, which was satisfied, that RAI
pay to its shareholders a minimum quarterly dividend of $.475
per share (with that minimum dividend having been adjusted to
reflect RAI’s 2006
two-for-one
stock split). For Mr. Delen, the amount shown in this
column represents performance shares that vested on
December 31, 2007, 34% of the total performance share grant
made to him effective January 1, 2007, when he joined RJR
Tobacco as President. See footnote 3 to the 2007 Grants of
Plan-Based Awards table for additional information regarding
such grant.
(3)
These amounts represent the cash payments made to the named
executive officers upon the vesting of the performance shares as
described in the preceding footnote.
The following table sets forth information concerning each plan
that provides the named executive officers with payments or
other benefits at, following, or in connection with retirement.
Retirement Plan for Salaried Employees of Brown &
Williamson Tobacco Corporation and Certain Affiliates(6)
18.100
574,696
0
Supplemental Pension Plan for Executives of Brown &
Williamson Tobacco Corporation(7)
23.100
1,512,053
0
Dianne M. Neal
Reynolds American Retirement Plan(4)
19.359
300,276
0
Reynolds American Additional Benefits Plan(5)
19.359
1,400,761
0
Daniel M. Delen
—
—
—
—
Jeffrey A. Eckmann
Reynolds American Retirement Plan(4)
3.335
84,528
0
Reynolds American Additional Benefits Plan(5)
3.335
406,872
0
Retirement Plan for Salaried Employees of Brown &
Williamson Tobacco Corporation and Certain Affiliates(6)
22.300
1,118,962
0
Supplemental Pension Plan for Executives of Brown and Williamson
Tobacco Corporation(7)
24.300
2,214,958
0
Contractual Benefit(8)
26.500
552,516
0
Tommy J. Payne
Reynolds American Retirement Plan(4)
19.502
337,873
0
Reynolds American Additional Benefits Plan(5)
19.502
689,786
0
(1)
RAI has maintained two defined benefit plans — the
Reynolds American Retirement Plan, a tax-qualified pension
equity plan, referred to as the PEP, and the non-qualified
Additional Benefits Plan, referred to as the ABP — in
which all of the named executive officers participate, other
than Mr. Delen who is not eligible to participate based
upon his hire date. In addition, Ms. Ivey and
Mr. Eckmann have accrued benefits for service with B&W
before the Business Combination under two additional defined
benefit plans, the obligations of which were assumed by RAI in
connection with the Business Combination — the
Retirement Plan for Salaried Employees of Brown &
Williamson Tobacco Corporation and Certain Affiliates, referred
to as the Legacy Plan, and the Supplemental Pension Plan for
Executives of Brown & Williamson Tobacco Corporation,
referred to as the B&W Supplemental Plan.
The number of years of credited service is shown as of
December 31, 2007. Ms. Ivey’s and
Mr. Eckmann’s years of credited service for purposes
of the PEP and the ABP represent their service with RAI after
the Business Combination, and their service for purposes of the
Legacy Plan and the B&W Supplemental Plan represent their
service with B&W before the Business Combination. In
addition, pursuant to contractsincorporated by reference into
the B&W Supplemental Plan, Ms. Ivey and
Mr. Eckmann were granted 5 and 2 additional years of
service credit, respectively, for purposes of the B&W
Supplemental Plan. This grant of additional service increased
the present value of the accumulated benefit under the B&W
Supplemental Plan by $1,440,281 for Ms. Ivey and $502,300
for Mr. Eckmann.
(3)
The present value of accumulated benefit is shown as of
December 31, 2007. The calculation of the present value of
accumulated benefits assumes a discount rate of 6.50% (the rate
used by RAI in determining the accumulated pension obligations
for financial reporting purposes) and post-commencement
mortality based on the 1994 Group Annuity Mortality Table,
projected 10 years by Scale AA to 2004, for males and
females. Benefit values of the PEP and the ABP are based on
immediate payment at January 1, 2008, as these plans have
no special provisions for unreduced benefits. Benefit values for
the Legacy Plan and the B&W Supplemental Plan are based on
payment at age 60, the age at which unreduced benefits
could commence.
The present value of accumulated benefit under the ABP shown in
this column has been reduced by the value of benefits under this
plan previously waived in connection with an elective funding of
a portion of certain named executive officers’ qualified
and non-qualified pension benefits. In 2000, RJR offered its
current employees who had earned non-qualified pension benefits
a one-time opportunity to elect to have at least 75% of their
total earned qualified and non-qualified pension benefits funded
under an existing retention trust over a three-year period. For
any eligible named executive officer who elected such funding,
the accumulated benefits under the ABP were reduced to give
effect to the fact that non-qualified benefits waived under the
ABP would be paid from the retention trust rather than from the
ABP. The reductions were in the following amounts —
Ms. Neal: $24,939; and Mr. Payne: $193,366. In
addition, the present value of accumulated benefits in this
column for the B&W Supplemental Plan does not reflect the
value of benefits under this plan, the obligation for which was
retained by B&W in connection with the Business
Combination. The value of these retained benefits is $4,843,142
for Ms. Ivey and $2,769,001 for Mr. Eckmann.
(4)
The PEP provides a lump sum benefit that is a multiple of final
average earnings payable after termination of employment at any
age. The multiple is the sum of the participant’s core
earned percentages (ranging from 4% to 13% per year depending on
age) and excess earned percentages (ranging from 0% to 4% per
year depending on age) while covered by the PEP. A
participant’s lump sum benefit is equal to his or her total
final average earnings multiplied by his or her total core
percentage, plus his or her final average earnings in excess of
Social Security covered compensation multiplied by his or her
total excess percentage. For purposes of the PEP, final average
earnings is the annualized sum of base salary and bonus in the
year earned, and is determined by considering the 36 consecutive
months that yield the highest average during the
participant’s last 60 months of service. Each
year’s compensation for the PEP is limited by the
compensation limits under the Code.
(5)
The ABP provides a benefit equal to the benefit that would be
paid under the PEP if the limits on compensation and benefits
under the Code did not apply and if certain extraordinary items
of income that are excluded from compensation under the PEP were
included. This benefit is reduced by the PEP benefit and is paid
upon termination of employment in monthly annuity payments. Lump
sum payments above $10,000 are not available. The ABP is a
non-qualified unfunded plan designed to allow participants in
the plan to receive a pension benefit equal to the benefit that
would have been paid under the PEP had the PEP not been subject
to the limits on compensation and benefits under the Code and
had the compensation thereunder been recognized under the PEP.
All benefits under the ABP are payable out of the general
corporate assets of RAI.
(6)
The Legacy Plan provides monthly benefits equal to the product
of a participant’s years of pensionable service (to a
maximum of 38 years) multiplied by his or her pensionable
salary, divided by 57 and reduced by a proportionate amount of
the participant’s Social Security benefit. A
participant’s pensionable salary is
the average of the participant’s base rate of pay in effect
for the
36-month
period immediately before his or her termination of employment.
Ms. Ivey’s and Mr. Eckmann’s service with
RAI is not considered pensionable service, but their base rate
of pay with RAI is taken into account in determining their
pensionable salary.
Benefits are payable at age 65. In addition, early
retirement benefits may commence before age 65 to a
participant who terminates employment either after attaining
age 55 with at least ten years of service or with at least
ten years of service when his or her age plus years of service
equal at least 65. If early retirement benefits commence before
age 65, they are reduced 1/4 of 1% per month for each month
that commencement precedes age 60, unless the participant
has 30 years of service at termination, in which case
benefits may commence without reduction on or after age 55.
An employee who was a participant on July 1, 1994, who
terminates employment with at least ten years of service when
his or her age plus years of service equal at least 60 may
commence benefits after attaining age 50 with the reduction
for commencement before age 60 described above. Both
Ms. Ivey and Mr. Eckmann are currently eligible for
early retirement under the Legacy Plan. Ms. Ivey is
eligible for 70% of her full retirement benefit commencing at
age 50, and Mr. Eckmann is eligible for 86% of his
full retirement benefit, under the Legacy Plan.
(7)
The B&W Supplemental Plan is a non-qualified pension plan
that provides a benefit equal to the benefit that would have
been paid under the Legacy Plan had the Legacy Plan included
bonuses and deferred compensation in pensionable salary,
included additional service in pensionable service for
Ms. Ivey and Mr. Eckmann, and not been subject to the
limits on compensation under the Code, reduced by the actuarial
value of the benefit payable under the Legacy Plan. For purposes
of this plan, for the period after the Business Combination, a
participant’s bonus is deemed to be an amount equal to the
participant’s salary rate multiplied by the average rating
under B&W’s Performance Incentive Plan for the three
years preceding the Business Combination. Benefits are payable
in a lump sum upon termination of employment from the general
assets of RAI.
(8)
Pursuant to an agreement between RAI and Mr. Eckmann,
Mr. Eckmann is entitled to receive additional benefits in
an amount equal to the difference between what he will receive
from the PEP, ABP, the Legacy Plan and the B&W Supplemental
Plan, as shown in the “Present Value of Accumulated
Benefit” column with respect to him, and the amount he
would have received under the Legacy Plan and the B&W
Supplemental Plan based on his combined service with RAI and
B&W. In addition, he will receive a tax
gross-up
payment related to the taxes on such amount and the amount
payable under the B&W Supplemental Plan. The estimated
amount of this tax
gross-up
payment, which is not reflected in the “Present Value of
Accumulated Benefit” column, is $894,520.
The following table sets forth information regarding each
defined contribution or other plan that provides for the
deferral of compensation on a basis that is not tax-qualified.
RAI maintains two non-qualified excess benefit plans for those
employees, including the named executive officers, whose
benefits under RAI’s tax-qualified 401(k) plan are limited
by virtue of certain provisions of the Code. All information in
this table reflects activity under such plans. Pursuant to these
non-qualified plans, RAI credits to each named executive
officer’s account an amount, referred to as the principal
amount, equal to the amount RAI would have contributed to such
executive’s account in the tax-qualified 401(k) plan, but
for the Code’s limitations. In addition, RAI credits the
principal amount with interest at the same rate as is earned by
a certain interest income fund offered under RAI’s
tax-qualified 401(k) plan. Unlike with respect to the
tax-qualified 401(k) plan, RAI does not contribute any funds to
the non-qualified excess benefit plans, but instead credits
amounts by book entry to participants’ accounts.
Commencing with the amounts credited for the 2004 plan year, RAI
distributes, in the first quarter of each year, to each
participant in the non-qualified excess benefit plans the
amounts that have been credited to such participant’s
account during the prior year. Prior to January 1, 2004, a
participant in the non-qualified excess benefit plans had the
election to defer receipt of the amounts credited to his or her
account in any year until the beginning of the next year or
until his or her termination of employment. Any participant in
the non-qualified excess benefit plans who elected to defer
receipt, until after termination of employment, of any amounts
that had been credited to his or her account prior to
January 1, 2004, will continue to earn interest on such
amounts until termination of employment.
(2)
The amounts in this column represent the principal amounts
credited during 2007 and also are included in the “All
Other Compensation” column of the Summary Compensation
Table above.
(3)
The amounts in this column represent the aggregate interest
credited during 2007 on each named executive officer’s
account in the non-qualified excess benefit plans.
(4)
These amounts, which were paid to the respective named executive
officers during the first quarter of 2008, represent the sum of
the principal amounts and interest credited during 2007.
(5)
These amounts represent the balance in each named executive
officer’s account in the non-qualified excess benefit plans
as of December 31, 2007, after taking into account the
payment, described in the preceding footnote, made with respect
to each executive’s account.
RAI has entered into agreements and has adopted plans that
require it to provide compensation
and/or other
benefits to each named executive officer in the event of such
executive’s termination of employment under certain
circumstances, or upon a change of control of RAI occurring
during the executive’s term of employment. The following
table sets forth the amounts payable to each named executive
officer if such executive’s employment had terminated under
different scenarios,
and/or a
change of control of RAI had occurred, on December 31,2007. As noted above under “— Compensation
Discussion and Analysis — Other Compensation
Policies — Special Incentives,” Ms. Neal
resigned as RAI’s Executive Vice President and Chief
Financial Officer effective December 31, 2007, but remains
employed by RAI on an interim basis. Her interim employment is
expected to end at the conclusion of the first quarter of 2008.
In addition, as RAI announced in February 2008, Mr. Eckmann
will retire effective May 1, 2008. Notwithstanding the
foregoing, we have, as required by the SEC’s applicable
disclosure rules, included in the table below the same type of
information regarding payments and benefits under different
scenarios for Ms. Neal and Mr. Eckmann as we have
provided for the other named executive officers who were serving
as such on December 31, 2007.
The table below does not include certain payments or benefits
that do not discriminate in favor of RAI’s executive
officers and that generally would be available to any salaried
employee of RAI or its operating subsidiaries upon termination
of employment, or upon a change of control of RAI. For instance,
any participant in RAI’s annual cash incentive plan whose
employment were terminated, for any reason other than cause, on
the last business day of any year would be entitled to receive
an annual cash incentive for such year. As a result, the annual
cash incentive for 2007 paid to each of the named executive
officers (and included in the “Non-Equity Incentive Plan
Compensation” column of the Summary Compensation Table
above) is not included in the table below.
Except as otherwise expressly indicated, the amounts set forth
in the following table do not represent the actual sums a named
executive officer would receive if his or her employment were
terminated or there were a change of control of RAI. Rather, the
amounts below generally represent only estimates, based upon
assumptions described in the footnotes to the table, of certain
payments and benefits that the named executive officers who were
employed by RAI or any of its subsidiaries on December 31,2007, would have been
entitled to receive had any of the identified events occurred on
such date. Moreover, for all of the named executive officers,
the amounts set forth in the table necessarily are based upon
the benefit plans and agreements that were in effect as of
December 31, 2007. Payments which RAI may make in the
future upon an employee’s termination of employment or upon
a change of control of RAI will be based upon benefit plans and
agreements in effect at that time, and the terms of any such
future plans and agreements may be materially different than the
terms of RAI’s benefit plans and agreements as of
December 31, 2007.
Potential
Payments Upon Termination of Employment and/or a Change of
Control
Qualifying
Termination
Involuntary
Termination
due to
Voluntary
Termination
Termination
on Change of
Death or
Change of
Termination
not for Cause
for Cause
Control
Disability
Control
Name
Benefits and Payments
($)
($)(1)
($)(1)
($)(2)(3)
($)
($)(3)(4)
Susan M. Ivey
Cash Severance(5)
0
8,448,275
0
8,448,275
0
0
Performance Shares(6)
0
2,639,521
0
2,797,627
2,797,627
2,797,627
Restricted Stock(6)
0
2,843,799
0
6,049,455
6,049,455
6,049,455
Performance Units(7)
0
3,840,361
0
4,815,571
3,840,361
4,815,571
Incremental Pension Benefit(8)
0
3,330,084
0
3,330,084
0
(9)
0
Insurance Benefits(10)
0
24,195
0
24,195
0
0
Health-Care Benefits(11)
0
196,187
0
196,187
0
0
280G Tax
Gross-up(12)
0
0
0
11,678,210
0
0
Dianne M. Neal
Cash Severance(5)
0
2,180,280
0
2,180,280
0
0
Performance Shares(6)
0
890,856
0
944,151
944,151
944,151
Restricted Stock(6)
0
742,050
0
1,518,201
1,518,201
1,518,201
Performance Units(7)
0
963,482
0
1,185,460
963,482
1,185,460
Incremental Pension Benefit(8)
0
649,413
0
649,413
0
0
Insurance Benefits(10)
0
56,805
0
56,805
0
0
Health-Care Benefits(11)
0
89,790
0
89,790
0
0
280G Tax
Gross-up(12)
0
0
0
2,711,625
0
0
Daniel M. Delen
Cash Severance(5)
0
2,134,344
0
2,837,344
0
0
Performance Shares(6)
0
365,946
0
1,516,025
1,516,025
1,516,025
Restricted Stock(6)
0
228,881
0
834,064
834,064
834,064
Performance Units(7)
0
531,515
0
797,273
531,515
797,273
Incremental Pension Benefit(8)
0
127,900
0
127,900
0
0
Insurance Benefits(10)
0
37,980
0
50,640
0
0
280G Tax
Gross-up(12)
0
0
0
2,842,234
0
0
Jeffrey A. Eckmann
Cash Severance(5)
2,462,566
2,462,566
0
2,462,566
2,462,566
0
Retention Bonus(13)
0
789,474
0
1,000,000
1,000,000
0
Performance Shares(6)
944,151
944,151
0
944,151
944,151
944,151
Restricted Stock(6)
1,475,459
1,475,459
0
1,475,459
1,475,459
1,475,459
Performance Units(7)
1,983,738
1,983,738
0
2,627,982
1,983,738
1,173,418
Incremental Pension Benefit(8)
1,646,057
1,646,057
0
1,646,057
0
(9)
0
Insurance Benefits(10)
36,501
36,501
0
36,501
0
0
Health-Care Benefits(11)
325,969
325,969
374,981
325,969
183,623
(14)
0
280G Tax
Gross-up(12)
0
0
0
0
0
0
Tommy J. Payne
Cash Severance(5)
0
1,431,543
0
1,431,543
0
0
Performance Shares(6)
0
462,182
0
489,819
489,819
489,819
Restricted Stock(6)
0
427,487
0
871,925
871,925
871,925
Performance Units(7)
0
553,309
0
679,800
553,309
679,800
Incremental Pension Benefit(8)
0
333,174
0
333,174
0
0
Insurance Benefits(10)
0
20,061
0
20,061
0
0
280G Tax
Gross-up(12)
0
0
0
0
0
0
(1)
Generally, under the severance agreement and ESP, the term
“cause” is defined to mean (a) the
executive’s criminal conduct, (b) the executive’s
deliberate and continued refusal to (i) perform employment
duties on a substantially full-time basis or (ii) act in
accordance with instructions of a more senior employee or of the
Board, or (c) the executive’s deliberate misconduct
which would be damaging to RAI without a reasonable good faith
belief that the conduct was in the best interest of RAI, except
that under the ESP, an executive at the level of Mr. Delen
(who is the only named executive officer who is not a party to a
severance agreement, but instead participates in the ESP) will
not be deemed to have been terminated for cause unless the
Board, by an affirmative vote of at least two-thirds of the
Board, adopts a resolution finding that the executive committed
an act constituting “cause.” Under the severance
agreement, a termination for cause is required to be made by
RAI’s senior human resources executive.
The amounts in this column are based on the assumption that on
December 31, 2007 (a) a change of control of RAI
occurred, and (b) (i) in the case of each named executive
officer, after such change of control, either RAI terminated the
executive’s employment without cause or the executive
terminated his or her employment for good reason or (ii) in
the case of Mr. Delen, who participates in the ESP, that
during the one-year period prior to the change in control, his
employment was terminated without cause at the request of a
party involved in the change in control transaction (a
termination described in this clause (b) is referred to as
a qualifying termination). Under both the severance agreement
and ESP, a participant is eligible to receive severance benefits
if he or she terminates his or her employment for good reason,
or his or her employment is terminated without cause, within two
years after a change in control. A party to the severance
agreement, unlike a participant in the ESP such as
Mr. Delen, is not eligible to receive severance benefits
under the circumstances described in preceding clause (b)(ii).
Under both the severance agreement and ESP, an executive may
terminate his or her employment for “good reason,” in
the absence of a change of control event, if the executive
experiences a more than 20% reduction in the total amount of his
or her base salary, targeted annual incentive and targeted LTIP
award. In addition, under the severance agreement, unlike under
the ESP, an executive may terminate his or her employment for
“good reason,” in the absence of a change of control
event, if the executive’s responsibilities are
substantially reduced in importance or if the executive is
forced to relocate a certain distance from his current place of
employment. Following the occurrence of a change of control
event, the circumstances that would entitle an executive under
the severance agreement or an executive, at
Mr. Delen’s level, under the ESP to terminate his or
her employment for good reason, generally, would be (a) a
material reduction in the executive’s duties from those in
effect prior to the change in control, (b) the executive
having to relocate a certain distance from the executive’s
current place of employment, (c) a material breach of the
severance agreement or ESP, as the case may be, (d) a
reduction in certain employee benefits, or (e) (in the case of
the ESP) RAI’s failure to obtain an agreement from any
successor to perform RAI’s obligations under the ESP.
(3)
A “change of control” of RAI is defined, for purposes
of the severance agreement and ESP, to mean the first to occur
of the following — (a) the acquisition by a
person of 30% or more of the voting power of RAI’s
securities ordinarily having the right to vote for the election
of directors, except that BAT’s acquisition of RAI’s
common stock pursuant to the Business Combination or as
permitted by the Governance Agreement will not be deemed to be a
change of control, (b) the failure of the persons who
constituted RAI’s Board of Directors on July 30, 2004
(or the failure of individuals elected or nominated either by a
supermajority of such persons or pursuant to certain provisions
of the Governance Agreement) to be a majority of the Board, and
(c) the approval by RAI’s shareholders of certain
extraordinary transactions involving RAI, including certain
merger transactions or certain sales of all or substantially all
of RAI’s assets.
(4)
The amounts in this column are based on the assumption that a
change of control of RAI occurred on December 31, 2007, but
that the executive’s employment continued after such date.
(5)
These amounts represent the value of the following sums that
would be payable upon the occurrence of the events set forth in
the table pursuant to the severance agreement (in the case of
the named executive officers other than Mr. Delen) and
pursuant to the ESP (in the case of Mr. Delen) (as each of
the severance agreement and ESP is described above under
“— Compensation Discussion and
Analysis — Severance Benefits”):
(a)
three times annual base salary and three times target annual
incentive in the case of Ms. Ivey, two times annual base
salary and two times target annual incentive in the case of the
other named executive officers, except Mr. Delen, payable
in installments as follows — six months of annual base
salary and six months of target annual incentive, payable in a
single lump sum on July 1, 2008, and the balance of the
base salary and target annual incentive amounts payable in 30
equal monthly installments thereafter;
(b)
in the case of Mr. Delen, one and one-half times annual
base salary and one and one-half times target annual incentive
upon an involuntary termination of employment without cause, and
two times annual
base salary and two times target annual incentive upon a
qualifying termination, in either case payable in installments
as follows — six months of annual base salary and six
months of target annual incentive, payable in a single lump sum
on July 1, 2008, and the balance of the base salary and
target annual incentive amounts payable in 12 equal monthly
installments (in the case of involuntary termination of
employment without cause) and 18 equal monthly installments (in
the case of a qualifying termination);
(c)
six months of interest on the lump sum payment described in the
preceding clauses, at the rate of 7.25% per annum, the assumed
average prime rate of interest during the first six months of
2008, with such interest payable on July 1, 2008; and
(d)
three years of such person’s respective annual perquisite
payments (as described in footnote 9 to the 2007 Summary
Compensation Table above), other than Mr. Delen, who is not
entitled to such payments under the ESP, with such amounts
payable in three equal installments (in July 2008, and in
January of each of 2009 and 2010) (the three-year period over
which the executive will receive the foregoing payments is
referred to as the severance period).
As indicated in the preceding sentence, the amounts in these
rows are based on the assumption that the commencement of
payments under the severance agreement will be deferred for a
period of six months. An executive officer, however, may elect
to receive such payments immediately upon termination of
employment in which case he or she will be responsible for
satisfying any interest and taxes arising from such immediate
payment, including interest and taxes arising under
Section 409A of the Code. The interest payment described in
clause (c) above is intended to compensate an executive who
defers the commencement of severance payments.
The payment of the amounts described in this footnote, and of
the benefits described in footnote 10, are subject to the named
executive officer complying with certain non-compete and
confidentiality obligations owing to RAI and its subsidiaries,
and cooperating with RAI and its subsidiaries in the prosecution
or defense of any litigation. If the named executive officer
refuses to execute a document evidencing the foregoing
obligations, then the named executive officer will not be
entitled to receive the payments and benefits described in this
footnote and in footnote 10; in such event, the executive will
be entitled to a lesser benefit under RAI’s Salary and
Benefits Continuation Program, provided he executes a release of
claims against RAI. Under such program, the period during which
a person receives severance benefits is based upon years of
service, with such period in no event exceeding 18 months.
(6)
The values in these rows represent the product of $65.96, the
per share closing price of RAI common stock on December 31,2007, and the number of performance shares or shares of
restricted stock, as the case may be, that would vest upon the
occurrence of the particular events identified in the table.
Upon an executive’s involuntary termination without cause,
he or she would vest immediately in a pro rata amount of
his or her outstanding performance shares and restricted stock,
except that Mr. Eckmann would vest in all of his
outstanding performance shares and restricted stock. Upon an
executive’s qualifying termination on or after a change of
control, or an executive’s death or disability, or upon a
change of control in the absence of the executive’s
termination of employment, the executive would vest immediately
in all of his or her outstanding performance shares and
restricted stock. The value of the performance shares shown in
the table is based on, for all named executive officers other
than Mr. Delen, those performance shares granted on
March 2, 2005, and for Mr. Delen, the performance
shares granted to him on January 1, 2007, in each case
based on those shares that had not yet vested on or prior to
December 31, 2007. The value of the restricted stock shown
in the table is based on those shares of restricted stock
granted on March 6, 2006, to all named executive officers
other than Mr. Delen, and granted on March 6, 2007, to
all named executive officers, in each case based on those shares
that had not yet vested on or prior to December 31, 2007.
The performance shares which were granted in 2005 and vested on
March 2, 2008, are included in this table because they
remained unvested as of December 31, 2007, the date as of
which the information in this table is presented. For additional
information on such performance shares and restricted stock, see
the Outstanding Equity Awards at 2007 Fiscal Year-End table
above and the 2007 Grants of Plan-Based Awards table above,
respectively.
These amounts represent the value of the performance units in
which the executive would vest, if the employment of the
executive had terminated on December 31, 2007, under the
circumstances set forth in the table; such vested performance
units are a pro rata amount of the total number of
performance units granted on March 6 in each of 2006 (for all
named executive officers other than Mr. Delen) and 2007
(for all named executive officers). The value of the performance
units granted on March 2, 2005, to each named executive
officer, other than Mr. Delen, are not reflected in this
table. The conditions to the vesting of such units were
satisfied effective December 31, 2007, entitling such
persons to a cash payment with respect thereto in accordance
with the applicable normal vesting schedule. The value of such
units are included in the “Non-Equity Incentive Plan
Compensation” column of the Summary Compensation Table
above. The terms governing the performance units granted on
March 6, 2007, are summarized in footnote 1 to the 2007
Grants of Plan-Based Awards table above. The terms governing the
performance units granted on March 6, 2006, are the same as
the terms governing the performance units granted on
March 6, 2007, except that the three-year performance
period applicable to the 2006 performance units ends on
December 31, 2008, the performance metric applicable to the
2006 performance units is the average annual AIAP score during
the performance period, and the minimum quarterly dividend
payment that is a condition to vesting is $.625 per share. In
contrast, for the 2007 performance units, the three-year
performance period ends on December 31, 2009, the
applicable performance metric is the EPS for the last year of
the performance period, and the minimum quarterly dividend
payment that is a vesting condition for such units is $.75 per
share.
The value of the performance units shown in the table if the
named executive officer’s employment had terminated on
December 31, 2007, due to involuntary termination without
cause, death or disability, is based on (a) in the case of
the 2006 performance units, the actual AIAP score for 2006 and
2007, and the assumption that the AIAP score for 2008 would be
equal to the target AIAP score, or 100, and (b) in the case
of the 2007 performance units, the assumption that RAI’s
EPS for 2009 would be equal to the targeted EPS goal. The value
of the performance units shown in the table if a change of
control of RAI had occurred on December 31, 2007
(irrespective of whether an executive’s employment
continued thereafter or ended on such date due to a qualifying
termination), is based on (a) in the case of the 2006
performance units, the actual AIAP scores for that part of the
relevant performance period that ended on December 31,2007, and (b) in the case of the 2007 performance units,
the assumption that RAI’s EPS growth from the grant date
through December 31, 2007, would continue at the same rate
from January 1, 2008, through December 31, 2009, and
that there would be no adjustment to the number of vested units
based on RAI’s TSR.
(8)
These amounts represent the value of the incremental benefit
under RAI’s qualified and non-qualified pension and/or
defined contribution plans resulting from the additional service
and age credit the named executive officers will accrue during
the severance period and the treatment of salary and annual
incentives as if they were paid at 100% versus two-thirds, where
applicable. In addition to the amounts in this row, each named
executive officer (other than Mr. Delen) would receive in
these circumstances his or her accumulated pension benefit; the
present value of such accumulated benefit is set forth in the
2007 Pension Benefits table above.
(9)
Each of Ms. Ivey and Mr. Eckmann would be entitled to
an unreduced pension benefit under a certain RAI retirement
plan, the obligations of which, with respect to such executives
and other former B&W employees, were assumed by RAI in
connection with the Business Combination. The value of such
benefit is not included in this table because all participants
in such plan are entitled to such an unreduced benefit upon
termination of employment due to disability.
(10)
The insurance benefits represent the value of (a) the
premiums which would be paid by RAI on behalf of each named
executive officer during the severance period for health care,
excess liability and life insurance, (b) a
tax-reimbursement amount associated with the excess liability
insurance premium payment and (c) contributions by RAI for
the benefit of the named executive officers who are eligible to
participate in RAI’s post-retirement health-savings account
program.
(11)
These amounts represent the present value, discounted to
December 31, 2007, of the health-care benefits that
(a) would commence immediately after the severance period
in the event of involuntary termination
not for cause or qualifying termination on change of control (in
the case of Ms. Ivey and Mr. Eckmann), or in the event
of voluntary termination (in the case of Mr. Eckmann) and
(b) would commence immediately after voluntary termination
in the case of Mr. Eckmann. Mr. Eckmann was already
vested in his retiree health benefit as of December 31,2007. Ms. Ivey was not yet vested in her retiree health
benefit as of such date. The health-care benefits for
Ms. Ivey and Mr. Eckmann are reflected in this table
because they will receive such benefits pursuant to a former
B&W plan which RAI assumed in the Business Combination; the
benefits provided under such plan are more generous than the
health-care benefits provided under the RAI sponsored plan in
which the other named executive officers participate and which
is generally available to salaried employees of RAI and its
operating subsidiaries. The health-care benefits for
Ms. Neal are reflected in this table because she would
satisfy the plan’s “Rule of 70” provision (based
on age and years of service) during the severance period. The
amounts in this row are based upon the same assumptions
(including a discount rate of 6.5%) used by RAI in determining
post-retirement health-care expense in its 2007 financial
statements in accordance with U.S. generally accepted accounting
principles, referred to as GAAP.
(12)
This amount represents RAI’s payment, as soon as
practicable after the hypothetical change of control, of
(a) the excise tax that would be imposed on the executive
by virtue of the executive’s receipt of an “excess
parachute payment” within the meaning of Section 280G
of the Code and (b) a tax
gross-up
amount relating to the payment of such tax. Under the ESP,
unlike the severance agreement, an eligible participant is
entitled to a tax reimbursement payment only if the participant
receives “total parachute payments,” within the
meaning of the Code, that exceed 110% of the amount the
participant would be entitled to receive without being subject
to the excise tax.
(13)
These amounts represent the value of a retention bonus payable
to Mr. Eckmann in certain circumstances. Provided
Mr. Eckmann remains employed with RAI through
April 30, 2008, RAI will pay him a retention bonus of
$1,000,000 in May 2008. RAI announced in February 2008, that
Mr. Eckmann will retire effective May 1, 2008.
Pursuant to the terms of a retention trust governing such bonus
arrangement, if prior to April 30, 2008,
Mr. Eckmann’s employment (a) were involuntarily
terminated by RAI without cause, as defined therein, then
Mr. Eckmann would receive a pro rata portion of the
retention bonus, provided, however, that if such termination
occurred after a change of control, as defined therein,
Mr. Eckmann would receive the full amount of the retention
bonus, (b) were terminated as a result of death or
permanent disability, then Mr. Eckmann or his estate, as
the case may be, would receive the full amount of the retention
bonus following such event and (c) were terminated for any
other reason, then Mr. Eckmann would forfeit his right to
receive any part of the retention bonus.
(14)
The health-care benefit shown for Mr. Eckmann in the column
“Termination due to Death or Disability” represents
the present value of the survivor health-care coverage, under a
former B&W plan that RAI assumed in the Business
Combination, in the event of his death.
Pursuant to rules adopted by the SEC designed to improve
disclosures related to the functioning of corporate audit
committees and to enhance the reliability and credibility of
financial statements of public companies, the Audit Committee of
RAI’s Board of Directors submits the following report:
The Board of Directors of RAI has adopted a written Audit
Committee Charter which incorporates requirements mandated by
the Sarbanes-Oxley Act of 2002 and the NYSE listing standards.
All members of the Audit Committee are independent as defined by
SEC rules and NYSE listing standards. At least one member of the
Audit Committee is an “audit committee financial
expert” within the meaning of Item 407(d)(5) of
Regulation S-K.
The Audit Committee has reviewed and discussed the audited
financial statements for fiscal year 2007 with management and
has discussed with the independent auditors the matters required
to be discussed by SAS No. 61 “Communication With
Audit Committees,” as amended, and as adopted by the
Public Company Accounting Oversight Board in Rule 3200T.
The Audit Committee has received written disclosures and the
letter from the independent auditors required by Independence
Standards Board Standard No. 1, “Independence
Discussions with Audit Committees,” and has discussed with
the independent auditors the auditors’ independence.
Based on review and discussions of the audited financial
statements for fiscal year 2007 with management and discussions
with the independent auditors, the Audit Committee recommended
to the Board of Directors that the audited financial statements
for fiscal year 2007 be included in the Company’s Annual
Report on
Form 10-K
for the year ended December 31, 2007, as filed with the SEC.
Respectfully submitted,
Thomas C. Wajnert (Chair)
Martin D. Feinstein
Nana Mensah
Lionel L. Nowell, III
The Audit Committee’s current Audit and Non-Audit Services
Pre-Approval Policy was adopted by the Audit Committee in August
2004 and last revised in February 2008. The Audit and Non-Audit
Services Pre-Approval Policy describes the procedures and
conditions pursuant to which services proposed to be performed
by the independent auditors may be pre-approved by the Audit
Committee, or its Chair pursuant to delegated authority. The
Policy provides that the Chair of the Audit Committee may make
pre-approval decisions for proposed services that are not
covered by specific reference in the Policy and have not been
previously approved by the full Committee. Under the Policy, the
Chair is required to report any such pre-approval decisions to
the full Audit Committee at its next scheduled meeting.
A copy of the Audit Committee’s Audit and Non-Audit
Services Pre-Approval Policy can be found in the
“Governance” section of the
www.reynoldsamerican.comweb site, or can be requested
free of charge, by writing to the Office of the Secretary,
Reynolds American Inc., P.O. Box 2990, Winston-Salem,
North Carolina27102-2990.
The following table shows the aggregate fees billed to RAI by
KPMG LLP for services rendered during each of the fiscal years
ended December 31, 2007 and 2006:
Audit fees principally constitute fees billed for professional
services rendered by KPMG LLP for the audit of RAI’s
financial statements for the fiscal years ended
December 31, 2007 and 2006, the reviews of the condensed
financial statements included in RAI’s Quarterly Reports on
Form 10-Q
filed during the fiscal years ended December 31, 2007 and
2006, and the audits of certain subsidiaries where legally or
statutorily required. Also, audit fees for 2007 and 2006 include
professional fees for services related to RAI’s preparation
of Registration Statements on
Form S-4
in connection with the issuance of certain debt securities.
Audit-related fees constitute fees billed for assurance and
related services rendered by KPMG LLP that are reasonably
related to the performance of the audit or review of RAI’s
financial statements, other than the services reported above
under “— Audit Fees,” in the fiscal years
ended December 31, 2007 and 2006. In fiscal 2007 and 2006,
audit-related fees consisted principally of fees for audits of
certain subsidiaries, audits of the financial statements of
certain employee benefit plans and other agreed upon procedures
performed under Statements on Auditing Standards and Statements
on Standards for Attestation Engagements. The Audit Committee
pre-approved 100% of the audit-related services in 2007 and 2006.
Tax fees constitute fees billed for professional services
rendered by KPMG LLP for tax compliance, tax consulting and tax
planning in each of the fiscal years ended December 31,2007 and 2006. In fiscal 2007 and 2006, tax fees consisted
principally of fees for tax compliance advice. The Audit
Committee pre-approved 100% of the tax services in 2007 and 2006.
All other fees constitute the aggregate fees billed, if any, for
products and services, other than the services reported above
under “— Audit Fees,”“— Audit-Related Fees” and
“— Tax Fees,” provided by KPMG LLP in each
of the fiscal years ended December 31, 2007 and 2006. In
2007 and 2006, there were no other fees.
The Audit Committee of the Board of Directors has appointed KPMG
LLP, independent registered public accounting firm, to audit the
financial statements of RAI for the fiscal year ending
December 31, 2008. We are submitting this selection to you
for your ratification. KPMG LLP audited RAI’s financial
statements for the fiscal year ended December 31, 2007, and
has been RAI’s independent auditors since RAI’s
organization in 2004. KPMG LLP also had served as RJR’s
independent auditors from 2000 to 2004. Representatives of KPMG
LLP are expected to be present at the 2008 annual meeting to
make a statement, if KPMG LLP desires, and to answer your
questions.
If the shareholders do not ratify the appointment of KPMG LLP,
then the Audit Committee will reconsider its appointment. Even
if the appointment is ratified, the Audit Committee, in its
discretion, may direct the appointment of a different
independent accounting firm at any time during the year if the
Audit Committee determines that such a change would be in the
best interests of RAI and its shareholders.
Your Board of Directors considers KPMG LLP to be well
qualified and recommends a vote FOR ratification of KPMG’s
appointment as our independent auditors for fiscal year 2008.
Certain of our shareholders have submitted the three proposals
described under Items 3, 4 and 5. We will furnish the
names, addresses and claimed share ownership positions of the
proponents of these proposals promptly upon written or oral
request directed to the Secretary of RAI. The following
proposals have been carefully considered by your Board of
Directors, which has concluded that their adoption would not be
in the best interests of RAI or its shareholders. For the
reasons stated after each proposal and its supporting statement,
your Board of Directors recommends a vote AGAINST each of the
three proposals.
Proposals of shareholders intended to be included in RAI’s
2009 annual meeting proxy statement and form of proxy must be
received by the Secretary of RAI, in writing, no later than
November 24, 2008, at our corporate offices: Reynolds
American Inc., P.O. Box 2990, Winston-Salem, North
Carolina 27102- 2990. The rules of the SEC contain detailed
requirements for submitting proposals for inclusion in our 2009
proxy statement and permit us to exclude proposals from our
proxy statement in specified circumstances.
In accordance with RAI’s Bylaws, shareholders who do not
submit a proposal for inclusion in our 2009 annual meeting proxy
statement, as described in the immediately preceding paragraph,
but who intend to present a proposal, nomination for director or
other business for consideration at our 2009 annual meeting,
must notify the Secretary of RAI, in writing, that they intend
to submit their proposal, nomination or other business at our
2009 annual meeting by no earlier than October 25, 2008,
and no later than November 24, 2008. RAI’s Bylaws
contain detailed requirements that a shareholder’s notice
must satisfy. If a shareholder does not comply with the notice
requirements, including the deadlines specified above, then the
persons named as proxies in the form of proxy for the 2009
annual meeting will use their discretion in voting the proxies
on any such matters raised at the 2009 meeting. Any shareholder
notice and any request for a copy of RAI’s Bylaws should be
in writing and addressed to the Office of the Secretary,
Reynolds American Inc., P.O. Box 2990, Winston-Salem,
North Carolina27102-2990.
For a further discussion of the Board nomination process, see
“The Board of Directors — Governance
Agreement” and “The Board of Directors —
Committees and Meetings of the Board of Directors —
Corporate Governance, Nominating and Leadership Development
Committee” above.
Two shareholders have submitted the following proposal, which
will be voted upon at our annual meeting if presented by one of
its proponents:
“Create
Human Rights Protocols for the Company and Its Suppliers
“Whereas, global corporations
and/or
corporations having global sourcing for their products have a
responsibility to ensure their ‘supply chain’ is
uncorrupted by practices that deny basic human rights for the
workers.
“Increasingly, corporations have learned their reputational
risk is at stake when their suppliers become publicized as
undermining workers’ basic human rights.
“While RAI does not directly hire farmworkers, it does have
contracts with those who hire them, thus supplying products for
its tobacco production. When such farmers are not organized they
can be denied basic human rights.
“A key problem of workers harvesting tobacco for Reynolds
American, whether in the U.S.A. or abroad, involves their
possibility of contracting acute nicotine poisoning, Green
Tobacco Sickness (GTS). This is caused by the skin’s
absorption of nicotine from touching green tobacco plants. A
2005 study called this a ‘unique hazard’ (McKnight and
Spiller, Green Tobacco Sickness in Children and Adolescents,
Public Health Rep. 2005; 120.6).
“ ‘Health problems due to transdermal nicotine
absorption are frequent among tobacco harvesters.... The
toxicity to the cardiovascular system and carcinogenicity of
chronic dermal nicotine exposure are likely to exist as
non-smoking tobacco harvesters show similar cotinine and
nicotine levels compared to active smokers in the general
population.’ (Schmitt et. al, Health Risks in Tobacco
Farmers — a Review of the Literature, Journal of
Public Health, 15:4, August 2007).
“GTS threatens 33 million+ tobacco farm workers
globally (World Health Organization, 1999 World Bank).
“Sara A. Quandt, Ph.D. noted in Science Daily,
2/24/2000,
‘Many farm workers believe they will be fired and lose
their income if they get sick or work too slowly. Green tobacco
sickness is an environmental justice issue, part of the growing
concern that poor, minority and medically underserved
populations bear a disproportionate share of environmental and
occupational health risks.’
“GTS is a particular hazard for migrant and Hispanic
tobacco farmworkers. For instance Mexican farmworkers were
recently hospitalized in Kentucky for GTS.
“ ‘Conditions are shamefully bad for most
farmworkers,’ said Virginia Nesmith, of the National
Farmworkers’ Ministry. ‘This company has the power to
make a difference for thousands of workers.’
“RESOLVED shareholders request the Board of Directors of
Reynolds American Tobacco International, to commit itself to
create procedures for the implementation of the internationally
agreed core human rights conventions in the countries in which
it operates and to find ways to ensure that its suppliers are in
compliance with these as well.”
The proponents have submitted the following statement in support
of this proposal:
“This resolution’s sponsors believe the creation of a
‘basic human rights’ protocol that will be used by RAI
and in its contracts with all its suppliers is key to be
recognized as a good corporate citizen. We believe this is
critical if the rights of farmworkers and others who are
essential actors contributing to this Company’s production
of tobacco products are ensured such things as a healthy and
safe working conditions, a basic right to organize, adequate
health care and other elements enshrined in the Universal
Declaration of Human Rights and the various international
covenants.”
Your Board of Directors recommends a vote AGAINST this
proposal.
RAI and its operating companies believe that universally
recognized fundamental human rights should be respected. This
principle and its
day-to-day
practice is one of the foundations of how we conduct our
business.
The contracts that RAI and its operating companies have with
suppliers specifically require adherence to all applicable laws
and regulations. In addition, RJR Tobacco has contracted with an
independent company to monitor RJR Tobacco’s leaf suppliers
worldwide for purposes of evaluating such matters as the impact
the suppliers’ activities have on the environment and
safety conditions at the suppliers’ farms. If deficiencies
are identified, consultants from the independent monitor work
with the supplier to help develop an appropriate remediation
plan.
RAI and RJR Tobacco also have been meeting with external
stakeholders to determine what additional steps can be taken to
address living and working conditions for tobacco farm workers
employed by U.S. contract tobacco growers. RJR Tobacco has
identified, and plans to implement, several additional efforts
to support improved safety and more sanitary living and working
conditions on those farms. Both RJR Tobacco and the stakeholders
continue to work together to identify additional opportunities
and external resources to address these issues.
Finally, the business of RAI’s operating companies is
conducted primarily in the United States where, unlike in many
developing countries, issues such as child labor, dangerous
pesticide levels and exposure, and lack of minimum wage
requirements, are rare.
Five shareholders have submitted the following proposal, which
will be voted upon at our annual meeting if presented by one of
its proponents:
“Reynolds
American — Endorse Health Care Principles
“WHEREAS: our company’s products are a major, if not
the major, contributor to fatal cancers and heart disease;
“University of Minnesota Cancer Center researchers report:
‘users of smokeless tobacco are exposed to higher amounts
of tobacco-specific nitrosamines — molecules ... known
to be carcinogenic — than smokers.’
“More than 40 elements in tobacco smoke are cancer causing.
Smokers are 22 times more likely to develop lung cancer than
non-smokers. Studies show length of tobacco use increases the
cancer risk: cancer of the nose (2 times greater), tongue,
mouth, salivary gland and pharynx (6 to 27 times more), throat
(12 times) esophagus (8-10 times); larynx
(10-18
times), stomach (2-3 times), kidney (5 times) bladder (3 times),
penis (2-3 times), pancreas (2-5 times) colon-rectum (3 times)
and anus (5-6 times);
“In 2007, in a ‘stark departure from past practice,
the American Cancer Society’ redirected its entire
$15 million advertising budget ‘to the consequences of
inadequate health coverage.’ John R. Seffrin, the American
Cancer Society’s CEO, stated: ‘I believe, if we
don’t fix the health care system, that lack of access will
be a bigger cancer killer than tobacco.’ He added:
‘The ultimate control of cancer is as much a public policy
issue as it is a medical and scientific issue;’
“A 2003 study estimated that one of every 10 cancer
patients were uninsured. Health insurance companies are known to
provide substantially lower rates to those who do not smoke or
use our tobacco products;
“Our company’s health care costs are higher in the US
because it has to cover employees who use tobacco products. If
America had universal health care, these would be covered.
Consequently, shareholder revenues are diminished when company
finances must cover health care costs, many stemming from cancer
and heart disease arising from tobacco use;
“Because access to affordable, comprehensive health
care/insurance is the most significant social policy issue in
America and has become a central concern in the 2008
presidential campaign;
“RESOLVED: Shareholders urge the Board of Directors to
adopt principles for comprehensive health care reform (such as
those based upon the following principles of the Institute of
Medicine): Health care coverage should be universal, continuous,
and affordable to individuals and families. Any health insurance
strategy should be affordable and sustainable for society and
should enhance health and well-being by promoting access to
high-quality care that is effective, efficient, safe, timely,
patient-centered, and equitable).”
The proponents have submitted the following statement in support
of this proposal:
“As shareholders, we believe publicly held companies must
account to all their stakeholders
vis-a-vis
their positions on critical public policy issues, like universal
health care, especially tobacco companies because they
contribute so much to the health problems of so many. We ask
fellow shareholders to support this resolution.”
Your Board of Directors recommends a vote AGAINST this
proposal.
The availability and affordability of health-care coverage for
Americans has been, and continues to be, an important issue in
Congress and other forums. RAI and its operating companies
provide comprehensive, affordable health, dental and vision
coverage for their employees. Even with plan modifications over
the years due to the rising cost of health care, RAI and its
operating companies still provide competitive plans with a range
of options, allowing employees to select the program which best
fits their individual and family needs.
RAI and its operating companies traditionally have not
established positions on legislative issues beyond those that
might apply to the tobacco industry. Management expects that
Congress and others will continue to discuss and debate the
range of proposals for making health-care coverage more
available and for dealing with the ever-rising costs of such
care. Management will continue to pay close attention to those
discussions, and will be mindful of the details of health-care
reform proposals as they become more apparent, including the
intended funding sources of these proposals.
The universal health-care debate in Congress, in
1993-1994,
centered in part on increasing the federal cigarette excise tax
by $1.00 per pack, to pay for additional health-care coverage.
We opposed that proposal at that time, and would do so today.
Just last year, as Congress debated expanded coverage for the
State Children’s Health Insurance Program, referred to as
SCHIP, we opposed the requirement of a $.61 per pack increase in
the federal cigarette excise tax and proportional increases in
taxes for other tobacco products. Congress ultimately expanded
and continued SCHIP through March, 2009, without additional tax
increases.
Although we generally agree with the concept of making health
care more available to Americans at affordable prices, we
believe it is in the best interests of RAI and its operating
companies to refrain, at this time, from endorsing specific
solutions to this complex and evolving debate concerning
national health-care reform. We continue, however, to oppose any
approach that would impose the resulting costs (exclusively or
disproportionately) on RAI’s shareholders or on RAI’s
operating companies’ customers and consumers.
Therefore, your Board of Directors urges you to vote AGAINST
this proposal.
Two shareholders have submitted the following proposal, which
will be voted upon at our annual meeting if presented by one of
its proponents:
“
‘TWO CIGARETTE’ APPROACH TO MARKETING
“On October 22, 2007 the following op-ed piece, The
Two Cigarette Society appeared in The New York Times.
It was written by David G. Adams, a lawyer who was the
director of the policy staff at the Food and Drug Administration
from 1992 to 1994.
“ ‘WHEN it comes to the health of our children, two
cigarettes may be better than one. Young smokers who begin their
habit with nicotine-laden cigarettes need a cigarette that will
not leave them to later fight the ravages of addiction.
“ ‘Experts tell us that teenagers often begin smoking
to copy their peers and others whom they see smoking. As adults,
however, they continue smoking largely because of the addictive
qualities of nicotine. (Ninety percent of smokers regret having
begun smoking and most make efforts to stop.) This means that in
the absence of addictive levels of nicotine in their cigarettes,
most young smokers would ultimately quit.
“ ‘A two-cigarette strategy would prohibit young
smokers from buying addictive cigarettes. The tobacco industry
is capable of producing cigarettes that are virtually free of
nicotine, and regulators could develop clear standards for
non-addictive cigarettes. (Disclosure: My law firm represents
tobacco companies, but I have recused myself from that work.)
“ ‘The age to purchase addictive cigarettes might be
set at 21. Better yet, sales of addictive cigarettes could be
restricted to individuals born 19 or more years before the
two-cigarette strategy was put into effect. Under this approach,
18-year-olds
who start smoking non-addictive cigarettes would be prohibited
from switching to addictive cigarettes even after they turned
21. In addition, a higher federal excise tax on addictive
cigarettes than on non-addictive cigarettes would create a
financial incentive for smokers of all ages, including scofflaw
adolescents, to select non-addictive cigarettes.
“ ‘Granted, a two-cigarette policy would not be a
panacea. It would not end smoking, it would not give us safer
cigarettes, and it would not undo the addiction that grips the
current generation of smokers.
“ ‘The Institute of Medicine, a unit of the National
Academy of Sciences, has called for a gradual reduction of the
nicotine content in all cigarettes to non-addictive levels (an
approach I proposed 13 years ago when I worked at the Food
and Drug Administration). But it would take decades to eliminate
addictive cigarettes from the market. While a worthy strategy
for eliminating addiction many years from now, a gradual
approach would still permit the addiction of the next generation
of smokers.
“ ‘Decades of addiction will mean disease and death
for millions of our children. If we can prevent addiction at the
outset, we shouldn’t waste another day.’
“This resolution’s shareholders are against smoking
itself because of its health-hazards. We also believe a lesser
evil is better than a greater evil. Hence the following:
“RESOLVED: shareholders request the Board of Directors to
begin immediately to find ways to implement a ‘two
cigarette’ approach globally with all its various cigarette
brands and to report such to the shareholder and its publics
within six months of the annual meeting.”
Your Board of Directors recommends a vote AGAINST this
proposal.
The specific approach recommended in the proposal to reduce harm
from the use of cigarettes has already proven to be commercially
unsuccessful in the United States. At least two other
manufacturers have marketed a nicotine-free cigarette or a
cigarette with substantially reduced nicotine levels, but were
unable to gain any meaningful consumer acceptance of the
products.
Management, however, agrees with the underlying intent of the
proposal — efforts should be made to explore the
implementation of harm reduction strategies in connection with
the manufacture and marketing of existing and future tobacco
products. As stated in RAI’s Guiding Principles and
Beliefs, “Decreasing the health risk and harm directly
associated with the use of tobacco products is in
everyone’s best interest.” RAI and its operating
companies have a desire to work in conjunction with others to
reduce the harm caused by the use of tobacco products.
A harm reduction, or continuum of risk, strategy recognizes and
informs smokers that different types of tobacco products have
different levels of risk. This strategy has the potential for
achieving measurable reductions in the harm caused by tobacco
use, particularly cigarettes.
David Sweanor, in a recent article published in The Ottawa
Citizen, explained the benefits of such a strategy: “When
dealing with any cause of death, injury or disease, we have four
broad areas of intervention: We can try to prevent onset of the
behaviors, encourage cessation among those already engaging in
it, protect third parties from any associated risks, and reduce
the risks for those who will continue the behaviors. This
applies whether we are talking about rock climbing...or
ingesting nicotine. The way we use these four broad avenues of
interventions will vary but the goal is always the same: the
maximum practical reduction in the risk of harm.”
Published scientific studies indicate compelling differences
between the tobacco product categories for the incidence and
risk for serious and chronic diseases. The difference is
particularly notable when comparing the harm caused by cigarette
smoking with that of non-burning tobacco products. A 2007 report
from Britain’s Royal College of Physicians said that
“the consumption of non-combustible tobacco is on the order
of 10 (to) 1,000 times less hazardous than smoking.”
The rate of smoking has consistently declined for decades, but
government sources report that approximately 45 million
Americans continue to smoke. It is likely that smoking and
tobacco use will remain legal and prevalent for the foreseeable
future. Given that there are adults who choose to continue to
smoke, the acceptance and implementation of harm reduction
strategies by tobacco manufacturers, public health and other
interested groups and relevant government agencies could help
achieve further reductions in the harm caused by smoking.
RAI and its operating companies have already begun implementing
strategies consistent with this goal. RAI’s acquisition of
Conwood, with its portfolio of smokeless tobacco products, and
RJR Tobacco’s
introduction of Camel Snus, a new alternative and replacement
tobacco product for current smokers, are two recent examples.
RAI’s operating companies also are actively working,
consistent with applicable laws, to help identify methods of
appropriately and accurately educating tobacco consumers on the
differences in risk between cigarettes and non-burning tobacco
products.
Therefore, your Board of Directors urges you to vote AGAINST
this proposal.
Effective February 6, 2007, RAI’s Board adopted a
Related Person Transaction Policy, referred to as the Policy.
The Policy generally requires that certain transactions in which
(1) RAI, or one of its subsidiaries, is a participant and
(2) a related person has a direct or indirect interest, be
approved in advance by a designated executive officer, the Audit
Committee, the Board or a
sub-set of
the Board. The arbiter in any particular case may only approve a
proposed related person transaction if it has determined in good
faith that such transaction is in, or not inconsistent with, the
best interests of RAI and its shareholders. The definition of
“related person” for purposes of the Policy is based
upon the definition set forth in the applicable rules of the
SEC; a “related person” of RAI means a director or
director nominee of RAI, an executive officer of RAI, a greater
than 5% shareholder of RAI or an immediate family member of any
of the foregoing.
The Policy’s pre-approval requirements depend upon the
related person and the dollar amount involved in a proposed
transaction, as summarized below:
Related Person:
Dollar Amount of Transaction:
Approval Required by:
• Transactions in which an RAI director,
executive officer or an immediate family member of either of the
foregoing has an interest
• Less than or equal to $25,000
• Greater than $25,000
• Chief Executive Officer or Chief
Financial Officer
• Audit Committee
• Transactions in which BAT, or an
affiliate thereof, has an interest
• Less than $1 million
• Chief Executive Officer, Chief Financial
Officer or RAI Group President
• Greater than or equal to $1 million and
less than $20 million
• Audit Committee
• Greater than or equal to $20 million
• independent directors (excluding any
independent directors who have been designated by B&W)
• Transactions in which any related person
other than those listed above has an interest
• Less than $1 million
• Chief Executive Officer, Chief Financial
Officer or RAI Group President
• Greater than or equal to $1 million and
less than $20 million
• Audit Committee
• Greater than or equal to $20 million
• Board of Directors
Under the Policy, any contract in existence on the effective
date of the Policy (February 6, 2007) involving a
related person is not required to be pre-approved under the
Policy; provided, however, that if a material amendment or
modification of any such pre-existing contract is adopted after
February 6, 2007, then such
material amendment or modification shall be subject to the
Policy’s pre-approval requirements. Further, any
compensation, benefit or indemnification arrangement involving
an RAI director, executive officer or an immediate family member
of any of the foregoing, which arrangement is approved by the
RAI Board or another Board committee, is not required to be
pre-approved under the Policy.
The approval requirements of the Policy are in addition to other
measures already in place. For example, under the Governance
Agreement, the independent directors of RAI (excluding any
independent directors who have been designated by B&W) are
required to approve any material contract or transaction
involving RAI or any of its subsidiaries, on the one hand, and
BAT or any of its subsidiaries, on the other hand, if the terms
of that contract or transaction are not governed by either an
agreement existing on the date of the Business Combination or a
provision of the Articles of Incorporation or Bylaws.
RAI paid BAT an aggregate of $475,000 during 2007 in
consideration for the services of Messrs. Monteiro de
Castro and Withington as directors of RAI. For further
information on this arrangement, see “The Board of
Directors — Director Compensation — Payment
for Services of Certain Board Designees,” above.
In connection with the consummation of the Business Combination
on July 30, 2004, RJR Tobacco entered into contract
manufacturing agreements with two subsidiaries of BAT (BAT and
its subsidiaries, including B&W, are referred to as the BAT
Group), pursuant to which RJR Tobacco manufactures certain of
BAT’s
U.S.-sourced
cigarettes and other tobacco products for export outside of the
United States. Unless extended or earlier terminated as provided
therein, each such contract manufacturing agreement will expire
on December 31, 2014. Sales by RJR Tobacco to the BAT Group
pursuant to such contract manufacturing agreements during 2007
were $430,336,000. In addition to sales pursuant to the above
contract manufacturing agreements, RJR Tobacco sold a variety of
fixed assets to the BAT Group during 2007 in the amount of
$360,000. Also, during 2007, the BAT Group purchased from Lane,
Limited, a wholly owned subsidiary of RAI referred to as Lane,
little cigars and semi-cut tobacco filler in the amount of
$15,598,000. Lane and a member of the BAT Group are parties to a
trademark license agreement pursuant to which Lane licenses
certain trademarks to such BAT Group member in consideration for
the payment of royalties. Unless earlier terminated in
accordance with the terms thereof, such trademark license
agreement will expire on July 31, 2030. During 2007, Lane
recorded $79,000 in royalties under such trademark license
agreement.
During 2007, the BAT Group purchased tobacco leaf from RJR
Tobacco in the amount of $59,538,000. Also during 2007, the BAT
Group agreed to purchase additional tobacco leaf from RJR
Tobacco in the amount of $34,634,000. In accordance with GAAP,
none of the $34,634,000 (including that portion of the purchase
price that was paid by the BAT Group in 2007) was recorded
as sales in RAI’s 2007 financial statements, but will be
recognized as sales when the product is shipped to the BAT
Group. In addition, during 2007, the BAT Group purchased from
RJR Tobacco expanded tobacco and re-constituted tobacco, and
other tobacco products, in the amount of $1,913,000.
B&W and RAI also entered into a leaf purchase agreement
upon the consummation of the Business Combination. Such
agreement relates to certain leaf purchase commitments of RAI
and its operating subsidiaries (RAI and its operating
subsidiaries are referred to as the RAI Group), commitments
B&W had previously agreed to in connection with the
settlement of third-party litigation and that the RAI Group had
assumed pursuant to the Business Combination. If such leaf
commitments exceed certain manufacturing needs of the RAI Group,
then B&W is required either to make a cash payment to the
RAI Group directly based upon the amount of the excess leaf
purchased, or otherwise take such action so that the RAI Group
has no liability for such excess. During 2007, B&W made no
payments to the RAI Group under the above leaf purchase
agreement.
RJR Tobacco and a member of the BAT Group are also parties to a
technology sharing and development services agreement, which was
entered into on July 30, 2004. Pursuant to this agreement,
each party may license or otherwise transfer rights to the other
in its respective technologies, and may pursue joint technology
projects with the other party. Each party or its respective
affiliates may also provide certain contract services to the
other party or its affiliates. Unless extended or earlier
terminated as provided therein, the technology sharing and
development services agreement will expire on December 31,2009. During 2007, the RAI Group billed the BAT Group
$2,742,000, and the BAT Group billed the RAI Group approximately
$21,000, pursuant to such agreement.
The RAI Group also purchases from the BAT Group tobacco leaf and
cigarettes, and pays royalties to the BAT Group relating to the
sale by the RAI Group of certain cigarette brands outside of the
United States. The parties entered into the agreements
evidencing such arrangements, which have various expiration
dates, following the consummation of the Business Combination.
During 2007, the RAI Group paid the BAT Group $18,427,000
pursuant to the foregoing arrangements. In addition, as of the
end of 2007, the RAI Group had $1,141,000 in accounts payable to
the BAT Group under such arrangements.
In connection with the Business Combination, RJR Tobacco agreed
to indemnify B&W and its affiliates for certain litigation
liabilities, arising out of the U.S. cigarette and tobacco
business of B&W. As a result of this indemnity, RJR Tobacco
has assumed the defense of pending B&W-specific
tobacco-related litigation, has paid the judgments and costs
related to certain pre-Business Combination tobacco-related
litigation of B&W, and has posted bonds on behalf of
B&W, where necessary, in connection with cases decided
since the Business Combination. In 2007, pursuant to this
indemnity, RJR Tobacco recorded $948,000 in expenses for funds
to be reimbursed to BAT for costs and expenses incurred arising
out of tobacco-related litigation.
RJR Tobacco has seconded certain of its employees to the BAT
Group in connection with particular assignments. During their
service with the BAT Group, the seconded employees will continue
to be paid by RJR Tobacco and participate in employee benefit
plans sponsored by the RAI Group. The BAT Group will reimburse
members of the RAI Group certain costs of the seconded
employees’ compensation and benefits during the secondment
period. For 2007, RJR Tobacco billed the BAT Group $2,282,000 in
connection with such secondment arrangements.
Effective as of January 1, 2007, Mr. Delen became
President of RJR Tobacco. Prior to joining RJR Tobacco,
Mr. Delen had served as President of British American
Tobacco Ltd. — Japan. Mr. Delen is a full-time
employee of, and is paid by, RJR Tobacco, and he does not
receive any compensation from BAT for his services on behalf of
RJR Tobacco, nor will BAT reimburse RJR Tobacco for the costs of
Mr. Delen’s compensation.
Lisa J. Caldwell, currently Senior Vice President —
Human Resources of RAI, is married to Alan L. Caldwell, who is
currently Senior Director — Public Issues of RAI and
previously served in a variety of positions with RJR Tobacco
since joining RJR Tobacco in 1981. During 2007,
Mr. Caldwell earned approximately $219,000 in salary and
bonus, and vested in LTIP awards valued at approximately $13,000.
Prior to joining RAI in October 2007, Frederick W. Smothers,
RAI’s Senior Vice President and Chief Accounting Officer,
served as the chief executive officer of ATRS Consulting, a
management consulting firm which he owned. The RAI Group has
used the services of ATRS Consulting, and during 2007, prior to
Mr. Smothers joining RAI as an employee, the RAI Group paid
ATRS Consulting $346,223 for services rendered in 2007 and for
certain services rendered in 2006.
The Board is not aware of any matters to be presented for action
at the 2008 annual meeting other than those described herein and
does not intend to bring any other matters before the annual
meeting. However, if other matters shall come before the 2008
annual meeting, it is intended that the holders of proxies
solicited hereby will vote thereon in their discretion.
You have the option to submit your proxy by the Internet,
telephone or mail. Your vote does not count until we receive it.
VOTE BY INTERNET - www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of
information up until 11:59 P.M. Eastern Time on May5, 2008 (May 1, 2008 for CIP or SIP participants).
Have your proxy card in hand when you access the web
site and follow the instructions to obtain your
records and to create an electronic voting
instruction form.
ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER COMMUNICATIONS
If you would like to reduce the costs incurred by
Reynolds American Inc. in mailing proxy materials,
you can consent to receiving all future proxy
statements, proxy cards and annual reports
electronically via e-mail or the Internet. To sign
up for electronic delivery, please follow the
instructions above to vote using the Internet and,
when prompted, indicate that you agree to receive or
access shareholder communications electronically in
future years.
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit your voting
instructions up until 11:59 P.M. Eastern Time on May5, 2008 (May 1, 2008 for CIP or SIP participants).
Have your proxy card in hand when you call and
follow the simple instructions provided to you.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in
the postage-paid envelope we have provided or return
it to Reynolds American Inc., c/o Broadridge, 51
Mercedes Way, Edgewood, NY11717.
Your telephone or Internet vote authorizes the named
proxies to vote the shares in the same manner as if
you marked, signed and returned the proxy card.
If you vote by telephone or Internet, do not mail back the proxy card.
C:
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
REYNO1
KEEP THIS PORTION FOR YOUR RECORDS
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
REYNOLDS AMERICAN INC.
For
All
Withhold
All
For All
Except
To withhold authority to vote for any individual
nominee(s), mark “For All Except” and write the number(s)
of the nominee(s) on the line below.
The Board recommends a vote FOR:
1.
Election of Directors
o
o
o
Nominees For Class I:
(01) Betsy S. Atkins, (02) Nana Mensah, (03) John J. Zillmer
Nominee For Class III:
(04) Lionel L. Nowell, III
For
Against
Abstain
2.
Ratification of KPMG LLP as Independent Auditors
o
o
o
The Board of Directors recommends a vote AGAINST:
3.
Shareholder Proposal on Human Rights Protocols for the Company and its Suppliers
o
o
o
4.
Shareholder Proposal on Endorsement of Health Care Principles
o
o
o
5.
Shareholder Proposal on Two Cigarette Approach to Marketing
o
o
o
Shares for which an executed proxy is received, but no instruction is given,
will be voted by the proxies FOR Items 1 and 2 and AGAINST Items 3, 4 and 5, and by Citibank, as Trustee under
the CIP, and Vanguard, as Custodian under the SIP, in the same proportion as the shares for which instructions
are received by Citibank and Vanguard, respectively.
For address changes and/or comments, please check this box and write them on
the back where indicated.
o
Note: Please make sure that you complete, sign and date your proxy card.
Please sign exactly as your name(s) appear(s) on the account. When signing as a fiduciary, please give your full
title as such. Each joint owner should sign personally. Corporate proxies should be signed in full corporate
name by an authorized officer.
Please complete, sign and date your proxy card and return this proxy card in the enclosed envelope
or vote by telephone or Internet as soon as possible!
To:
Shareholders of Reynolds American Inc.
Participants in the Reynolds American Capital Investment Plan
Participants in the Savings and Investment Plan for Employees of R. J. Reynolds Tobacco in
Puerto Rico
Shares of common stock of Reynolds American Inc. will be voted as you direct if this card is
completed by you and received by Broadridge on or before May 5, 2008 (May 1, 2008 for CIP or SIP
participants). Broadridge is responsible for tabulating the returns.
If you have any questions or need assistance in voting the shares, please contact:
Reynolds American Inc.
Shareholder Services
401 North Main Street Winston-Salem, NC27101
Important Notice Regarding Internet Availability of Proxy Materials for the Annual Meeting: The
Notice and Proxy Statement, Form 10-K and Chairman Letter are available at www.proxyvote.com.
6
DETACH PROXY CARD HERE IF YOU ARE NOT VOTING BY TELEPHONE OR
INTERNET 6
REYNOLDS
AMERICAN INC.
PROXY
This proxy is solicited on behalf of the Board of Directors
for the Annual Meeting of Shareholders to be held on May 6, 2008.
The undersigned shareholder of Reynolds American Inc. hereby appoints Susan M. Ivey, McDara P.
Folan, III and Robert A. Emken, Jr., and each of them (with full power of substitution and
resubstitution), as proxies of the undersigned, to vote all shares of the common stock of
Reynolds American Inc. that the undersigned may be entitled to vote at the Annual Meeting of
Shareholders to be held on May 6, 2008 at 9:00 a.m. (Eastern time) in the Reynolds American
Plaza Building Auditorium, 401 North Main Street, Winston-Salem, North Carolina, and at any
adjournments or postponements thereof, as designated on the reverse side of this proxy card,
and in their discretion, the proxies are authorized to vote upon such other business as may
properly come before the Annual Meeting and any adjournments or postponements thereof.
The undersigned also provides instructions to Citibank, N.A., as Trustee under the Reynolds
American Capital Investment Plan (the “CIP”), and to Vanguard Group, Inc., as Custodian under
the Savings and Investment Plan for Employees of R. J. Reynolds Tobacco in Puerto Rico (the
“SIP”), to vote shares of the common stock of Reynolds American Inc. allocated, respectively,
to accounts of the undersigned under the CIP or the SIP, and which are entitled to be voted at
the Annual Meeting, and at any adjournments or postponements thereof, as designated on the
reverse side of this proxy card, and to vote all such shares on such other business as may
properly come before the Annual Meeting and any adjournments or postponements thereof.
Change of address:
(If you have written in the above space, please mark
the corresponding box on the reverse side of this card.)
(Continued and to be signed and dated on reverse side.)
Dates Referenced Herein and Documents Incorporated by Reference