Costco 2013 Annual Report Download - page 65

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Note 7—Stock-Based Compensation Plans
The Company grants stock-based compensation to employees and non-employee directors. Stock option
awards were granted under the Amended and Restated 2002 Stock Incentive Plan, amended as of January
2006 (Second Restated 2002 Plan), and predecessor plans until, effective in the fourth quarter of fiscal 2006,
the Company began awarding restricted stock units (RSUs) under the Second Restated 2002 Plan in lieu
of stock options. Through a series of shareholder approvals, there have been amended and restated plans
and new provisions implemented by the Company. Under revisions in the Fourth Restated 2002 Plan in the
fourth quarter of fiscal 2008, grants of RSUs are subject, upon certain terminations of employment, to quarterly
vesting. Employees who attain certain years of service with the Company receive shares under accelerated
vesting provisions on the annual vesting date rather than upon qualified retirement. The first grant impacted
by these amendments occurred in the first quarter of fiscal 2009. Each share issued in respect of stock
bonus or stock unit awards is counted as 1.75 shares toward the limit of shares made available under the
Fourth Restated 2002 Plan. The Sixth Restated 2002 Plan (Sixth Plan), amended in the second quarter of
fiscal 2012, is the Company’s only stock-based compensation plan with shares available for grant at the end
of 2013. The Sixth Plan authorizes the issuance of 16,000,000 shares (9,143,000 RSUs) of common stock
for future grants in addition to shares previously authorized. The Company issues new shares of common
stock upon exercise of stock options and upon vesting of RSUs. Vested RSUs are generally delivered to
participants annually, net of minimum statutory withholding taxes.
As required by the Company’s Sixth Plan, in conjunction with the special cash dividend discussed in Note
6, adjustments were made to awards outstanding on the dividend record date to preserve their value following
the dividend, as follows: (i) the number of shares subject to outstanding RSUs was increased; and (ii) the
exercise prices of outstanding stock options were reduced and the number of shares subject to such options
was increased. The number of outstanding stock options and RSUs was increased by multiplying the number
of outstanding shares by a factor of 1.0763, representing the ratio of the NASDAQ closing price of $105.95
on December 5, 2012, which was the last trading day immediately prior to the ex-dividend date, to the
NASDAQ opening price of $98.44 on the ex-dividend date, December 6, 2012. The exercise prices of stock
options were reduced by multiplying the prices by a factor of 0.9291, representing the ratio of the NASDAQ
opening price on the ex-dividend date to the NASDAQ closing price on December 5. Approximately 2,905,000
stock options were adjusted, and approximately 9,676,000 RSUs were adjusted. These adjustments did not
result in additional stock-based compensation expense, as the fair value of the outstanding awards did not
change. As further required by the Sixth Plan, the maximum number of shares issuable under the Sixth Plan
was also proportionally adjusted, which resulted in an additional 1,362,000 shares (778,000 RSUs) available
to be granted.
Summary of Stock Option Activity
All outstanding stock options were fully vested and exercisable at the end of 2013 and 2012. The following
table summarizes stock option transactions during 2013:
Number
Of
Options
(in 000’s)
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value(1)
Outstanding at the end of 2012 . . . . . . . . . . . . . . 3,161 $ 40.90
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,435) 36.22
Special cash dividend . . . . . . . . . . . . . . . . . . 221 N/A
Outstanding at the end of 2013 . . . . . . . . . . . . . . 1,947 $ 39.70 1.38 $140
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(1) The difference between the exercise price and market value of common stock at the end of 2013.