Philips 2004 Annual Report Download - page 156

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31 Related-party transactions
In the normal course of business, Philips purchases and sells goods and services to various
related parties in which Philips holds a 50% or less equity interest. These transactions are
generally conducted on an arm’s length basis with terms comparable to transactions with third
parties. In 2004, purchases of goods and services from related parties totaled EUR 1,844 million
(2003: EUR 1,342 million, 2002: EUR 559 million), whereas sales of goods and services to
related parties totaled EUR 444 million (2003: EUR 263 million, 2002: EUR 209 million). At
December 31, 2004, receivables from related parties totaled EUR 35 million; payables to related
parties totaled EUR 286 million (2003: EUR 42 million and EUR 237 million respectively, 2002:
EUR 63 million and EUR 109 million respectively).
In November 2002, Picker Financial Group, an affiliate acquired in the Marconi acquisition in
2001, sold approximately EUR 140 million receivables to Philips Medical Capital, in which the
Company has a 40% equity interest.
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32 Share-based compensation
The Company has granted stock options on its common shares and rights to receive common
shares in the future (restricted share rights) to members of the Board of Management and other
members of the Group Management Committee, Philips Executives and certain non-executives.
The purpose of the share-based compensation plans is to align the interests of management
with those of shareholders by providing additional incentives to improve the Company’s
performance on a long-term basis, thereby increasing shareholder value. Under the Company’s
plans, options are granted at fair market value on the date of grant.
In 2003 and 2004, the Company issued restricted share rights that vest in equal annual
installments over a three-year period. Restricted shares are Philips shares that the grantee will
receive in three successive years, provided the grantee is still with the Company on the
respective delivery dates. If the grantee still holds the shares after three years from the delivery
date, Philips will grant 20% additional (premium) shares, provided the grantee is still with Philips.
As from 2002, the Company granted fixed stock options that expire after 10 years. Generally,
the options vest after 3 years; however, a limited number of options granted to certain
employees of acquired businesses contain accelerated vesting.
In prior years, fixed and variable (performance) options were issued with terms of ten years,
vesting one to three years after grant.
In contrast to the year 2001 and certain prior years, when variable (performance) stock options
were issued, the share-based compensation grants as from 2002 consider the performance of
the Company versus a peer group of multinationals.
USD-denominated stock options and restricted share rights are granted to employees in the
United States only.
155Philips Annual Report 2004