Philips 2004 Annual Report Download - page 157

Under the terms of employee stock purchase plans established by the Company in various
countries, substantially all employees in those countries are eligible to purchase a limited
number of shares of Philips stock at discounted prices through payroll withholdings, of which
the maximum ranges from 8.5% to 10% of total salary. Generally, the discount provided to the
employees is between the range of 10% to 20%. In the United States, the purchase price equals
the lower of 85% of the closing price at the beginning or end of quarterly purchase periods. A
total of 1,224,655 shares were sold in 2004 under the plan at an average price of EUR 20.54
(2003: 1,889,964 shares, at a price of EUR 18.46, 2002: 1,722,575 shares, at a price of
EUR 23.69).
In the Netherlands, Philips issues personnel debentures with a 5-year right of conversion into
common shares of Royal Philips Electronics. The conversion price is equal to the current share
price at the date of issuance. The fair value of the conversion option (EUR 6.05 in 2004 and
EUR 6.89 in 2003) is recorded as compensation expense over the period of vesting. In 2004,
333,742 shares were issued in conjunction with conversions at an average price of EUR 21.56
(2003: 907,988 shares at an average price of EUR 15.41, 2002: 515,309 shares at an average
price of EUR 14.52).
Effective January 1, 2003, the Company adopted the fair value recognition provisions of FAS No.
123, ‘Accounting for Stock-Based Compensation’, prospectively to all employer awards granted,
modified, or settled after January 1, 2003.
An expense of EUR 79 million was recorded in 2004 for share-based compensation, net of
income of EUR 3 million related to the performance stock options issued in 2001 (2003:
EUR 41 million).
Prior to 2003, the Company accounted for share-based compensation using the intrinsic value
method, and the recognition and measurement provisions of APB Opinion No. 25, ‘Accounting
for Stock Issued to Employees’, and related interpretations. In 2002, compensation income of
EUR 5 million was recognized for the performance stock options granted. Additionally,
approximately EUR 1 million was recorded as an expense for shares purchased through certain
compensatory stock purchase plans.
Since awards issued under the Company’s plans prior to 2003 generally vested over three years,
the cost related to share-based compensation included in the determination of net income for
2004 and 2003 is less than that which would have been recognized if the fair value method had
been applied to all outstanding awards.
Pro forma net income and basic earnings per share, calculated as if the Company had applied the
fair value recognition provisions for all outstanding and unvested awards in each period,
amounted to a profit of EUR 2,773 million and EUR 2.17 respectively for 2004, a profit of
EUR 588 million and EUR 0.46 for 2003, and a loss of EUR 3,358 million and EUR 2.63 for 2002.
Please refer to stock-based compensation under accounting policies for a reconciliation of
reported and pro forma income of earnings per share.
Pro forma net income may not be representative of that to be expected in future years.
156 Philips Annual Report 2004
Financial statements of the Philips Group