Philips 2006 Annual Report Download - page 161

Philips Annual Report 2006 161
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At the beginning of July 2006, Philips transferred its Optical Pick Up
activities to Arima Devices in exchange for a 12% interest in Arima
Devices valued at EUR 8 million.
In June 2006, the merger of Philips Mobile Display Systems with Toppoly
Optoelectronics Corporation of Taiwan to form a new company named
Toppoly Display Corporation was completed. Philips obtained a 17.5%
stake in this entity as a consideration for the transaction valued at
EUR 180 million.
In 2005, a 15% ownership interest in TPV and a convertible bond of
EUR 220 million were received in connection with the sale and
transfer of certain activities within the Company’s monitor and fl at TV
business. During 2006, the ownership interest in TPV has been diluted
to 13.55%.
In 2004, shares in Computer Access Technology Corporation were
sold in two tranches. In March 2004 shares were sold for an amount
of EUR 9 million. In December 2004, the remaining shares were sold
for EUR 8 million of which the proceeds were collected in 2005.
Furthermore, shares in Openwave Systems (EUR 6 million) were
received in connection with the sale of Magic4.
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Related-party transactions
In the normal course of business, Philips purchases and sells goods
and services to various related parties in which Philips typically
holds a 50% or less equity interest and has signifi cant infl uence.
These transactions are generally conducted with terms comparable
to transactions with third parties.
2004 2005 2006
Purchases of goods and services 1,844 1,803 2,041
Sales of goods and services 444 358 152
Receivables from related parties 35 53 37
Payables to related parties 286 298 271
For acquisitions and divestments see note 2.
For remuneration details of the members of the Board of Management
and the Supervisory Board see note 34.
33
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.
As from 2003 onwards, 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 fi xed 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, fi xed and
variable (performance) options were issued with terms of ten years,
vesting one to three years after grant.
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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.
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 in the range of 10% to 20%. In
2004 and certain prior years, the purchase price in the United States
equaled the lower of 85% of the closing price at the beginning or end
of quarterly purchase periods. A total of 1,016,421 shares were sold in
2006 under the plan at an average price of EUR 24.70 (2005: 1,248,113
shares at EUR 21.78, 2004: 1,224,655 shares at a price of EUR 20.54).
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 of EUR 6.41 in 2006
(EUR 5.85 in 2005 and EUR 6.05 in 2004) is recorded as compensation
expense over the period of vesting. In 2006, 1,570,785 shares were
issued in conjunction with conversions at an average price of EUR 16.94
(2005: 61 shares at an average price of EUR 32.64, 2004: 333,742
shares at an average price of EUR 21.56).
Effective January 1, 2006, the Company adopted SFAS No. 123
(Revised 2004), ‘Share Based Payments’ using the modifi ed prospective
method for the transition. Since the Company had previously adopted
the fair value provisions of SFAS No. 123 prospectively for all employer
awards granted, modifi ed or settled after January 1, 2003, the adoption
of SFAS No. 123 (R) did not have a material impact on the Company’s
fi nancial position or results of operation.
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 2005
and 2004 is less than that which would have been recognized if the
fair value method had been applied to all outstanding awards.
Share-based compensation expense was EUR 107 million (EUR 78
million, net of tax), EUR 76 million (EUR 52 million, net of tax)
and EUR 60 million (EUR 39 million, net of tax) in 2006, 2005,
and 2004, respectively.
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 profi t
of EUR 2,856 million and EUR 2.28 respectively for 2005 and a profi t
of EUR 2,773 million and EUR 2.17 for 2004. Please refer to share-
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.
In accordance with SFAS No. 123 (R), the fair value of stock options
granted is required to be based upon an option valuation model. Since
the Company’s stock options are not traded on any exchange, employees
can receive no value nor derive any benefi t from holding these stock
options without an increase in the market price of Philips’ stock.
226 Corporate governance224 Reconciliation of
non-US GAAP information
234 The Philips Group
in the last ten years
236 Investor information