Philips 2007 Annual Report Download - page 171

Philips Annual Report 2007 177
action antitrust complaints led in the United States federal courts.
be reliably estimated with respect to these matters. An adverse nal
adverse effect on the Company’s consolidated nancial position and
exercised. As a means to protect the Company and its stakeholders
upon exercise of options and convertible personnel debentures and
treasury shares are issued, is recorded in capital in excess of par value,
except in the situation in which the cash received is lower than cost,
and capital in excess of par has been depleted.
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took place:
place in 2007:
Pursuant to Dutch law certain limitations exist relating to the
(2006: EUR 6,600 million).
cash was received with respect to foreign exchange derivative contracts
related to nancing of subsidiaries (in 2006 receipt of EUR 62 million
and in 2005 payment of EUR 46 million). Cash ow from interest-
related derivatives is part of cash ow from operating activities.
During 2007 there was a cash outow in relation to these derivatives
of EUR 2 million (in 2006 EUR 1 million cash outow).
Proceeds from other non-current nancial assets
non-current nancial assets.
activities to Arima Devices in exchange for a 12% interest in Arima
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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 at TV business.
During 2006, the ownership interest in TPV has been diluted to 13.55%.
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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 signicant inuence.
These transactions are generally conducted on terms comparable
to transactions with third parties.
2005 2006 2007
Purchases of goods and services 1,803 2,041 1,837
Sales of goods and services 358 152 168
Receivables from related parties 53 37 26
Payables to related parties 298 271 289
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.
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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 selected
employees. The purpose of the share-based compensation plans is
to align the interests of management with those of shareholders by
providing 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 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, xed 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.
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%.
A total of 707,717 shares were sold in 2007 under the plan at an
average price of EUR 29.99 (2006: 1,016,421 shares at EUR 24.70,
2005: 1,248,113 shares at a price of EUR 21.78).
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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 4.01 in 2007
(EUR 6.41 in 2006 and EUR 5.85 in 2005) is recorded as compensation
expense over the period of vesting. In 2007, 2,019,788 shares were
issued in conjunction with conversions at an average price of EUR
18.94 (2006: 1,570,785 shares at an average price of EUR 16.94, 2005:
61 shares at an average price of EUR 32.64).
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
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 111 million (EUR 84 million,
net of tax), EUR 107 million (EUR 78 million, net of tax) and EUR 76
million (EUR 52 million, net of tax) in 2007, 2006, and 2005, 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 prot
of EUR 2,856 million and EUR 2.28 respectively for 2005. 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.
The fair value of the Company’s 2007, 2006 and 2005 option grants
was estimated using a Black-Scholes option valuation model and the
following weighted average assumptions:
EUR-denominated
2005 2006 2007
Risk-free interest rate 2.89% 3.63% 4.18%
Expected dividend yield 1.8% 1.8% 1.8%
Expected option life 5 yrs 6 yrs 6 yrs
Expected stock price
volatility 44% 39% 27%
USD-denominated
2005 2006 2007
Risk-free interest rate 3.84% 4.73% 3.96%
Expected dividend yield 1.8% 1.8% 1.7%
Expected option life 5 yrs 6 yrs 6 yrs
Expected stock price
volatility 43% 38% 28%
The assumptions were used for these calculations only and do not
necessarily represent an indication of Management’s expectations
of future developments.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of subjective assumptions, including the
expected price volatility.
The Company has based its volatility assumptions on historical
experience for a period that approximates the expected life of the
options. The expected life of the options is also based upon historical
experience.
The Company’s employee stock options have characteristics
signicantly different from those of traded options, and changes
in the assumptions can materially affect the fair value estimate.
Group nancial statements
Notes to the group nancial statements
Company nancial statements 250 Corporate governance246 Reconciliation of
non-US GAAP information 258 The Philips Group in the last ten years 260
Investor information