Philips 2008 Annual Report Download - page 171

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 consideration for the transaction valued
at EUR 180 million.
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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 significant influence. These
transactions are generally conducted on terms comparable to
transactions with third parties.
2006 2007 2008
Purchases of goods and services 2,041 1,837 692
Sales of goods and services 152 168 174
Receivables from related parties 37 26 24
Payables to related parties 271 289 112
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.
The Company issues restricted share rights that vest in equal annual
installments over a three-year period, starting one year after the date
of grant. 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 the Company on the respective
delivery dates.
The Company grants 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 may
contain accelerated vesting. Of the total stock options that are
outstanding as of December 31, 2008, approximately 3 million options
contain performance conditions.
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 1,051,206 shares were sold in 2008 under the plan at an
average price of EUR 21.82 (2007: 707,717 shares at EUR 29.99, 2006:
1,016,421 shares at EUR 24.70).
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In the Netherlands, Philips issues personnel debentures with a 2-year
right of conversion into common shares of Royal Philips Electronics
starting three years after the date of issuance, with a conversion price
equal to the share price on that date. The fair value of the conversion
option of EUR 2.13 in 2008 (EUR 4.01 in 2007 and EUR 6.41 in 2006)
is recorded as compensation expense over the period of vesting. In
2008, 485,331 shares were issued in conjunction with conversions at
an average price of EUR 19.13 (2007: 2,019,788 shares at an average
price of 18.94, 2006: 1,570,785 shares at an average price of EUR
16.94).
Share-based compensation expense was EUR 78 million, EUR 111
million and EUR 107 million, in 2008, 2007, and 2006, respectively.
The fair value of the Company’s 2008, 2007 and 2006 option grants
was estimated using a Black-Scholes option valuation model and the
following weighted average assumptions:
EUR-denominated
2006 2007 2008
Risk-free interest rate 3.63% 4.18% 3.75%
Expected dividend yield 1.8% 1.8% 2.4%
Expected option life 6 yrs 6 yrs 6 yrs
Expected stock price
volatility 39% 27% 26%
USD-denominated
2006 2007 2008
Risk-free interest rate 4.73% 3.96% 3.17%
Expected dividend yield 1.8% 1.7% 2.8%
Expected option life 6 yrs 6 yrs 6 yrs
Expected stock price
volatility 38% 28% 27%
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 significantly
different from those of traded options, and changes in the assumptions
can materially affect the fair value estimate.
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Philips Annual Report 2008 171
254
Corporate governance
250
Reconciliation of
non-US GAAP information
262
Ten-year overview
266
Investor information