Electrolux 2002 Annual Report Download - page 55

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Synthetic options 2000
The Board granted Wolfgang König, Head of White Goods
Europe, 118,400 synthetic employee stock options with the
right to receive a cash amount for each option when exer-
cised, calculated as the difference between the current share
price and the strike price of SEK 147. The options may be
exercised until July 1, 2006. The options have been allotted
without consideration and as compensation for lost options
with his former employer immediately before joining the
Electrolux Group. This program is hedged with an equity
swap. The annual cost is SEK 0.8m.
Hedging arrangements for the stock option programs
The company uses repurchased Electrolux B-shares in order
to meet the company’s obligations under the stock option
programs. The shares will be sold to option holders who wish
to exercise their right under the option agreement(s). Electro-
lux will also sell additional shares on the market in connection
with the exercise of options in order to cover the cost of
employer contributions. Between 2000 and 2002, the Annual
General Meeting approved the sale of 9,410,100 shares for this
purpose.
Assuming that all outstanding stock options allotted up to
and including 2002 are exercised, a sale of previously repur-
chased shares will result in a dilution of 2.6%. This includes
the sale of shares to cover employer contributions in connec-
tion with exercise.
Accounting principles and cost of options
The Group accounts for employer contributions expected
to be paid when the options are exercised. The provision for
outstanding options is periodically revalued. The total provi-
sion as per December 31, 2002 for all option programs was
SEK 128m.
The option programs are hedged through repurchased
shares. Such repurchase increases the financial expenses of the
Group with approximately SEK 49m annually. When exer-
cised, the Group sells hedge shares, which increases the Group’s
equity without an effect on the profit and loss statement.
The Black-Scholes value of the 2002 option program that
has been the base for the reserve for the employer contribu-
tion was SEK 138m. Employer contributions for 2002 were
SEK 32m and the estimated financing costs for the hedge of
repurchased shares was SEK 19m calculated on an annual basis.
2003 option program
The Board will present a proposal at the Annual General
Meeting to introduce a new employee stock option program
in 2003. It is proposed that a maximum of 3,000,000 options
will be allotted to less than 200 senior managers and that the
2003 program will be based on the same parameters as the 2001
and 2002 programs, including the number of options per lot.
The Board has decided to propose to the Annual General
Meeting that the Company’s obligations under the proposed
program, including estimated employer contribution, will be
secured by repurchased shares.
Assuming that all stock options allotted under the proposed
2003 program are exercised, the sale of previously repurchased
shares under this program would result in a dilution of 1.1%.
The maximum dilution from the proposed 2003 program and
all existing stock option programs is 3.6%. This includes the
sale of shares for hedging of employer contributions in con-
nection with exercise of the options.
Costs for the option program
The theoretical value of the proposed option program for
2003, calculated in accordance with the Black-Scholes model,
is approximately SEK 81m based on the share price during
the first half of February. This value is calculated on the basis
of a number of assumptions.The actual outcome may differ
significantly and there may be no value realized at all. Based
on the theoretical value, the estimated cost for employer
contributions is SEK 18m. Subject to the approval of the
Annual General Meeting, Electrolux will hedge the program
with repurchased Electrolux shares. The cost of financing the
repurchased shares used for hedging is approximately SEK 20m.
Based on the above-mentioned Black-Scholes value, the
charge to the Electrolux income statement for 2003 for the
proposed option program will be approximately SEK 38m for
employer contributions and financing cost. Alternatively, if the
accounting principles suggested by IASB relating to options
were applied, the charge in the income statement for 2003
would be approximately SEK 23m, including employer con-
tributions in addition to the above-mentioned cost of financ-
ing the hedge.
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