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As filed with the Securities and Exchange Commission on March 14, 2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark one)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[x] OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 2-20193
KONINKLIJKE PHILIPS ELECTRONICS N.V.
(Exact name of Registrant as specified in charter)
ROYAL PHILIPS ELECTRONICS
(Translation of Registrant's name into English)
THE NETHERLANDS
(Jurisdiction of incorporation or organization)
BREITNER CENTER, AMSTELPLEIN 2, 1096 BC AMSTERDAM, THE NETHERLANDS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON SHARES - PAR VALUE NEW YORK STOCK EXCHANGE
EURO (EUR) 0.20 PER SHARE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
COMMON SHARES - PAR VALUE EURO (EUR) 0.20 PER SHARE
(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Class Outstanding at December 31, 2002
KONINKLIJKE PHILIPS ELECTRONICS N.V.
Priority Shares par value EUR 500 per share 10 shares
Common Shares par value EUR 0.20 per share 1,275,977,923 shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------- -----------
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
------------ ------------
TABLE OF CONTENTS Page
INTRODUCTION
PART I
Item 1. Identity of directors, senior management and advisors 3
Item 2. Offer statistics and expected timetable 3
Item 3. Key information 4
Item 4. Information on the company 8
Item 5. Operating and financial review and prospects 20
Item 6. Directors, senior management and employees 22
Item 7. Major shareholders and related party transactions 27
Item 8. Financial information 27
Item 9. The offer and listing 28
Item 10. Additional information 29
Item 11. Quantitative and qualitative disclosures about market risk 31
Item 12. Description of securities other than equity securities 31
PART II
Item 13. Defaults, dividend arrearages and delinquencies 31
Item 14. Material modifications to the rights of security holders
and use of proceeds 31
Item 15. Controls and procedures 31
Item 16. Reserved 31
PART III
Item 17. Financial statements 31
Item 18. Financial statements 32
Item 19. Exhibits 32
2
In this report amounts are expressed in euros ("euros" or "EUR") or in US
dollars ("dollars", "US $" or "$").
Introduction
In order to utilize the "Safe Harbor" provisions of the United
States Private Securities Litigation Reform Act of 1995, Philips is providing
the following cautionary statement. This document contains certain
forward-looking statements with respect to the financial condition, results of
operations and business of Philips and certain of the plans and objectives of
Philips with respect to these items. In particular, among other statements,
certain statements in Item 3 "Key Information-Risk factors" and Item 4
"Information on the Company" with regard to management objectives, market
trends, market standing, product volumes and business risks, the statements in
Item 8 "Financial Information" relating to legal proceedings, the statements in
Item 5 "Operating and Financial Review and Prospects" with regard to
Management's current expectations for the short term under the heading "Outlook"
and with regard to trends in results of operations, margins, overall market
trends, risk management, exchange rates and statements in Item 11 "Quantitative
and Qualitative Disclosures about Market Risks" relating to risk caused by
derivative positions, interest rate fluctuations and other financial exposure
are forward-looking in nature. Forward-looking statements can be identified
generally as those containing words such as "anticipates", "assumes",
"believes", "estimates", "expects", "should", "will", "will likely result",
"forecast", "outlook", "projects" or similar expressions. By their nature,
forward-looking statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future. There are a
number of factors that could cause actual results and developments to differ
materially from those expressed or implied by these forward-looking statements.
These factors include, but are not limited to, levels of consumer and business
spending in major economies, changes in consumer tastes and preferences, changes
in law, the performance of the financial markets, pension costs, the levels of
marketing and promotional expenditures by Philips and its competitors, raw
materials and employee costs, changes in future exchange and interest rates (in
particular, changes in the euro and the US dollar), changes in tax rates and
future business combinations, acquisitions or dispositions and the rate of
technological changes. See also Item 3 "Key information - Risk factors". Market
share estimates contained in this report are based on outside sources such as
specialized research institutes, industry and dealer panels, in combination with
management estimates based on publicly reported information about competitors.
Rankings are based on, and references to "leading" and other measures of market
performance refer to sales unless otherwise indicated.
Effective January 1, 1999, Philips' consolidated financial statements have been
reported in euros. The 1998 financial statements which were originally
denominated in Dutch guilders have been translated into euros using the
irrevocably fixed conversion rate applicable since January 1, 1999 for all
periods presented (EUR 1 = NLG 2.20371). Management believes that the data
redenominated to euros reflects the same trends as previously reported. Philips'
financial data may not be comparable to other companies that also report in
euros if those other companies previously reported in a currency other than the
Dutch guilder.
Starting January 1, 2002, the audited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America (US GAAP). All relevant reporting periods have been
restated according to US GAAP.
Specific portions of Philips' Annual Report 2002 to Shareholders are
incorporated by reference in this report on Form 20-F to the extent noted
herein. Philips' Annual Report for 2002 comprises two separate booklets entitled
"Management Report" and "Financial Statements and Analysis". Philips' Annual
Report is attached hereto as Exhibit 10(b).
Item 1. Identity of directors, senior management and advisors
Not applicable.
Item 2. Offer statistics and expected timetable
Not applicable.
3
Item 3. Key information
Selected consolidated financial data
Beginning January 1, 2002 the audited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America (US GAAP). Financial statements for periods covered by
this report have been restated according to US GAAP.
Selected financial data for the years ended December 31,
------------------------------------------------------------------
2002(a) 2002 2001 2000 1999 1998
US $ in millions, except per share data and ratio EUR EUR EUR EUR EUR
data
INCOME STATEMENT DATA:
33,344 Sales 31,820 32,339 37,862 31,459 30,459
440 Income (loss) from operations 420 (1,395) 4,258 1,553 1,289
(2,334) Financial income and expenses-net (2,227) (915) 1,993 (107) (311)
(3,360) Income (loss) from continuing operations and
before cumulative effect of change in
accounting principle (3,206) (2,475) 9,577 1,595 1,025
-- Income from discontinued operations
(less applicable income taxes) -- -- -- -- 4,891
-- Cumulative effect of change in accounting
principle -- -- 85 -- --
(3,360) Net income (loss) (3,206) (2,475) 9,662 1,590 5,900
Weighted average number of common shares
1,274,950 outstanding (in thousands) 1,274,950 1,278,077 1,312,859 1,378,041 1,440,224
BASIC EARNINGS PER COMMON SHARE: (B)
0.35 Income (loss) from operations 0.33 (1.09) 3.24 1.13 0.89
(2.63) Income (loss) from continuing operations (2.51) (1.94) 7.30 1.16 0.71
(2.63) Net income (loss) (2.51) (1.94) 7.36 1.15 4.10
Weighted average number of common shares
1,279,002 outstanding on a diluted basis (in thousands) 1,279,002 1,286,544 1,326,538 1,389,226 1,452,076
DILUTED EARNINGS PER COMMON SHARE:(b)(c)
(2.63) Income (loss) from continuing operations (2.51) (1.94) 7.22 1.15 0.70
(2.63) Net income (loss) (2.51) (1.94) 7.28 1.15 4.06
BALANCE SHEET DATA:
33,835 Total assets 32,289 39,202 39,524 31,673 28,009
647 Short-term debt 617 1,271 1,743 577 801
6,803 Long-term debt 6,492 6,595 2,284 2,737 2,786
1,337 Short-term provisions (d) 1,276 1,443 969 1,056 966
2,064 Long-term provisions (d) 1,970 2,297 2,588 2,000 2,007
188 Minority interests 179 202 469 333 242
14,586 Stockholders' equity 13,919 19,160 22,707 16,708 14,456
276 Capital stock 263 263 263 339 1,672
CASH FLOW DATA:
2,335 Net cash provided by operating activities 2,228 1,248 2,996 1,913 2,140
(260) Net cash used for investing activities (248) (4,564) (2,404) (3,834) (1,441)
2,075 Cash flow before financing activities 1,980 (3,316) 592 (1,921) 699
Net cash (used for) provided by financing
(940) activities (897) 3,159 (2,038) (2,606) (814)
Cash provided by (used for) continuing
1,135 operations 1,083 (157) (1,446) (4,527) (115)
4
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
KEY RATIOS:
Income (loss) from operations:
as a % of sales 1.3 (4.3) 11.2 4.9 4.2
as a % of net operating capital (RONA) 3.2 (9.3) 35.1 15.8 12.5
Turnover rate of net operating capital 2.43 2.15 3.12 3.20 2.95
Inventories as a % of sales 11.1 13.3 13.9 13.6 13.2
Outstanding trade receivables (in months' sales) 1.3 1.5 1.5 1.4 1.3
Income (loss) from continuing operations:
as a % of stockholders' equity (ROE) (19.2) (11.9) 48.5 10.9 9.7
Ratio net debt : group equity 27:73 26:74 11:89 5:95 (e)
DEFINITIONS:
Turnover rate of net
operating capital : sales divided by average net operating capital
Net operating capital : intangible assets, property, plant
and equipment, non-current receivables and current
assets excluding cash and cash equivalents, securities
and deferred tax positions, after deduction of
provisions and other liabilities
RONA : income from operations as a % of average net operating
capital
ROE : income from continuing operations as a % of average
stockholders' equity
Net debt : long-term and short-term debt net of cash and cash
equivalents
Net debt: group
equity ratio : the % of net debt over group equity plus net debt
Average number of
outstanding shares : weighted average number of outstanding common shares
uring the reporting year
(a) For the convenience of the reader, the euro amounts have been converted into
US dollars at the exchange rate used for balance sheet purposes at December
31, 2002 (US $ 1 = EUR 0.9543).
(b) Previously reported figures restated for 4-for-1 stock split in 2000.
(c) See Note 8 of "Notes to the Consolidated Financial Statements" on page 75 of
the 2002 Annual Report - Financial Statements and Analysis - incorporated
herein by reference for a discussion of net income (loss) per common share
on a diluted basis.
(d) Includes provision for pensions, severance payments, restructurings and
taxes among other items; see Note 19 of "Notes to the Consolidated Financial
Statements" on pages 81 and 82 of the 2002 Annual Report - Financial
Statements and Analysis - incorporated herein by reference.
(e) Not meaningful: net cash in 1998 exceeded the debt level.
5
CASH DIVIDENDS AND DISTRIBUTIONS PAID PER COMMON SHARE
The following table sets forth in euros the gross dividends and cash
distributions paid on the Common Shares in the financial years indicated (from
prior-year profit distribution) and such amounts as converted into US dollars
and paid to holders of Shares of New York Registry:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
- In EUR 0.36 0.36 0.30 0.25 0.23
- In US $ 0.32 0.32 0.29 0.27 0.24
The cash distribution in respect of 2002, subject to approval by the General
Meeting of Shareholders on March 27, 2003, will result in a total payment in the
year 2003 of EUR 459 million (EUR 0.36 per Common Share).
The dollar equivalent of this cash distribution to be paid to shareholders in
the year 2003 will be calculated at the euro/dollar rate of the official
Amsterdam daily fixing rate (transfer rate) on the date fixed and announced for
that purpose by the Company, being April 2, 2003. The dollar equivalents of the
prior year profit distributions paid to shareholders have been calculated at the
euro/dollar rate of the official Amsterdam daily fixing rate (transfer rate) on
the date fixed and announced for that purpose by the Company.
EXCHANGE RATES US $ : EUR
The following two tables set forth, for the periods and dates indicated, certain
information concerning the exchange rate for US dollars into euros based on the
Noon Buying Rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate"). The years prior to 1999 have been converted into euros
using the irrevocably fixed conversion rate which became effective on January 1,
1999 (EUR 1 = NLG 2.20371):
calendar period EUR per US $ 1
---------------------------------------------
period end average(1) high low
---------- ---------- ------ ------
1998 0.8517 0.8996 0.9479 0.8232
1999 0.9930 0.9455 0.9984 0.8466
2000 1.0652 1.0881 1.2092 0.9676
2001 1.1235 1.1234 1.1947 1.0488
2002 0.9537 1.0573 1.1636 0.9537
2003 (through February 28) 0.9277 0.9295 0.9652 0.9195
(1) The average of the Noon Buying Rates on the last day of each month during
the period.
highest lowest
rate rate
------- -------
September 2002 1.0325 1.0041
October 2002 1.0301 1.0120
November 2002 1.0106 0.9863
December 2002 1.0074 0.9537
January 2003 0.9652 0.9207
February 2003 0.9339 0.9195
Philips publishes its financial statements in euros while a substantial portion
of its assets, earnings and sales are denominated in other currencies. Philips
conducts its business in more than 50 different currencies.
6
Unless otherwise stated, for the convenience of the reader the translations of
euros into dollars appearing in this report have been made based on the balance
sheet rate on December 31, 2002 (US $ 1 = EUR 0.9543). This rate is not
materially different from the Noon Buying Rate on such date (US $ 1 = EUR
0.9537).
The following table sets out the exchange rate for US dollars into euros
applicable for translation of Philips' financial statements for the periods
specified.
EUR per US $ 1
---------------------------------------------
period end average(a) high low
---------- ---------- ------ ------
1998 0.8576 0.8985 0.9484 0.8213
1999 0.9914 0.9392 0.9987 0.8460
2000 1.0740 1.0858 1.2089 0.9675
2001 1.1326 1.1215 1.1632 1.0828
2002 0.9543 1.0579 1.1497 0.9543
(a) The average rates are the accumulated average rates based on daily
quotations.
Risk factors
The information on risk factors required by this Item is incorporated by
reference herein from pages 30 through 32 and pages 100 through 105 of the 2002
Annual Report - - Financial Statements and Analysis.
It describes some of the risks that could affect Philips' businesses. The
factors and the cautionary statements contained in the section entitled
"Introduction" on page 3 should be considered in connection with any
forward-looking statements contained in Philips' Annual Report on Form 20-F.
Forward-looking statements can be identified generally as those containing words
such as "anticipates", "assumes", "believes", "estimates", "expects", "should",
"will", "will likely result", "forecast", "outlook", "projects" or similar
expressions. From time to time, Philips may also provide oral or written
forward-looking statements in other materials Philips releases to the public.
The cautionary statements contained in "Introduction" are deemed to apply to
these statements.
The risks described are not the only ones that Philips faces. Some risks are not
yet known to Philips and some that Philips does not currently believe to be
material could later turn out to be material. All of these risks could
materially affect Philips' business, its revenues, operating income, net income,
net assets and liquidity and capital resources.
In addition, Philips is a global company, which means that it is affected by
economic developments in all regions of the world.
In addition to the risk factors referred to above, the following are potential
risks that Philips faces:
Philips' business is exposed to the risks of economic recession.
Certain of Philips' businesses have been negatively impacted by the prolonged
economic downturn in 2001 and 2002 that has continued into 2003. Investment
sentiment may see continued weakness and customers could become less ebullient
which might impact on spending for Philips products in various areas of the
Philips product portfolio as well as the regional markets in the U.S., Europe,
Asia and elsewhere. A continued or deepened recession could adversely affect the
performance of the Philips Group.
Philips is exposed to geopolitical and military developments.
The business environment is influenced by numerous political uncertainties,
including the military situation in the Middle East and potential conflict in
other regions, which continue to affect the global economy (and the
international capital markets). Political and military developments could have a
material adverse effect on Philips' results of operations.
Philips is exposed to continued poor performance of capital markets.
The performance of capital markets has been extremely bearish and if this
continues, it could have a further material impact on pension expense and the
value of financial assets of the Company.
7
Item 4. Information on the Company
The structure of the Philips group
The following information is important for understanding the structure of the
Philips group ("Philips" or the "Group"). Koninklijke Philips Electronics N.V.
(the "Company" or "Royal Philips Electronics") is the parent company of Philips.
Its shares are listed on the stock markets of Euronext Amsterdam, the New York
Stock Exchange, the London Stock Exchange and a number of other stock exchanges.
The Company was incorporated as a limited partnership with the name Philips & Co
under the laws of the Netherlands on May 15, 1891. This limited partnership was
converted to the limited liability company N.V. Philips' Gloeilampenfabrieken on
September 11, 1912. On May 6, 1994, the name was changed to Philips Electronics
N.V., and on April 1, 1998 the name was changed to Koninklijke Philips
Electronics N.V. The management of the Company is entrusted to the Board of
Management under the supervision of the Supervisory Board. The Group Management
Committee, consisting of the members of the Board of Management, chairmen of
product divisions and certain key officers, is the highest consultative body to
ensure that business issues and practices are shared across Philips and to
define and implement common policies. Members of the Board of Management and the
Supervisory Board are appointed by the Annual General Meeting of Shareholders on
the recommendation of the Supervisory Board and the Meeting of Priority
Shareholders. See Item 7: "Major Shareholders and Related Party Transactions".
The other members of the Group Management Committee are appointed by the
Supervisory Board. Since 1998, the Board of Management is located in Amsterdam,
The Netherlands.
The activities of the Philips group are organized in product divisions, which
are responsible for the worldwide business policy. Philips delivers products,
systems and services in the fields of lighting, consumer electronics, domestic
appliances and personal care, components, semiconductors and medical systems. At
the end of 2002, Philips has about 150 production sites in 35 countries and
sales and service outlets in approximately 150 countries, employed about 170,000
people and recorded sales of EUR 32 billion in 2002.
Since 1996, Philips has made significant progress in strategic refocusing of its
portfolio of businesses. It has reduced the number of businesses from 100 to
approximately 60 and the number of operating divisions from 12 to 7 at the end
of 2002, bringing more transparency, accountability and focus to its operations.
As part of the ongoing portfolio management program to strengthen the focus on
digital technologies, downscale the involvement in more mature analog businesses
and to reduce complexity, the Components division was reviewed in the course of
2002. This review resulted in measures to simplify the structure and reduce
costs, leading to the dissolution of the Components division, a realignment of
its business into other product divisions and a restructuring program to bring
the Optical Storage business back to profitability.
In 2002, Philips streamlined its organizational structure, by decreasing the
number of corporate regions from 7 to 4. As part of this process, the
Netherlands region is being integrated in the region 'Europe, Middle East and
Africa' (EMEA).
Royal Philips Electronics has its corporate seat in Eindhoven, The Netherlands
and is registered under number 17001910 at the Commercial Register of the
Chamber of Commerce and Industry in Eindhoven, The Netherlands. The executive
offices of the Company are located at the Breitner Center, Amstelplein 2, 1096
BC Amsterdam, The Netherlands, telephone 31 (0)20 59 77 777.
8
Business Overview
Since it started its activities in 1891, Philips has grown from a small
incandescent lamp factory to a widely diversified multinational group of
companies, engaged primarily in the manufacture and distribution of electronic
and electrical products, systems and equipment, as well as information
technology services.
Since 1996, Philips has been engaged in a continuing process of reviewing its
portfolio of businesses from a strategic and performance perspective. When it
started this process in the course of the year 1996, Philips' portfolio
comprised more than 100 businesses.
Rather than acquiring businesses in new areas, Philips is focusing on the
strengthening of its existing core activities, including the use of selected
acquisitions, and the disposal of activities that are under-performing and not
essential from a strategic viewpoint. These disposals include the reduction of
Philips' involvement in the German consumer electronics company Grundig AG at
the end of 1996, the formation of a joint venture for mobile communications with
Lucent Technologies in 1997 and the subsequent dissolution in 1998 after the
incurrence of substantial losses, the sale of Philips Car Systems in 1998, the
sale of Philips' 75% equity interest in PolyGram N.V. in 1998 and the merger of
Origin with Atos in 2000 (for a further description see "Product Sectors and
Principal Products").
The portfolio of Philips Components has essentially been adjusted by: the
disposition of Philips' conventional (non-ceramic) Passive Components business
group in 1998, the divestment of the Advanced Ceramics & Modules and General
System Components business groups in 2000, the placement of large LCD displays
into a joint venture with LG Electronics of Korea in 1999 and the merger of the
maturing cathode-ray tube (CRT) activities with those of LG Electronics of Korea
in 2001. As of the end of 2002, the Components division has been dissolved. The
new structure will streamline innovation and create more value through alignment
of related businesses in different divisions. As a result, Philips' telecom
speaker activity has been combined with Mobile Display Systems and moved to
Philips Semiconductors, offering customers a single source for complete and
integrated solutions for the telecom and PDA markets. In the same way, certain
digital displays and wireless connectivity activities, including the Pronto
remote controls group, have been moved to the Consumer Electronics division.
A stand-alone new business initiative group has been formed in order to give
more focus and attention to new high-growth display opportunities, including
Liquid Crystal on Silicon (LCoS) technology. For Optical Storage, a
comprehensive restructuring program is being carried out with the goal of
bringing the activity back to profitability. The major part of the restructuring
will see the PC-related (Data) business line concentrated in Taiwan. The R&D
group in Eindhoven will be strengthened to concentrate on pre-development. The
concentration of Philips' data activities in Taiwan and the collaboration with
BenQ will enhance Philips' focus on DVD+RW development. Both Optical Storage and
the new business initiative group will appear in the Miscellaneous sector in
Philips' financial reporting, as of 2003.
Consumer Electronics (CE) is changing rapidly and is increasing its focus on
digital, high growth products. In 2001, manufacturing of mobile handsets was
transferred to a partnership with China Electronics Corporation (CEC), while the
manufacturing of VCR's was outsourced to Funai Electric of Japan. In addition,
CE's portfolio of businesses has been streamlined further by the recent
divestment of Fax, Broadcast and part of Marantz, while other smaller
businesses, which were part of the former Specialty Products businesses, were
transferred to Corporate Investments as part of the Miscellaneous sector.
In November 2002, Philips and Jabil Circuit Inc., a global leader in Electronic
Manufacturing Services (EMS), agreed on the sale of most of Philips Contract
Manufacturing Services (PCMS). This agreement is in line with the strategy to
focus on selected activities that fully support the long-term ambitions of
Consumer Electronics as it continuously seeks to minimize the assets allocated
to the Consumer Electronics business through optimized supply chain management,
an Original Design Manufacturing (ODM) business philosophy and outsourcing.
Jabil will provide design and engineering services, new product introduction,
prototype and test services, procurement, PCB assembly, and final assembly and
integration.
9
The digital parts of CE, together with Semiconductors and Research, are the
focus on the high-growth technology strategy relating to core businesses.
The other core building blocks include the Medical Systems, Lighting and
Domestic Appliances and Personal Care divisions. The multi-billion dollar
acquisition program has substantially strengthened the Medical Systems division;
its acquisitions in 2001 of Agilent Healthcare Solutions and Marconi's Medical
Systems enabled it to achieve the No. 2 position in worldwide medical imaging
and monitoring equipment sales. The Lighting division is a world leader with
consistent returns and cash flows. Philips believes that new growth will be
stimulated by emerging technologies, such as solid-state lighting Light Emitting
Diodes (LEDs) and a strong focus on lighting-related electronics. In the case of
Domestic Appliances and Personal Care, growth is expected to center mainly on
male shaving and oral healthcare. The acquisition of Optiva Corporation, a
leading manufacturer of electric toothbrushes, on October 1, 2000 was made in
pursuit of this strategy.
In 2002, various businesses belonging to the Miscellaneous sector have been
divested, because they no longer fit in the strategic portfolio of the Philips
group. The most significant were: X-ray Analytical, Philips Broadband Networks,
and Philips' business unit Communication, Security and Imaging business.
Philips encounters aggressive and able competition worldwide in virtually all of
Philips' business activities. Competitors range from some of the world's largest
companies offering a full range of products to small firms specializing in
certain segments of the market. In many instances, the competitive climate is
characterized by rapidly changing technology that requires continuing research
and development commitments and intensive investment capital to meet customer
requirements. Also, the competitive landscape is changing as a result of
increased alliances between competitors.
A key element of Philips' drive to create a better, simpler and more
cost-effective organization is its program "Transforming into One Philips
(TOP)". It is designed to streamline the business support functions by
standardizing processes and introducing a shared way of working in the areas of
IT, HRM, Finance and Purchasing.
Philips views TOP not just as a method of cost control, but also as a vehicle
for fundamental change in the way the Company operates - a simpler
organization, with greater transparency and clearly defined accountabilities. It
encompasses the move to shared services which will improve the ability of the
businesses to focus on the real value drivers - technology, design and
marketing - which Philips believes will enhance the ability to innovate. With
the successful implementation of TOP, the Company will have an interactive
support infrastructure, allowing new businesses to be launched more easily.
Additionally, Philips has continued to focus on optimizing asset management,
increasing the use of outsourcing, reducing working capital, shortening the cash
conversion cycle and reducing debt.
Product sectors and principal products
In order to improve financial transparency to Philips' shareholders and the
financial community at large, the Board decided in 2000 that separate results
would be published for all divisions. As a consequence, the following nine
segments were distinguished at that time: Lighting, Consumer Electronics,
Domestic Appliances and Personal Care, Components (dissolved as of January 1,
2003), Semiconductors, Medical Systems, Origin (deconsolidated from October 1,
2000 onwards), Miscellaneous and Unallocated.
For a description of the changes in the businesses comprising the segments, and
data related to aggregate sales, segment revenues and income from operations,
see Note 31: "Information relating to product sectors and main countries" on
pages 105 through 109 of the 2002 Annual Report - Financial Statements and
Analysis, and page 10 and 11 of the Management Report, incorporated herein by
reference. For a discussion of revenues and income from operations of the
product sectors, see Item 5: "Operating and Financial Review and Prospects". For
a discussion of principal cooperative business activities and participating
interests, see also "Cooperative Business Activities and Unconsolidated
Companies" on pages 23 and 24 of the 2002 Annual Report - Financial Statements
and Analysis, as incorporated by reference under Item 5.
10
LIGHTING
Philips has been engaged in the lighting business since 1891 and is a leader in
the world market for lighting products with recognized expertise in the
development and manufacture of lighting products. A wide variety of applications
is served by a full range of incandescent and halogen lamps, compact and normal
fluorescent lamps, automotive lamps, high-intensity gas-discharge and special
lamps, QL induction lamps, fixtures, ballasts and lighting electronics. Lighting
products are manufactured in more than 70 manufacturing facilities worldwide.
Philips' worldwide presence in the lighting market has given it a strong
international position in lighting projects, both in design and full-scale
turnkey project installation. These activities require sophisticated expertise
and help Philips to maintain its leading position in the professional lighting
market.
Philips Lighting worldwide consists of four integrally responsible ongoing
businesses: Lamps, Luminaires, Automotive & Special Lighting and Lighting
Electronics. Each of these businesses has complete control over all its
processes. Major drivers for growth are: innovation, marketing excellence and
customer service, especially delivery reliability. Focusing on these areas at
the same time as pursuing a policy of continuous improvement and strict control
of costs and assets will sustain the leadership position as a pace-setter in the
lighting industry.
Across Europe, North America, Latin America and Asia Pacific, the division
employs some 47,000 people. After selling Philips' ownership in the joint
venture Philips Matsushita Battery Corporation, the battery marketing and sales
activities of Philips were transferred (Mid 2001) from Lighting to Consumer
Electronics.
In 2002, Philips Lighting entered into a long-term contract to be the exclusive
supplier of branded lighting products to Home Depot, the US company that is the
world's leading home-improvement retailer.
Within Lamps, the largest business, the main growth areas are the thin 16 mm T5
fluorescent lamps, halogen and high-intensity discharge lamps - especially
Mastercolor CDM. The latter solves the color variation problems inherent in
conventional metal-halide lamps, while offering much longer economic life and
thus considerably lower maintenance costs.
In Luminaires a development program to increase efficiency and improve
profitability has been implemented. Among many product introductions, the
efforts to help make urban areas more beautiful as well as safer at night has
continued with the introduction of Philips Lighting's New Metronomis range,
offering lighting designers, architects and urban planners a complete tool box
for lighting urban spaces.
In Automotive, fast growth is driven by innovations enhancing comfort and safety
on the road. Philips' HiPerVision car lamps represent a clear response to the
trend that people expect cars to have ever-higher levels of quality, reliability
and design. HiPerVision lamps are engineered to last the lifetime of the car,
use less energy, are recyclable and small, and offer greater design freedom. In
Special Lighting - which contains applications such as digital data projection
(where Philips Lighting has a leading position with the UHP lamp),
stage/theater/entertainment, infrared for industrial use, and ultraviolet for
both solaria and air/water disinfection - the focus will be continued on
exploiting double-digit growth opportunities in new application areas. In June
2001 a joint venture was formed with the Fraunhofer Institute in Aachen,
Germany, to develop Extreme Ultraviolet (EUV) light sources to be mounted in the
next generation of photolithography equipment for the semiconductor industry.
Further progress in IC technology is heavily dependent on new projection methods
to etch the finest details onto silicon. EUV, a radiation with a wavelength at
around 13 nm, is the technology widely expected to revolutionize semiconductor
lithography from about 2007.
In 1997, Philips and Agilent Technologies (formerly part of Hewlett-Packard)
entered into a joint venture company, LumiLeds Lighting B.V., a company
specialized in development, manufacture and marketing of LED (Light Emitting
Diode)-based lighting products. Light-emitting diodes (LEDs) offer enormous
potential for existing and new applications requiring dynamics in light level
and color. Their small size, long life, instant response, increasingly powerful
light output, durability and semiconductor-based nature set them apart from
other lamp technologies. The Luxeon V LED has made it possible to create special
color effects in shops, offices and the home. Luxeon V generates a
record-shattering 120 lumens of light from a single emitter - by far the
highest-power LED on the market.
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In the lighting controls business, growth was boosted by the acquisition of ECS
Lighting Controls Ltd., the UK market leader, in November 1999. In the year
2000, a stake was acquired in Metrolight, an Israeli company with a leading
position in HID (High Intensity Discharge) ballasts.
In Lighting Electronics, the business opportunities generated by energy savings,
miniaturization, increased power and flexibility, and cost effectiveness have
led to the creation of a new global business unit, Special Lighting Electronics,
focusing on electronics for, among other things, Ultra High Performance (UHP)
lamps, LEDs and automotive and solar applications. Through the acquisition in
2001 of the fluorescent lighting ballast operation of Lumisistemas (Mexico) and
the lighting ballast activities of Helfont (Brazil), our leading position in
these markets has been continued. The launch of the eKyoto ballast in Europe
provides an attractive, economical alternative to electromagnetic ballasts,
offering substantial energy savings and lesser environmental impact.
CONSUMER ELECTRONICS
As a top-three global player, Philips Consumer Electronics offers products
designed to bring consumers the benefits of the latest digital technologies at
any time and any place: at home, at work or on the move. The product range
encompasses: consumer TV (including widescreen and flat TV), institutional TV,
VCR, TV-VCR, optical disc products including DVD recorders and Super Audio CD;
digital television systems and Internet-connected devices including audio
systems; other audio products such as portable audio products, mini and micro
audio systems; PC peripherals such as PC monitors and DVD+RW data drives;
set-top boxes and personal communication products including cellular phones and
DECT phones. Philips Consumer Electronics has approximately 20,000 employees.
Philips Consumer Electronics is building upon competences in display, storage
and connectivity. Philips Consumer Electronics contributes to the Philips brand
experience by enhancing consumers' everyday lives through innovative top-class
products. Their aim is to be `the brand people think of first' when it comes to
digital entertainment, communication and information. Philips Consumer
Electronics plans to achieve this ambition by focusing on the strength of the
Philips brand, maintaining category leadership in display, storage and
connectivity, managing costs and maximizing asset productivity.
In display, leadership is based on creating the best picture quality and a
natural viewing experience with flat, slim and wide displays. Storage means
high-capacity, low-cost, robust storage solutions that allow consumers to easily
store and access content, including high-quality video, audio, pictures and
data. Connectivity enables the consumer to interact intuitively - anytime,
anywhere - with wireless devices.
The pace at which the consumer electronics market is shifting from analog to
digital is quickening. Digital products currently represent around 30% of the
audio/video market and are expected to increase to about 60% in 2005. Philips'
strategy is to pro-actively manage the transition of the product portfolio from
analog to digital and to shift even faster than the market. Examples include the
outstanding LCD monitors and the range of DVD recorders, which will be extended
in 2003, bringing DVD recording within the reach of a broader, mass market
audience.
Management believes that consumers are not interested in products as such, but
rather in the experiences they deliver. Accordingly, the business strategy has
been adapted to the concept of the `Consumer Experience', comprising three
domains - - Home Entertainment, Personal Expression and Productivity. The first
two are totally consumer-focused, while the third covers a broad range of
professional, semi-professional, small-office and business-to-business
applications. The Home Entertainment experience targets consumers who desire
customized and intuitive solutions for their homes, allowing them to enjoy
watching and listening to their preferred choice of digital audio and video
content. The solutions offer these consumers the ideal combination of
convenience, excitement and design.
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The Personal Expression experience is based on giving consumers - predominantly
young people, who have a natural affinity for today's Internet-centric lifestyle
- the freedom to enjoy the digital audio and video content of their choice,
wherever they go. The Productivity experience focuses on delivering solutions
that enable professionals - at home or at work - to do their jobs more
effectively, more efficiently and more enjoyably. These include solutions for
capturing information, storing and displaying it and making it easy to access,
distribute and use, both for individual viewing and group presentations.
Digital Networks spearheads Philips' involvement in the emerging world of
convergent digital content delivery, transforming the way people access
television and the Internet at home or on the move. This business is creating
the technologies to fulfill the promise of digital broadband via set-top boxes
for consumers and end-to-end standards-based software solutions with which
content providers and operators can create and deliver digital services.
In 2001, the PCB/Assembly unit - set up to bring together all the printed
circuit board assembly operations of Consumer Electronics in one unit - was
renamed Philips Contract Manufacturing Services (PCMS).
In 2002, Philips and Jabil Circuit Inc., a global leader in Electronic
Manufacturing Services (EMS), concluded on the sale of most of PCMS. This
agreement was in line with the strategy to focus on selected activities that
fully support the long-term ambitions of Consumer Electronics. It follows the
need to continuously minimize the assets for the Consumer Electronics business
through optimized supply chain management, an ODM business philosophy and
outsourcing. Jabil will provide design and engineering services, new product
introduction, prototype and test services, procurement, PCB assembly, and final
assembly and integration.
A key area of attention is the performance in the US. An extensive turnaround
program is being deployed. Enhancing the product offering and increasing the
visibility in high-tier retail shops are key elements of this program. The new
management team also decided to split the Philips brand from Magnavox, with
Philips targeting the high-value consumer segments and Magnavox focusing on
consumers looking for a value-for-money proposition. Significant steps have
already been made in the Flat TV category, where surveys show spontaneous
awareness of the Philips brand has gone up considerably. Also, the US field
sales force has been expanded and upskilled. And in order to improve the supply
chain management, warehousing and all transportation to US retail customers from
cross-border operations in Mexico have been outsourced.
In 2001 Philips' mobile phone activities were refocused, with Philips Consumer
Communications (PCC) ceasing to operate as an independent manufacturer of mobile
handsets; this involved a major restructuring, particularly in France. Part of
PCC's R&D capabilities and part of its manufacturing activities have been
incorporated in partnerships with China Electronics Corporation (CEC). Philips
maintains a focus on sales and marketing activity in mobile telephony under the
Philips brand.
On March 25, 2002, Philips and Nike Inc. announced an alliance to merge their
athletic and digital technology expertise to develop innovative technology
product solutions. The premier offerings from the Nike and Philips alliance are
expected to include a new line of portable MP3 and MP3-CD players that have been
designed for sport through the integration of ergonomics, usability, portability
and solid state technology.
As from January 1, 2003, certain activities have been transferred from the
discontinued Components division. These are digital display and audio/video
wireless connectivity activities, including the Pronto remote controls group.
This move is designed to reduce organizational complexity and duplication, and
maximize synergies both for branded and OEM solutions. A stand-alone activity,
New Displays Business Development, has been formed in order to strengthen the
focus on new high-growth display opportunities, including the Liquid Crystal on
Silicon (LCoS) and PolyLED technologies.
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DOMESTIC APPLIANCES AND PERSONAL CARE
Philips Domestic Appliances and Personal Care is engaged in the developing,
manufacturing and marketing of innovative appliances in the field of shaving and
beauty, oral health care, food and beverage appliances, garment care and
floorcare. The division employs just above 8,700 employees. Philips Domestic
Appliances and Personal Care (DAP) holds market leadership positions through its
portfolio of power brands in the personal care markets (Philishave worldwide,
Norelco and Sonicare in the USA) and a strong Philips brand position in the
domestic appliance markets, especially in Europe, Latin America and Asia
Pacific.
In October 2000, Philips acquired Optiva Corporation, the Seattle, USA based
business of the Sonicare power toothbrushes. By this acquisition, Philips
Domestic Appliances and Personal Care division has become the No. 2 global
player in the market of rechargeable power toothbrushes.
Philips has a leadership position in electrical dry and wet male shaving and
grooming products. In its beauty portfolio, Philips has a range of products
which are used for female depilation, haircare and tanning solaria. Furthermore,
Philips provides food and beverage appliances, such as mixers, blenders, food
processors, toasters, coffee makers and fryers and manufactures and markets
vacuum cleaners and irons. Domestic appliances and personal care products are
sold under the Philips brand and other brand names.
Philips has long been successful on the US market under the brand name Norelco
and will continue to use this brand name for the male shaving and grooming
products.
In 2001, the Senseo coffee maker, the breakthrough concept for the traditional
coffee segment which has been developed in partnership with Sara Lee/DE, has
been introduced in the market.
At the end of October 2002, Philips concluded the sale of Payer Elektroprodukte
to Hui Holding Sdn. Bhd. of Malaysia. Payer Elektroprodukte is an Austria-based
leading original equipment manufacturer (OEM) of electric foil shavers.
COMPONENTS
Until year-end 2002 Philips Components was a major provider of integral digital
electronic solutions in the areas of displays, optical storage and connectivity.
With a global customer base covering the computing, consumer electronics,
telecommunications and automotive industries, it produced: modules for optical
storage in CD and DVD formats; mobile display systems for use in cellular phones
and other handheld devices; wireless connectivity modules; speaker systems,
tuners, remote control systems, multimedia projectors and digital display
systems (LCD TV, etc.). In 2002 Philips Components employed some 13,000 persons.
As part of the ongoing portfolio management program for the Philips group to
strengthen the focus on digital technologies, downscale the involvement in more
mature analog businesses and reduce complexity, a comprehensive review of the
Components division was carried out in the course of 2002. This review resulted
in measures to simplify the structure of the electronics activities and reduce
costs, leading to the dissolution as of January 1, 2003 of the Components
division and a restructuring program designed to bring Philips Optical Storage
back to profitability.
The new configuration, which became effective on January 1, 2003, will
streamline innovation and create more value through alignment of related
businesses previously grouped in different divisions. The telecom speaker
activity has been combined with Mobile Display Systems and transferred to
Philips Semiconductors, offering customers a single source for complete and
integrated solutions for the telecom and Personal Digital Assistant (PDA)
markets. Similarly, certain digital display and audio/video wireless
connectivity activities, including the Pronto remote controls group, have moved
to Consumer Electronics. Again, this move is designed to reduce organizational
complexity and duplication, and maximize synergies both for branded and OEM
solutions. A stand-alone activity, New Displays Business Development, has been
formed in order to strengthen the focus on new high-growth display
opportunities, including the Liquid Crystal on Silicon (LCoS) and PolyLED
technologies.
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For Optical Storage, a comprehensive restructuring program is being carried out
in order to bring the activity back to profitability. The major part of the
restructuring will concentrate the PC-related (Data) business line in Taiwan.
The R&D group in Eindhoven will be strengthened to concentrate on
pre-development. The concentration of the data activities in Taiwan and the
collaboration with BenQ will enhance Philips' focus on DVD+RW development. The
turnaround in Data will be accelerated by focusing on the more profitable,
high-growth segment of DVD+RW drives. By strengthening its position in DVD+RW
applications and new or emerging standards, Philips intends to remain a leading
player in the OEM and aftermarket optical storage industry with a solid basis
for sustained profitability.
The consumer and automotive businesses of Philips Optical Storage are profitable
and developing according to plan. The consumer line is a leader in the
audio/video market and supplies drives for applications including DVD Recorders
(based on the DVD+RW standard) and games consoles (Microsoft's Xbox). The
Automotive line is a leader in its industry and growing significantly, mainly
due to the switch from tapes to CDs and DVDs and the increasing application of
navigation systems in cars.
The wireless connectivity module activities of Components will be transferred to
the new joint venture with Accton Technology Corporation of Taiwan, in which
Philips will hold a 48% share. This joint venture was announced on January 8,
2003 and the deal is expected to be closed in the second quarter of 2003. The
joint venture will provide innovative wireless connectivity (802.11) products
for design-in (OEM) to, for example, the consumer electronics, PC and mobile
phone industries. The new company will address the increasing market
requirements for advanced, easy-to-use and cost-effective wireless connectivity
solutions based on state-of-the-art technology in Wi-Fi (802.11),
Bluetooth(TM) and other industry standards.
As of 2003, the results of Optical Storage, the New Displays Business
Development group and the businesses that are transferred to the business
Philips Corporate Investments will be reported under Miscellaneous.
In 2001, Philips and LG Electronics of Korea (LGE) completed a definitive
agreement through which the two companies merged their respective cathode ray
tube (CRT) businesses into a new joint venture company. LGE and Philips share
equal control of the joint venture, named LG.Philips Displays. The aim of the
joint venture is to ensure the lowest possible cost base in the maturing CRT
market and to achieve significant synergies. The joint venture is in the midst
of a significant restructuring program intended to reduce its operational costs.
This follows the substantial investments in digital-age display technologies
made by Philips through the establishment of a manufacturing joint venture
between Philips and LGE (LG.Philips LCD) in 1999, creating a leading supplier of
Active Matrix Liquid Crystal Displays (AMLCDs).
Due to anticipated capital requirements, LG.Philips LCD is exploring capital
raising options for 2003, including the possibility of making an initial public
offering of its shares.
In 2002, Philips and Dell announced that they entered into a global strategic
alliance. The five year agreement calls for Philips to supply cathode-ray tube
and flat panel monitors, storage devices, connectivity solutions and other
components to Dell for use in computer systems. Dell will also market and sell a
comprehensive range of Philips-brand computer peripherals, along with related
products. The companies will collaborate on technology planning, marketing and
optical storage standards to more rapidly serve the needs of world-wide
customers.
SEMICONDUCTORS
Philips Semiconductors is one of the world's top ten semiconductor manufacturers
and a major supplier of innovative silicon solutions for consumer electronics,
telecommunications, automotive, computing and industrial applications.
Semiconductors' solutions are designed to grow and evolve as their customers
adapt their businesses to take advantage of and respond to fast-evolving digital
technologies. The division has approximately 31,000 employees in more than 50
countries.
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Activities in the consumer segment of the division are focused on responding to
a market trend of a new generation of digital applications, wireless
connectivity and new, simple user interfaces. For the home, Philips' Nexperia
Multimedia Solutions provide customers with reconfigurable and reusable
solutions for full digital television. Over 70% of the world's DVD+RW recorders
made in 2002 contained a Philips Nexperia solution. Philips expects that over
the next five to seven years a significant proportion of the installed TV base
in Europe and the US will be replaced by new integrated digital TVs, and Philips
Semiconductors is uniquely positioned to take advantage of this new market. Over
60% of all TVs sold in 2002 contained a Philips Semiconductors product.
In the communications segment, Philips Semiconductors strengthened its position
in the mobile phone market. By the end of 2003 it is expected that one in every
ten mobile phones made in the world will have a Philips Nexperia system solution
inside. This system solution enables mobile phone makers to bring new mobile
phone designs to market quickly. System solutions are ready for all the new
mobile phone technologies that will come onto the market in 2003 and 2004 (GPRS,
G2.5, G3, etc.).
During the year 2001, Philips formed a joint venture with China Academy of
Telecommunications Technology (CATT) and CEC Wireless (CECW) to develop 3G
(third generation) phones for the Chinese market. The Company believes the
Chinese market, with its low mobile phone penetration rate, is a region of
promise for new 3G phones.
Combined with the Nexperia platform, Philips Semiconductors will continue to
invest in key technologies and capabilities that will drive the digital
revolution forward. These include identification and security, power management,
connectivity, wired and wireless communications (such as Bluetooth(TM)) and
user interface design.
During 2002, one of the world's leading clothing chains selected the
identification chip for incorporation in their garments. At first they will use
the chip for tracking throughout their manufacturing and logistics chain, and
then as a security device in shops. In the longer term it can also be used as
part of their customer relationship management.
Philips continues to develop leading solutions for the wireless and wired
connectivity markets. On December 19, 2002 a definitive agreement was announced
to acquire Systemonic, a leading developer of complete silicon system solutions
for multi-protocol, multi-band wireless local area networks (LANs). This
acquisition, which closed by year-end 2002, will increase the ability to hold
leading positions in the 802.11 standard for wireless connectivity. Philips
expects to be the first company to release silicon for the new ZigBee standard.
Philips maintained its leadership in Bluetooth((TM)) by delivering over 10
million units of low-power, low-cost system solutions targeting voice and data
applications. During 2002 the Company and Sony jointly announced a new standard
for secure Near-Field Communication (NFC). Near-Field Communication allows the
transfer of any kind of data between NFC-enabled devices such as mobile phones,
digital cameras, PDAs and PCs over a distance of up to twenty centimeters. NFC
will deliver speeds fast enough to transfer high-quality images in a secure and
seamless way. This will enable the development of several new markets, including
electronic toys, and easy uploading of music and software from main players to
portable machines.
Philips is in the forefront of new technologies for semiconductors. With its
partners Motorola and ST Microelectronics, the wafer fab in Crolles, France,
will start producing leading-edge 120 nm wafers for a number of new products in
2003. The 90 nm development is proceeding very well, and it is expected to
commence pilot production by the end of 2003. In January 2003 a world first -
functional memory cells in 65 nm technology - was demonstrated. These new
technologies will lead to lower-power, higher-speed and smaller-area
semiconductors, which are needed for the next generation of mobile phones, PDAs
and other portable devices.
As of January 1, 2003 some activities have been transferred from the Components
division. The telecom speaker activity has been combined with Mobile Display
Systems and moved to Philips Semiconductors, offering customers a single source
for complete and integrated solutions for the telecom and Personal Digital
Assistant (PDA) markets.
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The division has 16 manufacturing facilities throughout the world, located in
Europe, the United States and Asia. In addition Semiconductors has significant
investments in Singapore (SSMC), Taiwan (TSMC) and China (ASMC). In November
2002 it was announced that the fab in Albuquerque, New Mexico in the US will be
closed during 2003.
MEDICAL SYSTEMS
Philips Medical Systems is one of the world's leading suppliers of medical
imaging modalities and patient monitoring systems. It is a global leader in the
product segments x-ray, ultrasound, nuclear medicine, patient monitoring,
magnetic resonance, computed tomography, clinical information management and
resuscitation products. The product portfolio also includes positron emission
tomography, radiation therapy planning, as well a comprehensive range of
customer support services. Philips Medical Systems employs around 31,000 people.
Addressing a market that increasingly demands full range suppliers able to
provide total healthcare solutions, Philips Medical Systems is reaching for a
global leadership position in this total provider area. Following a focused and
ambitious program of acquisitions over the last three years, representing
investments in excess of USD 5 billion, Philips Medical Systems believes it is
now able to offer integrated solutions covering the entire spectrum of
diagnostic imaging and patient management needs.
Advancing its mission to become the industry leader in meeting the needs of
healthcare providers worldwide, Philips Medical Systems took significant steps
in 2002 to strengthen its position in its key markets. This included an
accelerated program of product innovations that have reinforced its technology
leadership in imaging, patient monitoring and IT. Major steps were also taken to
execute the program integrating the division's recently acquired market- and
technology-leading companies to form a strong, harmonized market presence and an
effective, competitive organization. The result is a significant increase in the
reach of the Philips brand to important target audiences, for example with a 50%
installed base in US hospitals in the critical care area. Philips Medical
Systems has significantly strengthened its position in the field of diagnostic
imaging with the acquisition of ATL Ultrasound in 1998. This company is one of
the leaders in ultrasound imaging systems - one of the fastest growing sectors
of the market - and the clear leader in all-digital ultrasound systems.
In ultrasound, the subsidiary ATL has brought SonoCT realtime compound imaging,
an advanced real time imaging standard, to all major applications of ultrasound
and united it with other advanced capabilities such as 3D, bringing the benefits
of numerous powerful technologies together.
In the course of 2000, a range of new customer support products was introduced,
aimed at better cost control for health care providers. For instance, Philips
Medical Systems is capable of offering transcription services that reduce over-
all reporting costs through the acquisition in 2000, of the majority of shares
in MedQuist Inc. of the United States, a provider of outsourced medical record
translation services.
In December 2000, Philips Medical Systems acquired substantially all of ADAC
Laboratories' common stock. The Milpitas, California based company is a
worldwide market leader in nuclear medicine, positron emission tomography -
one of the fastest-growing market segments - and radiation therapy planning.
In August 2001, Philips Medical Systems completed the acquisition of the
Healthcare Solutions Group (HSG) of Agilent Technologies Inc. HSG is active in
the field of pervasive cardiology and monitoring solutions, and is a leading
global provider of medical products and services to hospitals, healthcare
clinics, physicians' offices, airlines and others. The primary reason for the
acquisition was to enhance existing business and to provide Medical Systems with
a strong position in the cardiac sector. Additionally, the acquisition enables
Medical Systems to enter certain new, high-growth segments such as home care
technology enabling remote diagnostics.
In October 2001, Philips Medical Systems acquired all the shares of Marconi's
Medical Systems business, which comprises two businesses, the core Medical
Imaging Equipment business, a global participant in the medical diagnostic
imaging equipment industry, and the Marconi Healthcare Products business (HCP),
one of the largest distributors of radiology imaging supplies in the USA. The
primary reasons for the acquisition were to enhance Medical Systems' Computed
Tomography (CT) portfolio and to acquire an additional CT installed base whose
service and maintenance is the most profitable area of the diagnostic imaging
industry. At the end of November 2002, the sale of the HCP group to Platinum
Equity Holdings was concluded. Final settlement is expected to occur in the
first quarter of 2003. A divestment of the HCP group has been intended from the
moment of acquisition of Marconi's Medical Systems' business since it does not
fit in the strategic portfolio.
Philips is engaged in complex and far reaching systems integration activities as
a result of the recent acquisitions that may require additional resources and
time before fully implemented.
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MISCELLANEOUS
This segment comprises various activities and businesses not belonging to a
product sector. It consists mainly of two groups of activities: the central
research and technology centers (such as Philips Research, Intellectual Property
and Standards, Philips Centre for Industrial Technology and Philips Design) and
Corporate Investments (such as Assembleon, and Philips Enabling Technologies
Group). It also comprises various (remaining) activities from businesses that
have been sold, discontinued, phased out or deconsolidated in earlier years.
NavTech was consolidated for the first time in 2001 and included in the
Miscellaneous sector. Until its deconsolidation in May 2001, FEI Company, was
included in the consolidated figures of the Miscellaneous sector. Also included
are some remaining former businesses from the Consumer Electronics and
Components sectors and the equity investment in Atos Origin.
In 2000, Philips Machinefabrieken changed its name to Philips Enabling
Technologies Group. Philips Enabling Technologies Group manufactures
customer-specific machinery, tools and precision components for high-quality
professional equipment. The Philips Enabling Technologies Group consists of
three businesses:
- High Tech Equipment, with focus on Semiconductor front-end and
Semiconductors back-end production, plus new future opportunities like
Optical Storage, Flat Screen and Solar Cell.
- High Tech Aerospace, with focus on Engine Sheet Metal, Fan- and Compressor
Blisks and Assembly of Fan Modules.
- High Tech Plastics, including Tooling, with focus on Optical Products,
Medical disposables and Automotive Products.
In March 2002, Philips sold its Fax business to Groupe SAGEM of France, the main
activities of this business were located in Vienna, Austria. The reason for this
disposal is that strategically the fax market and related printing technologies
no longer fit within Philips.
In May 2002, Marantz, in which Philips had a 49% stake, and Denon, Ltd, merged
operations into D&M Holdings, Inc. maintaining the established Marantz and Denon
brands.
In September 2002, Philips sold the major part of its X-ray Analytical business
to Spectrics plc of Egham, United Kingdom, a precision instrumentation and
controls company.
In September 2002, C-COR.net of State College, PA, USA, a global provider of
broadband communications technology systems and services, acquired Philips
Broadband Networks (PBN).
In October 2002, Philips and Robert Bosch GmbH concluded the sale of Philips'
business unit Communication, Security and Imaging (CSI).
Following the dissolution of the Components division, the Optical Storage
business has been transferred to the Miscellaneous sector as of January 1, 2003.
A comprehensive restructuring program will be carried out designed to bring the
activity back to profitability. The major part of the restructuring will
concentrate the PC-related (data) business line in Taiwan.
Philips Design is dedicated to creating value by delivering innovative solutions
that humanize technology. With 450 employees active in 12 locations around the
world, Philips Design serves all Philips' businesses and a select portfolio of
external customers.
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UNALLOCATED
This product sector comprises the costs of the corporate center - including the
Company's initial funding of e-business and global brand management programs -
as well as country and regional overhead costs.
ORIGIN
In October 2000, Philips sold its 98% interest in Origin, its global IT service
company delivering systems and a full range of services that facilitate total
business solutions for clients, to Atos, a leading European IT service provider,
and received a 48.7% interest (currently 48.4%) in the combined entity Atos
Origin. As a result of the merger, as from October 1, 2000, Philips no longer
consolidates Origin as a separate division but includes its share of Atos
Origin's earnings in results relating to unconsolidated companies (in the
Miscellaneous segment).
Research and Development, Patents and Licenses
Philips' research and development activities are allocated between Philips
Research, which focuses on research projects relevant to the entire group, and
the product divisions. Approximately 19,800 employees are engaged in advanced
development, product development and in the development of production methods
and equipment.
In recent years, Philips has placed greater emphasis on research projects that
are relevant to the entire group, and which are conducted by Philips Research,
while the main responsibility for the development of products and production
methods in Philips currently lies with the product divisions, which have at
their disposal development laboratories and implementation departments in 25
countries throughout the world.
Expenditures for research and development activities represented 9.6% of Group
sales in 2002, 10.2% of Group sales in 2001 and 7.3% of Group sales in 2000.
Founded in 1914, Philips Research is one of the world's major private research
organizations, with main laboratories in the Netherlands, the United Kingdom,
Germany, the United States and China, together employing some 2,500 people.
Continuous efforts to sustain the strong performance in the field of research
and development activities are critical for Philips to preserve and strengthen
the Company's competitiveness in its various markets. Through substantial
investments in Research & Development, Philips has created a large knowledge
base. Each year, new technological breakthroughs are added to Philips' long list
of research successes. To provide a direct response to the needs of the market,
Philips has in recent years adopted a more product-oriented approach to research
and development, with expenditures directed at projects with more apparent
short-term commercial prospects.
Philips plays a leading role in shaping the world of digital electronics by
bringing meaningful technological innovations to people. Many of these
innovations have their roots in the laboratories of Philips Research. Creating
value and growth by generating new technologies for the various Philips
businesses is the main focus of Philips Research. Drawing upon a deep and broad
technology foundation, scientists at Philips Research are constantly striving to
break down the barriers between technology and application domains in order to
achieve the synergies that will lead to new product concepts and new business.
At Philips Research, scientists from a wide range of disciplines and backgrounds
work together, influencing and broadening each other's views, thus enabling the
Philips businesses to reap the benefits of diversity, cross-fertilization of
ideas and synergy. To give an example of the diversity of the organizational
fabric, more than 50% of all new employees at Philips Research in the
Netherlands are recruited from abroad.
19
Philips' Centre for Industrial Technology (CFT) is a center of competence
supporting the product divisions and a number of external high-tech companies in
all aspects of production, particularly in the areas of mechatronics,
electronics, process technology, assembly and industrial support, employing over
1,200 people.
In 2002, CFT made a number of key contributions to the manufacture of innovative
new products. For example, it greatly simplified the production process for
PolyLED displays, as used in Philips' new Sensotec shaver, eliminating the
problem of water vapor ingress, which caused rapid degeneration of the PolyLED
material.
Intellectual Property & Standards (IP&S), formed on January 1, 2002 through the
merger of Corporate Intellectual Property and System Standards & Licensing, is
responsible for managing Philips' intellectual property. The activities of IP&S
include the creation of all intellectual property rights, including patents,
trademarks, designs, domain names and copyrights, as well as the
commercialization of these rights. In addition, IP&S plays a leading role in
establishing standards in specific technical fields, such as optical storage, in
cooperation with Philips Research and third parties. IP&S also exploits Philips'
technologies through the transfer of know-how and licensing of the associated
intellectual property rights to third parties.
As a result of increased patent filings over the last two years, the total
worldwide patent portfolio grew by more than 10% in 2002 and now comprises some
85,000 patent rights. The aim is to extract maximum value from this portfolio
through a structured process of identification and verification of valuable
patents.
None of our business segments is dependent on a single patent or license or a
group of related patents or licenses.
Organizational structure
The information concerning Philips' significant subsidiaries in Exhibit 8 to
this Annual Report on Form 20-F is incorporated herein by reference.
Property, plant and equipment
Philips owns and leases manufacturing facilities, research facilities,
warehouses and office facilities in numerous countries over the world.
Philips has over 150 production sites in 35 countries. Philips believes that its
plants are well maintained and, in conjunction with its capital expenditures for
new property, plant and equipment, are generally adequate to meet its needs for
the foreseeable future. For net book value of its property, plant and equipment
and developments therein, reference is made to Note 15 "Property, plant and
equipment" on page 78 of the 2002 Annual Report -Financial Statements and
Analysis, which is incorporated herein by reference. The geographic allocation
of assets employed as shown in Note 31 entitled "Information relating to product
sectors and main countries" on pages 105 through 109 of the 2002 Annual Report
-Financial Statements and Analysis- and incorporated herein by reference, is
generally indicative of the location of manufacturing facilities. The
headquarters in Amsterdam are leased. The information as shown in Note 25,
entitled "Commitments and contingent liabilities" on page 87 of the 2002 Annual
Report - Financial Statements and Analysis-, partly related to the rental of
buildings, is incorporated herein by reference.
For environmental issues affecting the Company's properties, reference is made
to Legal Proceedings in Item 8, entitled "Financial Information", which is
incorporated herein by reference.
Item 5. Operating and financial review and prospects
The information on pages 3 through 39 of the 2002 Annual Report - Financial
Statements and Analysis ("Operating and Financial Review and Prospects") is
incorporated herein by reference.
20
Operating results
The information on pages 3 through 24 of the 2002 Annual Report - Financial
Statements and Analysis ("Operating and Financial Review and Prospects"), and
Note 30, entitled "Financial instruments and risks" on page 100 through 104 of
the 2002 Annual Report - Financial Statements and Analysis is incorporated
herein by reference.
Critical Accounting Policies
For a description of critical accounting policies, reference is made to pages
33 through 35 of the 2002 Annual Report - Financial Statements and Analysis
("Operating and Financial Review and Prospects"), and such information is
incorporated herein by reference.
A complete description of Philips' accounting policies appears on pages 49
through 57 of the 2002 Annual Report - Financial Statements and Analysis
("Accounting Policies"), and is incorporated herein by reference.
As from 2002, Philips presents its financial statements on a basis
consistent with generally accepted accounting principles in the United States
("US GAAP"). Previous years have been restated accordingly.
Full financial statements of the Company's statutory accounts, in conformity
with Dutch law and adopted by the shareholders meeting and subsequently filed,
will continue to be prepared on a basis consistent with generally accepted
accounting principles in The Netherlands ("Dutch GAAP") and remain available
for investors. A reconciliation of material differences between the two is
provided in the notes to the annual financial statements and is publicly
available on the Company's website (www.philips.com).
New Accounting Pronouncements
In addition to the items discussed on page 57 of the 2002 Annual Report -
Financial Statements and Analysis - , which is incorporated herein by reference,
the Financial Accounting Standard Board ("FASB") also issued Financial
Interpretations number 45 and 46.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires that a liability
be recorded, at fair value, in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the entity's product
warranty liabilities. The initial recognition and initial measurement provisions
of FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002.
Philips is currently assessing the impact of the adoption of this interpretation
on its financial position, results of operations and cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, and an Interpretation of ARB No.
51". FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. For a discussion of the
effect and expected impact of this interpretation for Philips, reference is made
to commitments and contingent liabilities on page 87 of the 2002 Annual Report -
Financial Statement and Analysis, which is incorporated herein by reference.
21
Liquidity and capital resources
The information on pages 25 through 29 and pages 85 through 88 and pages 100
through 105 of the 2002 Annual Report - Financial Statements and Analysis is
incorporated herein by reference.
Since July 2002, the Company has had a USD 3.5 billion revolving credit facility
with a five-year maturity, for general business purposes and as a back-stop to
Philips' USD 2.5 billion Commercial Paper Program. As of December 31, 2002, USD
10 million were outstanding under the Commercial Paper Program. The USD 3.5
billion revolving credit facility does not contain financial covenants, any
credit rating related acceleration possibilities nor any credit rating related
availability restrictions. The USD 3.5 billion revolving credit facility has not
been drawn upon (nor had the previous USD 2.5 billion revolving facility).
Off-balance sheet arrangements
The information on page 29 and pages 87 through 88 of the 2002 Annual Report -
Financial Statements and Analysis is incorporated herein by reference.
Contractual obligations and commercial commitments
The information on page 29, pages 87 through 88 and pages 100 through 105 of the
2002 Annual Report - Financial Statements and Analysis is incorporated herein by
reference.
Trading activities that include non-exchange traded contracts accounted for at
fair value
Philips does not engage in trading activities in non-exchange traded
contracts.
Research and Development
For information required by this Item, reference is made to the separate section
"Research and Development, Patents and Licenses" as part of the business
description under Item 4; and page 17, page 53 and page 65 of the 2002 Annual
Report - Financial Statements and Analysis, which is incorporated herein by
reference.
Outlook
The information required by the Item "Trend Information" on page 36 of the 2002
Annual Report - Financial Statements and Analysis is incorporated herein by
reference.
Item 6. Directors, senior management and employees
The information on page 64, pages 82 through 84 and pages 95 through 99 of the
2002 Annual Report -Financial Statements and Analysis, and pages 56 through 63
of the Annual Report -Management Report is incorporated herein by reference.
In addition to the principal business activities inside the Company referred to
in the Annual Report, members of the Board of Management perform the following
functions outside the Company.
Mr G.J. Kleisterlee is a Director of Vivendi Universal and is chairman of the
Supervisory Board of Eindhoven Technical University. Mr J.H.M. Hommen is a
member of the Supervisory Boards of TPG and Atos Origin, and chairman of the
Academic Hospital Maastricht. Mr A.P.M. van der Poel is a member of the Board of
Directors of Taiwan Semiconductor Manufacturing Company and of the Supervisory
Board of PSV. Mr A. Huijser is a member of the Supervisory Board of CQM.
22
Directors and senior management
As of May 1, 2003, Mr A. van der Poel will relinquish his position as member of
the Board of Management and become a member of the Company's Group Management
Committee on a part-time basis. As of the same date, Mr A. Veenhof will resign
as CEO of DAP and as a member of the Group Management Committee.
The Company's policy forbids personal loans to and guarantees on behalf of
members of the Board of Management, the Supervisory Board or the Group
Management Committee and no loans and guarantees have been granted and issued,
respectively, to such members in 2002, nor are any loans or guarantees
outstanding as of December 31, 2002.
Compensation
For information on the remuneration of the Board of Management and the
Supervisory Board, required by this Item, see pages 95 through 99 for the
aggregate amounts and individually named members of the 2002 Annual Report -
Financial Statements and Analysis-, which is incorporated herein by reference.
Share ownership
number of shares
-------------------------------------
as of February as of December 31,
28, 2003 2002
-------------- ------------------
L.C. van Wachem 17,848 17,848
W. de Kleuver 4,131 4,131
L. Schweitzer 1,070 1,070
G.J. Kleisterlee 41,137 41,137
J.H.M. Hommen 314,131 314,131
A. Huijser 25,227 25,227
The aggregate share ownership of the members of the Board of Management and the
Supervisory Board represents less than 1% of the outstanding ordinary shares.
Mr L.C. van Wachem is also Chairman of the Board of the Dr. A.F. Philips
Stichting and a member of the Board of the Stichting Preferente Aandelen
Philips. Messrs W. de Kleuver, J.M. Hessels and K.A.L.M. van Miert are also
members of the Board of the Dr. A.F. Philips Stichting. Mr Kleisterlee, as
President of the Company, is a member of the Dr. A.F. Philips Stichting and a
member of the Board of the Stichting Preferente Aandelen Philips. The Dr. A.F.
Philips Stichting holds all of the outstanding priority shares of the Company.
The Stichting Preference Aandelen Philips has the right to acquire all of the
authorized preference shares of the Company. For more information see Item 7
"Major shareholders and related party transactions".
Board practices
Members of the Board of Management are elected in such position for an
indefinite period by the General Meeting of Shareholders. They may be suspended
by the Supervisory Board and the General Meeting of Shareholders and dismissed
by the latter.
The employment agreements of the members of the Board of Management, other than
Mr Kleisterlee, are entered into for a definite period of five years, and may be
extended upon agreement of both parties. Their employment agreements provide
that if their employment is terminated, other than for a compelling reason,
prior to the expiration of the term of their respective agreement, they will be
entitled to receive a once only payment equal to twice their annual salary. If
Philips does not renew the contract at the end of a term after having renewed
the contract at least once, the employee is entitled to a payment of up to twice
his annual salary. The employment agreements also provide provisions for the
members of the Board of Management to receive bonus, pension rights, stock
options and other benefits. The employment agreements are governed by Dutch law.
As Mr Kleisterlee's employment agreement with Philips is for an indefinite
duration, any benefit payable to him on termination will be determined under
Dutch law, in the same manner as other employees of Philips who are employed for
an indefinite duration. Exhibit 4 contains the form of contract used for
members of the Board of Management.
23
The Supervisory Board
The overall assignment of the Supervisory Board is (a) to supervise the policies
and management and the general affairs of the Philips group of companies and (b)
to assist the Board of Management and the Group Management Committee with advice
on general policies related to the activities of the Company and the companies
belonging to the Philips group. The Supervisory Board is, in the applicable
two-tier structure of the Netherlands law, a separate body and independent from
the Board of Management. This independence is also reflected in the requirement
that the members of the Supervisory Board are neither a member of the Board of
Management, nor an employee of the Company. The Supervisory Board, though
remaining responsible, may assign certain tasks to one or more permanent and/or
ad hoc committees formed from among its members. Three permanent committees
assist the Supervisory Board: a Corporate Governance and Nomination & Selection
Committee, an Audit Committee and a Remuneration Committee.
The resolutions to be taken by the Supervisory Board in connection with
appointments to the Supervisory Board, the Board of Management and the Group
Management Committee, and regarding corporate governance principles, are
prepared by the Corporate Governance and Nomination & Selection Committee of the
Supervisory Board. The Corporate Governance and Nomination & Selection Committee
will consult with both or either of the President/CEO and the Board of
Management from time to time with respect to changes that the Corporate
Governance and Nomination & Selection Committee believes to be desirable to the
size of the Supervisory Board, the Board of Management and the Group Management
Committee. It also will consult with both or either of the President/CEO and the
Board of Management on candidates to fill vacancies on the Supervisory Board,
the Board of Management and the Group Management Committee. The Corporate
Governance and Nomination & Selection Committee will also consult with the
Meeting of Priority Shareholders on the list of candidates for appointment to
the Supervisory Board or the Board of Management. The Corporate Governance and
Nomination & Selection Committee will interview possible candidates. The
Corporate Governance and Nomination & Selection Committee will review the
corporate governance principles applicable to the Company at least once a year,
and advises the Supervisory Board on any changes to these principles as it deems
appropriate. The Corporate Governance and Nomination & Selection Committee meets
at least twice a year.
The Remuneration Committee meets at least twice a year and is responsible for
overseeing the administration of the Company's compensation programs for members
of the Board of Management and the Group Management Committee, for reviewing the
compensation of members of the Board of Management and the Group Management
Committee and for preparing decisions of the Supervisory Board on proposals of
the President/CEO on the remuneration of members of the Board of Management and
the Group Management Committee. The Remuneration Committee, in consultation with
the President/CEO and the Head of Management Conditions and Remuneration,
prepares the Company's general compensation philosophy for members of the Board
of Management and the Group Management Committee, and oversees the development
and implementation of compensation programs for members of the Board of
Management and the Group Management Committee. The Remuneration Committee
reviews and proposes to the plenary Supervisory Board corporate goals and
objectives relevant to the compensation of members of the Board of Management,
including the President/CEO and the Group Management Committee. The Remuneration
Committee further evaluates the performance of members of the Board of
Management and the Group Management Committee in light of those goals and
objectives, and makes recommendations to the plenary Supervisory Board on the
compensation levels of the members of the Board of Management and the Group
Management Committee based on this evaluation. In proposing to the Supervisory
Board the long-term incentive component of the compensation of the members of
the Board of Management and the Group Management Committee, the Remuneration
Committee shall consider, among other factors, the Company's performance, the
enhancement of the value of the Group and the remuneration package for
board-level executives of other multinational companies operating in global
markets.
The Audit Committee meets at least four times a year before the publication of
the annual and quarterly results. The charter of the Audit Committee provides
that each member will be financially literate (or will become so within a
reasonable time after the appointment to the Audit Committee), and the chairman
of the Audit Committee shall have accounting or related financial management
expertise. No members of the Audit Committee may serve on the audit committees
of more than two other public companies unless the Supervisory Board determines
that such simultaneous service would not impair the ability of such member to
effectively serve on the Audit Committee. The Company's External Auditor will,
unless decided otherwise, attend the meetings of the Audit Committee.
24
The Audit Committee may assist the Supervisory Board in fulfilling its oversight
responsibilities for the integrity of the Company's financial statements, the
financial reporting process, the system of internal business controls and risk
management, the internal and external audit process, the internal and external
auditor's qualifications, independence and performance as well as the Company's
process for monitoring compliance with laws and regulations and the General
Business Principles. The Audit Committee shall report its findings to the
Supervisory Board. The Audit Committee shall review the Company's financial
statements and the non-financial information to be provided in the annual and
quarterly reports. With regard to internal audit, the Audit Committee reviews
the internal audit charter, audit plan, audit scope and its coverage in relation
to the scope of the external audit, staffing, independence and organizational
structure of the internal audit function. With regard to the external audit and
in preparation of final resolutions to be taken by the Supervisory Board, the
Audit Committee will: review the External Auditors' proposed audit scope,
approach and fees, including the coordination efforts with internal audit,
formally evaluate the External Auditor's independence, document its position on
this matter and addresses any changes to the Philips Policy on Auditor
Independence as needed, assess the performance of the External Auditor against
measurable criteria laid down in a formal service level agreement and advise the
Supervisory Board every three years on the (re-) appointment of the External
Auditor, approve non audit services provided by the External Auditor in
conformity with the Philips Policy on Auditor Independence, approve changes on
the Philips Policy on Auditor Independence and discuss with the External Auditor
its year-end report and report on observations and recommendations related to
internal controls and advise the Supervisory Board thereon.
The Audit Committee periodically discusses the Company's policy on business
control, the General Business Principles including the deployment thereof, and
the Company's major areas of risk. The Audit Committee will periodically review
the effectiveness of the system for monitoring compliance with the General
Business Principles.
Employees
The information set forth under the heading "Employment" on page 30 and
"Employees" on page 64 of the 2002 Annual Report - Financial Statements and
Analysis - is incorporated herein by reference.
At the end of
--------------------------------
employees by product sector 2002 2001 2000
------- -------- -------
Lighting 46,870 47,922 47,124
Consumer Electronics 20,080 31,525 38,726
DAP 8,766 9,527 10,111
Components 13,005 15,107 43,546
Semiconductors 31,185 32,740 35,304
Medical Systems 31,027 30,993 19,358
Miscellaneous 14,839 15,366 18,872
Unallocated 4,315 5,463 6,388
------- -------- -------
Total 170,087 188,643 219,429
At the end of
--------------------------------
employees by geographical area 2002 2001 2000
------- -------- -------
Netherlands 29,260 30,982 35,262
Europe (excl. Netherlands) 48,267 57,100 69,733
USA and Canada 34,196 36,411 33,173
Latin America 13,424 15,239 18,882
Africa 450 518 811
Asia 43,940 47,804 60,776
Australia and New Zealand 550 589 792
------- -------- -------
Total 170,087 188,643 219,429
25
Stock options
During 2002, 22,209,081 stock options to purchase Common Shares of Koninklijke
Philips Electronics N.V. were issued. In 2002 2,826,336 options were exercised
and 4,098,220 initially allocated options were forfeited due to resignations or
dismissals prior to vesting. In accordance with the terms and conditions of the
performance - related stock options, granted in 2000, the Supervisory Board has
decided to fix vesting at 75% of these performance - related stock options given
Philips' performance vis-a-vis a defined group of peer companies during the
period November 30, 1999 to November 30, 2002. As a consequence, 1,544,690 stock
options in total are to be canceled during 2003. From January 1, 2003 to
February 28, 2003, 46,236 stock options were newly issued, 2,244 stock options
were exercised and 2,812,560 initially allocated options were forfeited.
As of February 28, 2003, the number of shares issuable upon exercise of stock
options outstanding was 57,112,181 (December 31, 2002: 59,880,749 stock
options).
For a discussion of the options and the employee debentures of Philips, see Note
23 "Long-term debt", Note 26 "Stockholders' equity" and Note 28 "Stock-based
compensation" of "Notes to the Consolidated Financial Statements" on pages 85
through 94 of the 2002 Annual Report -Financial Statements and Analysis-,
incorporated herein by reference.
For information specified in this Item for individually named directors and
officers, see pages 95 through 99 of the 2002 Annual Report -Financial
Statements and Analysis-, incorporated herein by reference.
The following table provides more detailed information about the stock options
outstanding at February 28, 2003:
options outstanding options exercisable
------------------------------------------------ -------------------------------
number exercise weighted average number weighted
outstanding price per remaining exercisable average
at February share contractual life at February 28, exercise
28,2003 (years) 2003 price per
share
----------- ------------- ---------------- --------------- -------------
fixed option plans: price in EUR price in EUR
1998 184,000 11.57-21.02 0.4 184,000 16.88
1999 2,821,800 15.76-23.01 1.0 2,821,800 16.12
2000 3,250,825 42.03-53.75 7.0 1,992,000 43.49
2001 5,093,284 24.35-37.60 8.1 - -
2002 10,179,301 17.19-34.78 9.0 - -
2003 38,844 15.29 10.0 - -
price in US $ price in US $
1998 1,261,211 12.94-23.59 5.1 1,261,211 17.38
1999 1,919,743 22.24-35.34 6.2 1,919,743 23.09
2000 2,822,645 36.65-49.71 7.2 257,200 41.46
2001 5,176,704 22.12-34.50 8.2 338,200 34.50
2002 10,717,150 16.88-30.70 9.1 - -
2003 7,392 16.41 10.0 - -
----------- ---------------
43,472,899 8,774,154
=========== ===============
variable plans: price in EUR price in EUR
2000 2,427,700 42.03-53.75 7.0 1,489,000 43.49
2001 4,702,934 24.35-37.60 8.0 - -
price in US $ price in US $
1995 - 1997 1,148,760 7.50-14.20 1.8 1,148,760 7.81
2000 2,091,484 36.65-49.71 7.2 167,400 41.46
2001 3,268,404 22.12-34.50 8.1 - -
----------- ---------------
13,639,282 2,805,160
=========== ===============
26
Item 7. Major shareholders and related party transactions
Major shareholders
As of February 28, 2003, no person or group is known to the Company to be the
owner of more than 5% of its Common Shares.
Related party transactions
For a description of related party transactions see pages 88 "Guarantees" and 90
"Related party transactions" of the 2002 Annual Report - Financial Statements
and Analysis - , incorporated herein by reference. As of December 31, 2002 there
were no personal loans or guarantees outstanding to members of the Board of
Management, Group Management Committee or the Supervisory Board.
Item 8. Financial information
Consolidated statements and other financial information
See Item 18 "Financial Statements".
Dividend policy
Philips aims for a stable dividend distribution to shareholders in the
long-term.
Legal proceedings
For a description of legal proceedings see page 89 of the 2002 Annual Report -
Financial Statements and Analysis - "Litigation", which is incorporated herein
by reference.
One pending proceeding involves claims by Volumetrics Medical Imaging, Inc.
relating to the decision of a Philips Ultrasound business not to collaborate
with or acquire Volumetrics, a decision that occurred after the announcement of
Philips Medical Systems' acquisition of Agilent Technologies, Inc.'s Healthcare
Solutions Group. On January 22, 2003, a jury in Raleigh, North Carolina
delivered a verdict of approximately USD 152 million against a Philips
subsidiary. The judgment is subject to review by the trial judge, which is
expected no earlier than April 2003. The Philips subsidiary has moved to set
aside the judgment and for a new trial; Volumetrics has moved to treble the
non-punitive damages portion of the judgment. Philips believes that the facts of
the case do not support the verdict.
While an ultimate unfavorable outcome could have a material effect on the
Company's consolidated results of operations in the period of resolution,
Management does not believe that an ultimate unfavorable outcome will have a
material adverse effect on the Company's consolidated financial position.
Significant changes
Philips Electronics announced plans for the closure of its semiconductor wafer
fabrication operation (fab) in San Antonio, Texas in the United States of
America. The announcement follows Philips' stated intention to reduce
semiconductor manufacturing capacity within the Philips wafer fab operations as
part of the semiconductor division's previously announced restructuring. The
closure will lower excess capacity and fixed costs to reduce the structural
break-even level, and better adjust capacity in line with demand. The closure is
expected to result in restructuring charges of approximately EUR 200 million,
EUR 30 million of which will be taken in the first quarter of 2003, EUR 70
million of which will be taken in the second quarter of 2003 and EUR 100 million
of which will be taken in the third quarter of 2003. Of the anticipated EUR 200
million charge, EUR 45 million are anticipated to be cash costs.
27
Item 9. The offer and listing
The Common Shares of the Company are listed on the stock market of Euronext
Amsterdam, on five other European stock exchanges (Frankfurt, London, Brussels,
Paris and Zurich) and on the New York Stock Exchange. The principal markets for
the Common Shares are the Amsterdam and New York Stock Exchanges.
The following table shows the high and low sales prices of the Common Shares on
the stock market of Euronext Amsterdam as reported in the Official Price List
and the high and low sales prices on the New York Stock Exchange:
Euronext New York
Amsterdam (EUR) stock exchange (US$)
----------------- --------------------
high low high low
----- ----- ----- -----
1998 23.18 9.03 25.75 10.50
1999 33.75 14.14 34.13 16.38
2000 58.30 30.39 55.80 31.00
2001 1st quarter 45.95 27.72 42.63 24.65
2nd quarter 39.11 26.95 34.10 23.35
3rd quarter 34.09 16.30 29.74 15.03
4th quarter 35.40 19.26 30.98 18.36
2002 1st quarter 35.45 27.64 31.56 24.41
2nd quarter 36.20 24.40 33.00 24.74
3rd quarter 28.70 12.61 27.97 12.75
4th quarter 23.27 13.15 22.94 13.01
September 2002 20.49 12.61 19.19 12.75
October 2002 18.49 13.15 18.17 13.01
November 2002 22.73 15.60 22.40 15.89
December 2002 23.27 16.30 22.94 17.18
January 2003 18.66 14.14 19.45 15.78
February 2003 16.59 14.22 17.58 15.57
The Common Shares are held by shareholders worldwide in bearer and registered
form. Outside the United States, shares are held primarily in bearer form. As of
February 28, 2003, approximately 88% of the total number of outstanding Common
Shares were held in bearer form. In the United States shares are held primarily
in the form of registered Shares of New York Registry (Shares of New York
Registry) for which Citibank, N.A., 111 Wall Street, New York, New York 10043 is
the transfer agent and registrar. As of February 28, 2003, approximately 12% of
the total number of outstanding Common Shares were represented by Shares of New
York Registry issued in the name of approximately 1,530 holders of record.
Only bearer shares are traded on the stock market of Euronext Amsterdam and
other European stock exchanges. Only Shares of New York Registry are traded on
the New York Stock Exchange. Bearer shares and registered shares may be
exchanged for each other. Since certain shares are held by brokers and other
nominees, these numbers may not be representative of the actual number of United
States beneficial holders or the number of Shares of New York Registry
beneficially held by US residents.
For further information on Priority and Preference shares, a reference is made
to page 90 and page 131 of the 2002 Annual Report - Financial Statements and
Analysis, which is incorporated herein by reference. As of February 28, 2003,
there were ten authorized and issued Priority shares, and 3,249,975,000
Preference shares authorized, of which none were issued.
28
Item 10. Additional information
Articles of association
For a general description of Philips' Articles of Association see the summary of
these Articles of Association enclosed as Exhibit 10(c) hereto, which is
incorporated herein by reference.
Material contracts
For a description of the material provisions of the employment agreements
entered into by members of the Board of Management, refer to Item 6 - Directors
and Senior Management - Board practices.
Exchange controls
There are currently no limitations, either under the laws of the Netherlands or
in the Articles of Association of the Company, to the rights of non-residents to
hold or vote Common Shares of the Company. Cash dividends payable in euros on
Netherlands registered shares and bearer shares may be officially transferred
from the Netherlands and converted into any other currency without Dutch legal
restrictions, except that for statistical purposes such payments and
transactions must be reported to the Dutch Central Bank, and furthermore, no
payments, including dividend payments, may be made to jurisdictions subject to
sanctions adopted by the government of the Netherlands and implementing
resolutions of the Security Council of the United Nations.
The Articles of Association of the Company provide that cash distributions on
Shares of New York Registry shall be paid in US dollars, converted at the rate
of exchange on the stock market of Euronext Amsterdam at the close of business
on the day fixed and announced for that purpose by the Board of Management in
accordance with the Company's Articles of Association.
Taxation
The statements below are only a summary of the present Netherlands tax laws and
the Tax Convention of December 18, 1992 between the United States of America and
the Kingdom of the Netherlands (the US Tax Treaty) and are not to be read as
extending by implication to matters not specifically referred to herein. As to
individual tax consequences, investors in the Common Shares should consult their
own tax advisors.
WITHHOLDING TAX
In general, a distribution to shareholders by a company resident in the
Netherlands (such as the Company) is subject to a withholding tax imposed by the
Netherlands at a rate of 25%. Distributions paid out of the Company's paid-in
share premium recognized for Netherlands tax purposes are not subject to the
above mentioned withholding tax. Distributions in capital stock paid out of the
Company's retained earnings are subject to dividend withholding tax on the
nominal value of the shares issued.
Pursuant to the provisions of the US Tax Treaty, dividends paid by the Company
to a beneficial owner of shares (as defined in Dutch Dividend Tax Act) and who
is a resident of the United States (as defined in the US Tax Treaty), are
generally eligible for a reduction in the rate of Dutch withholding tax to 15%,
unless (i) the beneficial owner of the dividends carries on business in the
Netherlands through a permanent establishment, or performs independent personal
services in the Netherlands from a fixed base, and the Common Shares form part
of the business property of such permanent establishment or pertain to such
fixed base, or (ii) the beneficial owner of the dividends is not entitled to the
benefits of the US Tax Treaty under the "treaty-shopping" provisions thereof.
Dividends paid to qualifying exempt US pension trusts and qualifying exempt US
organizations are exempt from Dutch withholding tax under the US Tax Treaty.
29
However, for qualifying exempt US organizations no exemption at source upon
payment of the dividend can be applied for; such exempt US organizations should
apply for a refund of the 25% withholding tax.
The gross amount (including the withheld amount) of dividends distributed on
Common Shares will be dividend income to the US shareholder, not eligible for
the dividends received deduction generally allowed to corporations. However,
subject to certain conditions and limitations, the Dutch withholding tax will be
treated as a foreign income tax that is eligible for credit against the
shareholder's US income taxes.
CAPITAL GAINS
Capital gains upon the sale or exchange of Common Shares by a non-resident
individual or by a non-resident corporation of the Netherlands are exempt from
Dutch income tax, corporation tax or withholding tax, unless (i) such gains are
effectively connected with a permanent establishment in the Netherlands of the
shareholders' trade or business or (ii) are derived from a direct, indirect or
deemed substantial participation in the share capital of a company (such
substantial participation not being a business asset).
In general, an individual has a substantial participation if he holds either
directly or indirectly and either independently or jointly with his spouse or
steady partner, at least 5% of the total issued share capital or particular
class of shares of a company. For determining a substantial participation, other
shares held by close relatives are taken into account. The same applies to
options to buy shares. A deemed substantial participation amongst others exists
if (part of) a substantial participation has been disposed of, or is deemed to
have been disposed of, on a non-recognition basis. Under the US Tax Treaty,
however, the Netherlands may only tax a capital gain that is derived by an
alienator who is an US resident under the US Tax Treaty and is not disqualified
from treaty benefits under the treaty-shopping rules from a substantial
participation and that is not effectively connected with a permanent
establishment in the Netherlands if the alienator has been a resident of the
Netherlands at any time during the five-year period preceding the alienation,
and owned at the time of alienation either alone or together with his relatives,
at least 25% of any class of shares.
NET WEALTH TAX
As of January 1, 2002, for foreign shareholders no net wealth tax is levied in
the Netherlands.
ESTATE AND GIFT TAXES
No estate, inheritance or gift taxes are imposed by the Netherlands on the
transfer of Common Shares if, at the time of the death of the shareholder or the
transfer of the Common Shares (as the case may be), such shareholder or
transferor is not a resident of the Netherlands, unless such Common Shares are
attributable to a permanent establishment or permanent representative of the
shareholder in the Netherlands.
Inheritance or gift taxes (as the case may be) are due, however, if such
shareholder or transferor:
(a) has Dutch nationality and has been a resident of the Netherlands at any
time during the ten years preceding the time of the death or transfer; or
(b) has no Dutch nationality but has been a resident of the Netherlands at any
time during the twelve months preceding the time of transfer (for
Netherlands gift taxes only).
Documents on display
It is possible to read and copy documents referred to in this annual report on
Form 20-F that have been filed with the SEC at the SEC's public reference room
located at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms and their
copy charges.
30
Item 11. Quantitative and qualitative disclosure about market risk
The information required by this Item is incorporated by reference herein on
pages 30 through 32 and pages 100 through 104 of the 2002 Annual Report -
Financial Statements and Analysis.
Item 12. Description of securities other than equity securities
Not applicable.
Item 13. Defaults, dividend arrearages and delinquencies
None.
Item 14. Material modifications to the rights of security holders and use of
proceeds
None.
Item 15. Controls and procedures
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934) within 90 days of the filing
date of this Annual Report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their most recent evaluation.
Item 16. Reserved
Item 17. Financial statements
Philips is furnishing the Financial Statements pursuant to the instructions of
Item 18 of Form 20-F.
31
Item 18. Financial statements
The following portions of the Company's 2002 Annual Report -Financial Statements
and Analysis- as set forth on pages 41 through 109 are incorporated herein by
reference and constitute the Company's response to this Item:
"Auditors' Report"
"Consolidated statements of income of the Philips Group"
"Consolidated balance sheets of the Philips Group"
"Consolidated statements of cash flows of the Philips Group"
"Consolidated statements of changes in stockholders' equity of the Philips
Group"
"Accounting policies"
"Notes to the consolidated financial statements of the Philips Group"
Schedules:
Schedules are omitted as they are either not required or the required
information is included in the consolidated financial statements.
Philips owns greater than 20% but less than 50% of Atos Origin and accounts for
its Atos Origin holdings by the equity method of accounting. Under SEC Rule 3-09
under Regulation S-X, Philips may be required to include or incorporate by
reference Atos Origin's 2002 consolidated financial statements in this Annual
Report.
Therefore, Philips expects, if required, to file by amendment to this Annual
Report any required financial statements with respect to Atos Origin.
Philips expects to file the amendment, if required, on or before June 30, 2003.
Item 19. Exhibits
INDEX OF EXHIBITS
Exhibit 1 English translation of the Articles of Association of the
Company (incorporated by reference to Exhibit 1 of the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2000 (File No. 2-20193).
Exhibit 2(b)(1) The total amount of long-term debt securities of the Company
and its subsidiaries authorized under any one instrument does
not exceed 10% of the total assets of Philips and its
subsidiaries on a consolidated basis. Philips agrees to
furnish copies of any or all such instruments to the
Securities and Exchange Commission upon request.
Exhibit 4 Form of employment contract (incorporated by reference to
Exhibit 4 of the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2000).
Exhibit 8 List of Significant Subsidiaries.
Exhibit 10(a) Consent of the independent auditors.
Exhibit 10(b) The 2002 Annual Report to Shareholders of the Company,
consisting of the Management Report and Financial Statements
and Analysis, which is furnished to the Securities and
Exchange Commission for information only and is not filed
except for such specific portions that are expressly
incorporated by reference in this report on Form 20-F.
Exhibit 10(c) Summary of Articles of Association.
32
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
KONINKLIJKE PHILIPS ELECTRONICS N.V.
(Registrant)
/s/ G.J. Kleisterlee /s/ J.H.M. Hommen
G.J. Kleisterlee J.H.M. Hommen
(President, Chairman (Vice-Chairman
of the Board of Management and of the Board of
the Group Management Committee) Management, and the
Group Management Committee
and Chief Financial Officer)
Date: March 14, 2003
33
CERTIFICATION
I, G.J. Kleisterlee, certify that:
1. I have reviewed this annual report on Form 20-F of Koninklijke Philips
Electronics N.V., a company incorporated under the laws of the
Netherlands;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 14, 2003
/s/ G.J. Kleisterlee
--------------------------------------
G.J. Kleisterlee
President, Chairman of the Board of Management
and the Group Management Committee
34
CERTIFICATION
I, J.H.M. Hommen, certify that:
1. I have reviewed this annual report on Form 20-F of Koninklijke Philips
Electronics N.V., a company incorporated under the laws of the
Netherlands;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 14, 2003
/s/ J.H.M. Hommen
------------------------
J.H.M. Hommen
Vice-Chairman of the Board of Management
and the Group Management Committee
and Chief Financial Officer
35