1 ----------------------------------------------------------------------------- As filed with the Securities and Exchange Commission on March 29, 2000 ----------------------------------------------------------------------------- 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 OR [X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number 2-20193 KONINKLIJKE PHILIPS ELECTRONICS N.V. (Exact name of Registrant as specified in charter) THE NETHERLANDS (Jurisdiction of incorporation or organization) REMBRANDT TOWER, AMSTELPLEIN 1, 1096 HA 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) 1 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) 1 PER SHARE (Title of class) Indicate the number of outstanding shares of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: <TABLE> <CAPTION> <S> <C> <C> <C> Class Outstanding at December 31, 1999 KONINKLIJKE PHILIPS ELECTRONICS N.V. Priority Shares par value EUR 500 per share 10 shares Common Shares par value EUR 1 per share 339,078,811 shares </TABLE> Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 ------ ------ Name and address of person authorized to receive notices and communications from the Securities and Exchange Commission: RICHARD C. MORRISSEY SULLIVAN & CROMWELL ST. OLAVE'S HOUSE 9a IRONMONGER LANE LONDON EC2V 8EY, UNITED KINGDOM - --------------------------------------------------------------------------------
2 <TABLE> <CAPTION> TABLE OF CONTENTS <S> <C> PAGE EXCHANGE RATES/INTRODUCTION 3 ITEM 1. DESCRIPTION OF BUSINESS 4 2. DESCRIPTION OF PROPERTY 12 3. LEGAL PROCEEDINGS 12 4. CONTROL OF REGISTRANT 12 5. NATURE OF TRADING MARKET 12 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS 13 7. TAXATION 13 8. SELECTED CONSOLIDATED FINANCIAL DATA 15 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 19 10. DIRECTORS AND OFFICERS OF REGISTRANT 19 11. COMPENSATION OF DIRECTORS AND OFFICERS 19 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES 20 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS 21 14. DESCRIPTION OF SECURITIES TO BE REGISTERED 21 15. DEFAULTS UPON SENIOR SECURITIES 21 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES 21 18. FINANCIAL STATEMENTS 21 19. FINANCIAL STATEMENTS AND EXHIBITS 21 </TABLE> EXCHANGE RATES In this report amounts are expressed in euros ("euros" or "EUR") or in US dollars ("dollars", "US $" or "$"). 2
3 Beginning in 1999, Philips' consolidated financial statements are reported in euros. Previously presented financial statements 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). Historically, the consolidated financial statements of the Group were prepared using the Dutch guilder as the reporting currency. The euro was introduced on January 1, 1999. The countries participating in the European single currency are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Portugal, Spain and the Netherlands. Management believes that the consolidated financial statements reported in euros reflect the same trends as previously reported. Expression of these historical amounts in euros does not eliminate or alter any translation effect that existed when they were originally reported in Dutch guilders. The consolidated financial statements may not be comparable with those of other companies that are also reporting in euros if other companies restated their financial statements from a currency other than the Dutch guilder. Unless otherwise stated, for the convenience of the reader the translations of euros into dollars appearing in this report have been made at the balance sheet rate on December 31, 1999 (US $ 1 = EUR 0.9914). This rate is not materially different from the Noon Buying Rate in New York City for cable transfers in foreign currencies as testified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") on such date (US $ 1 = EUR 0.9930). The following table sets forth, for the periods and dates indicated, certain information concerning the exchange rate for US dollars into euros based on 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): <TABLE> <CAPTION> Calendar period Period End Average (1) High Low ---------------------------------------------------------------------------------------------------------------- (EUR per US $ 1) ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 1995 0.7272 0.7290 0.7930 0.6925 1996 0.7837 0.7634 0.7968 0.7295 1997 0.9202 0.8887 0.9610 0.7850 1998 0.8517 0.8996 0.9479 0.8232 1999 0.9930 0.9455 0.9984 0.8466 2000 (through Feb. 25) 1.0243 1.0246 1.0276 0.9676 </TABLE> (1) The average of the Noon Buying Rates on the last day of each month during the period. See also Item 8: "Selected Consolidated Financial Data". 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. 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 1 "Description of Business" with regard to management objectives, market trends, market standing, product volumes and business risks, the statements in Item 3 "Legal Proceedings", the statements in Item 9 "Management's Discussion and Analysis of Financial Condition and Results of Operations" with regard to trends in results of operations, margins, overall market trends, risk management, exchange rates and Item 9A "Quantitative and Qualitative Disclosures about Market Risks" are forward-looking in nature. 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, the levels of marketing and promotional expenditures by Philips and its competitors, raw materials and employee costs, changes in future exchange and interest rates, changes in tax rates and future business combinations, acquisitions or dispositions, and the rate of technical changes. Market share estimates contained in this report are based on outside sources such as specialized research institutes, industry and dealer panels, etc. in combination with management estimates. 3
4 Specific portions of Philips' Annual Report 1999 to Shareholders are incorporated by reference in this report on Form 20-F to the extent noted herein. Philips' Annual Report for 1999 comprises 2 separate booklets entitled "Management Report" and "Financial Statements". ITEM 1 DESCRIPTION OF BUSINESS 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 Amsterdam Exchanges, the New York Stock Exchange, the London Stock Exchange and several other stock exchanges. 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, certain Chairmen of product divisions and certain key officers, is the highest consultative body within Philips 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 4: "Control of Registrant". The other members of the Group Management Committee are appointed by the Supervisory Board. The general management of Philips' worldwide operations is centered in Amsterdam and Eindhoven, the Netherlands. The activities of Philips are organized in product divisions which are responsible for the worldwide business policy. Philips has more than 200 production sites in over 25 countries and sales and service outlets in some 150 countries. Products, systems and services are delivered in the fields of lighting, consumer electronics and communications, domestic appliances and personal care, components, semiconductors, medical systems, business electronics and information technology. In the course of 1999 the Board of Management decided to regroup all activities of the Business Electronics division. Upon completion of the regrouping, this division ceased to be an organizational entity effective January 1, 2000. The responsibilities for the various businesses have been reallocated to other divisions. However, the financial reporting on Business Electronics in the product sector reporting remained unchanged until this date. The changes from January 1, 2000 onwards are described in the applicable section of the "Product Sectors and Principal Products" under Item 1. BUSINESS OF PHILIPS 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. Philips has made significant progress in reviewing its portfolio of businesses, which started in 1996. The portfolio has been cleaned up during 1997, 1998 and 1999. The number of businesses has been reduced by approximately 40, while the number of divisions has been reduced from 12 to 7, bringing more transparency, accountability and focus. At present, rather than acquiring businesses in new areas, Philips is focusing on strengthening its existing core businesses, through selected acquisitions, and through disposal of businesses that are underperforming and not essential from a strategic viewpoint. A few examples are the sale of Philips' 75% equity interest in PolyGram N.V., the disposition of Philips' conventional (non-ceramic) Passive Components business group, the sale of Philips Car Systems, the termination of Philips' involvement in the German consumer electronics company Grundig AG, the termination of Philips' media portfolio, the divestiture of the data communication activities and various miscellaneous activities. (For a further description see "Product Sectors and Principal Products".) In the course of 1996, Philips undertook a major review of its governance model (i.e. the organizational systems, procedures and structure by which the Group is managed). This review started at the corporate headquarters where the corporate staff has been refocused on a limited number of corporate functions and core processes, whereas the corporate services have been refocused on a few shared activities. As part of the new governance model, a new set of performance processes, such as a strictly applied budgeting system and monthly performance review, were developed. In the course of 1997, the new governance model was introduced at the level of businesses, product divisions, regions and countries. The key part of this model was to decentralize decision-making and to streamline corporate departments. In addition to streamlining its portfolio of businesses and management, Philips engaged in a comprehensive review of its strategy and portfolio, involving the field of high-volume electronics - televisions, audio systems, telephones and PC-related equipment. Philips has decided to focus on high-volume electronics because the businesses in this field are strongly interrelated through brand, technologies, manufacturing and sales channels and already generate more than one third of Philips' total sales. That is why, as of January 1, 1998, Philips grouped together the relevant operations of Sound & Vision, Philips Consumer Communications and Business Electronics into a single Consumer Electronics organization, and created a new Business Electronics division to coordinate business and professional applications. Given that the technologies of TV, audio, telecommunications and computing are increasingly converging, these combinations are appropriate. 4
5 It is expected that they will capitalize on the strength of the Philips brand and make new business generation easier, market intelligence more coordinated and time-to-market shorter. In addition, the Business Electronics division has been discontinued as an organizational entity as per January 1, 2000. To reflect the trend that many of the Business Electronics businesses are becoming more consumer oriented, the major part has been transferred to Consumer Electronics. Besides high-volume electronics, there are other very important building blocks that make up the Group. The Semiconductors and Components divisions play a crucial role, both as internal suppliers and through their leading positions in the external market. The capital expenditures required in this field place considerable demands on management in terms of ensuring adequate returns by means of flexible and cost-effective operations. The other building blocks include the Lighting division, a world leader with relatively consistent returns and cash flow in which Philips will continue to invest, Medical Systems and Domestic Appliances and Personal Care. The Company wants to extend Medical Systems' business scope with new diagnostic modalities and clinical solutions and services. In the case of Domestic Appliances and Personal Care, Philips wishes to see this division grow in the personal care field by offering new functionalities and an enhanced emotional appeal to the consumer. In the area of information technology services, Philips is evaluating a number of strategic options for Origin, including the merits of obtaining a primary listing. Having successfully restructured its operations, Origin may require greater freedom and flexibility to realize its full potential for profitable growth in the e-commerce environment while unlocking its value for the Philips shareholder. Aggressive and able competition is encountered 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 by capital-intensive needs to meet customer requirements. Also, the competitive landscape is changing as a result of increased alliances between competitors. PRODUCT SECTORS AND PRINCIPAL PRODUCTS In 1998, Philips changed its product sector reporting to comply with the new requirements of Statement of Financial Accounting Standard No. 131, issued by the Financial Accounting Standards Board of the United States. As a consequence, the related activities are grouped together into seven product sectors based on similar markets and the use of similar technologies. The product sectors are as follows: Lighting, Consumer Products, Components, Semiconductors, Professional, Origin and Miscellaneous. In the course of 1999, the Board of Management decided to regroup all the activities of the Business Electronics division, part of the Professional sector. Upon completion, this division ceased to be an organizational entity, effective January 1, 2000 and its activities have been regrouped to the Consumer Electronics and Miscellaneous divisions. However, the financial reporting on Business Electronics in the product sector reporting remained unchanged until this date. For a description of the changes, and data related to aggregate sales, segment revenues and income from operations, see Note 29: "Information relating to product sectors and geographic areas" on pages 55 through 63 of the 1999 Annual Report -Financial Statements- incorporated herein by reference. For a discussion of revenues and income from operations of the product sectors, see Item 9: "Management's Discussion and Analysis of Financial Condition and Results of Operations". For a discussion of recent acquisitions and alliances, see also "Cooperative Business Activities and Unconsolidated Companies" under Item 1. 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 standard fluorescent lamps, automotive lamps, high-intensity gas-discharge and special lamps, QL induction lamps, fixtures, ballasts, lighting electronics and batteries. Lighting products are manufactured in 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 turn-key project installation. These activities require sophisticated expertise and help Philips to maintain its leading position in the professional lighting market. Philips Lighting's policy of leadership in innovation continues to bring rewards in the marketplace. Philips is the market leader in Xenon headlamps, which were introduced in 1997 and are achieving increasing penetration in the upper end of the market. Providing superb illumination of the road, these lamps dramatically improve road safety and driver comfort. 5
6 With Mercedes Benz, Philips is also developing a new high-performance signaling system that will last the car's entire lifetime, cut fuel consumption and enhance styling. Philips' position as a supplier of headlights to the car industry is very strong in Japan, where Philips is the market leader, and Philips is rapidly establishing a full global presence in this field. Another innovation is the UHP (Ultra High Power) lamp which is applied in LCD projectors of leading companies for applications such as business presentations and large-screen consumer TVs. UHP will also increase the application possibilities of fiber-optic lighting. Philips Lighting's PowerLife battery gives more power and longer life than conventional alkaline batteries. Advanced graphite technology is the key to PowerLife's success in answering consumer demand for batteries which perform better in "high-drain" products. Philips Lighting is concentrating on developments in the design of electronic lighting products, which play an increasingly important role in allowing better integration of fixture, ballast and lamp. The use of electronics permits the design of lighting products with improved quality and reduced size, weight and energy consumption. Major benefits for the end-user include flexibility and comfort. Philips Lighting is the market leader in light-regulating control gear for fluorescent lamps. In response to the greater demand for more efficient light sources and lighting systems, Philips has emphasized among other things the development of more energy-efficient lighting products and projects. In addition to the TL5 system, these include a range of electronic compact fluorescent lamps, Lighting Management Systems, as well as QL induction lamps, which are increasingly being used in general lighting applications. Philips Lighting is also aware of the problem of hazardous waste. The small-diameter TL5 fluorescent lamp combines energy efficiency with a low mercury content. Philips' low-mercury ALTO(TM) technology - the first to comply with the relevant US environmental protection legislation - has met with considerable success. In Europe, the TLD Super 80 Generation fluorescent lamps are now recyclable, minimizing end-of-life disposal problems and the impact on the environment, while the outstanding performance of the series is not appreciably affected. This technology enables virtually complete recycling of the lamp materials. Six of the ten stadiums staging the 1998 World Cup soccer finals in France were lit by Philips' highly versatile ArenaVision systems - demonstrating once more the Company's global leadership in sports floodlighting. ArenaVision is specially designed for today's more dramatic, theatrical approach to sports events. While offering optimal low-glare conditions for players, it provides both spectators and TV audiences with more realistic action by creating accents and preserving natural colors. Philips' specially designed Halogena (TM) light bulb welcomed the new millennium, lighting up the world-famous New Year's Eve in Times Square, New York. In recent years Philips Lighting has completed a number of strategic acquisitions and joint ventures, seeking to strengthen its presence in the historically faster-growing areas of the world, such as the Asia-Pacific region and Eastern Europe. Acquisitions include the Farel Mazury luminaire operation (1996) and Polam Pabianice (1997) in Poland. In November 1999 two new acquisitions were added: Construlita de Queretaro in Mexico and ECS Lighting Controls Ltd in the UK. Market leadership in LEDs (light-emitting diodes) has been strengthened by the expansion of LumiLeds Lighting, the 50-50 joint venture established in 1997 with Agilent Technologies -a spin-off from Hewlett-Packard- which now employs 1,000 persons. The venture will develop, manufacture and market LEDs, modules, products and systems worldwide for an increasingly broad range of applications. In 1997, the new organization of Philips Lighting worldwide became effective. This consists of five integrally responsible businesses: Lamps, Luminaires, Automotive, Lighting Electronics & Gear, and Batteries. Each of these is given complete control over all its processes. Philips Lighting continues to give top priority to cycle-time reduction. In 1998, Philips Lighting started to give new impetus to quality improvement activities through the BEST approach (Business Excellence through Speed and Teamwork). This program has been implemented Philips-wide during 1999. Philips is placing strong emphasis on value creation through profitable growth in emerging markets such as Central and Eastern Europe and Asia Pacific, while further improving its position in mature markets. Philips sees continued growth potential in this division, with special opportunities in areas such as energy-saving lighting and technologically advanced lighting applications. 6
7 CONSUMER PRODUCTS This sector comprises the divisions Consumer Electronics and Domestic Appliances and Personal Care. The Consumer Electronics division encompasses all Philips-branded products in the fields of television, video equipment, audio, PC peripherals, and communications. Besides Philips-branded products, Consumer Electronics is also an important Original Equipment Manufacturer (OEM) supplier, particularly of monitors and VCRs. The division retained its No. 3 position in the global market for audio and video products in 1999 and its No. 2 position in Europe. Philips has a leading role in the development of flatscreen and widescreen television sets featuring the 16:9 format. Philips is increasingly focusing on new digital consumer applications and products which exploit the convergence of audio and video technologies with telecommunications and information technology. The Consumer Electronics division is a pioneer in, for instance, Digital TV, a medium that brings a new dimension to home entertainment, offering a wider choice of channels, true widescreen pictures, optimum sound quality and interactive services. The division has launched Digital TV in the UK and introduced a widescreen rear-projection HDTV set in the US. Not included in this reporting are the activities belonging to digital networks, which encompasses most of the businesses which were transferred from Business Electronics as of January 1, 2000. Philips markets audio systems, portable audio products, speakers and accessories under the Philips name, as well as high-end audio products and systems under the Marantz brand. Philips was instrumental in the revolution unleashed by CD Audio, which now has an installed base of some 700 million units worldwide, and continues to play a leading role in the development of related standards such as DVD, CD Recordable and CD ReWritable. In Europe, Philips and Warner Home Video have launched a joint marketing effort focusing on DVD-Video as the ultimate medium for a cinema-style viewing and listening experience in the home. A full-length feature movie fits onto a single DVD-Video disc. Philips' latest CD Recorders allow the user hear his choice of music as he really wants it. With the Philips dual-deck CDRecorder, the user can make his own personal CDs without the need for a second CD player. In the field of PC Peripherals, Philips is the world's No. 2 and Europe's No. 1 supplier of computer monitors (in volume terms). Philips makes a full range of Cathode Ray Tubes (CRT) monitors, as well as LCD-based flat-screen models. Philips is a leading supplier of observation systems e.g. for hospitals, security cameras and PC video cameras, which are instrumental in the fast growing market for video mail. They also market products for optical storage and sound reproduction, Universal Serial Bus (USB) peripherals and LCD projectors. Over the next few years, emphasis will be increased on wireless interconnectivity. Philips develops, manufactures and markets a wide range of consumer communications products, including digital and analogue cellular phones, corded phones, faxes and answering machines. In volume terms, Philips is one of Europe's leading providers of corded and cordless phones and answering machines. For the future, the main focus of cellular wireless products is on GSM technology, which currently represents the major part of the global cellular market. Meanwhile, development continues on third-generation digital mobile phone technology, involving the deployment of wideband wireless networks which will provide consumers with voice, data and multimedia services on their phones. On October 1, 1997, Philips (60%) and Lucent Technologies (40%) formed a joint venture for mobile communications comprising the Philips Consumer Communications business and the Lucent Consumer Products division. Despite ambitious plans for break-even results in the second half of 1998, PCC continued to incur substantial losses and consequently the joint venture was dissolved on September 27, 1998. Each party retained the business previously contributed to the joint venture. Ambitions for the remaining activities have been scaled back and the product offering streamlined, resulting in substantial reduction of losses. The Domestic Appliances and Personal Care division includes home comfort and kitchen appliances, shavers and other personal care products. Philips produces the Philishave, a dry shaver which is based on the Philips-invented rotary shaving technique. The division is the world market leader in dry shaving with leading positions in Europe, Latin America and the United States. Other personal care products include female depilatory products, skin care, dental care, hair care, vital body signs and sun care products. Philips provides products for all stages of food preparation, such as mixers, blenders, food processors, kettles, toasters, coffee makers, deep fryers, grills and table-top cooking. Philips manufactures and markets vacuum cleaners, irons, air cleaners and heating appliances. The division holds the world No. 2 position in ironing. Domestic appliances and personal care products are sold under the Philips brand and other brand names. 7
8 Philips has long been successful on the US market under the brand name Norelco and will continue to use this brand name for male shaving and grooming products. To further boost growth, Philips introduced the Philips brand name there in 1998, with initially the focus on body beauty and health. Philips has also started re-launching products formerly sold under the Norelco brand name as Philips products. COMPONENTS Philips Components is a leading supplier of display, storage and other important sub-systems that help define the digital and electronic products that are changing and shaping our world today. It has major production facilities in Europe, the United States, Latin America and the Asia Pacific region. Based on world-class technology and customer knowledge, Philips Components provides a competitive advantage for OEMs in the consumer electronics, electronic data-processing, telecommunications and automotive industries. Philips Components has initiated a strategic refocus on innovative products for these markets, exploiting the synergies available within Philips and, where necessary, entering into alliances to access the required competencies. In 1998, this led to an agreement on the divestiture of the Non-Ceramic Passive Components business, which was completed in January 1999. Philips is the world's leading manufacturer of color picture tubes for televisions and monitors. In 1997 a majority shareholding was established in Hua Fei Colour Display Systems Co. Ltd. in Hua Fei, China, and accordingly, the financial statements of this joint venture are consolidated since January 1, 1997. On April 1, 1998, Philips increased its ownership in Hosiden and Philips Display Corp., a joint venture in Japan for the development, production and sale of active matrix LCDs, from 50% to 80%. As from the same date, Hosiden and Philips Display Corp. (HAPD) is reported as a consolidated company. In addition to the joint venture between Hosiden and Philips Display in Japan, a joint venture was created in July 1999 between Philips and LG Electronics of South Korea, under the name LG.Philips LCD. This makes Philips the world's largest manufacturer of flat-panel displays for notebook computers, desktop monitors and digital TVs - a market that is expected to grow rapidly. In November 1999, the joint venture LG.Philips LCD introduced the world's first 22-inch flat panel display. Referred to as Thin Film Transistor LCD (TFT-LCD), or Active Matrix LCD (AMLCD), it is used in applications such as desktop-publishing monitors and digital TV. In small display systems, Philips is the world's leading maker of passive LCDs for cellular telephones and handheld devices. In addition, a wide range of Active Matrix LCDs is offered for automotive applications, cockpit navigation and electronic games. Philips is a leading manufacturer of CD-ReWritable drives and supplier of choice to many of the world's top ten PC manufacturers. Philips is also a leading producer of modules for CD-ReWritable and Video CD. SEMICONDUCTORS Philips Semiconductors, currently No. 9 in the provisional 1999 Dataquest ranking of global semiconductor manufacturers, is a major supplier and partner of manufacturers in the consumer electronics, telecommunications, automotive, PC and PC peripherals industries. Its integrated circuits and discrete semiconductors help to make their products better, smaller, cheaper, more energy efficient and therefore 'greener'. In June 1999, Philips acquired the semiconductor manufacturer VLSI Technology Inc., based in San Jose, California, and employing 2,200 persons worldwide. VLSI and Philips Semiconductors have complementary portfolios and operations. The combination of VLSI's digital expertise and capabilities in wireless communications, computer networking and ASICs (application-specific integrated circuits) with Philips' strengths are expected to create many new opportunities for growth. In support of the strategy of Philips Semiconductors to remain a top-flight process technology player, strategic alliances are being strengthened and substantial investments are being made in technology, especially in Complementary Metal Oxide Semiconductor (CMOS). Leadership in cost/performance will be maintained and increased by continuing to supply advanced technologies at affordable prices, also in an era of platform-based silicon solutions. Major production facilities are located in Europe, the United States and Asia. Philips, Taiwan Semiconductor Manufacturing Company (TSMC) and the Economic Development Board of Singapore (EDB Investments) are together investing US $ 1.2 billion in a new chip factory in Singapore. This will enable the Company to benefit from the forecast growth in demand for logic chips for consumer electronics and communications applications toward the end of 2000. The factory will produce the latest type of chip, with interconnects as thin as 0.25 micron (1/400th of the thickness of a human hair). 8
9 PROFESSIONAL This sector comprises two divisions: Medical Systems and Business Electronics (the latter until Jan. 1, 2000). Philips Medical Systems ranks among the top three diagnostic imaging companies in the world. The division offers healthcare providers a full range of imaging modalities and services in the areas of X-ray, computed tomography, magnetic resonance and ultrasound systems. Its IT systems enable imaging departments to become completely digital, with improved access to images and seamless integration with hospital-wide IT networks. Services include management consultancy, training and technical services to help hospitals operate more efficiently and cost-effectively. Philips has technology agreements with Analogic Corporation of the United States and Hitachi Medical Corporation of Japan for the development, production and sale of medical equipment. Philips Medical Systems, already the world leader in X-ray imaging systems, has significantly strengthened its position in the field of diagnostic imaging with the acquisition of ATL Ultrasound as of October 1, 1998. This company is one of the leaders in ultrasound imaging systems - one of the fastest growing sectors of the market - and a clear leader in all-digital ultrasound systems. The quality of its products and their performance is widely recognized, and its leading ultrasound product has been selected by NASA for use in the international space station scheduled to become operational in 2001. Demand for diagnostic imaging products and services is expected to continue to grow as new markets emerge and advances are made in functionality, e.g. through the further integration of IT solutions. The synergy between Philips and ATL has already begun to bear fruit. Philips has expanded direct sales of ATL's products in 13 countries and the Philips and ATL sales teams are working closely together in the USA and elsewhere, the outcome being additional growth of ATL sales. Philips is the leading innovator in cardiovascular imaging. More than half of all cardiovascular x-ray procedures in the world are performed with Philips' equipment and the Integris system has become the system of choice of leading medical institutions. The Business Electronics division focuses on the business-to-business sector. Main product areas are digital videocommunications systems, broadband network equipment, business communication systems, communication and security systems, and fax equipment. The division is a major supplier of electronic manufacturing equipment to the semiconductor industry. It also deals with infrastructural and industrial projects. Effective January 1, 2000, Business Electronics has for the most part been integrated into the Consumer Electronics division. The largest business group is videocommunication systems, where Philips is a leading supplier of digital set-top boxes. Certain smaller units of Business Electronics are being integrated into the Miscellaneous sector. ORIGIN Origin (in which Philips holds a 98% majority interest) is a global, full-service information technology services company. Today, more than 16,000 Origin professionals work in 30 countries, successfully delivering information technology services to multinational corporations, including 100 of the Fortune 500 companies. Origin offers value-added services in the areas of consulting, enterprise solutions, application and infrastructure management, together with systems development, implementation, integration and management. This core set of services is complemented by the e-service offerings focused on helping customers extend their supply chain activities between their customers, vendors and employees. With a global team of more than 5,000 professionals Origin is engaged in services supporting the implementation, operations and maintenance of complex distributed enterprise applications. Origin is acknowledged as one of only a handful of suppliers who can deliver these critical services. Beyond its own internal resources, Origin has established partnerships with other industry leaders that enable it to deliver the full range of information technology services that business needs today. MISCELLANEOUS This sector comprises various activities and businesses, including other businesses not belonging to a product division, as well as Philips Research, Corporate Intellectual Property, Philips Centre for Industrial Technology, Philips Machinefabrieken and Philips Design. Philips Plastics and Metalware Factories' (PMF's) printed circuit board and metal display components activities have been divested. Philips Machinefabrieken, which includes the remaining activities of PMF, manufactures customer-specific machinery, tools and precision components for high-quality professional equipment. 9
10 RESEARCH AND DEVELOPMENT Continuous efforts to sustain the strong performance in the field of research and development activities are of the utmost importance to Philips in order to preserve and strengthen the Company's competitiveness in its various markets. Through substantial investments in R&D, Philips has created a large knowledge base. Each year, new technological breakthroughs are added to Philips' long list of research successes. Philips continuously adapts its research and development strategy. 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. In addition, projects with a mid-term range are agreed upon with the product divisions to secure an innovative product offering a few years from now. With a view to the longer term, Philips will seek to establish more research alliances with the academic world. This change in strategy for research and development activities is designed to enhance the effectiveness of expenditures in this area. In recent years, Philips has placed greater emphasis on research projects that are relevant to the entire group, 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. Approximately 20,500 employees are engaged in advanced development, product development and in the development of production methods and equipment. In addition, approximately 3,000 employees work in Philips' corporate research laboratories. Exploratory research and research leading to the conception of new products and technologies is carried out in four corporate laboratories in Europe, one in the United States and one in Taiwan. Product development laboratories and the manufacturing operations are supported by the Center for Industrial Technology. This organization has its headquarters in Eindhoven and regional support centers in Asia Pacific and in the United States. In the United States, this center also provides pilot line facilities for advanced products. As a highly professional organization of over 900 employees, the Center for Industrial Technology is specialized in the innovation and improvement of production processes, and the Product Creation Process and has the capability to develop specialized advanced production equipment. The Center also gives corporate level support in the field of standardization issues. The achievements of Philips' laboratories in the fields of lighting, consumer electronics, optics, magnetics, mechanics and information technology have been of global significance. Achievements in research and/or development by Philips alone or, in certain circumstances, in cooperation with others, include flat-panel displays, lighting electronics, speech recognition and dialogue systems, optical and magnetic recording (DVD and DigaMax), low-power electronics (new batteries and asynchronous IC design), IC technology and other. Recent contributions applied in consumer products include various concepts for the Nexperia Digital Video Platform introduced at the 1999 Internationale Funkausstellung (IFA). For Philips' Flat TV, Research has also applied its video-processing know-how to enhance the picture quality of plasma panels. This supports Flat TV's leadership in this field, as demonstrated by its reception at the IFA, where it won the EISA award for the second time. Another recent example of a contribution to the product divisions, is the rotational angio software package which has been added to Medical Systems's Integris product, allowing the 3-D reconstruction and display of vessels. Philips participates in various European research and development projects such as the projects for submicron IC technology (MEDEA), information technology and telecommunications (ACTS). In the United States, Philips has played a role in the "Grand Alliance" developing a fully digital high-definition television system for terrestrial broadcasting. The standard has now been adopted by the Federal Communications Commission, and broadcast service was launched in 1998. In 1999 Philips introduced its first fully digital television receiver, taking advantage of this. Philips has a strong Intellectual Property Right (IPR) position consisting of approximately 60,000 registered patent rights, 21,000 registered trademarks, 6,000 design rights and a substantial number of license agreements. In 1999, Philips filed over 1,400 new patent applications and more than 1,200 worldwide patent families based upon the new patent filings of 1998. Although many of Philips' patents and licenses are significant, none is individually material to Philips' business as a whole. Patent protection is extremely important to Philips' operations. It spends significant resources to protect its intellectual property rights and intellectual property licenses. 10
11 COOPERATIVE BUSINESS ACTIVITIES AND UNCONSOLIDATED COMPANIES The information set forth under the heading "Cooperative business activities and unconsolidated companies" on pages 61 and 62 of the 1999 Annual Report -Management Report- of the Company, is incorporated herein by reference. EMPLOYMENT The information set forth under the heading "Employment" on pages 48 and 49 of the 1999 Annual Report -Management Report- of the Company, is incorporated herein by reference. MILLENNIUM For a more detailed discussion of this issue, see page 69 of the 1999 Annual Report -Management Report- incorporated herein by reference. 11
12 ITEM 2 DESCRIPTION OF PROPERTY Philips' manufacturing facilities, warehouses and office facilities are located in the Netherlands, the rest of Europe, the Far East and the United States and Canada. These plants are generally in good condition and adequate for the manufacturing requirements of Philips. The geographic allocation of assets employed as shown in Note 29: "Information relating to product sectors and geographic areas" on pages 55 through 63 of the 1999 Annual Report -Financial Statements- and incorporated herein by reference, is generally indicative of the location of manufacturing facilities. ITEM 3 LEGAL PROCEEDINGS Philips is involved in proceedings concerning environmental problems including proceedings relating to the closure of discontinued chemical operations and the clean-up of various sites, including Superfund sites, in the United States. The potential costs related to these proceedings and the possible impact thereof on future operations are uncertain. However, based on current information, management does not believe, that the outcome of these matters or other litigation incidental to its extensive international operations and involving, among other matters, competition issues and commercial transactions, will result in a liability which would have a material adverse effect on the consolidated financial position and results of operations of Philips at December 31, 1999. ITEM 4 CONTROL OF REGISTRANT The information required by this Item is incorporated by reference herein on pages 71 through 77 of the 1999 Annual Report -Financial Statements. As of February 25, 2000, no person is known to the Company to be the owner of more than 10% of its Common Shares. ITEM 5 NATURE OF TRADING MARKET The Common Shares of the Company are listed on the Amsterdam Stock Exchange, on six other European stock exchanges and on the New York Stock Exchange. The principal markets for the Common Shares are the Amsterdam, New York and London Stock Exchanges. The following table shows the high and low sales prices of the Common Shares on the Amsterdam Stock Exchange as reported in the Official Price List of the Amsterdam Stock Exchange (1998 converted into euros using the irrevocably fixed conversion rate which became effective on January 1, 1999: EUR 1 = NLG 2.20371) and the high and low sales prices on the New York Stock Exchange: <TABLE> <CAPTION> AMSTERDAM NEW YORK STOCK EXCHANGE (EUR) STOCK EXCHANGE (US $) ------------------------------------------------------------------------ High Low High Low ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 1998 1st quarter 73.74 51.05 78 1/4 54 7/16 2nd quarter 92.71 67.39 102 7/8 71 3rd quarter 87.58 36.12 94 13/16 42 4th quarter 61.62 36.85 71 5/16 44 5/8 1999 1st quarter 76.50 56.55 83 5/8 65 1/2 2nd quarter 97.10 71.80 100 7/8 78 1/16 3rd quarter 109.75 86.00 110 3/4 91 13/16 4th quarter 135.00 85.10 136 1/2 91 3/4 1st quarter 2000 (through Feb. 25) 201.00 121.55 195 1/2 128 </TABLE> 12
13 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 25, 2000, approximately 81% of the 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 25, 2000, approximately 19% of the total number of outstanding Common Shares were represented by Shares of New York Registry issued in the name of approximately 1,200 holders of record. Only bearer shares are traded on the Amsterdam Stock Exchange 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. ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS 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 Dutch guilders 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, 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 Amsterdam Exchanges N.V. ("AEX") 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. ITEM 7 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 dividend distributed 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%. Stock dividends paid out of the Company's paid-in share premium recognized for Netherlands tax purposes are not subject to the above mentioned withholding tax. Pursuant to the provisions of the US Tax Treaty, dividends paid by the Company to a shareholder 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. 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 U.S. 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 shareholders' US income taxes. 13
14 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 derived from a substantial participation 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 No net wealth tax is imposed by the Netherlands in respect of Common Shares owned by non-resident corporations. A non-resident individual shareholder is not subject to Netherlands net wealth tax unless he has a permanent establishment in the Netherlands and the Common Shares are effectively connected with that permanent establishment. 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). 14
15 ITEM 8 SELECTED CONSOLIDATED FINANCIAL DATA I. IN ACCORDANCE WITH DUTCH GAAP * ** *** Beginning in 1999, Philips' consolidated financial statements are reported in euros. Previously presented financial statements 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 denominated in 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. <TABLE> <CAPTION> (Millions, except per share data) ------------------------------------------------------------------ 1995 1996 1997 1998 EUR EUR EUR EUR -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INCOME STATEMENT DATA: Sales 25,259 27,094 29,658 30,459 Income from operations 1,350 422 1,714 685 Financial income and expenses-net (312) (404) (319) (312) Income from continuing operations 971 126 1,231 541 Net income (loss) 1,143 (268) 2,602 6,053 BASIC EARNINGS PER COMMON SHARE (1999: EUR 1 par value; 1995 up to and including 1998 NLG 10 par value): Income from continuing operations 2.85 0.37 3.52 1.50 Net income (loss) 3.36 (0.79) 7.45 16.81 DILUTED EARNINGS PER COMMON SHARE: Income from continuing operations 2.75 0.37 3.45 1.49 Net income (loss) (b) 3.24 (0.79) 7.30 16.68 Dividend per Common Share (from prior-year profit distribution) 0.57 0.73 0.73 0.91 BALANCE SHEET DATA: Working capital 1,389 610 1,900 1,170 Total assets 20,981 21,907 23,322 28,153 Short-term debt 1,919 2,446 821 801 Long-term debt 2,837 3,409 3,209 2,786 Short-term provisions (c) 1,022 879 938 966 Long-term provisions (c) 2,438 2,541 2,313 2,019 Minority interests 496 279 559 242 Stockholders' equity 6,626 6,585 9,154 14,560 Cash flow data: Net cash provided by operating activities 662 911 3,210 2,140 Cash flow before financing activities (870) (925) 3,255 699 Net cash (used for) provided by financing activities 854 777 (2,661) (814) (Decrease) increase in cash and cash equivalents (16) (148) 594 (115) </TABLE> <TABLE> <CAPTION> (Millions, except per share data) ---------------------------- 1999 1999 (a) EUR US $ -------------------------------------------------------------------- <S> <C> <C> INCOME STATEMENT DATA: Sales 31,459 31,732 Income from operations 1,751 1,766 Financial income and expenses-net 32 32 Income from continuing operations 1,804 1,820 Net income (loss) 1,799 1,815 BASIC EARNINGS PER COMMON SHARE (1999: EUR 1 par value; 1995 up to and including 1998 NLG 10 par value): Income from continuing operations 5.24 5.29 Net income (loss) 5.22 5.27 DILUTED EARNINGS PER COMMON SHARE: Income from continuing operations 5.19 5.24 Net income (loss) (b) 5.18 5.22 Dividend per Common Share (from prior-year profit distribution) 1.00 1.01 BALANCE SHEET DATA: Working capital 1,412 1,424 Total assets 29,496 29,752 Short-term debt 577 582 Long-term debt 2,737 2,761 Short-term provisions (c) 1,056 1,065 Long-term provisions (c) 2,062 2,080 Minority interests 333 336 Stockholders' equity 14,757 14,885 Net cash provided by operating activities 1,913 1,930 Cash flow before financing activities (1,921) (1,938) Net cash (used for) provided by financing activities (2,606) (2,628) (Decrease) increase in cash and cash equivalents (4,527) (4,566) </TABLE> 15
16 ITEM 8 SELECTED CONSOLIDATED FINANCIAL DATA (continued) I. IN ACCORDANCE WITH DUTCH GAAP (continued) * ** *** <TABLE> <CAPTION> ------------------------------------------------------------------------------ 1995 1996 1997 1998 1999 ------------------------------------------------------------------------------ KEY RATIOS: Income from operations: <S> <C> <C> <C> <C> <C> - - as a % of sales 5.3 1.6 5.8 2.2 5.6 - - as a % of net operating capital (RONA) 15.4 4.2 16.4 6.5 17.5 Turnover rate of net operating capital 2.88 2.70 2.84 2.91 3.14 Inventories as a % of sales 20.1 16.0 15.2 14.0 14.5 Outstanding trade receivables (in months' sales) 1.5 1.3 1.3 1.3 1.4 Income from continuing operations: - - as a % of stockholders' equity (ROE) 15.8 1.9 15.9 5.1 12.6 Net debt to group equity ratio 35:65 42:58 21:79 (d) 6:94 </TABLE> DEFINITIONS: Working capital : current assets excluding cash and cash equivalents and securities less current liabilities Net operating capital : intangible assets (excluding goodwill of unconsolidated companies), 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 (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, 1999 (US $ 1 = EUR 0.9914). (b) See Note 9 of "Notes to the Consolidated Financial Statements" on page 32 of the 1999 Annual Report -Financial Statements- incorporated herein by reference for a discussion of net income (loss) on a diluted basis. (c) Includes provision for pensions, severance payments, restructurings and taxes among other items; see Note 19 of "Notes to the Consolidated Financial Statements" on page 37 of the 1999 Annual Report -Financial Statements- incorporated herein by reference. (d) Not meaningful: net cash in 1998 exceeded the debt level. * 1997 and prior years have been restated to reflect the sale of PolyGram N.V. in 1998 and to present the Philips Group accounts on a continuing basis. ** In accordance with Dutch GAAP and trends in international accounting, the proposed dividend distribution to shareholders, which is subject to approval by the General Meeting of Shareholders, is no longer recorded in the balance sheet. Prior years have been restated for comparison purposes. *** The consolidated financial data for 1999 have been prepared in euros. Amounts previously reported in Dutch guilders are now reported in euros using the irrevocably fixed conversion rate which became effective on January 1, 1999 (EUR 1= NLG 2.20371). 16
17 II. APPROXIMATE AMOUNTS IN ACCORDANCE WITH US GAAP * (a), (b) (See Note 28 of "Notes to Consolidated Financial Statements" on pages 50 through 54 of the 1999 Annual Report -Financial Statements- incorporated herein by reference.) <TABLE> <CAPTION> (Millions, except per share data) ------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 1999(c) EUR EUR EUR EUR EUR US $ ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Income (loss) from continuing operations 787 (519 2,500 1,025 1,595 1,609 Discontinued operations 216 176 ) 233 4,891 - - Extraordinary items, net - - (43 ) (16 ) (5 ) (5 ) Net income (loss) in accordance with US GAAP 1,003 (343 ) 2,690 5,900 1,590 1,604 BASIC EARNINGS PER COMMON SHARE (1999: EUR 1 par value; 1995 up to and including 1998 NLG 10 par value): Income (loss) from continuing operations 2.24 (1.51 ) 7.16 2.85 4.63 4.67 Net income (loss) 2.85 (1.00 ) 7.70 16.39 4.61 4.65 DILUTED EARNINGS PER COMMON SHARE: Income (loss) from continuing operations 2.23 (1.51 ) 7.02 2.82 4.59 4.63 Net income (loss) 2.84 (1.00 ) 7.55 16.25 4.58 4.62 Dividend per Common Share (from prior-year profit distribution) 0.57 0.73 0.73 0.91 1.00 1.01 BALANCE SHEET DATA Stockholders' equity 6,745 6,598 9,220 14,456 16,708 16,853 Total assets 20,789 21,677 23,194 28,009 31,385 31,657 </TABLE> (a) Under Dutch GAAP, certain product development and process development costs are capitalized in inventory. Under US GAAP such costs are required to be expensed when incurred. The figures previously presented for 1995 through 1998 have been adjusted to reflect this difference in accounting. The effect of this adjustment was to increase (decrease) both income from continuing operations and net income in accordance with US GAAP by (EUR 60 million), EUR 21 million and (EUR 40 million), in 1995, 1997 and 1998, respectively and to decrease loss from continuing operations and net loss by EUR 50 million in 1996. Additionally stockholders' equity as of the end of 1995, 1996, 1997 and 1998 was reduced by EUR 260 million, EUR 210 million, EUR 189 million and EUR 229 million, respectively. (b) Under US GAAP, divestitures which cannot be regarded as discontinued segments of business must be included in income from continuing operations. Under Dutch GAAP, prior to 1999, certain material transactions such as disposals of lines of activities, including closures of substantial production facilities or substantial results from disposals of interests in unconsolidated companies were accounted for as extraordinary items, whereas under US GAAP these would have been recorded in income from operations. (c) 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, 1999 (US $ 1 = EUR 0.9914). * The consolidated financial data for 1999 have been prepared in euros. Amounts previously reported in Dutch guilders are now reported in euros using the irrevocably fixed conversion rate which became effective on January 1, 1999 (EUR 1 = NLG 2.20371). 17
18 III. CASH DIVIDENDS AND DISTRIBUTIONS PAID PER COMMON SHARE The following table sets forth in euros the gross dividends 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: <TABLE> <CAPTION> 1995 1996 1997 1998 1999 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> - - In EUR 0.57 0.73 0.73 0.91 1.00 - - In US $ 0.80 0.97 0.85 0.97 1.09 </TABLE> The 1999 financial statements under Dutch GAAP are presented before profit distribution that is subject to shareholder approval after year-end. This is in line with Dutch GAAP requirements and trends in international accounting. Adoption of the dividend proposal by the General Meeting of Shareholders on March 30, 2000, will result in a total dividend payment in the year 2000 of EUR 399 million (EUR 1.20 per Common Share). The dollar equivalent of the 1999 profit distribution of EUR 1.20 - which is subject to approval by the Annual General Meeting of Shareholders on March 30, 2000 - payable to shareholders in the year 2000, 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. IV. EXCHANGE RATES US $ : EUR <TABLE> <CAPTION> 1995 1996 1997 1998 1999 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> - - Rate at December 31, (as reported) 0.7260 0.7896 0.9166 0.8576 0.9914 - - Average rate (a) 0.7306 0.7669 0.8849 0.8985 0.9392 - - Highest rate 0.7941 0.7987 0.9620 0.9484 0.9987 - - Lowest rate 0.6943 0.7306 0.7850 0.8213 0.8460 </TABLE> (a) The average rates are the accumulated average rates based on daily quotations. 18
19 ITEM 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference herein on pages 40 through 73 of the 1999 Annual Report -Management Report. SUBSEQUENT EVENT On March 27, 2000, Philips announced the sale of approximately 20% of its shares of JDS Uniphase, resulting in an after tax gain of approximately EUR 525 million. Philips still holds 15,477,168 common shares of JDS Uniphase, of which, subject to market conditions, Philips from time to time may sell more shares. See also Note 3 and Note 11 of the Company's 1999 Annual Report - Financial Statements. ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The information required by this Item is incorporated by reference herein on pages 67 through 68 of the 1999 Annual Report -Management Report. ITEM 10 DIRECTORS AND OFFICERS OF REGISTRANT The information required by this Item is incorporated by reference herein on pages 74 through 78 of the 1999 Annual Report -Management Report- and pages 71, 75 and 76 of the 1999 Annual Report -Financial Statements. Mr. L.C. van Wachem is also Chairman of the Board of the Dr. A.F. Philips Stichting. Messrs W. de Kleuver C.J. Oort and C. Boonstra are also member of the Board of the Dr. A.F. Philips Stichting. ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS For information on the remuneration of the Board of Management and the Supervisory Board, required by this Item, see page 23 for the aggregate amounts and pages 71 through 75 for individually named members of the 1999 Annual Report - -Financial Statements- incorporated herein by reference. The aggregate direct remuneration paid in 1999 to, or for the benefit of, the members of the Supervisory Board, the Board of Management and 68 officers in the Netherlands, taken as a group, was as follows: Aggregate direct remuneration: EUR 21,656,000 Contribution to retirement plans: EUR 3,135,000 19
20 ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES During 1999, 1,724,525 stock options to purchase Common Shares of Koninklijke Philips Electronics N.V. were issued. In 1999 2,065,723 options were exercised; 83,889 initially allocated options were forfeited due to resignations/dismissals prior to vesting. Until March 1, 2000, 1,182,200 stock options were newly issued, 835,909 stock options were exercised and 1,667 initially allocated options were forfeited. As of March 1, 2000, the number of shares issuable upon exercise of stock options outstanding was 5,586,071 (December 31, 1999: 5,241,447 stock options). For a discussion of the options and the employee debentures, see also Note 23: "Long-term debt", Note 25: "Share premium and other reserves" and Note 26: "Stock-based compensation" of "Notes to the Consolidated Financial Statements" on pages 42 through 47 of the 1999 Annual Report -Financial Statements- incorporated herein by reference. For information specified in this Item for individually named directors and officers, see pages 71 through 75 of the 1999 Annual Report - -Financial Statements- incorporated herein by reference. The following table provides more detailed information about the stock options outstanding at March 1, 2000: <TABLE> <CAPTION> Fixed option plans: options exercisable weighted exercise options average number price per outstanding number price per outstanding share exercise exercisable share at March 1, (price in period at March 1, (price in 2000 EUR) (ending) 2000 EUR) - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 1996 202,650 30.13 Feb. 14, 2001 202,650 30.13 1996 20,000 26.46 Oct. 23, 2001 20,000 26.46 1997 401,800 36.76 Feb. 12, 2002 401,800 36.76 1997 25,000 44.02 Apr. 22, 2002 25,000 44.02 1997 135,000 77.73 July 23, 2002 135,000 77.73 1997 37,800 72.70 Oct. 22, 2002 37,800 72.70 1998 741,400 65.80 Feb. 11, 2003 741,400 65.80 1998 56,000 84.09 Apr. 21, 2003 - 1998 3,000 77.73 July 22, 2003 - 1998 96,000 46.29 Oct. 21, 2003 - 1999 906,250 63.05 Feb. 10, 2004 - 1999 16,500 83.40 Apr. 21, 2004 - 1999 21,500 92.05 July 21, 2004 - 1999 31,600 89.95 Sept. 22, 2004 - 2000 1,179,700 168.10 Feb. 16, 2005 - (price in US$) (price in US$) 1998 471,311 51.75-94.37 Oct. 1, 2008 270,758 68.81 1999 707,775 87.90-124.37 Oct. 1, 2009 - ----------------- -------------- 5,053,286 1,834,408 Variable plans: (price in US$) (price in US$) 1991 - 1992 11,042 11.81-21.38 Dec. 31, 2000 11,042 12.85 1993 - 1994 75,475 11.00-27.56 Dec. 31, 2002 75,475 11.50 1995 - 1997 446,268 30.00-56.81 Dec. 31, 2004 446,268 31.52 ----------------- --------------- 532,785 532,785 </TABLE> 20
21 ITEM 13 INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS The registrant does not report to its shareholders, or otherwise make public, the information specified in this Item for individually named directors and officers. ITEM 14 DESCRIPTION OF SECURITIES TO BE REGISTERED Omitted pursuant to Form 20-F General Instruction G(b). ITEM 15 DEFAULTS UPON SENIOR SECURITIES None. ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES None. ITEM 18 FINANCIAL STATEMENTS The following portions of the Company's 1999 Annual Report - -Financial Statements- as set forth on pages 3 through 63 are incorporated herein by reference and constitute the Company's response to this Item: "Accounting principles" "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" "Notes to the consolidated financial statements of the Philips Group" Schedules: Schedules are omitted as they are either not required or not applicable. ITEM 19 FINANCIAL STATEMENTS AND EXHIBITS (a) INDEX TO FINANCIAL STATEMENTS See Item 18 above. The total amount of long-term debt securities of the Registrant 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. (b) INDEX OF EXHIBITS I Independent auditors' report and consent of the independent auditors. II The 1999 Annual Report to Shareholders of the Company, consisting of the Management Report and Financial Statements, 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. III Articles of Association, as amended, dated as of May 29, 1999 - English translation - (incorporated by reference to the Company's Report on Form 6-K for the period commencing July 22, 1999 through August 9, 1999). 21
22 EXHIBIT INDEX Exhibit Number Description of Exhibit - ---------------------- ---------------------------------------------- I Independent auditors' report and consent of the independent auditors. II The 1999 Annual Report to Shareholders of the Company, consisting of the Management Report and Financial Statements, 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. III Articles of Association, as amended, dated as of May 29, 1999 - English translation - (incorporated by reference to the Company's Report on Form 6-K for the period commencing July 22, 1999 through August 9, 1999). 22
23 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant certifies that it meets all the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. <TABLE> <CAPTION> KONINKLIJKE PHILIPS ELECTRONICS N.V. <S> <C> /s/ C. Boonstra /s/ J.H.M. Hommen C. Boonstra J.H.M. Hommen (President, Chairman (Executive Vice-President, of the Board of Management and Member of the Board of the Group Management Committee) Management and the Group Management Committee, and Chief Financial Officer) Registrant Date: March 29, 2000 </TABLE> 23