Innovating to grow Annual Report 2005 We are focusing our activities on the interlocking domains of healthcare, lifestyle and technology. Understanding the needs of our customers is our starting point as we pursue innovation in every aspect of our business. We believe that fresh new ideas based on the combination of consumer insight and technology leadership – like our award-winning Ambient Experience radiology suite – are key to creating new opportunities for growth. Our advanced technologies span the entire scope of healthcare – pre-screening patients for diseases like cancer, monitoring patients while in hospital, enabling people to monitor their health at home, or simply helping them to pursue a healthy, active lifestyle. New ideas, 2 Philips Annual Report 2005 Advanced but easy to use, our We believe simplicity is the products and solutions enrich key to successful technology. people’s daily lives by offering Accordingly, we design our them more enjoyable products, systems and services experiences wherever they around the people who will be are – at home or on the move. using them. So, no matter how sophisticated they are, they make sense and are user-friendly. new opportunities Philips Annual Report 2005 Contents Financial highlights Group financial statements �2 Consolidated statements of income Message from the President �2 Consolidated balance sheets 128 Consolidated statements of cash flows � Our company �0 Consolidated statements of stockholders’ e�uity �� Information by sectors and main countries Information on the Philips Group � Accounting policies � ������������� � New accounting standards � �������������� 140 Notes to the group financial statements ������������������� ��5 Auditors’ report �� Our leadership IFRS information �� Management commentary �� Report of the Supervisory Board �� Consolidated statements of income �0 Consolidated balance sheets Management discussion and analysis 182 Consolidated statements of cash flows � ������������ � Consolidated statements of e�uity � ��������������������������������������� � Accounting policies ��������������������� �0 New accounting standards ��������������������������� 192 Notes to the IFRS financial statements ������������������������ 2�0 Auditors’ report ������������������������ �� ���������� Company financial statements ������������������������������������������5 2�2 Balance sheets and statements of income �� �i����������������������������� 2� Statement of e�uity 99 Ac�uisitions and divestments 2� Accounting policies �00 Restructuring and impairment charges 214 Notes to the company financial statements �0� Risk management 2�� Auditors’ report ��5 Critical accounting policies ��� Other information 2� Corporate governance �22 Proposed dividend to shareholders �2 Outlook 22 The Philips Group in the last ten years 22 Investor information Forward-looking statements This document contains certain forward-looking statements with respect to the financial condition, employee costs, changes in exchange and interest rates (in particular changes in the euro and results of operations and business of Philips and certain of the plans and objectives of Philips with the US dollar can materially affect results), changes in tax rates and future business combinations, respect to these items (including, but not limited to, restructuring cost and cost savings), in particular ac�uisitions or dispositions and the rate of technological changes, political and military the outlook paragraph of the Management discussion and analysis in this Annual Report. developments in countries where Philips operates, the risk of a downturn in the semiconductor By their nature, forward-looking statements involve risk and uncertainty because they relate to market, Philips’ ability to secure short-term profitability and invest in long-term growth, and events and depend on circumstances that will occur in the future. There are a number of factors industry consolidation. Statements regarding market share, including as to Philips’ competitive that could cause actual results and developments to differ materially from those expressed or position, contained in this document are based on outside sources such as specialized research implied by these forward-looking statements. These factors include, but are not limited to, levels institutes, industry and dealer panels in combination with management estimates. Where full-year of consumer and business spending in major economies, changes in consumer tastes and information regarding 2005 is not yet available to Philips, those statements may also be based on preferences, changes in law, the performance of the financial markets, pension costs, the levels estimates and projections prepared by outside sources or management. Rankings are based on of marketing and promotional expenditures by Philips and its competitors, raw materials and sales unless otherwise stated. Philips Annual Report 2005 Notes to the group financial statements Notes to the IFRS financial statements �0 � Discontinued operations �2 0 Discontinued operations �0 2 Ac�uisitions and divestments �2 � Ac�uisitions and divestments � �arnings before interest and tax � 2 �arnings before interest and tax � Restructuring and impairment charges �5 Financial income and expenses � 5 Financial income and expenses � Income taxes �� Income taxes �� 5 Investments in unconsolidated companies � � Investments in unconsolidated companies � Minority interests �50 Minority interests 200 � �arnings per share �50 Cumulative effect of change in accounting principles 200 Other current assets �5� �0 �arnings per share 200 Other non-current assets �52 �� Receivables 20� 50 Property, plant and e�uipment �52 �2 Inventories 202 5� Intangible assets excluding goodwill �52 � Other current assets 202 52 Goodwill �52 � Other non-current financial assets 20 5 Accrued liabilities �5 �5 Non-current receivables 20 5 Provisions �5 � Other non-current assets 20 55 Pensions and postretirement benefits other than pensions �5 �� Property, plant and e�uipment 20 5 Short-term debt �5 � Intangible assets excluding goodwill 20 5� �ong-term debt �5 � Goodwill 20� 5 Other non-current liabilities �55 20 Accrued liabilities 20� 5 �eases �55 2� Provisions 20 0 Assets received in lieu of cash from the sale of businesses �5 22 Pensions 20 � Fair value of financial assets and liabilities �5 2 Postretirement benefits other than pensions 20 2 Other financial instruments, derivatives and currency risk �� 2 Other current liabilities 20 Subse�uent events �� 25 Short-term debt �2 2 �ong-term debt Notes to the company financial statements � 2� Other non-current liabilities 2� A Receivables � 2 �eases 2� B Investments in affiliated companies � 2 Other commitments and contingent liabilities 2�5 C Other non-current financial assets �5 0 Stockholders’ e�uity 2�5 D Property, plant and e�uipment �5 � Cash from derivatives 2�5 � Intangible fixed assets �5 2 Proceeds from other non-current financial assets 2�5 F Other current liabilities �5 Assets received in lieu of cash from the sale of businesses 2�5 G Short-term debt � Related-party transactions 2�5 H Provisions � 5 Share-based compensation 2� I �ong-term debt ��� Information on remuneration of the individual members 2� J Stockholders’ e�uity of the Board of Management and the Supervisory Board 2� K Net income �� � Fair value of financial assets and liabilities 2� � �mployees �� Other ����������������������������������������������������fi 2� M Obligations not appearing in the balance sheet �� Subse�uent events Use of non-US GAAP information Fair value information In presenting and discussing the Philips Group’s financial position, operating results and cash In presenting the Philips Group’s financial position, fair values are used for the measurement of flows, management uses certain non-US GAAP financial measures. These non-US GAAP financial various items in accordance with the applicable accounting standards. These fair values are based measures should not be viewed in isolation as alternatives to the e�uivalent US GAAP measure(s) on market prices, where available, and are obtained from sources that are deemed to be reliable. and should be used in conjunction with the most directly comparable US GAAP measure(s). Users are cautioned that these values are subject to change sover time and are only valid at the A discussion of the non-US GAAP measures included in this document and a reconciliation of balance sheet date. When a readily determinable market value does not exist, fair values are such measures to the most directly comparable US GAAP measure(s) can be found in the estimated using valuation models. The models that are used are appropriate for their purpose. section Other information on page �20 of this document. They require management to make significant assumptions with respect to future developments which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the financial statements. In certain cases, independent valuations are obtained to support management’s determination of fair values. Philips Annual Report 2005 5 Financial highlights Sales Net income (loss) in billions of euros Nominal growth Comparable growth in millions of euros 50 5,000 2,836 2,868 40 2,500 31.7 31.0 30.4 29.3 30 27.9 695 0 20 (2,500) 10 (2,475) (14%) (2%) (10%) 5% 4% (3,206) (14%) (2%) 3% 9% 4% 0 (5,000) 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 Comparable sales growth in %1) Earnings beforeinterest and tax as a % of sales 2001 2002