Annual Report 2000 Management Report Annual ReportAnnual 2000 • Management Report Management www.philips.com www.investor.philips.com Seizing the opportunities offered by the Internet, we deliver exciting web-enabled products that reflect the dynamic aspirations of the digital age. These include eXpanium, our first CD portable that can play recordable and rewritable CDs with MP3 music as well as regular audio CDs. 9922 130 05015 Annual Report 2000 Management Report Copies of Annual Report 2000 Information sources ReportAnnual 2000 • Non-US shareholders and other non-US interested Investors and financial analysts may contact parties can obtain copies of the Annual Report 2000 Mr A.S. Cathcart, Director of Investor Relations free of charge from: Telephone:31-20-5977222 Royal Philips Electronics Fax: 31-20-5977220 Annual Report Office E-mail: [email protected] P.O. Box 218 5600 MD Eindhoven,The Netherlands US shareholders should direct communications Report Management Fax: 31-40-2786436 concerning share transfers, lost certificates, dividends and change of address to Citibank (see Holders of shares of New York Registry and opposite). Non-US shareholders should contact: other interested parties in the USA can obtain, ABN AMRO free of charge, copies of the Annual Report 2000 Afdeling Uitgevende Instellingen from the Transfer and Register Agent: Kemelstede 2 Citibank Shareholder Services 4817 ST Breda P.O. Box 2502 The Netherlands Jersey City, New Jersey 07303-2502 Telephone:31-76-5799482 www.philips.com www.investor.philips.com Telephone:877-CITI-ADR (toll-free) Fax: 31-76-5799620 Fax: 201-324-3284 E-mail: [email protected] Internet address: Internet address: www.citibank.com/corpbank/adr www.investor.philips.com The Annual Report on Form 20-F is filed electroni- cally with the United States Securities and Exchange Printed in the Netherlands Commission. This Annual Report (Management Report) is printed on Reviva Mega paper, which is made from 50% recycled The Annual Report 2000 is also available in the and deinked waste paper and 50% pulp (bleached original Dutch version, which is the authentic text. without any use of chlorine and fully recyclable). Seizing the opportunities offered by the Internet, we deliver exciting web-enabled products that reflect the dynamic aspirations of the digital age. These include eXpanium, our first CD portable that can play recordable and rewritable CDs with MP3 music as well as regular audio CDs. 9922 130 05015 Seizing the opportunities offered by the Internet, we deliver exciting web-enabled products that reflect the dynamic aspirations of the digital age. These include eXpanium, our first CD portable that can play recordable and rewritable CDs with MP3 music as well as regular audio CDs. Contents This Management Report booklet and the separate 2 Message from the President booklet entitled ‘Financial Statements’ together 7 Key data comprise the full Annual Report for the year 2000 of Koninklijke Philips Electronics N.V. (‘Royal Philips Electronics’) as expressed in euros.The selected 8 Divisional structure 2001 financial information included in this Management Report is derived from the Philips Group’s full annual financial statements including notes.The Business descriptions Financial Statements booklet also contains additional financial information and further 10 Lighting statutory and other information. For a full 14 Consumer Electronics understanding of the results of the Group and the state of affairs, both booklets should be consulted. 24 Domestic Appliances and Personal Care 28 Components 32 Semiconductors 36 Medical Systems 40 Miscellaneous 44 Operating and Financial Review and Prospects 74 Board of Management 75 Group Management Committee 76 Supervisory Board 77 Report of the Supervisory Board Selected Financial Information 79 Introduction 79 Auditors’ report 79 Accounting policies ‘Safe Harbor’ Statement under the Private Securities Litigation Reform Act of 1995 80 Consolidated statements of income of the Philips Group This document contains certain forward-looking 82 Consolidated balance sheets of the Philips Group statements with respect to the financial condition, results of operations and business of Philips and 84 Consolidated statements of cash flows of the Philips Group certain of the plans and objectives of Philips with 86 Consolidated statements of changes in stockholders’ equity respect to these items, in particular the Outlook paragraph of the Operating and Financial Review of the Philips Group and Prospects. By their nature, forward-looking 87 Some key financial information in NLG and USD statements involve risk and uncertainty because they relate to events and depend on circumstances 88 Sales and income per product sector that will occur in the future.There are a number 89 Sales and income per geographic area of factors that could cause actual results and developments to differ materially from those 90 The Philips Group in the last seven years expressed or implied by these forward-looking statements.These factors include, but are not limited to, levels of consumer and business 92 Important dates/Payment of dividend 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 (in particular, changes in the euro and the US dollar can materially affect results), 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. Contents 1 A sound basis for success In the year 2000, we broke major performance records • Income from continuing operations rose to an all-time high of EUR 9.6 billion (excluding one-time gains, EUR 2.6 billion, 65% up on 1999) • Sales reached a record level of EUR 37.9 billion • Our market value at year-end reached a new high of EUR 50 billion we met the objectives of our four-year program • At 35.7% – excluding one-time gains, 24.2% – we exceeded our RONA target of 24%, up from our 1996 starting point of 4.2% • Earnings growth (excluding one-time gains) of 65%, compared with 70% in 1999 • Over the course of the program we have generated EUR 10.2 billion cash from operations, of which EUR 7.6 billion has been invested in the Company and we took significant steps to advance the Company's long-term interests • We effected a number of divestments, generating cash of EUR 3.6 billion • A total of EUR 3.2 billion was invested in acquisitions designed to exploit new growth opportunities and achieve leadership positions • To encourage investment in our shares, we carried out a 4-for-1 stock split. We also returned EUR 1.7 billion to shareholders in cash, reducing the number of shares by 3%, and we increased the dividend by 20% These steps will help to position Philips as a high-growth technology company with a strong underlying cash flow, delivering sustained healthy returns to its shareholders. Message from the President 2 Message from the President Dear shareholder, I am delighted to say that Philips made a good start to the new millennium. The fruits of the efforts of the past four years are becoming clearer. Benefiting from favorable economic conditions and a strong US dollar, particularly in the first three quarters of the year, all our divisions reported performance improvements in . Our Semiconductors division, for example, turned in a sterling performance, with sales growth of %. And with a reconfigured, highly focused product portfolio, Components posted an improved performance, with income from operations, excluding one-time gains, up more than %. We enjoyed the benefit of strong contributions from unconsolidated companies, including a number of significant one-time gains. In the course of the year we sold % of our shareholding in ASML, resulting in a book profit of . billion. We also realized gains of . billion on our share of the increased equity value of TSMC and . billion on the sale of a portion of our shares in JDS Uniphase. Additionally, in December the exchange of our post-PolyGram Seagram shareholding to Vivendi Universal shares yielded a net gain of approximately . billion, while the merger of Origin and Atos resulted in a gain of . billion. Our income performance was further boosted by strong licensing revenues. We conducted a successful drive to maximize revenues from licenses on our many patents, resulting in a % increase over . We also filed almost , new patent applications, up % on the previous year, securing solid positions in fields which are of vital importance for the future. Sales rose by %, with growth accelerating in Europe, Asia Pacific and Latin America. Improvements in our financial performance like those outlined above have enabled us to regain our credibility within the financial community, completing step of our strategy process. However, in order to go further, we must keep improving our performance, building our profitability, because only by doing so – consistently – will we be able to hold our own in today’s highly competitive market. Strategy for a high-growth future Our objective is to be a high-growth technology company that achieves profitable growth with a strong cash flow and sustainable market leadership positions, thus creating increased shareholder value. With this in mind, we are now addressing the next stages of our strategy process. In step we are moving towards a high-growth portfolio, building a platform for profitable growth. In this respect, we took measures in to realign our Consumer Electronics organization to make it more transparent and flexible and better geared to the demands of the digital era. In step we intend to transform Philips into an ‘industry shaper’. To this end we continue to invest in and exploit our strategic capabilities to the full.