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Innovating to grow
Annual Report 2005

Table of contents

  • Page 1
    Innovating to grow Annual Report 2005

  • Page 2
    ...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...

  • Page 3
    ... at home or on the move. We believe simplicity is the key to successful technology. Accordingly, we design our products, systems and services around the people who will be using them. So, no matter how sophisticated they are, they make sense and are user-friendly. new opportunities Philips Annual...

  • Page 4
    ... company Information on the Philips Group Our structure Our businesses Our cooperations Our leadership Report of the Supervisory Board Management discussion and analysis Introduction Group performance 2005 compared to 200 Management summary Performance of the Group Performance by sector Performance...

  • Page 5
    ...non-current financial assets  Assets received in lieu of cash from the sale of businesses  Related-party transactions 5 Share-based compensation �� Information on remuneration of the individual members of the Board of Management and the Supervisory Board � Fair value of financial assets...

  • Page 6
    ...%) Medical Systems Semiconductors Domestic Appliances and Personal Care Consumer Electronics Lighting Other Activities (27%) (30%) 0% (2%) (4%) (6%) 2001 2002 2003 2004 2005 (3.9%) Sales per region as a % of sales Latin America North America Europe/Africa Asia Pacific Net debt to group equity in...

  • Page 7
    ... 2006 Annual General Meeting of Shareholders all amounts in millions of euros unless otherwise stated 20031) 20041) 2005 Sales Earnings before interest and tax as a % of sales Results relating to unconsolidated companies Net income per common share in euros - basic - diluted Dividend paid per...

  • Page 8
    Message from the President "We took a number of decisive steps that have created tangible value, and our market capitalization increased by some EUR 7 billion." �� Philips Annual Report 2005

  • Page 9
    ...for our customers and for our employees. At the same time, it will help us to create more value for Philips' shareholders. We also rolled out the second wave of our "sense and simplicity" brand campaign, reinforcing our distinctive positioning and taking in major new markets such as India and Russia...

  • Page 10
    ...new products based on real consumer insight, which, in turn, will help us to grow faster and realize better margins. As part of its Business Renewal Program, our Semiconductors division has changed its organizational structure from one based on technology to one centered around markets and customers...

  • Page 11
    ... venture in 2005, enabling us to build a leading solid-state lighting business. And we announced major investments in the production of state-of-the-art lamps at our facilities in the Netherlands and Belgium. Further simplify Philips We have made considerable advances in simplifying the company...

  • Page 12
    ... At the heart of our brand positioning is the promise to consumers of a more comfortable, more intuitive and more straightforward relationship with technology. As part of our commitment to "sense and simplicity", we asked Philips Design to explore how our solutions could simplify people's lives in...

  • Page 13
    ... to appoint the current heads of our five operating divisions to the Board of Management, bringing us as a board even nearer to our business and our customers. I look forward to working together with them even more closely to meet the longterm strategic goals we have set for the company. As we look...

  • Page 14
    ... that guide us in our everyday working lives. One Philips is a mindset and a way of working focused on maximizing value creation for the company and our customers by leveraging our competencies and resources across the areas of healthcare, lifestyle and technology. � Philips Annual Report 2005

  • Page 15
    ... new brand positioning and our brand promise of "sense and simplicity". We firmly believe that simplicity is the key to successful technology. We want to offer our customers straightforward solutions that meet their needs and wishes. Accordingly, we are committed to designing our products, systems...

  • Page 16
    ... expertise from right across the company and beyond, we are working together to create innovative solutions that are designed around the needs of both patients and healthcare professionals. Better environments for better care In 2005 the world's first Ambient Experience radiology suite opened its...

  • Page 17
    ... completely on patient care. And yet they need to interact with medical e�uipment, even when their hands are occupied with the patient. Usability engineers, researchers and medical specialists from across Philips have worked together to develop a voice control system - Hands-free Interaction...

  • Page 18
    ...Child Care line is set to become a key part of our Consumer Health & Wellness portfolio. Centered around three pillars - food & nutrition, health & personal care and development & monitoring - this global business will address a wide range of needs in the field of mother and child care with products...

  • Page 19
    ... for the digital home into the realm of healthcare - working with providers in North America and �urope to test wireless, broadband-based solutions. Developed by Medical Systems in cooperation with Philips Applied Technologies, this new communication platform - Motiva - enables patients...

  • Page 20
    ...We apply our shared understanding of how people interact with technology to design advanced yet user-friendly products and solutions that meet their everyday needs. Immersive viewing Our Cineos FlatTV features innovations that make on-screen images even more realistic. Pixel Plus 2 HD pushes video...

  • Page 21
    Philips Annual Report 2005 2�

  • Page 22
    ... Premiere in Germany, Canal+ in France and UPC in the Netherlands. As part of these strategic alliances, we supply HDTV set-top boxes and participate in �oint promotions to stimulate awareness of HDTV among consumers, e.g. around the 2006 FIFA World CupTM Soccer. 22 Philips Annual Report 2005

  • Page 23
    ... has recently been fully modernized with a new Philips lighting installation featuring environmentally friendly fiber optics and solid-state lighting. A revolution in shaving Designed to meet the needs of the most demanding consumers, two major innovations make the SmartTouch-X� a revolution in...

  • Page 24
    ...' - is home not only to a large part of Philips' technology community, but also to a diversity of other high-tech companies. In this open environment they can all collaborate on the development of new technologies in crucial areas such as microsystems, molecular medicine, embedded systems, signal...

  • Page 25
    ...! Consumers experience digital technology primarily through their home and mobile devices - their TVs, HiFi sets, PCs and mobile phones. Combining digital technology with advances in miniaturization, e.g. a thumbnail-size Systemin-Package (SiP) solution from Philips Semiconductors, enables consumers...

  • Page 26
    ... black'. Now Philips has tackled both issues head-on with its new Clear�CD technology." Applying our revolutionary Aptura backlighting technology to enable extreme motion sharpness, superb contrast in dark scenes and a very wide viewing angle, ClearLCD was named 'European Video Innovation of the...

  • Page 27
    ...Planck Institute in Munich, the Benelux Trademark office in The Hague and Philips Intellectual Property & Standards in �indhoven. Next Simplicity As part of our commitment to "sense and simplicity", Philips Design was commissioned to explore how our solutions could simplify people's lives in the...

  • Page 28
    ... Annual Report. the compact audio tape cassette in to set a global standard for tape recording. In 2 the Company produced In total, at the end of 2005, Philips had approximately the world's first video cassette recorder for home use. In �5 production sites in 2 countries, sales and service...

  • Page 29
    ... cardiology over �0% of the top 50 US hospitals have chosen Philips solutions. In 2005, Medical Systems concluded major contracts with Capital Health of Alberta, Canada; HealthTrust Purchasing Group of Brentwood, Tennessee; St. Francis Cardiac & Vascular Care Center of Indianapolis; Medical Center...

  • Page 30
    ... as it secures previous investments whilst further strengthening the current portfolio. Aside from the Strategic Partnership Program in the US, strategic customer partnerships around the world are creating business opportunities, with both orders and market share rising. For X-ray, CT and Ultrasound...

  • Page 31
    ... innovative Remote Services Network, enabling fast problem diagnosis and resolution as well as preventive maintenance, is being rolled out globally. Medical Systems is expanding its customer financing business. In the USA, Philips Medical Capital, a venture with the Rabobank Group's subsidiary De...

  • Page 32
    ... - every day. Strategy and objectives for 2006 and beyond Philips Medical Systems aims to establish and maintain DAP is engaged in the development, manufacturing and global leadership positions in enabling systems and marketing of innovative domestic and lifestyle appliances technologies for patient...

  • Page 33
    ...that combines a high-�uality appliance and premium-brand beer in light metal kegs to give the great taste of draft beer in the comfort of the home. PerfectDraft was first introduced in Belgium in 2004, followed by Germany and the Netherlands in 2005. In home environment care, DAP manufactures and...

  • Page 34
    Information on the Philips Group Domestic Appliances and Personal Care Markets In the product/market combinations that it is targeting, DAP has No. � or No. 2 market positions in the categories of male shaving, beauty, oral healthcare, food and beverage, and garment care, as well as a No. 3 ...

  • Page 35
    ... three business groups develop and market the following products: • Connected Displays - FlatTV (�CD, Plasma), conventional TV, �CD and CRT computer monitors; • Home �ntertainment Networks - video products such as Home Theater in a Box (HTiB), DVD and DVD+RW; set-top boxes; audio systems...

  • Page 36
    ... agreements allows CE to focus on specific parts of the value chain: product innovation, design, and brand and channel management. C� increasingly outsources activities to Original ��uipment Manufacturers (O�Ms) and Original Design Manufacturers (ODMs) in line with its asset-light business...

  • Page 37
    ... Hong Kong eco-design awards for the profitability by: Xenium C mobile phone and DVP520 DVD player. • capitalizing on a focused portfolio of businesses, including the launch of High-Definition TV and Blu-ray Sourcing recording (the next-generation optical storage standard), C� mainly purchases...

  • Page 38
    ...lighting products, systems and services. Consistent with Philips' "sense and simplicity" brand promise, it does this based on a thorough understanding of people's needs, desires and aspirations, applying its leading-edge technological capabilities to create advanced, user-friendly lighting solutions...

  • Page 39
    ... designed for easy installation; and a range of new ��D (light-emitting diode) products, which lighting designers, architects and urban planners can use to enhance urban spaces. �ighting �lectronics manages the lamp driver business, both in the general and special lighting fields. The driver...

  • Page 40
    ...�uropean sales management and supportive engineering and development activities are located in Best, Netherlands. Pursuing technology leadership In 2005, two major investments were announced in West �uropean plants to strengthen �ighting's technology leadership in applications with high growth...

  • Page 41
    ... semiconductor products. Over �5% of total sales go to the division's top 50 accounts. One of Semiconductors' most innovative solutions is Nexperia, a system-on-chip (SoC) platform designed to address the challenge of digital convergence. Nexperia's programmable ICs for multimedia applications...

  • Page 42
    ... to strengthen its long-term performance. Focus areas The main focus for the Home business unit is on the 'Connected Consumer', with particular emphasis on digital technology in TV sets, PC TV, set-top boxes and home media devices, and other audio/video components. The unit's strategy is based on...

  • Page 43
    ..., a long-established customer, announced its first GSM/GPRS/EDGE (Enhanced Data for GSM �volution) mobile phone handsets based on the Nexperia Cellular System Solution that enables high-speed wireless connectivity for video streaming and real-time audio. In the US, the communications technology...

  • Page 44
    ... TV tuner chip, which accounts for more than 0% of the total number of tuner chips sold worldwide in the last two years. In �urope, Philips introduced the Nexperia ���0 DVB Semiconductors solution, which has been designed to enable manufacturers to accelerate the move to digital television...

  • Page 45
    ...for customers that want to create their own systems. In view of the announcement in December in which Philips expressed its intention to create a separate legal structure for Semiconductors, the division will explore strategic options to strengthen its long-term performance. Semiconductors plans to...

  • Page 46
    ... group of patents and licenses. System integration services Philips Applied Technologies helps its customers to transform initial ideas into competitive products and costefficient manufacturing solutions by integrating new and existing technologies. Some �,200 highly skilled professionals work...

  • Page 47
    ... High Tech Campus in �indhoven, Netherlands, and the Philips Innovation Campus in Bangalore, India are prime examples of this. Corporate Technologies invests in world-class competencies and technologies that are essential for the divisions, but also leverages these to external customers, in order...

  • Page 48
    ... Philips �nabling Technologies Group (�TG) operates in the business of system integration of mechatronic (sub-)systems and modules for O�Ms in the high-tech capital e�uipment industry. �TG is an e�uipment foundry offering its customers e�uipment manufacturing, engineering and supply...

  • Page 49
    ...All support functions, including Finance, Human Resources, Information Technology, non-product-related Purchasing, Real Estate and Facilities Management, have made significant progress in turning Philips' Global Service Units strategy Unallocated into reality. Global Service Units help the company...

  • Page 50
    ... mostly system-on-silicon solutions for mobile phones and home applications (TV, set-top box, etc.) that can benefit from the smaller dimensions to offer better performance at lower prices. There is a strong emphasis on low power consumption and on embedded memories. 50 Philips Annual Report 2005...

  • Page 51
    ... company in which Philips holds 25% of the outstanding shares. F�I is the leading supplier of Structural Process Management TM solutions to the world's technology leaders in the fields of semiconductors, data storage and biological structures. Taiwan Semiconductor Manufacturing Company Taiwan...

  • Page 52
    ... is accountable for the performance of its assignment to the Supervisory Board and the General Meeting of Shareholders. The Rules of Procedure of the Board of Management are published on the Company's website (www.philips.com/investor). The remuneration policy applicable to the Board of Management...

  • Page 53
    ... and Chief Financial Officer (CFO) CFO and member of the Board of Management and the Group Management Committee since June 2005 Corporate responsibilities: Control,Treasury, Fiscal, Mergers & Ac�uisitions, Investor Relations, Information Technology, Pensions, Real �state, Corporate Investments...

  • Page 54
    ...Pro�ect Management and Operations. He has extensive experience in integrating businesses after acquisitions. Andrea Ragnetti 1960, Italian Member of the GMC since January 2003, Chief Marketing Officer since 200 and C�O of the Domestic Appliances and Personal Care division since 2005 Corporate...

  • Page 55
    ... Philips Consumer Electronics Global Sales and Services in 2003. Barbara Kux 1954, Swiss Member of the GMC since October 200 and Chief Procurement Officer since 2003 Corporate responsibilities: Supply Management, Sustainability Board Barbara Kux holds an MBA from INSEAD. She began her career with...

  • Page 56
    ... the Board of Management of Akzo Nobel and currently Chairman of the Supervisory Board of Heineken, member of the Supervisory Boards of Akzo Nobel, AF/KL, Reed Elsevier, Sara Lee Corporation, Air Liquide, and Chairman of the Board of Directors of INSEAD. * Member of the Audit Committee ** Member of...

  • Page 57
    ... term expires in 200�� Chairman and CEO of Venture Corporation. Also serves on the boards of various listed and private companies, including DBS Bank and DBS Group Holdings and SIA Engineering Company. Chairman of the National University of Singapore Board of Trustees. Philips Annual Report...

  • Page 58
    ... Following his period in hiding, Frits Philips returns after a lengthy absence to the Philips complex in Eindhoven by bike, to a warm welcome. It is 9 a.m. on September 21, 1944. Meeting with workers engaged in building their own homes in the winter of 1945-46. 5�� Philips Annual Report 2005

  • Page 59
    ... New York airport, about to board the Pan American World Airlines return flighttotheNetherlands. In 1962 Frits and Sylvia Philips are received in private audience by Pope John XXIII. Frits Philips being carried shoulder-high during the company's 75th anniversary in 1966. Philips Annual Report...

  • Page 60
    ...the Board of Management in performing its management tasks and setting the direction of the Philips Group's business. It is empowered to recommend to the General Meeting of Shareholders persons to be appointed as members of the Supervisory Board or the Board of Management. Major management decisions...

  • Page 61
    ...of Management and Chief Technology Officer, will retire. During his 5-year career with Philips, in particular in the Company's research activities, Mr Huijser has made a significant contribution to Philips. The Supervisory Board will propose, at the 200�� Annual General Meeting of Shareholders...

  • Page 62
    ... policy for members of the Board of Management, approved by the 200 General Meeting of Shareholders, amended by the 2005 General Meeting of Shareholders and published on the Company's website (www.philips.com/investor), is in line with that for Philips executives throughout the Philips Group...

  • Page 63
    ... the longer term as shareholders of the Company. The actual number of long-term incentives that will be granted to the members of the Board of Management, the other members of the Group Management Committee, executives and other key employees depends on the team and/or individual performance of the...

  • Page 64
    ... share rights For more details of the �ong-Term Incentive Plan, see note 5 of this Annual Report. According to Philips' Rules of Conduct with respect to inside information, members of the Board of Management (and the other members of the Group Management Committee) are only allowed to trade...

  • Page 65
    ... for in the Philips Pension Fund by-laws and regulations. As the retirement age is different from the date of commencement of the state pension, the pension plan provides for a bridging payment in order to compensate for the adverse effect. The Board of Management members' own contribution comprises...

  • Page 66
    ... times in 2005 and reported its findings periodically Annual Incentive design. The maximum base salaries for the to the plenary Supervisory Board. In accordance with its members of the Board of Management will be increased charter, which is part of the Rules of Procedure of the in line with market...

  • Page 67
    ..., as presented by the Board of Management, have been audited by KPMG Accountants N.V., independent auditors. Their reports appear on page 2�0 and 2�� of this Annual Report. We have approved these financial statements, and all individual members of the Supervisory Philips Annual Report 2005...

  • Page 68
    ... section Other Information that begins on page 120 of this Annual Report. Reclassifications Total expenditures of the Philips Group related to the global brand campaign have been reported in the sector Unallocated in 2005. 2004 has been restated accordingly. Mobile Display Systems' (MDS) activities...

  • Page 69
    ... the Company's share ownership to 96.5%. This acquisition further strengthens Philips' position in the emerging high-growth solid-state lighting market. Sales in 2005 increased 4%, on both a nominal and a comparable basis, over 2004. Medical Systems, Domestic Appliances and Personal Care (DAP...

  • Page 70
    ..., X-ray and Cardiac & Monitoring Systems. The 6% growth at DAP was mainly attributable to Food & Beverage and Shaving & Beauty, following a large number of new product launches across all businesses. CE grew nearly 5%, driven by Connected Displays (strong growth in FlatTVs) and Home Entertainment...

  • Page 71
    ... 593 million in 2004 to EUR 556 million, mainly as a result of increased research and development expenditures for new products, lower demand for UHP applications and costs related to the acquisition in November 2005 of a further 47.25% stake in Lumileds. Philips' stake in Lumileds is now 96.5%. As...

  • Page 72
    ... and ASML were sold. Other financial income of EUR 72 million mainly related to a fair value gain on a share option (EUR 53 million) within the convertible bond received in connection with the sale and transfer of certain activities within Philips' monitors and entry-level ï¬,at TV business to TPV...

  • Page 73
    ... the stock dividend distribution, its shareholding in TSMC was diluted as a result of shares issued to employees. Accordingly, Philips recorded a dilution loss of EUR 24 million in 2005. This dilution loss decreased the book value of Philips' investment in TSMC and was charged to results relating to...

  • Page 74
    ...-year results increased the share for the third-party shareholders as well. Sales growth % increase (decrease), nominal % increase, comparable Earnings before interest and tax as a % of sales Net operating capital (NOC) Cash ï¬,ows before financing activities Employees (FTEs) For a reconciliation...

  • Page 75
    ... demand for the new products iE33, HD11 and HD3), X-ray and Cardiac & Monitoring Systems. All regions contributed to this sales growth, especially Asia Pacific and Latin America. EBIT of Medical Systems in 2005 was negatively impacted by higher research and development expenditures (specifically...

  • Page 76
    ... offering technologically advanced products which are designed around the consumer and easy to use. Philips has further developed a new Consumer Health & Wellness group to develop products and services that diagnose, monitor, improve and care for consumer health and well-being. Financial performance...

  • Page 77
    ... increasing adoption of High-Definition TV and 'digital convergence', where applications in home computing and consumer electronics are coming together. Business developments CE continued to focus on innovative products, leveraging the Philips brand and improving channel management. Furthermore, CE...

  • Page 78
    ... million, mainly due to the cash outï¬,ow of EUR 788 million for the Lumileds acquisition. Sales Sales growth % increase (decrease), nominal % increase, comparable Earnings before interest and tax as a % of sales Net operating capital (NOC) Cash ï¬,ows before financing activities Employees (FTEs...

  • Page 79
    ... the Mobile & Personal market growth. The markets for Automotive & Identification and standard products grew in line with the total market. Home market growth is expected to increase in the coming years, as digital TV sets further replace analog systems. Business developments In 2005, as part of...

  • Page 80
    ...ow before financing activities improved from EUR 658 million in 2004 to EUR 675 million in 2005 as the lower cash inï¬,ow from EBIT and higher working capital requirements were compensated by a decrease in capital expenditures. 60 Q1 Q2 2004 Q3 Q4 Q1 Q2 Q3 2005 Q4 80 Philips Annual Report 2005

  • Page 81
    ...Research, Intellectual Property & Standards, Philips Applied Technologies and the Technology Incubator), Corporate Investments (such as Assembléon and Philips Enabling Technologies Group) and Other (such as Global Service Units for IT, Finance, Purchasing, Human Resources Management and Real Estate...

  • Page 82
    ...and tax Corporate and regional overheads Global brand campaign Pensions/postretirement benefit costs Earnings before interest and tax Number of employees (FTEs) 1) (307) âˆ' (254) (561) 2,452 (309) (80) (151) (540) 2,609 (317) (138) (16) (471) 2,392 Europe and Africa North America Latin America...

  • Page 83
    ... the overall Philips portfolio, such as the outsourcing of the monitor and low-end ï¬,at TV activities to TPV, as well as the pro-active re-balancing of research and development expenditures in line with the Company's healthcare, lifestyle and technology focus areas. Philips Annual Report 2005 83

  • Page 84
    ... Systems 30,978 Netherlands Europe (excl. Netherlands) USA and Canada Latin America Africa Asia Pacific Total of which discontinued operations 26,772 42,470 27,144 14,084 411 50,705 161,586 2,536 26,110 41,932 27,175 13,702 406 49,901 159,226 1,780 Average sales per employee Semiconductors...

  • Page 85
    ...nancial performance of the Company. Events with a significant positive impact included the initial public offerings of NAVTEQ and LG.Philips LCD, the sale of shares of Atos Origin, Vivendi Universal and ASML, and gains associated with transactions by Atos Origin and InterTrust. The total positive...

  • Page 86
    ...to higher sales in all businesses. Semiconductors showed comparable growth of 18%, the main driver being Mobile Communications. Within Other Activities, sales growth came from Optical Storage and Corporate Investments. Improved market conditions, higher-margin products from innovation and continued...

  • Page 87
    ...by mid-year selling prices started to decline as manufacturing capacity outpaced market demand. Confronted with continued price erosion and tough market conditions, LG.Philips Displays continued to reorganize its activities worldwide to reduce capacity. The Company's share of restructuring and asset...

  • Page 88
    ...and was credited to results relating to unconsolidated companies. Furthermore, in 2003, the Company recorded an investment (goodwill) impairment charge of EUR 411 million with respect to its investment in LG.Philips Displays. Minority interests The share of minority interests in the income of group...

  • Page 89
    ...Customer Service, Cardiac & Monitoring Systems, Computed Tomography and Ultrasound were the main contributors to this EBIT improvement. The growing installed base is driving the increase in customer service. The Philips-Neusoft venture, of which Philips holds 51%, has been consolidated; a total cash...

  • Page 90
    ..., the cash ï¬,ow used for investing activities related to Crolles2 recorded by the Philips Group amounted to EUR 105 million. 2003 2004 Sales Sales growth % (decrease) increase, nominal % increase, comparable Earnings before interest and tax as a % of sales Net operating capital (NOC) Employees...

  • Page 91
    ...-retirement fund led to a further reduction of the projected benefit obligations together with a reduction of pension plan assets. The increase in the number of employees occurred mainly in Asia, reï¬,ecting our continued focus on growth areas, especially China and India. Restated to present the...

  • Page 92
    ...end of December 2004, the Philips Group had 161,586 employees, a decline of 2,852 from December 31, 2003. The largest reductions in 2004 occurred at CE (2,118) and at Other Activities (3,217), mainly related to the Asia Pacific Total of which discontinued operations 92 Philips Annual Report 2005

  • Page 93
    ...by extended credit terms given by suppliers. In 2003, net cash provided by operating activities amounted to EUR 2,012 million. Philips continued its tight working capital management in 2003. Significant contributions were made by Lighting and Medical Systems. Inventories as a percentage of sales at...

  • Page 94
    ... related to Systems on Silicon Manufacturing Company (SSMC), consolidated for the first time in 2004, and to investments to balance capacity. • Acquisitions totaling EUR 449 million, mainly consisting of an equity contribution to LG.Philips Displays (EUR 202 million) and cash outï¬,ows related...

  • Page 95
    ... operations Inventories Unconsolidated companies Other non-current financial assets Property, plant and equipment Intangible assets Total assets 4,349 8,675 337 3,140 5,670 876 4,871 2,805 30,723 5,293 9,536 241 3,480 5,698 673 4,893 4,047 33,861 Accounts payable and other liabilities...

  • Page 96
    ... available-for-sale securities, EUR 43 million in negative currency translation differences and the dividend payment of EUR 460 million. The number of outstanding common shares of Royal Philips Electronics at December 31, 2005 was 1,201 million (2004: 1,282 million). 96 Philips Annual Report 2005

  • Page 97
    At the end of 2005, the Group held 43.0 million shares in treasury to cover the future delivery of shares in conjunction with the 69.0 million rights outstanding at year-end 2005 under the Company's long-term incentive plan and convertible personnel debentures. At year-end 2004 and 2003 respectively...

  • Page 98
    ... majority of employees in Europe and North America are covered by defined-benefit plans. Contributions are made by the Company, as necessary, to provide assets sufficient to meet future benefits payable to plan participants. The Company expects considerable cash outï¬,ows in relation to employee...

  • Page 99
    ... the consolidated financial statements in this Annual Report. Cash Recognized payments/ receipts gains âˆ' âˆ' Acquisitions Stentor Lumileds (194) (788) Divestments Connected Displays (Monitors) NAVTEQ Atos Origin TSMC LG.Philips LCD Great Nordic Philips Pension Competence Center 136 753 185 460...

  • Page 100
    ... charges totaling EUR 911 million, partly offset by releases of EUR 27 million. The Company recorded EUR 590 million impairment charges for MedQuist. New projects in 2004 were in CE, where the research and development and production of the Creative Display Solutions front-projection activity were...

  • Page 101
    ... and high ethical standards. Risk management is a well-established part of Philips' corporate governance model. The quality of the Company's systems of business controls and the findings of internal and external audits are reported to and discussed in the Audit Committee of the Supervisory Board...

  • Page 102
    ... relevant new developments in ICS throughout the Company. Systematic monitoring is in place to enable the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO) to review and report on the effectiveness of risk management and business controls. Each quarter, division management...

  • Page 103
    .... Philips continues to utilize partnerships in order to share the risks associated with large investments and to access technologies that enable innovation, etc. These partnerships take the form of minority shareholdings, joint ventures and majority shareholdings. Managing the growing number of...

  • Page 104
    ... less impact than projected. Philips has made great investments in the reshaping of the Group into a more market-driven company focusing on delivering advanced and easy-to-use products and easy relationships with Philips for its customers. The brand promise of "sense and simplicity" is important for...

  • Page 105
    ...in Philips' results. The majority of employees in Europe and North America are covered by these plans. The accounting for definedbenefit pension plans requires management to make assumptions regarding variables such as discount rate, rate of compensation increase and expected return on plan assets...

  • Page 106
    ...top-quality data for steering the businesses and for managing both top-line and bottom-line growth. Philips makes a great effort to continuously improve control procedures and to educate professionals in key financial positions. Flaws in control systems could adversely affect the financial results...

  • Page 107
    ... from unconsolidated equity investments. The Company uses foreign exchange derivatives to manage its currency risk. The inherent risk related to the use of these derivatives is outlined below. Due to their high correlation the US dollar and Hong Kong dollar have been grouped within the following...

  • Page 108
    ...fair value of the hedges of accounts receivable/payable are reported in the income statement under cost of sales. Forecasted transactions are not recorded in the accounts of the Company. Therefore the hedges related to these forecasted transactions are recorded as cash ï¬,ow hedges. The results from...

  • Page 109
    ... there are no individual customers with significant outstanding receivables. To reduce exposure to credit risk, the Company performs ongoing credit evaluations of the financial condition of its customers and adjusts payment terms and credit limits when appropriate. Philips Annual Report 2005 109

  • Page 110
    ... rating from Standard & Poor's and Moody's Investor Services. Wherever possible, cash is invested and financial transactions are concluded with financial institutions with strong credit ratings. Country risk The Company is exposed to country risk by the very nature of running a global business...

  • Page 111
    ... on the investment policies of the respective pension funds, the value of pension assets compared to the related pension liabilities and the composition of such assets, developments in financial markets may have a significant effect on the funded status of the Company's pension plans and their...

  • Page 112
    ... than offset by changes in the expected return on assets. This reï¬,ects the fund's relatively sound funding situation and its higher concentration of fixed income investments as well as the relatively long duration of those investments. The interest rate sensitivity of NPPC has been affected by...

  • Page 113
    ... that purpose general service agreements (GSAs) are signed with a large number of entities. Tax authorities review the implementation of GSAs, often auditing on benefit test for a particular country or the use of tax credits attached to GSAs and royalty payments, and may Philips Annual Report 2005...

  • Page 114
    ..., buy in/ out situations in case of (de)mergers could affect the tax allocation of GSAs between countries. Tax risk due to disentanglements and acquisitions When a subsidiary of Philips is disentangled, or a new company is acquired, related tax risks arise. Philips creates merger and acquisition...

  • Page 115
    ... over the employee's approximate service period, based on the terms of the plans and the investment and funding decisions made by the Company. The accounting requires management to make assumptions regarding variables such as discount rate, rate of compensation increase, return on assets, and future...

  • Page 116
    ... been included in the Company's strategic plans and long-range forecasts. The data necessary for the execution of the impairment tests are based on management estimates of future cash ï¬,ows, which require estimating revenue growth rates and profit margins. Assets other than goodwill are written...

  • Page 117
    ... of Philips shares has exceeded 5 percent of the Company's total outstanding shares. The Company expects to complete the second share repurchase program during the first half year of 2006. Subject to the approval of the 2006 Annual General Meeting of Shareholders, all shares repurchased for capital...

  • Page 118
    Management discussion and analysis statements included in its annual report for fiscal year 2002 and its quarterly reports during 2002 and 2003, and all earnings releases and similar communications relating to those periods, should no longer be relied upon. MedQuist also stated that it was unable ...

  • Page 119
    ... part of the LPD business in the Netherlands and United Kingdom has been continued. Given the holding company's inability to further fund the subsidiaries, its operations in Czech Republic, Mexico and the US are also reviewing their financial position. January-December 2003 2004 2005 Net sales...

  • Page 120
    ... for USD 690 million, net of USD 60 million cash acquired. Lifeline Systems is a leading provider of personal response services and emergency call systems in the USA and Canada. For further information, please refer to note 39. Sales growth composition in % comparable currency effects growth...

  • Page 121
    ...assets Philips Group 2005 Net operating capital (NOC) Eliminate liabilities comprised in NOC: • payables/ liabilities • intercompany accounts • provisions1) Include assets not comprised in NOC: • investments in unconsolidated companies • other non-current financial assets • deferred tax...

  • Page 122
    ... discussion and analysis Proposed dividend to shareholders of Royal Philips Electronics A proposal will be submitted to the 2006 Annual General Meeting of Shareholders to declare a dividend of EUR 0.44 per common share (EUR 529 million, based on the outstanding number of shares at December 31, 2005...

  • Page 123
    ... the end of 2006 and to continue to achieve an average annual sales growth of 5-6%, with returns in excess of our cost of capital. Overall, our financial position remains excellent, offering significant strategic ï¬,exibility. February 13, 2006 Board of Management Philips Annual Report 2005 123

  • Page 124
    ...net of tax (�) âˆ' âˆ' �0 Net income The years 2003 and 2004 are restated to present the MDS business as a discontinued operation (see note 1). Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements ����5 2 2 �2 Philips Annual Report 2005

  • Page 125
    ... in accounting principles Cumulative effect of a change in accounting principles Net income 0.5�� (0.0�) 0.55 (0.0�) 0.5 2.��� 0.02 2.2� âˆ' 2.2� 2.�� (0.0�) 2.2�� âˆ' 2.2�� Dividend paid per common share in euros 0.�� 0.�� 0.0 Philips Annual Report...

  • Page 126
    ...2,��� Total non-current assets ��,2�2 55 Total The year 2004 is restated to present the MDS business as a discontinued operation (see note 1). Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements. 0,�2 �2�� Philips Annual Report...

  • Page 127
    ... notes payable: - Trade creditors - Accounts payable to unconsolidated companies ,0��2 2 550 0 5 2 0 � 20 2� 22 2 2�� 2 25 2�� �iabilities of discontinued operations Accrued liabilities Short-term provisions Other current liabilities Short-term debt 2��2 Total...

  • Page 128
    ... non-current financial assets Purchase of businesses, net of cash ac�uired Proceeds from sale of interests in businesses Net cash provided by investing activities Cash flows before financing activities Cash flows from financing activities: (Decrease) increase in short-term debt Principal payments...

  • Page 129
    ... (�) 50 5 For a number of reasons, principally the effects of translation differences and consolidation changes, certain items in the statements of cashflowsdonotcorrespondtothedifferencesbetweenthebalancesheetamountsfortherespectiveitems. Philips Annual Report 2005 �2��

  • Page 130
    ...) outstanding number of shares in thousands unrealized gain (loss) on availablefor-sale securities change in fair value of cash flow hedges common stock capital in excess of par value currency transretained lation earnings differences additional minimum pension liability total treasury shares...

  • Page 131
    ...sectors and main countries in millions of euros unless otherwise stated; Sectors research and development expenses�) earnings before interest and tax �BIT as a % of sales results relating to unconsolidated companies cash flow before financing activities sales 2005 Medical Systems DAP Consumer...

  • Page 132
    Groupfinancialstatements Sectors net operating capital total liabilities excl. debt capital expenditures depreciation of property, plant and e�uipment total assets 2005 Medical Systems DAP Consumer �lectronics �ighting Semiconductors Other Activities Unallocated 5,5 2 5 2 50 �0,2 20...

  • Page 133
    Main countries net operating capital capital expenditures depreciation of property, plant and e�uipment sales�) 2005 Netherlands United States Germany France United Kingdom China Other countries �,0��0 �,2 2,2 00 5 0,��5 Discontinued operations total assets long-lived assets...

  • Page 134
    ... relating to unconsolidated companies. Foreign currencies The financial statements of foreign entities are translated into euros. Assets and liabilities are translated using the exchange rates on the respective balance sheet dates. Income and expense items in the income statement and cash flow...

  • Page 135
    ... over the expected economic life of the asset. Depreciation of special tooling is generally also based on the straight-line method. Gains and losses on the sale of property, plant and e�uipment are included in other business income. Costs related to repair and maintenance activities are expensed...

  • Page 136
    ... discounted projected cash flows. The review for impairment is carried out at the level where discrete cash flows occur that are largely independent of other cash flows. Assets held for sale are reported at the lower of the carrying amount or fair value, less cost to sell. Research and development...

  • Page 137
    ... paid out as dividends in the foreseeable future, and for undistributed earnings of minority shareholdings. Changes in tax rates are reflected in the period that includes the enactment date. Benefit accounting The Company accounts for the cost of pension plans and postretirement benefits other than...

  • Page 138
    ... earnings per share as if the Company had applied the fair value recognition provisions for all outstanding and unvested awards in each period: 200 200 2005 Use of estimates The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported...

  • Page 139
    ... stock-based compensation expenses for stock issued to employees. The revised Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The revised Statement contains certain changes compared with the original...

  • Page 140
    ... was founded in to provide a solution for enterprise-wide medical image and information management. The full business is included in the Medical Systems sector. Accounts and notes payable Other liabilities Total liabilities �5 5 �� 2�� � �0 Philips Annual Report 2005

  • Page 141
    ...results Sales �BIT 252 5�� 5 �) 25 (20) (20) (0.02) Total purchase price (net of �umileds cash) Net income �arnings per share - in euros Allocated to: Property, plant and e�uipment Goodwill Working capital Deferred tax assets Other intangibles In-process R&D �ong-term...

  • Page 142
    ...amounts totaling �UR �� million, of which �UR  million relates to goodwill. The venture will license know-how from Philips. Through this new venture Philips can deploy its strategy for the market in China and gain a direct link to a long-term supply of skilled personnel including research...

  • Page 143
    ... areas of new optical standards, research, and particularly in the definition of product roadmaps, product development, manufacturing of products, and customer support for optical storage devices for data applications. Arcadyan venture In July 200, the Arcadyan Technology was established between...

  • Page 144
    ... 2005 The result on disposal of businesses in 2005 related mainly to the sale of certain activities within the Company's monitors and flat TV business to TPV at a gain of �UR ��� million, and the sale of asset management and pension administration activities to Merrill �ynch and Hewitt...

  • Page 145
    ... new projects in 2005 Within Consumer �lectronics (C�), the Audio/Video Innovation Center in Austria and Mobile Phone Business in France were closed. The gross charge for these projects totaled �UR ��� million and consisted of: �ay-off costs Other costs �UR 5 million and related...

  • Page 146
    ... (25��) ��2 (2 Income from non-current financial assets Foreign exchange results Miscellaneous financing costs/income, net Total other financial income and expense ��� (5��) (5) �� (2) 2 2��� 20 05 �0�� ��� Philips Annual Report 2005

  • Page 147
    ... million during 2005; this was mainly as a result of the higher average cash position of the Group during 2005. Income from non-current financial assets in 2005 included EUR 233 million of tax-exempt gains from the sale of the remaining shares in Atos Origin and Great Nordic. In 200, this included...

  • Page 148
    ... Deferred tax assets grouped under other non-current assets Deferred tax liabilities grouped under provisions 22��) �,5���� ��2 �,52 (25 0 2005 The Company has a share in income, mainly TSMC and �G.Philips �CD, and losses, mainly Crolles2 (due to ongoing research and...

  • Page 149
    ...the Company's shareholding in TSMC was diluted as a result of shares issued to employees, in 200 by 0.2%. Also in 200, the TSMC Board of Management decided to withdraw some share capital, increasing Philips' shareholding by 0.�%. 200 In August 2002, Atos Origin purchased all of the common stock...

  • Page 150
    Groupfinancialstatements Investments in, and loans to, unconsolidated companies The changes during 2005 are as follows: investments The fair value of Philips' shareholdings in the publicly listed companies TSMC and �G.Philips �CD, based on �uoted market prices at December �, 2005, is ...

  • Page 151
    ... earnings per share: Income from continuing operations Income (loss) from discontinued operations Income (loss) from cumulative effect of a change in accounting principles Net income 0.5�� (0.0�) (0.0�) 0.5 2.��� 0.02 âˆ' 2.2� 2.�� (0.0�) âˆ' 2.2�� Philips Annual Report...

  • Page 152
    ...(please refer to note 5). Prior to this transaction, Philips' shareholding represented �5.% of Atos Origin's outstanding shares which were reclassified in 2004 from unconsolidated companies to available-for-sale securities in Other non-current financial assets. �52 Philips Annual Report 2005

  • Page 153
    ... of prepaid pension costs of �UR million (200: �UR �,2�� million) and deferred tax assets of �UR �,52 million (200: �UR million). �� Property, plant and equipment prepayments and construction in progress �� �2 5 no longer productively employed total land and...

  • Page 154
    ... to the section Information by sectors and main countries on page 132 for a specification of goodwill by sector. Ac�uisitions in 200 represent the goodwill paid on the ac�uisitions of Philips-Neusoft Medical Systems in China and Gemini Industries in the US. �5 Philips Annual Report 2005

  • Page 155
    ...: 200 200 2005 Pensions for defined-benefit plans (see note 22) Other postretirement benefits (see note 2) Postemployment benefits and obligatory severance payments Deferred tax liabilities (see note ��) Restructuring (see note ) Product warranty �oss contingencies (environmental...

  • Page 156
    ...based on employees' years of service and compensation levels. The measurement date for all definedbenefit pension plans is December 31. Contributions are made by the Company, as necessary, to provide assets sufficient to meet the benefits payable to defined-benefit pension plan participants. These...

  • Page 157
    ... the pension benefit obligations and defined pension plan assets for 2005 and 2004 and a reconciliation of the funded status of these plans to the amounts recognized in the consolidated balance sheets: 200 Netherlands other total Netherlands other 2005 total Projected benefit obligation Projected...

  • Page 158
    Groupfinancialstatements Movements in net balances 200 200 2005 Netherlands 200 other Increase in minimum liability, included in other comprehensive income (before income taxes) Service cost Interest cost on the projected benefit obligation �xpected return on plan assets Net amortization...

  • Page 159
    ...-term rate of return on total plan assets is expected to be 5.�% per annum, based on expected long-term returns on e�uity securities, debt securities, real estate and other investments of ��.0%, .5%, �% and 5%, respectively. Plan assets in other countries The Company's pension plan asset...

  • Page 160
    ...sheets. All the postretirement benefit plans are unfunded and therefore no plan asset disclosures are presented. 2005 Netherlands other total The components of the net period cost of postretirement benefits other than pensions are: 2005 Netherlands other Service cost Interest cost on accumulated...

  • Page 161
    ... the current position of long-term debt is �UR 22� million that relates to a USD 00 million bond, with an outstanding amount of USD 2 million, maturing on September �5, 200��. 2 25 other Netherlands �ffect on total of service and interest cost �ffect on postretirement benefit...

  • Page 162
    Groupfinancialstatements 2�� Long-term debt range of interest rates average rate of interest amount outstanding average remaining term (in years) amount outstanding 200 due in 200�� due after 200�� due after 20�0 �urobonds USD bonds USD putable bonds Convertible debentures ...

  • Page 163
    ... �0 5 Total outstanding guarantees have risen mainly as a conse�uence of Philips Medical Systems conducting business in the Private Financing Initiative (PFI) market segment. Business in this segment is characterized by long-term performance-related contracts. Philips Annual Report 2005...

  • Page 164
    ... discounted to their present value since the amounts and the timing of related cash payments are not reliably determinable. Potential insurance recoveries are recognized when recoveries are deemed probable. �itigation Royal Philips �lectronics and certain of its Group companies are involved as...

  • Page 165
    ...earnings A dividend of �UR 0. per common share will be proposed to the 200�� Annual General Meeting of Shareholders. � Cash from derivatives The Company has no trading derivatives. A total of �UR �� million cash was paid with respect to foreign exchange derivative contracts related...

  • Page 166
    ...plans established by the Company in various countries, substantially all employees in those countries are eligible to purchase a limited number of shares of Philips stock at discounted prices through payroll withholdings, of which the maximum ranges from ��.5% to �0% of total salary. Generally...

  • Page 167
    ... the expected stock price volatility. The Company's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  5 Philips Annual Report 2005 ����

  • Page 168
    Groupfinancialstatements The following table summarizes information about the stock options outstanding at December �, 2005: Fixed option plans options outstanding number outstanding at December �, 2005 exercise price per share (price in �UR) 2000 2,��0�,��25 42.03âˆ'53.75 .2 ...

  • Page 169
    ... not applicable (price in USD) 0.5�� âˆ' 25.5 5 222,52 02) 5,�02,��5�� not applicable .�5 0.05 2�.�� 2��.5�� During 2003 it was determined that 75% of the 2001 performance stock options would be eligible for vesting in 2004. Philips Annual Report 2005

  • Page 170
    Groupfinancialstatements A summary of the status of the Company's restricted share rights plan as of December �, 2005 and 200 and changes during the year is presented below: Restricted share rights�) 200 �UR denominated shares USD denominated shares �UR denominated shares 2005 USD ...

  • Page 171
    ...Annualincentivefigure2003relatestoperiodJanuary-March2002. The tables below give an overview of the interests of the members of the Board of Management under the restricted share plans and the stock options plans respectively of Royal Philips �lectronics: number of restricted share rights...

  • Page 172
    ... share in connection with the % share reduction program effected mid-2000. This increase is incorporated in the table above. The total pension charges of the members of the Board of Management in 2005 amount to �UR 5 pension charge in 200 5�; 200: �UR �,0 2 The vested pension benefits...

  • Page 173
    ... in Philips shares Members of the Supervisory Board and of the Board of Management are not allowed to take any interests in derivative Philips securities. number of shares as of as of December �, December �, 200 2005 membership committees total � Fair value of financial assets and...

  • Page 174
    ... the hedges of accounts receivable/ payable are reported in the income statement under cost of sales. The hedges related to forecasted transactions are recorded as cash flow hedges. The results from such hedges are deferred in e�uity. Currently, a loss of �UR 5 million before taxes is deferred...

  • Page 175
    ... the standards of the Public Company Accounting Oversight Board (United States of America) and auditing standards generally accepted in the Netherlands. Those standards re�uire that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are...

  • Page 176
    ... the Company's share ownership to 5%. This ac�uisition further strengthens Philips' position in the emerging high-growth solid-state lighting market. Sales in 2005 increased %, on both a nominal and a comparable basis, over 200. Medical Systems, Domestic Appliances and Personal Care (DAP...

  • Page 177
    ... improved results were due to gains recognized on the sale of certain financial holdings, partially offset by an impairment charge recorded with respect to the investment in �G.Philips Displays. Cash flows from operating activities for 2005 totaled EUR 2,787 million compared to EUR 3,240 million...

  • Page 178
    ... statements of income of the Philips Group for the years ended December 31 in millions of euros unless otherwise stated 200 2005 Sales Cost of sales 2 5���) 0,��5 (20,���) Gross margin 0 Selling expenses General and administrative expenses Research and development...

  • Page 179
    ... (0.�) 2.�0 Diluted earnings per common share in euros: Income from continuing operations Income (loss) from discontinued operations Net income 2.� 0.02 2.��� 2.�� (0.�) 2.�0 Dividend paid per common share in euros 0.�� 0.0 Philips Annual Report 2005 ����

  • Page 180
    ...amortization ,�2 (�,��5) 2,2 5,�5 (2,5�0) ,��5 2,0 52 Goodwill �,�� Total non-current assets ��,20 0 Total Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements. 0,�� ,5 ���0 Philips Annual Report 2005

  • Page 181
    ...- Trade creditors - Accounts payable to unconsolidated companies ,0��2 2 550 0 5 2� ��2 �0 0 5 2�� 5 55 2 5�� 5� �iabilities of discontinued operations Accrued liabilities Short-term provisions Other current liabilities Short-term debt 25�� �2 2 Total...

  • Page 182
    ... non-current assets Purchase of businesses, net of cash ac�uired Proceeds from sale of interests in businesses Net cash provided by investing activities Cash flows before financing activities Cash flows from financing activities: (Decrease) in short-term debt Principal payments on long-term debt...

  • Page 183
    ... Assets received in lieu of cash from the sale of businesses: Shares/share options/convertible bonds Receivables/loans 0 âˆ' Treasury stock transactions: Shares ac�uired �xercise of stock options/convertible personnel debentures For a number of reasons, principally the effects of translation...

  • Page 184
    ... common stock Net income Net current period change Income tax on net current period change Reclassification into income Ac�uisition - purchase accounting Total recognized income and expense Dividend paid Purchase of treasury stock Re-issuance of treasury stock Share-based compensation plans 25...

  • Page 185
    ... gain (loss) on available forsales securities currency translation differences change in fair value of cash flow hedges total other reserves Balance as of January 1, 2004 âˆ' 2�0 25 25 Net current period change Income tax on net current period change Reclassification into income...

  • Page 186
    ...-time Adoption of International Financial Reporting Standards' has been applied. An explanation of how the transition from financial statements prepared under previous Dutch law to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided on...

  • Page 187
    ...cash flows that are substantially independent from other cash flows and that is the lowest level at which goodwill is monitored and which reports discrete financial information to segment management and the Board of Management. In accordance with IFRS , the Company performed and completed annual...

  • Page 188
    ... research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized as an intangible asset if the product or process is technically and commercially feasible and the Company has sufficient resources to complete development...

  • Page 189
    ...-service costs related to pension plans and postretirement benefits other than pensions are being amortized by assigning a proportional amount to the income statements of a number of years, reflecting the average remaining service period of the active employees. Stock-based compensation The Company...

  • Page 190
    ... "Cash Flow Hedge Accounting of Forecast Intragroup Transactions". The amendment allows hedge accounting for highly probable forecast intragroup transactions in consolidated financial statements. The Company adopted this amendment and applied the early application provision to all periods presented...

  • Page 191
    ... product development cost Reversal of pensions and other postretirement benefits Goodwill amortization (until January �, 200) Goodwill capitalization (ac�uisition-related) Ac�uisition-related intangibles Unconsolidated companies Reversal of result recognition sale and leaseback Deferred tax...

  • Page 192
    ... Certain balance sheet items previously reported under specific financial statement captions have been reclassified to conform with the 2005 presentation. 0 Discontinued operations Philips Mobile Display Systems On November �0, 2005, Royal Philips �lectronics and Toppoly Optoelectronics...

  • Page 193
    ... be sold under the Philips brand. The Company accounts for the investment in TPV using the e�uity method since the Company can exercise significant influence. The Company also has representation on TPV's board. Philips Pension Competence Center / Pension Investment management / Philips Pension...

  • Page 194
    IFRS information In 2005, Philips continued to account for this investment using the e�uity method of accounting, because it continued to have significant influence. Great Nordic In September 2005, the Company sold its remaining share of .�% in Great Nordic. This resulted in a cash inflow of ...

  • Page 195
    ... 200 2005 The result on disposal of businesses in 2005 related mainly to the sale of certain activities within the Company's monitors and flat TV business to TPV at a gain of �UR �5�� million and the sale of asset management and pension administration activities to Merrill �ynch and...

  • Page 196
    ... million during 2005; this was mainly as a result of the higher average cash position of the Group during 2005. Income from non-current financial assets in 2005 included EUR 235 million of tax-exempt gains on the sale of the remaining shares in Atos Origin and Great Nordic. In 200 this included...

  • Page 197
    ... to apply e�uity accounting as of that date. In 2005, Philips sold 2�,�5,000 shares of �G.Philips �CD common stock, resulting in a gain of �UR 5 million. As a result of the sale, Philips' shareholding in �G.Philips �CD was reduced from 0.5% to 2.��%. Philips Annual Report...

  • Page 198
    ...The Company's shareholding in TSMC was diluted as a result of shares issued to employees in 200 by 0.2%. Also in 200, the TSMC Board of Management decided to withdraw some share capital, increasing Philips' shareholding by 0.�%. Investment impairment/guarantee charges 200 2005 Translation and...

  • Page 199
    ... in the income of Group companies in 2005 amounted to �UR � million (200: �UR 5 million). Minority interests in consolidated companies, totaling �UR 5 million (200: �UR 2��5 million), are based on the third-party shareholding in the underlying assets. Philips Annual Report 2005

  • Page 200
    ... current assets include assets for derivative instruments of �UR � million (200: �UR 52 million). �� Other non-current assets Other non-current assets in 2005 are primarily comprised of prepaid pension costs of �UR ��5 million (200: �UR �� million). 200 Philips Annual...

  • Page 201
    ... �ease assets Other e�uipment from � to 50 years from 5 to �5 years from  to �0 years from  to �0 years Capital expenditures include capitalized interest related to the construction in progress amounting to �UR �2 million (200: �UR �0 million). Philips Annual Report 2005...

  • Page 202
    ... The changes during 2005 were as follows: other intangible product assets development The additions relate to the following categories: other intangible product assets development total software Additions from internal development software total Balance as of January �, 2005: Cost Accumulated...

  • Page 203
    ... short-term 2005 long-term short-term Translation differences Changes in consolidation Balance as of December � Pensions for definedbenefit plans (see note 55) Other postretirement benefits (see note 55) Postemployment benefits and obligatory severance payments Restructuring Product warranty...

  • Page 204
    ... are based on employees' years of service and compensation levels. The measurement date for all defined-benefit plans is December �. Contributions are made by the Company, as necessary, to provide assets sufficient to meet the benefits payable to defined-benefit pension plan participants. These...

  • Page 205
    ...for other postretirement benefits is recognized in the following line items in the income statement: 200 2005 Cost of sales Selling expenses General and administrative expenses Research and development expenses ��  0  5�� (50 5��) (2��) (25) Philips Annual Report 2005 205

  • Page 206
    ... into common shares of Royal Philips �lectronics. Convertible personnel debentures may not be converted within a period of  years after the date of issue. These convertible personnel debentures are available to most employees in the Netherlands and are purchased by them with their own funds and...

  • Page 207
    ... put dates, the average remaining tenor of the total outstanding long-term debt at the end of 2005 was .�� years, compared to . years in 200. However, assuming that the 'putable' bonds will be repaid at maturity, the average 200�� 200�� 20�0 �ater Philips Annual Report 2005...

  • Page 208
    ... 220 million were received in connection with the sale and transfer of certain activities within the Company's monitors and flat TV business. In 200, shares in Computer Access Technology Corporation were sold in two tranches. In March 200 shares were sold for an amount of �UR �� million. In...

  • Page 209
    ... part of the LPD business in the Netherlands and United Kingdom has been continued. Given the holding company's inability to further fund the subsidiaries, its operations in the Czech Republic, Mexico and the US are also reviewing their financial position. ��0 2 �� Philips Annual Report...

  • Page 210
    ... Part 9 of Book 2 of the Netherlands Civil Code as far as applicable. Furthermore we have established to the extent of our competence that the Annual Report as set out on page 176 to 177 is consistent with the consolidated financial statements. Amstelveen, February �, 200�� KPMG Accountants...

  • Page 211
    Philips Annual Report 2005 2��

  • Page 212
    ... in affiliated companies Other non-current financial assets Property, plant and e�uipment Intangible fixed assets �5,��55 5 ���,2���� 2 50 2 5 Total 2 5 Liabilities and stockholders' equity Current liabilities: F G H Other current liabilities Short-term debt Short...

  • Page 213
    ... of priority shares into common stock Net income Net current period change Income tax on net current period change Reclassification into income Ac�uisition- purchase accounting Dividend paid Purchase of treasury stock Re-issuance of treasury stock Share-based compensation plans Balance as...

  • Page 214
    ... income of Royal Philips Electronics only reflect the net after-tax income of affiliated companies and other income after taxes. A Receivables 200 2005 Trade accounts receivable Group companies Unconsolidated companies Other receivables Advances and prepaid expenses Deferred tax assets Income tax...

  • Page 215
    ... normal business operations. D Property, plant and equipment Derivative instruments - liabilities G Short-term debt Short-term debt includes the current portion of outstanding long-term debt amounting to �UR 0 million (200: �UR 5 million) and debt to other Group companies totaling �UR...

  • Page 216
    ... million. A total of 2 shares were held by Royal Philips �lectronics at December �, 2005 (200: ,5 shares), ac�uired at an aggregate cost of �UR 2 million. Dividend A dividend of �UR 0. per common share will be proposed to the 200�� Annual General Meeting of Shareholders. K Net...

  • Page 217
    ... included in Part 9 of Book 2 of the Netherlands Civil Code. Furthermore we have established to the extent of our competence that the Annual Report as set out on page 176 to 177 is consistent with the Company financial statements. Amstelveen, February �, 200�� KPMG Accountants N.V. J.F.C. van...

  • Page 218
    ... the New York Stock �xchange corporate governance standards is published on the Company's website (www.philips.com/investor). In this report, the Company addresses its overall corporate governance structure and states to what extent it applies the provisions of the Dutch Corporate Governance Code...

  • Page 219
    ..., (c) the parameters to be applied in relation to the strategy. The Supervisory Board has decided to propose to the 200�� General Meeting of Shareholders to appoint the current C�Os of the Company's operating divisions as members of the Board of Management, effective April �, 200��. Risk...

  • Page 220
    ... the delivery date, Philips will grant 20% additional (premium) shares, provided he/she is still with Philips. The Plan is designed to stimulate long-term investment in Philips shares. To further align the interests of members of the Board of Management and shareholders, restricted shares granted...

  • Page 221
    ... shares in the Company held by a Supervisory Board member are long-term investments. The Supervisory Board has adopted a policy on ownership (and notification) of transactions in non-Philips securities by members of the Supervisory Board. This policy is included in the Philips Annual Report 2005...

  • Page 222
    ... performance, as well as the Company's process for monitoring compliance with laws and regulations and the General Business Principles (GBP). It reviews the Company's annual and interim financial statements, including non-financial information, prior to publication and advises the Supervisory Board...

  • Page 223
    ...Board by shareholders representing at least �% of the Company's outstanding capital or, according to the official price list of Euronext Amsterdam N.V., representing a value of at least 50 million euros. Main powers of the General Meeting of Shareholders All outstanding shares carry voting rights...

  • Page 224
    ... the interests of Philips all powers attributed to them. Audit of the financial reporting and the position of the external auditor The annual financial statements, observing Dutch law and applying US GAAP, are prepared by the Board of Management and reviewed by the Supervisory Board upon the advice...

  • Page 225
    ... at the Annual General Meeting of Shareholders, Philips elaborates its financial results during (public) conference calls, which are broadly accessible. It publishes informative annual and �uarterly reports and press releases, and informs investors via its extensive website. The Company is strict...

  • Page 226
    ... Netoperatingcapital: ROE: Net debt: Group equity: Net debt : group equity ratio: Average number of outstanding shares: totalassetsexcludingassetsfromdiscontinuedoperationsless:(a) (a) cashandcashequivalents,(b) (b) deferredtaxassets,(c) (c) othernon-currentfinancialassets...

  • Page 227
    ... Cash and cash e�uivalents Receivables and other current assets Assets of discontinued operations Inventories Current assets Non-current financial assets/unconsolidated companies Non-current receivables/assets Property, plant and e�uipment (book value) Intangible assets (book value) Non-current...

  • Page 228
    ... 20.97 19.06 22.53 20.90 Share capital structure Philips common stock is composed of 1,316,095 thousand shares in total, of which 8.7% were held in treasury stock as of December 31, 2005. No person or group, apart from Royal Philips Electronics, is known to the Company to be the owner of more than...

  • Page 229
    ...0 Analyst day 2 Analyst day 3 * subject to approval at the 2006 Annual General Meeting of Shareholders Dividend to shareholders Shares of Koninklijke Philips Electronics N.V. ('Royal Philips Electronics') will be traded ex-dividend as of March 31, 2006. In compliance with the listing requirements...

  • Page 230
    ...: Royal Philips Electronics Annual Report Office P.O. Box 218, 5600 MD Eindhoven, Netherlands Telephone: 31-40-27 83592 Website: www.philips.com/annualreport/orderform E-mail: [email protected] Communications concerning share transfers, lost certificates, dividends and change of address...

  • Page 231
    ..., Special Lighting, UHP & LCD Backlighting Lumileds Semiconductors Home Mobile & Personal Automotive&Identification MultiMarket Semiconductors Other Activities Research Intellectual Property & Standards System Integration Services Emerging Activities Corporate Investments Design Global Service...

  • Page 232
    © 2006 Koninklijke Philips Electronics N.V. All rights reserved. ����22 �0 0���