The Philips Group in 1999

--- Philips' income from continuing operations in 1999 was a record atEUR 1,804 million, or EUR 5.24 per common share, compared to EUR 541million, or EUR 1.50 per common share in 1998.

--- Net income in 1999 amounted to EUR 1,799 million or EUR 5.22 percommon share versus EUR 6,053 million (EUR 16.81 per common share) in1998, which included EUR 5,054 million (EUR 14.03 per common share)related to PolyGram as a discontinued operation, largely comprisingthe gain on the sale of Philips' 75% equity interest in PolyGram toThe Seagram Company Ltd.

--- All product sectors, except Miscellaneous, made positivecontributions to income in 1999. Our unconsolidated companies alsoachieved strong results. The overall profitability of continuingoperations was considerably improved, and has brought the Companycloser to its goal of achieving profitable growth with sustainablemarket leadership across its portfolio of businesses. Also, theCompany has been strengthened through several key acquisitions andcontinued investment in its infrastructure and in the Philips brand.

--- Philips Semiconductors saw a strong upturn in sales in the secondhalf of the year, with margins (excluding VLSI) improving in eachquarter of 1999.

--- A number of strategic options for Origin are being evaluated,including the merits of obtaining a primary listing. After itssuccessful restructuring, Origin may require greater freedom andflexibility to realize its full potential for profitable growth in thee-commerce environment.

Dividend
A proposal will be submitted to the General Meeting of Shareholders todeclare a dividend of EUR 1.20 per common share (1998: EUR 1.00).

Sales and income from operations
Sales in 1999 grew to EUR 31,459 million, on a nominal basis 3% higherthan the EUR 30,459 million in 1998. Currency fluctuations had apositive effect of 2%, while various changes in consolidations reducedsales by 2%. Sales growth on a comparable basis was 4%. The comparablesales increase in the second half of 1999 amounted to 5%, versus 2% inthe first half, reflecting an upturn in Philips' semiconductorbusiness which achieved 15% growth during this period.

Ebitda (in Philips' definition: income from operations beforedepreciation and amortization charges) in 1999 totaled EUR 3,555million, which is approximately EUR 1 billion more than in 1998.

Income from operations in 1999 totaled EUR 1,751 million, or 5.6% ofsales, as compared to EUR 685 million or 2.2% of sales in 1998. Thelargest increase in income from operations was realized by PCC, whoseresults significantly improved in 1999. PCC's 1998 results wereadversely impacted by special charges in connection with thedissolution of the joint venture with Lucent Technologies (EUR 375million), including subsequent restructuring costs. Income fromoperations in 1999 was favorably influenced by EUR 220 million highernon-recurring income from divestments - principally the sale ofConventional Passive Components.

The year-to-year comparison of income from operations is impacted bythe amortization of intangibles and the write-off of in-processresearch and development resulting from recent acquisitions such asVLSI Technology, VCS and Micrion/Fei in 1999, and ATL Ultrasound in1998.

Financial income and expenses was a positive of EUR 32 million in1999, as compared to expenses of EUR 312 million in 1998. Net interestexpense declined to EUR 129 million in 1999 mainly reflecting theimpact of the net cash position (cash exceeded debt) during the firsthalf of 1999. This compares to net interest expense of EUR 244 millionin 1998.

Financial income included a gain of EUR 117 million from the sale ofmarketable securities, and dividends received totaling EUR 28 million.1998 included a EUR 39 million gain from the sale of securities.

Income tax charges totaled EUR 336 million in 1999, compared to EUR 41million in 1998. This corresponds to an effective tax rate in 1999 of19%, up from 11% in 1998. The lower effective tax rate compared to thestatutory rate in both years, resulted from the utilization ofpreviously unrecognized loss carryforwards in various countries inEurope, and releases of valuation allowances.

Results relating to unconsolidated companies in 1999 totaled EUR 409million, compared with EUR 39 million in 1998. Income in 1999 waspositively influenced by the significant contribution from LG.PhilipsLCD Co., Korea of EUR 188 million, net of goodwill amortizationcharges. Apart from this, the 1999 results were considerably higherthan in the previous year, largely attributable to improving resultsof Taiwan Semiconductor Manufacturing Co. (TSMC). Philips' share inthe income of TSMC includes a EUR 92 million gain recorded on TSMC'sdebt equity conversion. ASML reported a 31% increase in earnings in1999, reflecting a particularly strong second half of the year.

Minority interests amounted to EUR 52 million in 1999, in contrast to1998 when they absorbed EUR 170 million of the net losses incurred byGroup companies. This was substantially related to LucentTechnologies' share in the losses of the PCC joint venture that wasdissolved at the end of September 1998.

Income from continuing operations was EUR 1,804 million in 1999, orEUR 5.24 per common share, compared to EUR 541 million, or EUR 1.50per common share in 1998.

Extraordinary items in 1999 amounted to a loss of EUR 5 million asopposed to a net gain of EUR 458 million in 1998. Major items in 1998were the sales of Philips Car Systems at a net gain of EUR 379 millionand Philips Optoelectronics B.V. at a net gain of EUR 78 million.

Net income in 1999 amounted to EUR 1,799 million or EUR 5.22 percommon share. Net income for 1998, including EUR 5,054 millionrelating to the discontinuation of PolyGram, totaled EUR 6,053 million(EUR 16.81 per common share).

Segment sales and income from operations
Sales in the Lighting division in 1999 were EUR 4.5 billionrepresenting comparable growth of 1%, more or less in line with theworld market, with positive volume growth being eroded by continuingprice pressure, particularly in Europe.

Income from operations in 1999 was EUR 602 million or 13.1% of segmentrevenues, compared to EUR 595 million or 13.2% of segment revenues in1998. 1999 income was impacted by restructurings in both Europe andLatin America.

Sales in the sector Consumer Products were essentially flat at anominal EUR 12.4 billion. Adjusted for the positive effects of highercurrency exchange rates (1%) and consolidation changes (minus 7%),comparable growth in 1999 amounted to 6%. The main consolidationchange was the dissolution of the PCC joint venture in 1998, which hada substantial impact on the sales comparison towards 1999. Lowerprices had an impact of 11% whereas sales volume had a positive effectof 17%. The growth related especially to the substantial increase insales at PCC, where unit sales of cellular phones almost doubled, andfavorable Consumer Electronics performance, headed by very strongsales in PC Peripherals, particularly in monitors. Also sales of Audioincreased sharply. In 1999 the DVD player became the audio-videoproduct with the fastest market penetration of all time. Sales of theDomestic Appliances and Personal Care division increased by 2% on acomparable basis. Both the Cool Skin product and the Quadra Actionshaver performed very well in the USA, and as a consequence the globalmarket share in shavers has increased.

Income from operations in the sector increased in 1999 to EUR 555million, or 4.3% of segment revenues, up from a loss of EUR 278million, or 2.2% of segment revenues, in 1998. The significantturnaround was primarily attributable to the fact that PCC's operatingperformance was drastically improved after the dissolution of thejoint venture with Lucent, and the subsequent restructuring of theremaining PCC activities. The disentanglement and restructuring had asignificant negative impact on 1998 earnings. Higher license incomewas also a positive factor in 1999. Disregarding the impact of PCC,profitability of the Consumer Electronics division was affected bylower income performance in a number of businesses. Television incomewas affected by components shortages in Europe which limited theavailability of high-end products.

Sales of Components in 1999 declined by 2% to EUR 3.8 billion.Disregarding consolidation and currency changes, comparable salesgrowth came to 3%. Substantial positive sales growth was recorded inFlat Display Systems, attributable to sustained strong growth in smallLCD displays for cellular phones and in large LCD screens, which werepartly sourced from the new joint venture with LG Electronics in SouthKorea.

Income from operations in 1999 improved substantially to EUR 286million, up from EUR 44 million a year earlier. Also disregarding thehigher gains from the sale of participations, largely the EUR 169million gain on the sale of the Conventional Passive Componentsbusiness, income in 1999 improved. The results of the Hosiden andPhilips Display Corporation (HAPD) joint venture have steadilyimproved to reach break-even during the second half of the year.Although Optical Storage income for the full year was down, incomeperformance has shown a strong positive trend in the second half ofthe year.

Sales of Semiconductors in 1999 were EUR 3.8 billion, up 18%. Adjustedfor consolidation changes (10%, mainly attributable to theconsolidation of VLSI Technology from June 1,1999) and currencychanges (an increase of 3%), the comparable sales growth was 5%consisting of 14% volume growth and price erosion of 9%. The secondhalf of the year saw a strong upturn in sales following the market.

Income from operations in 1999 was impacted by the consolidation ofVLSI per June 1, which had a negative effect on income of EUR 201million, due to VLSI's acquisition-related charges and operationallosses. Excluding VLSI and the gain on the sale of ComplexProgrammable Logic Devices, the operational margin came to 18.9% ofsegment sales versus 19.3% in the prior year with margins improvingeach quarter this year in line with the upturn of the business cycle.The integration of VLSI has been completed and we expect it to make apositive contribution to earnings (after goodwill) in the second halfof this year.

Sales in the Professional sector in 1999 were EUR 5.2 billion, anincrease on a comparable basis of 4%. Medical Systems recorded 9%comparable sales growth, significantly exceeding market growth. Salesof Business Electronics were flat.

Income from operations in 1999 was EUR 100 million, or 1.8% of segmentrevenues, up from a loss of EUR 55 million, or 1.2% of segmentrevenues, in 1998. Income in 1998 was substantially affected by theacquisition-related charges of EUR 233 million pertaining to theacquisition of ATL Ultrasound. Excluding ATL, the income of the sectorin 1999 was down from last year, primarily because of the lower incomeof Business Electronics, mainly due to losses at Digital Videocommunication Systems (DVS) caused by significant investments in theUS market for digital set-top boxes. DVS saw break-even in the fourthquarter, however, and is in a good position for accelerated growth in2000 and beyond.

In the course of 1999, it was decided to regroup all the activities ofthe Business Electronics division, mostly into Consumer Electronics.Upon completion, the division ceased to be an organizational entity,effective January 1, 2000. Consequently, the financial reportingrelated to Business Electronics in the product sector reporting,remained unchanged until this date.

Sales of Origin in 1999 were EUR 1.1 billion, unchanged from the yearearlier. Growth was sharply lower in the latter half of the year,because of lower IT spending by companies in anticipation of themillennium.

Income from operations rose from EUR 59 million, or 3.6% of segmentrevenues, to EUR 97 million, or 5.6% of segment revenues, as a directreflection of improving capacity utilization, as well as costefficiency. Higher charges of goodwill amortization and pension costsimpacted income by EUR 11 million.

Sales of the Miscellaneous sector were EUR 0.7 billion in 1999, down11% on a comparable basis. This was primarily caused by Philips'Plastics and Metalware Factories (PMF) following divestitures, andother miscellaneous activities, offsetting higher sales in PhilipsMachinefabrieken.

Income from operations came to a loss of EUR 91 million, or 11.8% ofsegment revenues, from a loss of EUR 46 million, or 4.1% of segmentrevenues in 1998, primarily due to lower income at PMF andMachinefabrieken.

Unallocated; in 1999, non-recurring events were included with anegative impact of approximately EUR 60 million, of which EUR 40million occurred in the fourth quarter.

Geographic Developments
Geographically, sales growth in 1999 showed a divergent pattern. NorthAmerica recorded robust growth (9%) with nearly all sectorscontributing. Asia Pacific recovered from its 1998 slump and recorded7% higher sales, realized across all sectors. Europe registered 1%growth, which was realized in Consumer Products, benefiting fromexcellent PCC sales. In addition, Latin America has experienced arecovery in sales in the second half of the year, and came close topositive growth for the full year.

North America generated the largest increase in income fromoperations. This was primarily due to the aforementioned substantiallyimproved performance at PCC. Europe also achieved an improvement inincome, mainly for the same reason. Asia Pacific benefited fromstronger results in China, mainly Consumer Electronics and Components,improving results in the HAPD joint venture and better PCC results.Income in Latin America reflected a recovery from last year, drivenespecially by positive Consumer Electronics results.

Cash flows and financing
The cash flows from operating activities totaled approximately EUR 1.9billion compared to EUR 2.1 billion in 1998. The slight decline isprimarily attributable to increased working capital requirements ofthe Company's businesses, which should be seen against the backgroundof increased sales.

Expressed as a percentage of sales, the amount of inventories at theend of 1999 was the equivalent of 14.5% of sales, which represents a0.5% increase compared to 14.0% a year earlier. Excluding currencyeffects, 1999 inventory as a percentage of sales was actually below1998 levels.

Cash required by investing activities in 1999 totaled approximatelyEUR 3.8 billion, compared to EUR 1.4 billion in 1998 (excluding thedivestiture of PolyGram). The increase is attributable to severalbusiness acquisitions during the year.

The net cash used by financing activities in 1999 totaledapproximately EUR 2.6 billion, including the return of EUR 1.5 billionto shareholders, which compares to a cash-out of EUR 0.8 billion in1998.

Total debt outstanding at the end of 1999 was EUR 3.3 billion,compared with EUR 3.6 billion at December 31, 1998.

The net debt to group equity ratio amounted to 6:94 at the end of1999. The net cash position renders this ratio meaningless in 1998.

Employees
The number of employees at the end of 1999 totaled 226,874, whichtranslates into a headcount reduction of 6,812 from the previousyear-end. Adjusting for consolidation changes, the headcount reductioncame to 4,155. VLSI added 2,257 employees to the Company's payroll.

The fourth quarter
Income from continuing operations in the fourth quarter of 1999amounted to EUR 687 million (EUR 2.04 per share) as compared to a lossof EUR 308 million (EUR 0.86 per share) in the year-earlier quarter.The latter was significantly affected by charges for the unwinding andsubsequent restructuring of PCC, and various other charges with atotal impact of EUR 736 million (net after taxes).

Sales performance on a comparable basis was 4 per cent up on thecorresponding quarter in 1998, primarily attributable to 22 per centgrowth in Semiconductors in addition to 7 per cent growth in PCC and8per cent growth in DAP.

Geographically, strong sales growth was continued in Asia Pacific andNorth America, and was sharply up in Latin America.

Income from operations in the 1999 quarter amounted to EUR 531 millionversus a loss of EUR 387 million in the prior year quarter.Improvements in income from operations occurred mainly at PCC, whichachieved a marginally positive result in the quarter, but also atComponents, DAP and Semiconductors. Excluding the acquisition of VLSI,the Semiconductor sector realized an operating margin of 19.9% versus14.7% in the corresponding quarter a year earlier. Group income fromoperations improved in all regions.

Unconsolidated companies made a substantially higher contribution toGroup income, notably EUR 269 million versus a minor loss of EUR 3million in 1998. This was entirely attributable to the significantcontribution of LG.Philips LCD Co., as well as much stronger TSMC andASML results, both benefiting sharply from the upturn in thesemiconductor industry. Philips' results relating to TSMC include aEUR 92 million gain recorded on TSMC's debt equity conversion. Netincome in the last quarter of 1999 came to EUR 687 million or EUR 2.04per common share, compared to EUR 4.683 million or EUR 13.00 per sharein 1998, which included the gain on the sale of PolyGram.

Outlook
We view the year 2000 with optimism. The economic development in thevarious regions of the world - except for Japan - is encouraging. Thetrend of improving annual earnings should continue, supported bypositive signs across all our product divisions.

Capital expenditure will exceed depreciation charges as a result ofinvestments in profitable growth; employment will stay at about thesame level as at the end of 1999.

We will continue to improve the cycle time of operating processes andimprove teamwork in the organization supported by the BEST program.
Our disciplined approach to improving operations, further tighteningour business controls and enhancing value-based management will bemaintained.

We remain committed to achieve double-digit earnings growth andpositive cash flow each year, while closing in on our longer-termobjective of 24% return on net assets.