20-F 1 d20f.htm ANNUAL REPORT OF THOMSON Annual Report of Thomson
Table of Contents

As filed with the Securities and Exchange Commission on May 30, 2003


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 20-F

 


 

(Mark One)

 

¨   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended:  December 31, 2002

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission file number 0-3003

 


 

THOMSON

(Exact name of Registrant as specified in its charter)

 


 

Not applicable

 

Republic of France

(Translation of Registrant’s name into English)

 

(Jurisdiction of incorporation or organization)

 

46, quai Alphonse Le Gallo

92100 Boulogne Billancourt

FRANCE

(Address of principal executive offices)

 


 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class registered


 

Name of each exchange on

which registered


Common Stock, nominal value € 3.75 per share, and American

Depositary Shares, each representing one share of Common

Stock

 

New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:  None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None

 


 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

Common Stock, nominal value € 3.75 per share:  280,613,508

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨

 

Indicate by check mark which financial statement item the Registrant has elected to follow:    Item 17  ¨    Item 18  x

 



Table of Contents

2002 20-F

 

Table of Contents

 

INTRODUCTION

  

3

FORWARD-LOOKING STATEMENTS

  

3

STATEMENTS REGARDING COMPETITIVE POSITION

  

4

REPORTING CURRENCY

  

5

PART I

    

ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

  

6

ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE

  

6

ITEM 3—KEY INFORMATION

  

7

ITEM 4—INFORMATION ON THE COMPANY

  

20

ITEM 5—OPERATING AND FINANCIAL REVIEW AND PROSPECTS

  

47

ITEM 6—DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

  

85

ITEM 7—MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

  

100

ITEM 8—FINANCIAL INFORMATION

  

108

ITEM 9—THE OFFER AND LISTING

  

114

ITEM 10—ADDITIONAL INFORMATION

  

119

ITEM 11—QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

  

141

ITEM 12—DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

  

149

PART II

    

ITEM 13—DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

  

150

ITEM 14—MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS

  

150

ITEM 15—CERTAIN DISCLOSURES

  

150

ITEM 16—RESERVED

    

PART III

    

ITEM 17—FINANCIAL STATEMENTS

  

150

ITEM 18—FINANCIAL STATEMENTS

  

150

ITEM 19—EXHIBITS

  

151

 

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INTRODUCTION

 

In this Annual Report on Form 20-F, the terms the “Company”, the “Group”, “Thomson”, “we” and “our” mean THOMSON (formerly THOMSON multimedia S.A.) together with its consolidated subsidiaries.

 

FORWARD-LOOKING STATEMENTS

 

In order to utilize the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995, we are providing the following cautionary statement. This Annual Report contains certain forward-looking statements with respect to our financial condition, results of operations and business and certain of our plans and objectives. These statements are based on management’s current expectations and beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In addition to statements that are forward-looking by reason of context, other forward-looking statements may be identified by use of the terms “may”, “will”, “should”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “projects”, “predicts” and “continue” and similar expressions identify forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Such statements are also subject to assumptions concerning, among other things: our anticipated business strategies; our intention to introduce new products; anticipated trends in our business; and our ability to continue to control costs and maintain quality. We caution that these statements may, and often do, vary from actual results and the differences between these statements and actual results can be material. Accordingly, we cannot assure you that actual results will not differ materially from those expressed or implied by the forward-looking statements. Some of the factors that could cause actual results and events to differ materially from those expressed or implied in any forward-looking statements are:

 

    economic conditions in countries in which our hardware devices and services are sold or patents licensed, particularly in the United States and Europe;

 

    general economic trends, changes in raw materials and employee costs and political and social uncertainty in markets where we manufacture goods, purchase components and finished goods and license patents, particularly in Latin America and Asia;

 

    increased competition in video technologies, components, systems and services and finished products and services sold to consumers and professionals in the entertainment and media industries;

 

    Force majeure risks, especially related to our just-in-time inventory, supply, and distribution policy;

 

    challenges inherent in our repositioning strategy, as detailed in “Item 4 A—History and Development of the Company”;

 

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    future business acquisitions, combinations or dispositions, and the success of certain partnerships and joint ventures that we may not control;

 

    technological advancements in the entertainment and media industries;

 

    change in future exchange rates, notably between the euro and the U.S. dollar, Japanese yen, Canadian dollar, Mexican peso and Polish zloty and the British Pound;

 

    warranty claims, product recalls or litigation that exceed or are not covered by our available insurance coverage;

 

    our failure to maintain over the long term contractual arrangements with our customers, or material adverse changes in the financial condition or creditworthiness of our key customers and clients;

 

    capital and financial market conditions, prevailing interest rates and availability of financing; and

 

    future possible impairment of certain assets.

 

Furthermore, a review of the reasons why actual results and developments may differ materially from the expectations disclosed or implied within forward-looking statements can be found under “Risk Factors” below. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update any of them in light of new information or future events. We advise you to consult any documents we may file or furnish with the U.S. Securities and Exchange Commission (“SEC”), as described under “Documents on Display”.

 

STATEMENTS REGARDING COMPETITIVE POSITION

 

This Annual Report contains statements regarding our market share, market position and products and businesses. Unless otherwise noted herein, market estimates are based on the following outside sources, in some cases in combination with internal estimates:

 

    Understanding & Solutions for information on CD and DVD (Digital Media Solutions);

 

    World Color Picture Tube Sales (“W.C.P.T.S.”) for information on tubes worldwide (Displays and Components);

 

    Gesellschaft für Konsumer Markt- und Absatzforschung (“GfK”) for information on TV, VCR, DVD and audio in the “Europe 5” market which comprises France, Germany, the United Kingdom, Italy and Spain (Consumer Products); and

 

    Institute for Market Research (“IMR”) for information on TV, VCR, DVD, audio and telephony in the Americas (Consumer Products); and

 

    Kinetic Strategies and Cable Datacom News for information on cable modem (Consumer Products)

 

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Statements contained in this Annual Report that make reference to “value market share” or market share “based on value” mean that the related market estimate is based on sales, and statements referring to “volume market share” or market share “based on volume” mean that the related market estimate is based on the number of units sold.

 

Market share and market position statements are generally based on sources published in the fourth quarter of 2002 or beginning 2003 . Statements concerning our Technicolor businesses are based on a combination of internal estimates and external sources published mid to late 2002.

 

REPORTING CURRENCY

 

Our consolidated financial statements that form part of this Annual Report on Form 20-F are presented in euro. Effective January 1, 2001, our consolidated financial statements are presented using the euro as our reporting currency. Our consolidated financial statements for 2000, which were prepared in French francs, have been translated into euro using the legal rate of conversion between French francs and the euro which was fixed on December 31, 1998 at € 1.00 = FF 6.55957.

 

The selected financial data for 1998 were derived from our consolidated financial statements for this year and have been restated from French francs into euro using the official fixed exchange rate established at December 31, 1998. These selected financial data may not be comparable to those of other companies that are also reporting in euro if those companies restated their financial statements from a currency other than the French franc.

 

For your convenience, this Annual Report contains translations of certain euro amounts into U.S. dollars. Unless otherwise indicated, dollar amounts have been translated from euro at the rate of € 1.00 = U.S.$1.1786, the noon buying rate in New York City for cable transfers in euro as announced by the Federal Reserve Bank of New York for customs purposes (the “Noon Buying Rate”) on May 23, 2003.

 

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PART I

 

ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

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ITEM 3—KEY INFORMATION

 

A—Selected Financial Data

 

We have derived the following selected consolidated financial data from our consolidated financial statements for the five-year period ended December 31, 2002. You should read the following selected consolidated financial data together with the section entitled Item 5: “Operating and Financial Review and Prospects” and our consolidated financial statements.

 

Figures for 1998 have been restated to take into the reclassification adopted in 1999 with respect to “net cash discounts” and general and administrative expenses.

 

Figures for 1999, 2000 and 2001 have been restated to take into account the reclassification in the income statement of costs incurred for certain sales incentive programs to resellers and end consumers in accordance with EITF 01-09. Those costs have been reclassified from Selling, general and administrative expense as a deduction of net sales for the following amounts: € 72 million, € 99 million and € 103 million for the years 1999, 2000 and 2001. 1998 figures have not been restated. This restatement only impacts the Consumer Products segment.

 

In 2002, Nextream, which was previously included in Digital Media Solutions, was managed within the Consumer Products segment. Previous years have been restated accordingly.

 

Our consolidated financial statements have been prepared in accordance with French GAAP, which differ in certain significant aspects from U.S. GAAP. Notes 31 and 32 to our consolidated financial statements describe the principal differences between French GAAP and U.S. GAAP as they relate to us and reconcile our net income and shareholders’ equity. We also summarize these differences in Item 5: “Operating and Financial Review and Prospects”. We have provided below certain financial data prepared in accordance with U.S. GAAP.

 

    

1998


  

1999


    

2000


    

2001


    

2002


    

2002


 
    

  

    

    

    

    

(U.S.$)

 
    

(in millions except share and per-share data)

        

Income Statement Data:

                                       

Net sales

  

5,629

  

6,618

 

  

8,995

 

  

10,391

 

  

10,187

 

  

12,006

 

Digital Media Solutions

  

—  

  

184

 

  

62

 

  

1,758

(1)

  

2,686

 

  

3,166

 

Displays and Components

  

1,151

  

1,279

 

  

1,686

 

  

1,642

 

  

1,560

 

  

1,839

 

Consumer Products

  

4,405

  

4,868

 

  

6,849

 

  

6,542

 

  

5,444

 

  

6,415

 

Patents and Licensing

  

67

  

278

 

  

378

 

  

395

 

  

429

 

  

506

 

New Media Services

  

—  

  

—  

 

  

9

 

  

44

 

  

58

 

  

68

 

Corporate

  

6

  

9

 

  

11

 

  

10

 

  

10

 

  

12

 

Cost of sales

  

(4,366)

  

(5,065

)

  

(6,915

)

  

(8,116

)

  

(7,761

)

  

(9,147

)

Gross margin

  

1,263

  

1,553

 

  

2,080

 

  

2,275

 

  

2,426

 

  

2,859

 

Selling, general and administrative expense

  

(835)

  

(897

)

  

(1,183

)

  

(1,271

)

  

(1,334

)

  

(1,572

)

Research and development expense

  

(284)

  

(290

)

  

(351

)

  

(368

)

  

(374

)

  

(441

)

Operating income

  

144

  

366

 

  

546

 

  

636

 

  

718

 

  

846

 

Digital Media Solutions

  

—  

  

8

 

  

(10

)

  

242

 

  

372

 

  

439

 

 

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Displays and Components

  

216

 

  

216

 

  

262

 

  

111

 

  

84

 

  

99

 

Consumer Products

  

(15

)

  

85

 

  

185

 

  

138

 

  

41

 

  

48

 

Patents and Licensing

  

47

 

  

218

 

  

319

 

  

338

 

  

387

 

  

456

 

New Media Services

  

(9

)

  

(55

)

  

(83

)

  

(82

)

  

(45

)

  

(53

)

Corporate(2)

  

(95

)

  

(106

)

  

(127

)

  

(111

)

  

(121

)

  

(143

)

Interest expense, net(3)

  

(54

)

  

(41

)

  

(10

)

  

(29

)

  

9

 

  

11

 

Other financial expense, Net(4)

  

(37

)

  

(39

)

  

(67

)

  

(160

)

  

(137

)

  

(161

)

Other income (expense), Net(5)

  

(27

)

  

(6

)

  

(81

)

  

8

 

  

(96

)

  

(113

)

Income tax(6)

  

(8

)

  

(50

)

  

1

 

  

(139

)

  

(56

)

  

(66

)

Net income before minority Interests

  

15

 

  

224

 

  

376

 

  

264

 

  

360

 

  

425

 

Minority interests

  

1

 

  

7

 

  

18

 

  

22

 

  

13

 

  

15

 

Net income

  

16

 

  

231

 

  

394

 

  

286

 

  

373

 

  

440

 

Basic net income per Share(7)

  

0.05

 

  

1.17

 

  

1.56

 

  

1.04

 

  

1.35

 

  

1.59

 

Diluted net income per Share(7)(8)

  

0.05

 

  

1.17

 

  

1.56

 

  

1.04

 

  

1.29

 

  

1.52

 

Weighted average number of shares basic outstanding

  

282,443,712

 

  

197,526,322

 

  

252,039,992

 

  

274,181,607

 

  

277,240,438

 

  

277,240,438

 

Dividend paid(9)

  

N/A

 

  

N/A

 

  

N/A

 

  

N/A

 

  

N/A

 

  

N/A

 

Approximate amounts in accordance with U.S. GAAP(10)

                                         

Operating income

  

69

 

  

169

 

  

284

 

  

204

 

  

465

 

  

548

 

Net income (loss)

  

(29

)

  

148

 

  

136

 

  

191

 

  

351

 

  

414

 

Basic income (loss) per share(7)

  

(0.22

)

  

0.77

 

  

0.54

 

  

0.72

 

  

1.26

 

  

1.49

 

Diluted income (loss) per share(7)(8)

  

(0.22

)

  

0.76

 

  

0.54

 

  

0.69

 

  

1.21

 

  

1.43

 


(1)   Reflects primarily the acquisition in 2001 of Technicolor and certain other companies in the Digital Media Solutions division. For further information refer to Note 2 to our consolidated financial statements.
(2)   “Corporate” amounts consist principally of research carried out centrally by us and other corporate costs not allocated to our operating segments.
(3)   We used the € 610 million and part of the € 844 million net proceeds from our public equity offerings realized in November 1999 and October 2000 and concurrent capital increases to reduce our net debt. In addition, in October 2000 we issued 11,175,385 convertible/exchangeable bonds (2000 OCEANE) due 2006 for an aggregate amount of € 812 million. In March 2002, we issued 14,814,815 convertible/exchangeable bonds for an aggregate amount of € 600 million (please refer to Note 21 to our consolidated financial statements). Includes as well € 25 million and € 29 million of interest on the promissory notes due to Carlton relating to the acquisition of Technicolor for the years 2001 and 2002 respectively (please refer to Note 23 to our consolidated financial statements). For further details on our net Interest expense/income, please refer to Note 5 to our consolidated financial

 

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statements.

(4)   Other financial expense, net, includes principally valuation allowances on investments carried at the lower of cost or market value, interest on pension plans and on other non-financial payables. For further details, please refer to Note 5 to our consolidated financial statements.
(5)   Other income (expense), net, is discussed further under Item 5: “Operating and Financial Review and Prospects”. For further details, please refer to Note 6 to our consolidated financial statements.
(6)   Our income tax expense through the end of 2000 was affected by the “tax indemnification agreement” with TSA (formerly—Thomson S.A.), as described in Item 5: “Operating and Financial Review and Prospects”. Pursuant to this agreement, TSA paid to us € 51 million in respect of the 1998 fiscal year, € 58 million in respect of the 1999 fiscal year, and € 82 million in respect of the 2000 fiscal year. This agreement expired at year-end 2000. Pursuant to the provisions of the French Tax Code (article 209 quinquies) and in accordance with a tax agreement from the French tax authorities dated November 6th, 2002, Thomson files a worldwide consolidated tax return. This tax agreement has been retroactively applied as of January 1, 2001 and will expire on December 31, 2005 unless renewed.
(7)   Net income (loss) per share for each year shown equals net income (loss) for that year divided by average number of shares outstanding for such year. As the number of shares outstanding has varied from year over year since 1998, the net income (loss) per share figure is not comparable on a year-to-year basis. The average number of shares in 2001 includes 15.5 million shares underlying the redeemable bonds subscribed by Carlton Communications Plc. which were redeemed for 15.5 million of our shares on March 16, 2002.
(8)   Please refer to Note 17 to our consolidated financial statements.
(9)   A dividend of € 0.225 per share was proposed by the Board of Directors on February 11, 2003 for the year ended December 31, 2002, and approved by the shareholders at the Shareholder’s annual meeting held on May 6, 2003.
(10)   Please refer to Item 5: “Operating and Financial Review and Prospects—Overview—Principal Differences between French GAAP and U.S. GAAP” and Notes 31 and 32 to our consolidated financial statements for further details.

 

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1998


  

1999


  

2000


  

2001


  

2002


  

2002


    

  

  

  

  

  

(U.S.$)

         

(in millions)

              

Balance Sheet Data:

                             

Intangible assets, net(1)

  

67

  

168

  

196

  

1,696

  

2,183

  

2,573

Property, plant and equipment, net

  

994

  

1,090

  

1,122

  

1,536

  

1,622

  

1,912

Total investments and other non-current assets

  

79

  

245

  

314

  

417

  

218

  

257

Total fixed assets(5)

  

1,140

  

1,503

  

1,632

  

3,649

  

4,023

  

4,742

Inventories(5)

  

907

  

1,108

  

1,477

  

1,120

  

962

  

1,134

Other current assets(2)

  

1,323

  

1,952

  

2,420

  

3,489

  

3,266

  

3,849

Cash and cash equivalents(3)

  

268

  

402

  

1,772

  

1,532

  

1,463

  

1,725

Total assets

  

3,638

  

4,965

  

7,301

  

9,790

  

9,714

  

11,450

Reserves for retirement benefits(4)

  

527

  

590

  

633

  

709

  

705

  

831

Restructuring reserves(5)

  

152

  

156

  

179

  

183

  

127

  

150

Other reserves

  

235

  

225

  

277

  

246

  

216

  

225

Financial debt (short-term and long-term)(6)

  

777

  

361

  

1,143

  

1,131

  

1,694

  

1,997

Total current liabilities(7)

  

1,080

  

1,841

  

2,155

  

3,492

  

2,987

  

3,520

Minority interests

  

3

  

73

  

54

  

71

  

38

  

45

Shareholders’ equity(8)

  

864

  

1,719

  

2,860

  

3,958

  

3,947

  

4,652

Total liabilities, shareholders’ equity and minority interests

  

3,638

  

4,965

  

7,301

  

9,790

  

9,714

  

11,450

Approximate amounts in accordance with U.S. GAAP

                             

Shareholders’ equity

  

1,144

  

2,794

  

3,411

  

3,399

  

3,859

  

4,548


(1)   Our intangible assets consist principally of goodwill, patents and trademarks, and software. In 2000, the goodwill related mainly to the ATLINKS acquisition (1999) and the Singingfish.com acquisition (2000). Our intangible assets at December 31, 2001 and 2002 included net goodwill relating mainly to our acquisition of Technicolor (€ 712 million at December 31, 2001 and € 535 million at December 31, 2002), our acquisition of the BTS business acquired from Philips Broadcast (€ 79 million at December 31, 2001 for a 66.67% interest at that date, and € 116 million at December 31, 2002 for a 100% interest at that date), the Technicolor trademark (€ 261 million at December 31, 2001, € 219 million at December 31, 2002).

At December 31, 2002, it includes also the estimated net goodwill related to the acquisition of Panasonic Disk Service Corporation (€ 272 million), Grass Valley (€ 93 million), VidFilm (€ 68 million), and the Thomson Broadband ADSL business (€ 61 million) as well as the customer relationships of Panasonic Disk Services Corporation (€ 85 million) and Screen-Vision Europe (€ 22 million) and a preliminary estimate of Grass Valley trademark (€ 43 million).

(2)  

In connection with the application of EITF 01-09 for certain sales incentives programs to resellers and consumers, sales deductions and price protection allowances are deducted from trade accounts and notes receivables gross for € 235 million and € 221 million as of December 31, 2002 and 2001. Accruals related to sales incentives, which are deducted from sales are, since 2002, deducted from “trade receivables” instead of “other creditors an accrued liabilities” (prior years have not been restated). In addition, the accruals related to

 

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consideration given by a vendor to a customer are classified in deduction from trade accounts and notes receivable (€ 29 million). Prior years have not been restated (respectively € 38 million and € 50 million as of December 2001 and 2000 were recorded in “other creditors and accrued liabilities”). This restatement only concerns the Consumer Products segment. Please refer to Note 13 to our consolidated financial statements for further information.

(3)   In November 1999, we received net proceeds of € 610 millions from a global equity offering. In October 2000, we received net proceeds of € 844 million from a global equity offering. In addition, we issued 11,175,385 convertible/exchangeable bonds (2000 OCEANE) due 2006 for an aggregate amount of € 812 million. In March 2002, we issued 14,814,815 convertible/exchangeable bonds (2002 OCEANE) due 2008 for an aggregate amount of € 600 million.
(4)   In 2002 the short-term portion of pension and post-retirement benefit, which was previously recorded in “other creditors and accrued liabilities” has been classified under the reserve. Prior years amounts have not been restated (€ 28 million in 2000 and € 16 million in 2001).
(5)   As of January 1, 2002 and according to the new French regulation 00-06 relating to the accounting for liabilities, all write-downs are reclassified against assets prior to disposals. The impact of this reclassification for year ended December 31, 2002 amounts to € 46 million. If applied to years ended December 31, 2001 and 2000, the restructuring reserve would have been decreased by € 46 million and € 28 million. Please refer to Notes 9, 12 and 19 for further information.
(6)   In late 1999, we raised € 610 million of new capital, which we used to repay debt that we owed to TSA (formerly Thomson S.A.) and its subsidiaries reducing our debt to these companies to € 9 million. In October 2000, we issued 11,175,385 convertible/exchangeable bonds (2000 OCEANE) due 2006 for an aggregate amount of € 812 million. In March 2002, we issued 14,814,815 1% convertible/exchangeable bonds (“Obligations à options de conversion ou d’échange en actions nouvelles”) due 2008 for an aggregate amount of € 600 million (the “2002 OCEANE”). As of December 31, 2002 accrued interests have been classified as part of the financial debt caption. Accrued interest are broken down into (i) € 32 million for the premium due at maturity on the October 2000 convertible bond which is recorded as a financial expense over the bond duration and (ii) € 13 million of interest. For 2000 and 2001 accrued interests have not been restated and were recorded in “Other creditors and accrued liabilities” in the amount of € 13 million and € 27 million (of which € 8 million and € 14 million, respectively for the premium and € 5 million and € 13 million, respectively for interest). The increase of interest payable is due to the premium due at maturity on the October 2000 convertible bond which is accrued for in “financial interest” over the bond duration. Please refer to Note 21 to our consolidated financial statements for further information on our financial debt.
(7)  

Includes in 2001 U.S.$600 million of promissory notes due to Carlton for the acquisition of Technicolor (€ 681 million at the December 31, 2001 closing rate), excluding accrued interest. At December 31, 2002, the amount of promissory notes due to Carlton is U.S.$ 450 million (€

 

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430 million at December 31, 2002) excluding accrued interest. For more information, please refer to Note 23 to our consolidated financial statements.

(8)   In 2001 includes € 761 million non-transferable, non-interest bearing bonds owed to Carlton, which were redeemed for 15.5 million of our shares on March 16, 2002.

 

    

1998


    

1999


    

2000


    

2001


    

2002


    

2002


 
    

    

    

    

    

    

(U.S.$)

 
    

(in millions)

        

Cash Flow Data:

                                  

Net cash provided by operating activities

  

236

 

  

435

 

  

410

 

  

1,005

 

  

1,104

 

  

1,301

 

Net cash used in investing activities

  

(237

)

  

(366

)

  

(398

)

  

(1,173

)

  

(1,716

)

  

(2,022

)

Net cash provided by (used in) financing activities

  

(86

)

  

17

 

  

1,413

 

  

(34

)

  

540

 

  

636

 

Net increase (decrease) in cash and cash equivalents

  

(63

)

  

134

 

  

1,370

 

  

(240

)

  

(69

)

  

(81

)

 

B—Exchange Rate Information

 

Our shares are denominated in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar price of our American Depositary Shares (“ADSs”) on the New York Stock Exchange. In addition, as we intend to pay any cash dividends in euro, exchange rate fluctuations will affect the U.S. dollar amounts that owners of ADSs will receive on conversion of dividends. Furthermore, fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the price of our shares on Euronext Paris S.A.

 

The following table shows the U.S. dollar/euro exchange rate for the periods presented based on the Noon Buying Rate. Because the euro did not exist prior to January 1, 1999, it is not possible to present exchange rates between euro and U.S. dollar for earlier periods, and euro/U.S. dollar exchange rates for these periods converted from currencies other than the French franc will differ. Exchange rates for 1998 have been taken from exchange rates between the U.S. dollar and the French franc for those periods and translated to euro using the legal exchange rate of € 1.00 = FF 6.55957. We do not make any representations that French francs or euro could have been converted into dollars at the rates shown or at any other rate.

 

12


Table of Contents

 

Month


  

Period

End


  

Average

Rate(1)


  

High


  

Low


    

(U.S. dollar/euro)

May 1 – May 23, 2003

  

1.18

  

1.15

  

1.18

  

1.12

April 2003

  

1.12

  

1.09

  

1.12

  

1.06

March 2003

  

1.09

  

1.08

  

1.11

  

1.05

February 2003

  

1.08

  

1.08

  

1.09

  

1.07

January 2003

  

1.07

  

1.06

  

1.09

  

1.04

December 2002

  

1.05

  

1.02

  

1.05

  

0.99

November 2002

  

0.99

  

1.00

  

1.01

  

0.99

 

Source: Federal Reserve Bank of New York


 

(1)   The average of the Noon Buying Rates for euro on the business days of each month during the relevant period.

 

Year


  

Period End


  

Average

Rate(1)


  

High


  

Low


    

(U.S. dollar/euro)

2002

  

1.05

  

0.95

  

1.05

  

0.85

2001

  

0.89

  

0.89

  

0.95

  

0.84

2000

  

0.94

  

0.92

  

1.03

  

0.83

1999

  

1.00

  

1.07

  

1.18

  

1.00

1998

  

0.86

  

0.90

  

0.95

  

0.82

 

Source: Federal Reserve Bank of New York


(1)   The average of the Noon Buying Rates for euro (or French francs translated into euro for 1998) on the last business day of each month during the relevant period.

 

The euro/U.S. dollar exchange rate for May 23, 2003 was € 1.00 = U.S. 1.1786 and is based on the Noon Buying Rate for such date.

 

C. Risk factors

 

This section describes some of the risks that could affect our businesses. The factors below should be considered in connection with any forward-looking statements in this document and with the cautionary statements contained in “Forward-Looking Statements” at the beginning of this document.

 

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The risks below are not the only ones that we face—some risks may not yet be known to us and some that we do not currently believe to be material could later turn out to be material. Any of these risks could materially affect our business, financial condition and results of operations.

 

Economic and geopolitical conditions may adversely affect our results and financial condition.

 

General economic trends in the countries in which our products and services are sold, primarily in North America and Europe, can have a significant impact on prices and demand for such products and services.

 

Certain of our businesses have been negatively affected by the prolonged economic downturn that began in 2000 and has continued into 2003. This economic downturn has negatively affected consumer confidence and household spending, as well as business spending, and, if it continues could curb spending on products in various areas of the Thomson product portfolio. A continued or deepened recession or soft economic conditions could adversely affect the results and performance of the Thomson group.

 

Decreases in prices and demand in the markets in which we sell our products and services could result in further pressure on our profit margins, which could in turn adversely affect our financial results.

 

Prices for hardware devices and components for the consumer electronics industry are affected also by economic trends in the countries or regions in which these products are manufactured. An economic downturn in a producing region can lead to a decrease in local demand and, if the value of the local currency decreases, a decrease in the production costs of local producers. These factors could lead to intensified export competition to our primary and aggressive price-cutting by these producers. This could result in pressure on our profit margins.

 

In addition, we produce and purchase a large number of goods in emerging markets and are subject to risks inherent in these markets, including currency fluctuations, political and social uncertainty, exchange controls and expropriation of assets. These risks could disrupt our production in such countries and our ability to produce and procure goods for sale in our principal North American and European markets.

 

For more detailed discussions on our sales in our principal markets, refer to Item 5: “Operating and Financial Review and Prospects”, and for more information on our main production sites, refer to Item 4: “Information on the Company—Property, Plants and Equipment”.

 

We face strong competition in our consumer electronics activity. Competition may push prices to unprofitable levels, which could adversely affect our financial results.

 

Hardware devices and components for consumer electronics markets are subject to intense price competition, especially from Asia. Furthermore, due to technological innovation and ease of imitation, new products tend to become standardized rapidly, leading to intense competition and price declines. As a result of these factors, the hardware devices and components sold in the consumer electronics industry have experienced and continue to experience long-term price declines. In addition, the production of some of the components for televisions and other

 

14


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audiovisual products, such as tubes, may carry high fixed costs that do not vary with output levels. As a result, producers of such components must maintain a minimum sales volume to cover their fixed costs. When many producers resort to maintaining minimum sales volumes during periods of falling demand for these components, market prices tend to fall. Price-driven competition may result in reduction of profit margins and, in some cases, losses, in our Displays and Components and Consumer Products divisions. In order to protect our margins and improve our operating efficiency in the face of continuing price pressure, we have implemented a number of restructuring plans and expect that our restructuring efforts will continue.

 

Our just-in-time inventory, supply and distribution policy expose us to certain force majeure risks.

 

We purchase raw materials, semi-finished and finished goods from suppliers located in various countries, and we export products to various countries. We have also recently implemented a just-in-time inventory policy. As a result, our operations may be disrupted by external factors beyond our control, including acts of God (e.g., natural disasters, environment and health conditions or calamities), labor disputes or strikes (e.g., the U.S. West Coast port workers strike in 2002), civil disturbances, war, terrorism, or delay or failure in performance by our suppliers or transporters. Depending on the severity and duration of the disruption, our results of operations could be adversely affected.

 

We are implementing a repositioning strategy. This strategy may fail.

 

Since the second half of 2000, we have been implementing a strategy to occupy leading positions in the video chain, particularly within our Digital Media Solutions division, and to take advantage of the ongoing transition within the entertainment and media industries to digital technologies. While we expand the scope of our business in the professional entertainment and media industries, we reduce our emphasis on the retail consumer electronics activities.

 

The success of this strategy depends on a number of factors, some of which are largely outside our control, including the continued growth in demand for our video and digital products and services, the acceptance of our new products and services and expanded market presence by existing and new customers, the development of working relationships with new partners and the development of synergies among new and existing businesses. This strategy may encounter problems as we move into new business areas, and as new risks, some not yet known, related to dependence on new technologies or customers may develop and harm our future business prospects.

 

In retail consumer electronics activities, we are implementing a business model that aims to achieve greater scale and secure our industrial base and financial performances of this activity, through partnerships if appropriate. Potential difficulties inherent in this transition such as delays in implementation or unexpected costs or liabilities, as well as the risk of not realizing operating benefits or synergies from completed a potential partnership, may adversely affect our results.

 

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Our acquisition strategy poses risks and uncertainties typical of such transactions. We also face risks relating to certain partnerships, joint ventures and subsidiaries that we do not control.

 

Our strategy depends in part on our ability to identify suitable acquisition targets, finance their acquisitions and obtain the required regulatory approvals. In addition, we will face risks associated with these acquisitions, including the integration of numerous entities, organizations, employees and facilities and fortifying new relationships with different customers. As a result of these acquisitions, we may also face an increase in our debt and interest expense. Potential difficulties inherent in mergers and acquisitions, such as delays in implementation or unexpected costs or liabilities, as well as the risk of not realizing operating benefits or synergies from completed transactions, may adversely affect our results.

 

In addition, some of our activities are, and will in the future be, conducted through entities that we do not entirely control or in which we have minority interest, like certain partnerships and joint ventures. Under the governing documents or agreements for certain of these entities, certain key matters such as the approval of business plans require the agreement of our partners, and in some cases, decisions regarding these matters may be made without our approval. There is also a risk of disagreement or deadlock among the stakeholders of jointly controlled entities and that decisions contrary to our interests will be made. These factors could affect our ability to pursue our stated strategies with respect to those entities or have a material adverse effect on our results or financial condition.

 

We are developing or producing a number of our new products and solutions in partnership with other companies. If any of these companies were to fail to perform, we may not be able to bring our products and solutions to market successfully or on a timely basis.

 

We complement our internal research and development or production activity by entering into co-development agreements and research programs with strategic partners or investors or by subcontracting certain activities to outside providers. These arrangements involve the commitment by each company of various resources, including technology, research and development as well as personnel. If these arrangements do not develop as expected, especially those that involve proprietary components and complementary technologies, if the products produced by companies working with us do not meet the required quality standards, or if the financial standing of our partners deteriorates, our ability to develop and produce these new products and solutions successfully and on schedule may be hampered.

 

Technological innovations can make older products less competitive. We could be at a competitive disadvantage if we are unable to develop or have access, either independently or through alliances, to new products and technologies in advance of our competitors.

 

The markets in which we operate are undergoing a rapid technological evolution resulting from the increasing use of digital technology and an increasing overlap among television, telecommunications and personal computers. Technological advances and new product introductions may render obsolete or significantly reduce the value of previously existing technologies, products and inventories. This could have a significant adverse effect on our ability to sell these products and to make a profit from these sales. For example, the emergence of digital

 

16


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technology has had this effect on many products using older analog technology. The emergence of new technologies could also have an adverse effect on the value of our existing patents. Also, within the physical digital formats, any technological shift could have an adverse effect on our ability to produce and sell such products, like DVD disks, and to make a profit from these sales.

 

We expect that the development of digitalization and the convergence of television, telecommunications and personal computers will increase the pace and importance of technological advancement in our industry. As a result, we are investing large sums in the development and marketing of new products and services. These investments might be made in unproven technologies or for products with no proven markets and may therefore yield limited returns.

 

Currency exchange rate fluctuations may lead to decreases in our financial results.

 

To the extent that we incur costs in one currency and make our sales in another, our profit margins may be affected by changes in the exchange rates between the two currencies. Most of our sales are in U.S. dollars and in euros; however, a large portion of our expenses are denominated in Japanese yen, Mexican peso and Polish zloty, in particular those of our significant production facilities in Asia, Mexico and Poland. Ongoing plant relocation initiatives are likely to continue to increase the proportion of expenses incurred in emerging market currencies. While most emerging market currencies have been in decline in the recent past and have thus allowed us to reduce our manufacturing and procurement costs, an unhedged increase in the value of these currencies would increase these costs. Although our general policy is to hedge against these currency transaction risks on an annual or six month basis, given the volatility of currency exchange rates, we cannot assure you that we will be able to manage effectively these risks. Volatility in currency exchange rates may generate losses, which could have a material adverse effect on our financial condition or results of operations. For more detailed information on our hedging policies, refer to Item 11: “Quantitative and Qualitative Disclosures about Market Risks”.

 

Product defects resulting in a large-scale product recall or successful product liability claims against us could result in significant costs or negatively impact our reputation and could adversely affect our business results and financial condition.

 

We are sometimes exposed to warranty and product liability claims in cases of product performance issue. There can be no assurance that we will not experience material product liability losses arising from such claims in the future and that these will not have a negative impact on our reputation and, consequently, our sales. We generally maintain insurance against many product liability risks and record warranty provisions in our accounts based on historical defect rates, but there can be no assurance that this coverage and these warranty provisions will be adequate for liabilities ultimately incurred. In addition, there is no assurance that insurance will continue to be available on terms acceptable to us. A successful claim that exceeds our available insurance coverage or a product recall could have a material adverse impact on our financial condition and results of operations.

 

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As our products and solutions include complex technologies involving patented and other proprietary technologies, we face a risk of claims that we have infringed third parties’ intellectual property rights. There is also a risk that our intellectual property rights may be challenged or infringed.

 

Our products and solutions include complex technology involving patented and other proprietary technologies. As the number of entrants in the market grows and the complexity of the technology and the overlap of product functionalities increase, the possibility of an inadvertent infringement and related intellectual property claim against us increases. Moreover, we or our customers may face claims of infringement in connection with our customers’ use of our products and solutions. Any such claims, regardless of merit, could result in costly litigation and the payment of damages and other compensation, divert the attention of our personnel, cause product shipment delays or require us to develop non-infringing technology or to enter into royalty or licensing agreements.

 

The performance of several of our businesses is dependant in large part on the long-term maintenance of certain contractual arrangements and relationships. Our financial results may suffer if we are unable to renew these contracts when they expire or if we are only able to renew them under significantly less favorable terms, if these relationships terminate or if certain of our customers face financial difficulties.

 

The net sales of certain of our business activities, particularly those in our Digital Media Solutions and Patents and Licensing divisions, depend on contracts that may have a duration of several years or are expected to be renewed at their expiration. These contractual relationships are with a relatively limited number of customers. For example, the performance of Technicolor, the largest contributor to the net sales of our Digital Media Solutions division, currently has a concentrated customer base that accounts for a substantial portion of the division’s net sales. We generally negotiate exclusive, long-term contracts, with these customers. Similarly, the licensing agreements that generate our Patents and Licensing division’s net sales, which typically have a duration of five years, are negotiated with a relatively limited number of licensees. Although most of our major client relationships comprise multiple contractual arrangements of varying terms, in any given year, certain contracts come up for renewal. If several major contracts were to come up for renewal at the same time, and we were unable to renew them under similar or more favorable terms, or if our relationship with several of these customers suffered or ended, our financial results could suffer.

 

In addition, in Digital Media Solutions and Patents and Licensing, as well as throughout our other businesses, we provide products and services to third parties that may have been or may be adversely affected by recent economic and financial conditions, or whose financial condition and results may otherwise suffer, or that may decide to discontinue the commercial arrangements they have with us, introducing a risk of loss (cash collection) or underperformance for the Group.

 

Further, a substantial portion of the distribution of our consumer electronics is effected through a small number of major retailers with whom we have had long-term relationships. The results of our consumer electronics segment are therefore vulnerable to weakness in the retail

 

18


Table of Contents

sector, and any financial difficulties encountered by these major retailers. If any of these retailers suffered financial difficulties or terminated its operations, or if we were otherwise not able to maintain our relationship with it, the terms of retail distribution of our consumer electronics products or our retail distribution capacity could be adversely affected, and our operations and results could suffer.

 

Our success depends upon recruiting and retaining key personnel.

 

Our products, services and technologies are complex, and our future growth and success depend to a significant extent on the skills of capable engineers and other key personnel. Continued re-training of currently competent personnel is also necessary to maintain a superior level of innovation and technological advance. The ability to recruit, retain and develop quality staff is a critical success factor for us.

 

Our major shareholders retain significant voting rights and representation on our Board of Directors, giving them the ability to influence our affairs.

 

TSA, Carlton Communications Plc., and Microsoft have significant shareholdings in Thomson. Furthermore, following the industrial partnerships developed with leaders in related industries in order to strengthen our position in different markets, we have worked on several business initiatives with industrial partners. Certain of these shareholders and industrial partners are represented on our Board of Directors (refer to item 6: “Directors, Senior Management and Employees). While none of these shareholders or partners individually has the ability to control our affairs, each may have some ability to influence our decision making and to directly impact the projects that such shareholder may be implementing jointly with us. For more detailed information on our shareholders, refer to Item 7: “Major Shareholders and Related Party Transactions”.

 

Our share price has been volatile in recent years and is exposed to the fluctuations in the equity capital markets.

 

The stock market in recent years has experienced extreme price and volume fluctuations which have particularly affected the market prices of technology companies. Volatility in our share price has also been significant during this period. This volatility can result in losses for investors in a relatively short period of time.

 

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ITEM 4—INFORMATION ON THE COMPANY

 

A—History and Development of the Company

 

Company Profile

 

Legal and Commercial name:

  

THOMSON

Registered office address:

  

THOMSON

    

46, quai Alphonse Le Gallo

    

92100 Boulogne-Billancourt France

    

Tel.: 33 (0) 1 41 86 50 00

    

Fax: 33 (0) 1 41 86 58 59

    

E-mail:webmaster@thomson.net

 

Domicile, legal form and applicable legislation: Thomson is a French corporation (société anonyme) with a Board of Directors, governed by Title II of the French Commercial Code pertaining to corporations and by all laws and regulations pertaining to corporations.

 

Date of incorporation and length of life of the Company: Thomson was formed on August 24, 1985. It was registered on November 7, 1985 for a term of 99 years, expiring on November 6, 2084.

 

Fiscal year: January 1 to December 31.

 

We provide a wide range of technologies, systems, finished products and services, with a particular focus on video, to consumers and professionals in the entertainment and media industries. In recent years we have expanded beyond our traditional consumer electronics activities to reposition ourselves as a solutions provider present on each link of the video chain. In fiscal year 2002, we generated net sales of € 10.2 billion. At December 31, 2002, we had approximately 65,000 employees in more than thirty countries.

 

The Video Chain

 

The video chain covers the space over which video images are developed, distributed and accessed and across which the players in the entertainment and media industries interact. We rely upon our technological expertise, the breadth of our hardware and service offerings, the reputation and position of our brands and our network of leading partners to serve the needs of customers at each of the three key links in the video chain:

 

   

content development, the first link and entry point in the video chain, comprises products and services that enable the capture, creation, post-production, preparation and management of multimedia content consisting of video images and associated sound and data. Customers are primarily film studios and other content creators as well as broadcasters. Their needs range from film colorization and digital post-production services,

 

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to digital broadcast equipment and systems integration.

 

    content distribution, the middle link in the chain, involves products and services that together enable content to be transmitted from the creator to the end-consumer for use typically in the movie theater or in the home. Key customers include film studios, software and game publishers, network operators and exhibitors. These customers have needs that encompass the processing, packaging, and distribution of analog and digital content in both physical and electronic media formats via physical distribution channels or electronic distribution networks.

 

    content access, the final link of the video chain, consists of products and services that allow consumers to access, view and interact with content and that provide a means for content creators and advertisers to reach these consumers using a variety of media formats and devices. The content access link includes consumer electronics and other devices that directly receive, store and display media content along with critical components that enable specific video-related functionality within these devices. Key customers are electronics manufacturers, advertisers, retailers of consumer electronics and end consumers.

 

Underlying the video chain is a group of coherent technologies (such as compression, encoding or interface technologies) which allow players in the entertainment and media industries to interact within and among the various links in the video chain.

 

The entertainment and media industries are experiencing transformations due to the transition from analog to digital technologies, and in addition, the development of broadband penetration. Since the mid-1990s, far-reaching technological changes, driven in large part by the emergence of digital technologies along with the increased convergence of consumer electronics, telecommunications and information technologies, have led to new products and forms of content delivery. The transition to digital technology is proceeding at different speeds and has reached various stages of progress for participants within each video industry segment. We believe that this trend will continue over the medium and long term and that analog and digital content delivery, storage and access technologies will co-exist for several years. The length of the transition will depend, among other factors, upon the pace of technological development, deployment of infrastructure, introduction of finished products and acceptance by players in the entertainment and media industries and of course consumers.

 

Our Strategy

 

Our strategy is to occupy leading positions within each of the links in the video chain. We implement this strategy by supplying products, equipment and services that enable video content to flow from one end of the chain to the other. We strive to provide our clients with the range of products and services that enable them to transition to digital technology at their own pace and in line with the needs of their particular markets. We believe that our presence throughout the video chain allows us to improve our understanding of the varying needs of our diverse customer base and enables us to develop and share technologies both within and among our business divisions. It also provides us close contact with consumers on the one hand, which helps us to assess their needs and preferences, and with content producers and distributors on the other hand, improving our ability to anticipate future developments. As a result, we are able to develop new solutions

 

21


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for participants in the video chain, and propose a more integrated product and services offering.

 

We believe that as a result of our strategy we will expand and diversify our scope of business within the professional and higher growth markets of the entertainment and media industries while reducing our emphasis on lower growth retail consumer electronics activities. We also believe our presence throughout the video chain and our focus on higher value-added segments will allow us to increase the stability of our revenues and to improve operating income by diversifying our customer base within the video chain as well as allowing us to play a greater role in the development of products and technology standards that are driving the digital transition.

 

Since 2001, Thomson has undertaken effective expansion of its business with content owners. The acquisition of Technicolor and the selective bolt-on acquisitions within Digital Media Solutions division allow the Group to provide the film and media industry with leading services in content preparation and distribution. We have adapted our costs to the volatile and frequently severe market conditions in the finished consumer electronics market. Our operational success has been built on a combination of centralized programs, such as sourcing, and the decentralized management of day-to-day operations. The result has been growth in operating income and operating cash flow.

 

Our main objectives for the coming years are:

 

  -   organic growth in the key areas of content preparation and distribution, broadband products and services, licensing and consumer essentials and services;

 

  -   achieving greater scale and a secure industrial base in consumer finished goods through partnerships if appropriate ;

 

  -   reviewing our business plan in our Displays and Components activities in the face of the fast-growing Chinese domestic tubes market serving both the domestic and export markets for finished television sets and the shortening life cycles and commoditization in modules; and

 

  -   to stress customer focus in all our activities.

 

In addition to relying upon organic growth, our strategy contemplates selective acquisitions to strengthen our position along the video chain and acquire key technology and customer relationships in Content and Network Activities (discussed below), Patents and Licensing and to achieve scale and location in Displays and Components.

 

Our Group

 

In order effectively to pursue our strategy and to serve our wide customer base, we built operating divisions that cover the entire video chain and address our principal customer categories: media/entertainment groups, manufacturers and technology groups and retailers and consumers. Until December 31, 2002, the Group comprised five operating divisions:

 

   

Digital Media Solutions, which was created in 2001 and recorded consolidated net sales of € 2.7 billion for the year ended December 31, 2002, positions us along the content

 

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development and content distribution links of the video chain through the delivery of products and solutions for professionals in the entertainment and media industries (mainly film studios and television production companies). Through this division’s activities, we believe we are the world leader in content preparation and distribution services to the film and media industry. We also believe that we are the second-largest supplier of broadcast equipment. Professional products and services are sold under the Technicolor® and Grass Valley® trademarks.

 

    Displays and Components, which generated € 2.2 billion in total sales in 2002 (including intra-segment sales, consolidated net sales amounted to € 1.6 billion in 2002), covers the content access link of the video chain and provides key components, which are sold both internally and to original equipment manufacturers (“OEMs”), for products in the electronics industry. In 2002 these components included displays for television sets, digital optical components for DVD players and game consoles and the development of integrated circuits. Through this division, we are the world’s second-largest producer of large and very large size television picture tubes based on volume and are also a leader in optical components.

 

    Consumer Products, which recorded consolidated net sales of € 5.4 billion in 2002, also covers the content access link of the video chain and provides traditional consumer electronics products such as television sets, DVD and VCR players, audio systems and residential telephones to retailers and the end-customers. Thomson markets these products primarily under two key brands: RCA® in the United States and THOMSON® in Europe. This division also develops and markets broadband access products such as digital set-top boxes, cable modems and DSL modems for network operators.

 

    Patents and Licensing, which recorded consolidated net sales of € 429 million in 2002, underlies and supports all three key links in the video chain. Through this division, we manage a major portfolio of patents relating principally to video technologies, which we license to other manufacturers and technology groups.

 

    New Media Services, which recorded consolidated net sales of € 58 million in 2002, is positioned along both the content distribution and content access links of the video chain. This division developed technologies and solutions that enabled interactivity for a wide range of customers including media groups, advertisers and consumers.

 

To further stress our customer focus and simplify the Group’s structure, Thomson reorganized its business units along the following customer lines starting January 1, 2003:

 

    Content and Network activities (39% of 2002 Group net sales)—comprising the video content preparation and distribution activities under the Technicolor® trademark and Screen-Advertising businesses (ScreenVision), and the Broadcast equipment and services and Broadband access products businesses;

 

    Consumer Products (42% of 2002 Group net sales)—comprising Television and Home Audio/Video products and Accessories, retail services and personal audio/video and telephony products;

 

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    Components (15% of 2002 Group net sales)—comprising the same activities as the former Displays and Components division;

 

    Licensing (4% of Group net sales) comprising the same activities as the former Patents and Licensing division.

 

The operations of the former New Media Services division will be absorbed by Consumer Products activities (principally guide-related activities) and Content and Network activities (principally the screen-advertising activity).

 

The activities of our historical divisions are described in detail below in “—Business Overview”. For information on geographic breakdown of revenues by division, refer to Item 5: “Operating and Financial Review and Prospects—Overview”.

 

Historical Background

 

In 1997, Thomson’s activities were focused on the manufacturing and assembling of key components and consumer products, which represented 98% of our net sales. Following the arrival in 1997 of a new management team in the context of a significant deterioration in our results of operations and financial condition in the early and mid-1990s, we benefited from a recapitalization by the French State, through TSA (previously Thomson S.A.), and launched several restructuring and reengineering initiatives which enabled the restoration of profitable business operations. In the second half of 2000, we developed our repositioning strategy by expanding our business and customer base beyond the traditional consumer electronics market to include new segments of the video industry. We have made several acquisitions, including Technicolor, Philips’ professional broadcast business and Grass Valley business, to accelerate this strategic repositioning and to take advantage of the industry’s transition to digital technologies. Thomson’s current situation is the result of our repositioning strategy along the video chain.

 

Our restructuring and repositioning strategy has been accompanied and facilitated by a significant shift in our equity structure. Five years ago, Thomson (previously THOMSON multimedia) was wholly owned by TSA, which in turn is wholly owned by the French State. Following a series of changes in our share capital in the period 1998-2002, on February 28, 2003, to the best of our knowledge, our share capital was held as follows: (i) TSA owned 20.81%, (ii) Carlton Communications Plc owned 5.52%, (iii) Microsoft owned 3.41%, (iv) NEC owned 1.07%, (v) the public owned 63.89%, (vi) our employees owned 4.10%, and (vii) 1.20% were held by us as treasury shares. For more details on our share capital, please refer to Item 7: “Major Shareholders and Related Party Transactions—Distribution of Share Capital”.

 

We changed our name from THOMSON multimedia to Thomson, pursuant to a resolution approved at our extraordinary Shareholders’ meeting held on October 8, 2002.

 

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B—Business Overview

 

The table below sets forth the consolidated net sales of each division in 2000, 2001 and 2002. These consolidated figures exclude eliminations, notably those sales by our Displays and Components division to our Consumer Products division.

 

    

2000


  

% of

total


  

2001


  

% of

total


  

2002


  

% of total


    

(€ in millions)

Digital Media Solutions

  

62

  

0.7%

  

1,758

  

16.9%

  

2,686

  

26.4%

Displays and Components

  

1,686

  

18.7%

  

1,642

  

15.8%

  

1,560

  

15.3%

Consumer Products

  

6,849

  

76.2%

  

6,542

  

63%

  

5,444

  

53.4%

Patents and Licensing

  

378

  

4.2%

  

395

  

3.8%

  

429

  

4.2%

New Media Services

  

9

  

0.1%

  

44

  

0.4%

  

58

  

0.6%

Other

  

11

  

0.1%

  

10

  

0.1%

  

10

  

0.1%

Total

  

8,995

  

100%

  

10,391

  

100%

  

10,187

  

100%

 

Digital Media Solutions

 

Digital Media Solutions (DMS) generated consolidated net sales in 2002 of € 2.686 billion (26.4% of consolidated net sales) up from € 1.758 billion in 2001 (16.9% of consolidated net sales), an increase of 53%. Operating income for the division in 2002 was € 372 million, up from € 242 million in 2001. At December 31, 2002, DMS had 15,112 full time employees.

 

DMS was formed in 2001 to address the needs of content owners and retailers and represents Thomson’s entry point to the front end of the video value chain content development and content distribution. Through established and developing relationships with a wide range of customers from local independent film production companies, through network operators and Hollywood Studios, to vertically integrated global entertainment groups, DMS offers these customers a full and continually evolving range of integrated products and service solutions that help them create and monetize their content while, at all times, maintaining control over the distribution process.

 

DMS offers content preparation services: post-production activities, including colorization services, subtitling, editing and creation of final masters for theatrical film release, VHS and DVD in both analog and digital format; storage, including compression, archives, indexing; media asset management, including streaming, indexing and searching tools and transfer/assembly of shots in films; and asset right management, including zoning and security.

 

DMS is also the worldwide leader in film, VHS and DVD replication activities.

 

DMS provides network operators with equipment and services such as cameras, film imaging and signal processing equipment, encoders/decoders, broadcast servers, and routers.

 

DMS’ strategy focuses on developing its global service offering to the media player industry, providing them with the integrated solutions they currently need and while, at the same time, developing new technology, products and services to support its customers through the digital

 

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transition. This strategy is enabled by DMS’ long established knowledge of, and position in, the industry coupled with its ability to leverage Thomson’s extensive research and innovation capabilities. We believe that very few, if any, competitors to DMS offer this breadth of products and services on a global scale.

 

DMS operates in the growing worldwide market for the creation and distribution of entertainment content. DMS’s strategy aims to exceed that growth by extending the range and depth of its product and service offerings to its existing customers, and by developing relationships with new customers. In pursuit of this strategy, DMS made significant but selective investments during 2002. The acquisition in March 2002 of Grass Valley Group and in June 2002 of Panasonic Disc Services consolidated our position in the professional broadcast equipment and optical disc (DVD and CD) replication markets, respectively. In the first half of 2002 we also completed a number of smaller acquisitions also focused on strengthening specific service capabilities and our geographical presence: post- production, and DVD compression and authoring services in North America (VidFilm and Still in Motion), VHS and optical disc replication in Australia (Southern Star Duplitek), distribution services in Canada (Victoria Films) and postproduction services in Europe and Asia (VidFilm).

 

• Content businesses—Technicolor®

 

In March 2001, we completed our acquisition of the Technicolor businesses and assets from Carlton Communications Plc. (a United Kingdom public company). Technicolor, the largest contributor to DMS consolidated net sales, is a world leader in content preparation and distribution services to the entertainment industry. It provides products and services from its key operating locations across North America, Europe and Australia. These operations are focused on key service areas: Creative Services, Film Services and Home Entertainment Services, each described further below. Technicolor’s leadership position is based on a combination of access to new technology, technical excellence, economies of scale, an integrated and secure service offering to its customers and an organization-wide focus on quality and customer service.

 

Key customers in 2002 included major film studios such as Disney, Warner Brothers and DreamWorks, software and games manufacturers such as Microsoft and Electronic Arts and television broadcasters such as ABC. 2002 has been a successful year for extending this customer base. With the acquisition of Panasonic Disc Services in June 2002, optical disc replication relationships with Universal Studios and Paramount were added. In addition, Universal’s worldwide film processing and Paramount’s European VHS duplication business also has been won, with work transitioning during the first half of 2003. Relationships with most of these major customers are covered by exclusive long-term contracts (usually 3 to 5 years), which typically cover volume and time commitments, as well as pricing and geographical territories served. In any given year certain contracts come up for renewal. Major client relationships are typically the result of multiple contractual arrangements which include a fixed duration, a type of service and rights to a particular geographical zone. Some contracts involve us making advance payments at the commencement for such contracts.

 

Through Creative Services, Technicolor offers a comprehensive set of content creation and management services to both theatrical (cinema) and television production customers. Technicolor currently provides services in both analog and digital formats and the ability to easily transition back and forth between them. This supports the content creators’ need, and

 

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desire, to work in both environments at the same time: for example, transferring content shot on film into digital form for editing or pulling together content shot in film with that shot, or created, in digital into one master. The range of services provided includes processing of daily rushes during filming, negative assembly, colorization services, editing and the creation of final masters including those used for theatrical film release, VHS and DVD replication, broadcast television (covering all global standards such as NTSC, PAL and High Definition). The Creative Services market is highly fragmented with significant elements, particularly post-production still being handled internally by major studios. The market is, however, now beginning to consolidate with increasing proportions of work being outsourced by the studios to suppliers who can meet their technical and service requirements. Technicolor believes that it now has 10% of the market and has significantly enlarged its global service offering and expertise to benefit from the post-production market growth. With the transition of the creative process to digital, the secure management of digital media assets is becoming increasingly important. During 2002 Technicolor has advanced two key initiatives: digital media asset management and the development of a global digital network. Technicolor has developed digital media asset management solutions allowing the storage, management and retrieval of content for easy distribution to multiple distribution channels. Pilot programs continue and commercial roll out is expected to begin during 2003. The concept of a global digital network to allow rapid and secure movement of content, particularly during the time critical production phase, is being piloted with key customers.

 

After the creative process is complete, Technicolor’s Film Services offer bulk-printing services for the release of a film to cinemas. A major studio release today can require in excess of 5,000 copies of a film to be printed and delivered to cinemas for simultaneous release. In a growing number of cases releases are happening simultaneously worldwide. This requires significant scale and efficiency and the ability to coordinate with the creative processes to address local issues such as multiple language versions. Through four main facilities in North America and Europe, Technicolor processed around 3.5 billion feet of film in 2002. The new film processing facility just outside Montreal, Canada is fully operational and will handle in excess of 50% of our North American requirements. Technicolor also provides logistics support in North America, delivering prints and studio marketing materials to cinemas. Opportunities to expand these logistics service operations to support the worldwide release of films and to provide real time information to distributors and cinemas regarding the status of film content will be pursued during 2003. We believe that Technicolor holds a 36% market share, based on footage of film sold, of the U.S. and European film processing market. Our main competitor in this business is Deluxe.

 

Through its Home Entertainment services, Technicolor manufactures and distributes VHS cassettes, DVD video and games and CD’s via 23 locations across North America, Europe and Australia. Technicolor provides a turnkey integrated service for video and games content producers that spans mastering, manufacturing, packaging, distribution, including direct-to-retail, direct-to-consumer and returns handling, as well as procurement, information services and retail inventory management systems. During 2002, a European distribution service was launched based in Holland and serving the northern European market. We are planning to extend this service during 2003.

 

Following the acquisitions made in the first-half of 2002, a major reorganization of Technicolor’s

 

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operations was initiated focusing on lowering costs and improving efficiency and customer service levels. Optical disc replication has been expanded in low-cost production facilities in Guadalajara, Mexico and Piaseczno, Poland. U.S. packaging and distribution is being consolidated in expanded facilities in Memphis, Tennessee. VHS duplication in Holland has been relocated to existing facilities in London, United Kingdom and Milan, Italy. This reorganization is expected to be substantially complete during 2003. Overall, at December 2002 Technicolor had annual capacity to produce 850 million DVD’s and 810 million VHS cassettes supported by 4.8 million square feet of dedicated distribution space.

 

The packaged media industry continues to grow steadily, most recently fueled by consumer demand for DVD video as well as games. Following the integration of Panasonic Disc Services, Technicolor is, we believe, the largest independent VHS and DVD replicator in the world with an estimated 35-40% U.S. and 30-35% European VHS market share and a 35-40% U.S. and 20-25% European DVD market share. Main competitors in VHS are Deluxe and Cinram and in DVD, competitors include Sony DADC, Sonopress, Deluxe/Ritek, Infodisc and Cinram.

 

Technicolor continues to support and guide its customers through the digital transition. Based on Technicolor’s current and targeted customer base, we believe this offers substantial growth opportunities, in particular in the areas of DVD, digital cinema, digital post-production, digital media asset management services in both its existing (principally the United Stated and Europe) and new geographical markets. Operational and technological synergies exist between Technicolor and Thomson’s other units for the next generation of technologies for content distribution, including copy protection, digital rights management, media asset management and networking technologies.

 

• Broadcast & Media Solutions—Grass Valley®

 

Broadcast & Media Solutions provides digital broadcasting products, equipment and services to the professional broadcast and post-production industry throughout the world. Its products include cameras for outside broadcast and studio use, content management products for TV studios and mobile broadcast vehicles, film imaging and signal processing equipment for broadcasters and post-production operations, and management and delivery systems.

 

The acquisition of Philips’ professional broadcast businesses, effective January 1, 2001, extended our existing professional broadcast business and gave us a leading position in the European market. The acquisition in March 2002 of Grass Valley Group further complemented our product offering, particularly in digital servers, and also provided a leading position in the important U.S. broadcast market.

 

During 2002, we initiated a major integration and restructuring plan aimed at rationalizing research and development capabilities, manufacturing and supply chain infrastructure and sales and administrative support functions worldwide.

 

Broadcast & Media Solutions aims to exploit a number of growth opportunities, in particular the migration by the broadcast industry from analog to digital networked technology. At the same time, broadcasters worldwide are increasingly shifting to server-based network architectures driven by their need to improve efficiency and processes and lower operating costs. This drive to

 

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efficiency is also creating opportunities to develop maintenance, service and support capabilities, functions increasingly being outsourced by our customers. Finally, we expect the migration to High Definition television in the United States is expected to create growth opportunities for most of our products.

 

Broadcast & Media Solutions now operates in more than twenty-two countries. We believe it is the leading supplier worldwide of broadcast servers, switchers, routers and of film imaging equipment used in post-production. We also believe we hold the number two position worldwide in cameras giving us, in value terms, an overall worldwide market share of around 30% at the end of 2002. Our main competitors are Sony and Panasonic.

 

Displays and Components

 

Displays and Components generated full year total net sales of € 2.224 billion in 2002 before elimination of which € 1.560 billion were sales to outside the Group (consolidated net sales), while the remaining € 664 million were internal sales to our Consumer Products Division. This division’s consolidated net sales represented 15.3% of our Group’s 2002 net sales. Operating income for the division was € 84 million. At December 31, 2002, the division had 25,889 employees and operated 13 industrial facilities.

 

Our Displays and Components division produces television tubes, optical and other components used in the manufacture of various consumer electronics, and also develops integrated circuits. In 2002, we were second worldwide in large and very large size TV picture tubes based on volume. We also held a leading position in optical components.

 

Our strategy in Displays and Components is to focus our core skills on a limited number of key hardware and software components for consumer electronics devices, to strengthen our presence in digital video technologies and capture a larger value market share of the consumer electronics finished product market. In addition, we intend to continue to optimize our cost profile by locating production in low cost countries. We are reviewing our business plan in our Displays and Components activities in the face of the fast-growing Chinese domestic tubes market serving both the domestic and export markets for finished television sets and the shortening life cycles and commoditization in modules.

 

Television Tubes

 

We are one of the world’s leading suppliers of television cathode tubes, producing 14.8 million color picture television tubes in 2002. We hold the number two position in the worldwide large and very large size tube market based on volume. Our television tubes business is highly vertically integrated, as we produce most of the important components that go into a finished picture tube. We produce 69% of our requirements for glass panels and funnels and nearly all of our requirements for electron guns and deflection yokes. Glass can account for up to half of the cost of a tube and is an important quality factor, particularly for larger displays. This vertical integration in glass allows us to keep our technological expertise and control the production of

 

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the higher value-added parts of the tubes and the overall quality of our finished products.

 

Since 1999, we have focused on producing higher-end large and very large tube sizes (greater than approximately 22 inches) and expect to benefit from the expanding market for digital and large format television sets. Internal estimates show that large and very large tubes, which are the highest margin and fastest growing part of the tube market, accounted for approximately two-thirds in value of the total tube market and 74% of our overall tube unit production in 2002. We estimate that at the end of 2002 we held approximately 17% of the value of the large and very large size tube market, in which we complete with several other large manufacturers.

 

In 2002, the global market for television tubes experienced a small increase in demand, driven by larger tubes sizes and demand for true flat products. The market for curved tubes declined. Growth was stronger in Asia (particularly in China). Overcapacity remains in the North American market, despite market rationalization since 2001, essentially because of the imports of television sets from countries with low manufacturing costs. We will continue as in previous years to adapt our North American capacity to demand. In January 2003, for example, we put one North American tube line into lay-off.

 

In 2002, the industry continued to consolidate in response to this situation, in particular through the merger of the tube businesses of Matsushita and Toshiba. We participated in the industry consolidation through the acquisition of a very large size tube production line in the United States from Hitachi. This line has been relocated to our production facilities in China to supply the growing Chinese market. In addition to this acquisition, we continued to increase our presence in low cost countries and reinforce our position in the growing segments of the markets.

 

In North America, we completed the ramp up of our large and very large size tubes production plant in Mexicali, Mexico. In 2002, Mexicali produced 810 000 tubes, 91% of which were very large size tubes. Following the closure of our facility in Scranton, Pennsylvania, we transferred a line for the production of large size tubes to our Mexicali plant. This line will be operational in the first half of 2003. We also maintained our strong focus on capacity management and cost control in North America.

 

In China, we successfully completed the ramp-up of our large size tube line and prepared the installation of the production line acquired from Hitachi, which will begin production during the second half of 2003.

 

In 2002, we also launched our second generation of true flat products and we are planning to introduce as many as 6 new true flat products in 2003 in order to expand our presence in this fastest growing segment of the tube market.

 

• Other Displays

 

We pursue our research and development efforts in cathode ray tubes technologies, but also in new displays technologies such as plasma, rear-projection and notably technologies related to OLEDs (Organo Luminescent Emitting Diodes), a technology with a considerable performance and manufacturing cost potential.

 

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Digital Optical Components

 

We produce optical modules and pick-ups that interpret and transmit data encoded in DVDs, and CDs. In 2002, we held a significant market share in such optical modules. We also supplied drives for Microsoft’s game console, mainly in the first half of 2002.

 

The market for optical components remained very competitive in 2002 with price decreases on our main products averaging more than 15%, consistent with experience in recent years. Demand for optical modules continued to grow at high rates in CD Audio, Discman and DVD products, although overall lower than in 2001. To enhance further our competitiveness in this market we launched a significant cost cutting program in our Chinese operation. In parallel we increased our research and development efforts in new product generations, in particular slim DVD optical modules

 

Other Components

 

We also produce television and VCR components both for our Consumer Products needs and for sale to OEMs. These components include tuners and remote control systems.

 

We continue to pursue the development of digital components which enable advanced features such as recording, search and interactivity within consumer video electronics products, including set-top boxes, personal video recorders, DVD players and television sets.

 

Integrated Circuits

 

We have an in-house integrated circuit design team, which designs many of the essential integrated circuit components used in our products, from professional to consumer equipment, generally in partnership with selected semi-conductor vendors and foundries. Integrated circuits are a key component of digital products. Our integrated circuit design team employs approximately 100 engineers with specialized skills in digital, analog, mixed digital-analog, and radio frequency signal processing. We operate out of four facilities located in Indianapolis (U.S.), Rennes (France), Villingen (Germany) and Edegem (Belgium). In 2002, we have started building a skill base in Bangalore (India), where we intend to develop subcontracting activities in IC design. This team co-develops, with companies like STMicroelectronics, the new specific integrated circuits required in many of our products.

 

In January 2001 we extended our co-development agreement with STMicroelectronics for an additional five years, with an emphasis on chip designs for digital consumer electronics, including digital televisions, digital set-top boxes and DVD players. We derive value from this agreement by sharing in the revenues resulting from the sale of integrated circuits containing patented technologies jointly developed. In addition, we continue to develop our in-house competencies and have reinforced our support for the integrated circuit components production through a fabless business model, which will combine our offering to network operators.

 

Consumer Products

 

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In 2002, the Consumer Products division generated € 5,444 million in consolidated net sales, or 53.4% of our net sales, and € 41 million in operating income. At December 31, 2002, this division employed 22,851 employees.

 

Through our Consumer Products division, we market two categories of products: retail consumer electronics (including television sets, DVD players, VCRs, accessories, home and personal audio and communications equipment) and broadband access products (including digital decoders, cable modems and DSL modems as well as network equipment and systems).

 

• Retail consumer electronics products

 

We believe that a presence in retail consumer electronics products is important to the efficiency of our business model as it brings us closer to the retailer and consumer at the end of the video chain. This position allows us to benefit from the strength of our brands. It also enables us to develop within our other divisions technologies, products and services that serve the needs of our professional customers while also fitting consumers’ needs and behaviors.

 

In this division, we intend to continue the high-end repositioning of our product portfolio in order to offset the traditional price pressure and product standardization of consumer electronics markets. In July 2001, we reorganized our Consumer Products division with the creation of a worldwide marketing and sales structure which implements a common brand strategy in both the United States and Europe that focuses on high-end positioning and targeting value market shares. Consumer Products has also continued to improve its operations through ongoing restructuring, monitoring of fixed costs and sourcing and supply chain improvements as well as reduction of working capital with a keen focus in areas of receivables and inventory management.

 

In global, relatively mature, and highly competitive retail consumer electronics markets, we continue to focus on our two leading brands, RCA® and THOMSON®, and reshape our product portfolio toward high-end, innovative digital products, in order to seize growth opportunities arising from the digital transition. As a result of this strategy, our THOMSON® brand accounted for approximately 80% of our TV and video sales in Europe in 2002, compared to approximately 60% in 1999. In line with this worldwide brand strategy, in September, 2002 Thomson launched the RCA Scenium® product line in the United States, with a market positioning similar to the successful Thomson Scenium® product line in Europe. In addition to our two main brands, we have various support brands which are primarily used for short-term targeted marketing operations: the GE® brand in the United States, and the Saba®, Telefunken®, Ferguson® and Brandt® brands in Europe.

 

In each of our principal retail product lines, we face intense competition. However, we believe that due to our product positioning, well-established brands, strong relationships with retailers and competitive cost structure, we can compete effectively in the retail consumer electronics industry and expect to benefit from synergies of product design and development. Our principal competitors are:

 

    for television and video products: Matsushita, Philips, Samsung, Sony and Toshiba;

 

    for audio products: Panasonic, Philips and Sony; and

 

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    for communication products: South Western Bell and V-Tech, which sells communications products under the AT&T brand name.

 

    for accessory products: Recoton and Gemini

 

• Television

 

In 2002, we were a market leader in the United States for television sets, with a 13% volume market share. In North America, we benefited from close relationships with key retail networks and a very strong distribution infrastructure. In 2002, 51% of our television and accessory sales in the United States were made through national account retailers such as WalMart, Best Buy, Circuit City and Radio Shack. We also market products in Canada, and South America, increasing our presence with global retailers such as WalMart, Sam’s, Carrefour, Radio Shack and Home Depot.

 

In 2002, we ranked third in value for television sets in our core European market, which comprises the five largest European national markets: France, Germany, the United Kingdom, Italy and Spain. THOMSON® brand value market share in these five countries was 7.4% in 2002, benefiting from the focus on the THOMSON® brand name and the success of our Scenium® product lines, in particular in high-end products such as projection TV and Plasma Flat Screen. In 2002, we also held significant market positions in Eastern European television markets, particularly in Russia, Poland the Czech Republic and more recently, the Ukraine. In addition, we have further strengthened our links with our distribution network. In 2002, sales in Europe through our top ten retailers increased by 6%.

 

Our sales volume is minor in Asia, where we focus our efforts on the Indian and Chinese markets, which represent a large part of the regional market (excluding Japan) and present significant growth opportunities.

 

• Audio and Video products

 

Since July, 2002, we have managed our Audio and Video activity as a combined business unit. We view the DVD product category as a convergence vehicle providing consumers with the complete audio and video experience from a single product. This change will allow us to benefit from cost synergies associated with component and finished product procurement.

 

In audio markets we accelerated our high-end strategy in 2002, continuing to concentrate our development resources on digital and convergence products including home cinema with integrated DVD and advanced audio flash memory and hard drive based products. At the same time, we have sought continued cost and product improvements in our core lines. We continue to leverage our technological engineering expertise and strong digital patent portfolio to introduce innovative products with mainstream appeal. Our leadership position in the digital audio market was further strengthened in 2002 by the introduction of the Lyra® Personal Jukebox, a portable personal stereo containing a 20GB hard drive capable of storing and playing a significant amount

 

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of digital audio content using the mp3 audio decoding standard. We also introduced a unique convergence product, the Lyra® Wireless, designed to transmit digital audio content from the PC to a traditional home stereo.

 

Thomson ranked second based on volume in the United States audio market in 2002, achieving an overall volume market share of 15%. We continued to enhance our product positions in Europe as global designs provided a strong range of CD, digital and home cinema products, allowing us to gain market share in key growth categories including home theater and digital audio players.

 

In the traditional DVD player category, intense competition from mainly Chinese OEMs drove significant price pressure in the marketplace in 2002. In this difficult environment, Thomson achieved a 11% market share in the United States based on volume through our well-established distribution presence with major retailers such as WalMart, Target, Circuit City and Radio Shack. Thomson maintained its strong position through key DVD product launches including a Digital Media Recorder and innovative portable and DVD/VCR Combo products. In the VCR category, we pursued a more selective distribution strategy consistent with the continued industry decline of this mature product.

 

• Accessories

 

Thomson’s Accessories Business at the end of 2002 became a global business. Globalization provides opportunities for Thomson in many areas of our business such as product development, product management, sourcing, purchasing and marketing. We look to gain efficiencies in speed to market our new products, maximize our resources through global planning, anticipation of gains through our sourcing team with global standardization possibilities and increased retail presence opportunities through a global packaging strategy.

 

Thomson global product and marketing teams will focus on eight key categories Control-User Interface, Reception, Hook-Up and Connectivity among others. In these categories we believe we are creating accessory product solutions for consumers that deliver performance, functionality and convenience opportunities to help simplify their lives. A key way to deliver this message to consumers and at retail is through our global packaging team approach to developing packaging that engages consumers through visual presentation and educates consumers with relevant packaging content. We feel a consumer-focused approach is key to consumers and retailers. Today Thomson markets accessories products though key retailers such as Wal-Mart, Home Depot, Best Buy, Auchan, Media Markt and Canadian Tire.

 

• Communications

 

We sell residential communications products (corded-linked and cordless telephones, answering machines, combination telephones) through our ATLINKS entity, under the GE® and Alcatel brand names. ATLINKS provides the relevant global design and technology to fulfill its

 

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customers’ needs worldwide in the retail, mass and professional markets. In 2002, we introduced important new product ranges including DECT phones in Europe as well as multi-handset models in North America. ATLINKS is a world leader in this sector, holding the number one position based on volume in the United States in 2002 with aproximately 22% market share, a gain of three percentage points compared with 2001 supported principally by the 2.4 GHz product category. In Europe, we hold a 10% market share based on volume, a slight improvement over 2001.

 

ATLINKS was a joint venture with Alcatel until January 2003, at which point Thomson purchased Alcatel’s 50% stake in ATLINKS, in accordance with the terms of the original joint venture. As a result, ATLINKS is now a wholly owned subsidiary of Thomson.

 

In 2003, the business activities carried on directly with regional telephone operators were transferred to be managed with Broadband Access Products within our Content and Network division.

 

• Broadband Access Products

 

Through the Broadband Access Products organization, Thomson develops technologies and products for broadband network operators who deliver digital entertainment and data to consumers and businesses. Worldwide demand for broadband is increasing and broadband connectivity is being incorporated into many types of consumer products such as set-top boxes, modems but also televisions and home audio products, further fueling the demand for broadband access devices.

 

In 2002, Broadband Access Products included digital decoders (set-top boxes) and cable modems marketed under the RCA® brand in the Americas and under the THOMSON® brand in Europe. In 2002 Thomson acquired Alcatel’s DSL modem activity and as a result, is a worldwide leader in DSL modems, marketed under the SpeedTouch® brand.

 

Our strategy is to deliver broadband access devices for every type of network (including satellite, cable, telecommunications and terrestrial networks), which allow the transmission of digital entertainment and high-speed data. We offer network operators comprehensive and integrated solutions for home broadband entertainment through Thomson’s combined expertise in broadband networking technologies and our leading positions in Broadband Access Products.

 

In order to expand our Broadband Access Products activity and to optimize its profitability, we intend to continue to enhance our technological, integration and distribution expertise. During the 1990s, we pioneered the development of digital multimedia technology, and we possess key patents and know-how linked to MPEG-2 digital compression technology and related integrated circuit designs. New technologies in video compression can allow our customers, network operators, to deliver enhanced services and new types of content such as high-definition television. Accordingly, we continue to develop our position in next generation digital compression technologies. For example, Thomson is participating in the development of next-generation, low bit-rate, advanced compression standards with the International Telecommunication Union and its JVT group. We also rely on our ability to integrate various middleware, operating systems and conditional access software required by network operators

 

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and on our close relationships with integrated circuits suppliers.

 

Finally, we capitalize on the strength of our relationships with retailers and our ability to efficiently manage different distribution channels, whether retail or through operators.

 

In order to align our activities along customer lines, we have begun in 2003 to manage the Broadband Access Products business together with our Broadcast business under our newly formed Content and Networks division.

 

• Digital Decoders

 

We believe that we are one of the world leaders in digital decoders based on volume, with a strong presence in the United States, Europe and Latin America. Our strong expertise in digital decoders is reflected in the development of the first high-power digital satellite television system in the United States in conjunction with DIRECTV.

 

In 2002, we continued to be a major supplier of digital decoders for DIRECTV subscribers. In 2002, we also began to supply through both the OEM and retail channels digital decoders for EchoStar, a U.S. satellite operator. We commenced the Echostar production in July, 2002 and expect our market share to grow. We also hold significant market positions in Europe, in particular with Canal+ and with other operators, including TPS and ViaDigital in Spain.

 

In June 2002, we acquired Grundig’s set-top box activity including its relationship with BSkyB, the leading provider of digital TV in Britain and Ireland. Through this acquisition, we also expanded our set-top box portfolio with new free-to-air products, a rapidly growing market in Europe and a natural addition to our business.

 

The growth of high definition broadcasting, which enhances video and audio quality for consumers, creates new opportunities in our decoder businesses. Our relationships with leading network operators, presence in major retailers and technical strengths create the opportunity for us to deliver complete high definition solutions to the end-user. A second significant trend in the business is the integration of digital video recording capabilities, which offer new levels of convenience for the consumer.

 

• High Speed Data

 

Cable

 

We hold a strong position in the digital cable modem market and have shipped more than 3.0 million cable modems to cable operators since 1999. In North America, we hold the third position in the DOCSIS cable modem market with 14% volume market share in 2002. This position enables us to develop relationships with many of the major U.S. cable operators such as AT&T/Comcast and Cox. In March 2002 we finalized a preferred supplier agreement with Time Warner Cable. These accomplishments, together with our continuing expansion in Europe and South America, allowed us to attain a worldwide market share of 12% in 2002.

 

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We were one of the first companies to obtain CableLabs certification (DOCSIS compliant) for our digital cable modems. DOCSIS is a performance standard for non-proprietary products developed by the cable industry.

 

DSL

 

In January 2002 Thomson began to operate and consolidate the Alcatel DSL modem activity acquired in December 2001. Through this business we have achieved a leading worldwide position in the DSL modem market and attained DSL technological expertise, particularly in the field of application specific integrated circuit (ASIC) design, along with a strong customer base of telecommunications operators in Europe, the United States and Asia.

 

Marketed under the SpeedTouch® brand, our DSL product family has expanded to include value-adding networking products that provide our customers with a more robust and secure broadband connection.

 

In 2002, we introduced a set-top box that allows the delivery of video entertainment over broadband DSL IP networks. This represents a new market and business opportunity for DSL network operators by enabling them to broaden their service offerings to consumers. It also represents a new choice in home entertainment options for consumers. This product is in successful field trials around the world and shows promise in many markets.

 

• Network Equipment and Systems

 

In February 2001, Thomson and Alcatel formed Nextream (75% and 25%, respectively), combining their interactive video network businesses. Nextream’s business is driven by digital convergence (voice, data and video), new content sharing, bandwidth optimization and infrastructure upgrades to support value added services, such as VOD (Video On Demand), web browsing and voice over Internet Protocol (VoIP). Nextream is a full service provider of MPEG-2 content delivery solutions whose primary purpose is to enable the delivery of entertainment to subscribers over multi-platform transmission networks. Nextream’s end-to-end solutions include digital head-ends, video sources, video servers, encoders, IP encapsulation and network management software for interactive digital TV (“IDTV managers”). Its customers include satellite (Pay TV), cable, and telecom operators, ISPs and broadcasters. Nextream holds a leading position in Europe in video network equipment and, according to internal estimates, the fifth position worldwide based on value at year-end 2002. Its principal competitors are Motorola, Scientific Atlanta and Harmonic Divicom.

 

Under the terms of the agreement, Alcatel may require us to purchase all of its interest in the venture at any time between February 2002 and February 2007, or in the event there is a deadlock concerning any of the decisions requiring joint approval.

 

Patents and Licensing

 

In 2002, this division generated € 429 million in consolidated net sales, or 4.2% of our consolidated net sales, and € 387 million in operating income, reaching an operating margin of 90%. At December 31, 2002, this division employed 162 individuals based in France, Germany,

 

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Switzerland, Japan, China and the United States.

 

We have made a strategic priority of the protection and valuation of our intellectual property. Our strong world-wide patents portfolio on video technologies combined with our licensing expertise constitute significant competitive advantages enabling us to benefit from sustainable revenues and profits. The Patents and Licensing division was created early in 1999, integrating the RCATL patent and license business transferred from General Electric Co. to us on January 1, 1999.

 

The Patents and Licensing team works closely with Thomson’s research and development centers to identify ideas that may be potential patent candidates, draft patent applications and detect uses of our patents. As of December 31, 2002, we held almost 35,000 patents and applications worldwide derived from more than 6,600 inventions. In 2002, we filed 553 priority applications, which are applications for new inventions that are filed for the first time, an increase of 14.7% compared to 2001.

 

We believe that our patent portfolio is well balanced between major new technologies and mature technologies. New technologies include digital decoders, high-definition television sets, digital televisions, optical module patents such as CD and DVD player technology, MPEG video compression, the mp3 audio compression format, interactive TV technologies, storage technologies and new screen technologies such as liquid crystal display and plasma. Mature technologies include color television sets, glass television tubes, VCRs, camcorders, and color display monitors.

 

We currently have approximately 680 licensing agreements relating to a diversified mix of video products and services covering almost all consumer electronics companies in the Americas, Europe and Asia. Our top ten licensees account for approximately 63% of our total licensing revenues. The licensing agreements are typically renewable and have a duration of five years, and royalties are primarily based on sales volumes.

 

The Patents and Licensing division relies on a relatively small infrastructure and cost base. When considering the relative profitability of the Patents and Licensing division, however, it is important to note that our other divisions support research and development costs but do not benefit from income from patents licensed which is attributed to the Patents and Licensing division.

 

Our strategy for Patents and Licensing is to develop further our intellectual property portfolio, through widespread, but highly targeted patent registrations and through the acquisition of additional patents that have strong commercial and technical complementarities with our existing portfolio. Furthermore, we intend to increase the number of licensees through a more systematic enforcement of existing patents, especially in emerging markets where production facilities have been relocated as well as in Europe and the United States, and to develop new licensing programs around true flat displays and digital and interactive television patents. In July 2002, we joined a consortium pooling and managing the licensing patents essential to the MPEG-2 video compression standard. Finally, we are leveraging our expertise in licensing through portfolio licensing services for third parties.

 

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New Media and Services

 

In 2002, this division generated € 58 million in consolidated net sales and a € 45 million operating loss. At December 31, 2002, this division had 69 employees.

 

We created the New Media Services (“NMS”) division in 1998 in order to seize opportunities associated with the development of interactivity enabled by digitalization and broadband networks. NMS’s first initiatives focused on services directed to the end-consumer and supported by consumer platforms. Since 2001, in addition to interactivity projects for end-consumers, NMS focuses also on services and technologies enabling interactivity applications for content owners, advertisers, network operators and ISPs.

 

In 2002, we developed our screen-advertising activities jointly with Carlton. During 2002, the division benefited from the full year contribution of the ScreenVision U.S. joint venture with Carlton, Val Morgan (acquired in September 2002) and ScreenVision Europe (acquired in June 2002). Thomson pursued its cooperation with Gemstar for the rolling out of television sets with on-screen electronic program guide (EPGs services) as part of the agreement renegotiated during the first semester 2002. Our TAK initiative (interactive television service), developed in cooperation with Microsoft, and launched in France in 2001 has been discontinued and some related services have been transferred to a service provider.

 

Effective January 2003, the operations of the NMS division have been absorbed by Consumer Products activities and Content and Network activities. This decision results from an assessment of the evolution of NMS’ activities, especially the development of interactivity initiatives towards our professional client base, as well as the wider reorganization of our division structure along customer lines. The screen-advertising business is managed, starting January 1, 2003, within our Content and Networks division to better serve our theater client base and the EPG business supported by our consumer electronic platforms has been transferred to the Consumer Products division.

 

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Research, Innovation and Product Development

 

We maintain a longstanding commitment to investing in a broad range of research and development initiatives to support and expand our product and service offerings and licensing programs in order to create competitive advantages and to establish new markets.

 

We centrally manage most of our long-term research through our Research and Innovation department, which employed 450 people mainly in six research centers on three continents as of December 31, 2002. The largest center, located in Rennes, France, had a staff of 140 as of the same date. The other centers are located in Hanover and Villingen (Germany), Indianapolis and Princeton (U.S.) and Tokyo (Japan).

 

Product development is carried out within each of our divisions and employs approximately 3,000 people primarily in the United States, France, Germany, the Netherlands, Belgium, Italy, Singapore, Korea and China.

 

Traditionally, our research and development efforts have covered a wide spectrum of technologies associated with a consumer electronics company. Our research and development is now focusing on the video chain, utilizing core competencies and knowledge gained through close relationships with our client base. Our goal is to develop new technologies to meet our clients’ needs facing the growth of their digital activities, to expand our intellectual property portfolio, to enhance product integration in cooperation with our business units and to reduce the time required to bring products and solutions from conception to production and eventually to market.

 

To respond to customer needs, we focus on key technologies throughout the video chain:

 

    In the area of digital content acquisition, we focus on image capture, processing, and manipulation technologies that address the wide range of display formats, image qualities, and applications found in the media industry. Examples include 4/3 and 16/9 TV displays, cinema formats such as pan-and-scan and standard and high-definition TV. Applications encompass conventional and digital cinema, home cinema, TV, and Internet. Our research and development programs focus on delivering highly flexible image capture and processing equipment, and on developing next-generation display technologies such as plasma, rear-projection and digital cinema.

 

    In the area of digital content production, we develop storage, networking, search, access, and asset management solutions such as Storage Area Network (SAN) and multi-SAN architectures. We also develop MPEG-2 compression solutions and platform architectures that allow the exchange of content between professional sites across multiple network formats and sizes. Leveraging our expertise in compression and IC design, we are preparing the next generation of coders and decoders that utilize MPEG-4 technology. We play in particular a leading role in the finalization of the new MPEG 4 PART 10/H.264 video compression standard, which will be used in bandwidth and storage critical applications.

 

   

To address our customers’ need to deliver content from multiple sources through a diverse

 

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range of networks, we develop programs for streaming technologies, adaptive network technologies, and network systems integration. In addition to our traditional focus on Satellite, Terrestrial and Cable networking technologies, we are developing advanced solutions for ADSL (Asynchronous Digital Subscriber Line) and Broadband Wireless networks like LMDS (Local Multipoint Distribution System) in the 42GHz band and HiperLAN2 and WiFi (Wireless Fidelity)/802.11a in the 5GHz bands. We believe that these wired and wireless technologies will eventually become jointly used for delivering digital content to consumers with a high degree of convenience, and we invest in the development of both critical enabling technologies and content-driven applications, like streaming video over mobile and heterogeneous networks.

 

    Our research and development leverages our core competence in consumer electronics and our knowledge of the needs of consumers, content providers, and distributors to develop innovative digital home networking, home media servers, and content protection solutions. We are designing the forthcoming digital home network architecture and transmission technologies that will allow the exchange of digital content via different platforms, with a particular attention to the emergence of products based on hard-disk drives, which are bringing considerable improvements to the end-consumer experience and open new opportunities for content providers and network operators.

 

    We continue our investments in the cathode ray tubes and plasma display technologies. In addition, we are rapidly raising our profile in OLEDs (Organo Luminescent Emitting Diodes), a technology we believe has considerable performance and manufacturing cost efficiency potential.

 

    Currently, our major product development initiatives include enhanced television displays, electronic program guides, interactive service interfaces, digital and high definition television, pickup heads and modules for CD and DVD drives, DVD players, tape-less audio/video recorders, digital set-top boxes and cable modems.

 

We complement our internal research and development activity by subcontracting certain research activities to outside providers, by entering into research or co-development programs with corporate investors and other strategic partners. For example, we developed the mp3 digital compression standard in cooperation with the Fraunhofer Institute and Coding Technologies, and in 2001 launched with these two partners mp3PRO®, a new version of mp3 that doubles the amount of music that can be stored in memory and improves the audio quality of compressed music files. Other key R&D partners include INRIA (Institut National de Recherche en Informatique et Automatique) and CEA (Commissariat à l’Energie Atomique) in France, HHI (Heinrich Hertz Institute) and many Universities in Germany, and CDT (Cambridge Display Technologies) in the UK. To access key technologies and accelerate the transition of our activities toward digital technologies, products and services, we also make selective minority investments in companies with leading technologies we consider beneficial to our product line. In addition, our internal research and development is supplemented by appropriate intellectual property acquisitions.

 

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Licenses and Trademarks

 

We believe that we own or have licenses in the technology standards necessary to compete in the markets for our products and systems. Since the practice in these markets has historically been to provide licenses on reasonable and equitable terms, we expect to continue to have access to the licenses necessary to manufacture and sell our products.

 

We also believe we have licenses in and are able to use freely the trademarks that are necessary to our business.

 

Since 1987, we used the RCA® brand name for consumer electronics products under a royalty-free exclusive license with an indefinite term. In 1999, the license was extended to cover additional products, and we purchased an option from General Electric Co. to acquire ownership of the RCA® brand. We exercised the option in December 2001 for U.S.$6 million paid in 2002. In March 2001, we acquired the Technicolor assets and businesses, including the Technicolor® trademark. During 2001, we purchased the THOMSON® names and all attached rights from TSA and Thalès S.A. For more details on these contracts, refer to Item 7: “Major Shareholders and Related Party Transactions—Related Party Transactions”. In March 2002, we acquired all of the issued and outstanding capital stock of Grass Valley Group, Inc., which owns the Grass Valley Group® trademark.

 

We also market products under secondary brands and under certain licensed brands, notably Alcatel and GE® for communications (please refer to “Communications” above).

 

Sourcing

 

Our centralized sourcing organization is composed of approximately 240 employees who are deployed throughout each business unit and are present in eighteen countries within Asia, Europe and the Americas. These individuals select and manage our network of suppliers of raw materials, components, finished goods, services and equipment. Their objective is to benefit from global volume and common vendor bases, standardization and deployment of best practices throughout the different operational divisions.

 

In addition, we have built relationships with strategic suppliers strengthening our position for the purchase of integrated circuits.

 

For several years, we have been implementing specific projects to reduce global sourcing costs. We have reorganized our component sourcing network by localizing the sourcing of components near our production facilities, reducing our supplier base, increasing the frequency with which supply agreements are renegotiated and establishing “Just In Time” flexible and consignment-based logistics relationships.

 

We have obtained significant price reductions linked to the sourcing department’s performance and to the increased competition among our component suppliers. In 2002, we experienced a significant decrease in materials costs throughout our organization. By focusing proactively on driving down ownership costs at a faster pace than the evolution of finished product prices, we have enhanced our capacity to partially offset market price declines.

 

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In addition, we have increased our use of electronic exchanges with our suppliers, achieving increased automation and improving the reliability of ordering and forecasting processes, and have implemented innovative collaborative planning projects. Since 2000, these initiatives have been extended towards indirect purchasing, for example, with the development of an e-procurement platform called Easysource, in order to optimize non-production purchasing via the Internet. In addition, in 2001 we created a joint venture named KeyMRO, which aims to group Thomson’s non-production purchases with those of two other French companies, Rhodia and Schneider, via e-business technologies, and thereby reduce the total cost of non-production goods and services purchased by leveraging combined volumes.

 

Our sourcing organization participates in the integration of newly acquired businesses through the implementation of our global and uniform processes. For example, identifying all components required for the manufacture of our products has allowed us to combine volume purchases.

 

We believe that the termination of any one of our supply contracts would not materially endanger our operations or financial condition.

 

C—Organizational structure

 

Please refer to Note 30 to our consolidated financial statements for a list of Thomson’s subsidiaries.

 

D—Property, Plants and Equipment

 

Manufacturing Facilities and Locations

 

In order to deliver our product and service offering to our customers, we have developed an industrial organization with important manufacturing operations. In addition, we rely on outsourcing for the manufacturing of some of our finished products.

 

Our objective is to continually improve the location and the organization of our manufacturing operations to reduce our production costs, minimize our stock levels and improve our lead-times. We have also implemented an outsourcing policy for the manufacturing of some of our finished products such as audio and communication products, accessories, camcorders, DVD players, VCRs, and smaller size televisions. We rely on third-party competencies for the manufacturing of standardized products in order to focus our resources on the conception and manufacturing of high-end components and products.

 

At the end of 2002, we had 55 locations. Principal manufacturing facilities are factories for the production of television sets, large and very large cathode ray tubes (“CRTs”), optical components, high-end audio products, VHS tapes and DVDs. Most of these manufacturing facilities are located in low-cost countries such as China, Mexico, Poland and Thailand, which give us a competitive cost base. We intend to continue this strategy of manufacturing in low-cost countries for all of our divisions.

 

Consistent with our manufacturing strategy, the majority of goods produced at our North

 

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American plants are sold in North America, while our European plants produce goods destined primarily for the European market. Our Asian plants produce goods for all markets.

 

The table below shows our significant manufacturing facilities by division. We own all of these facilities, except the Chinese facilities, which are on a long-term lease due to local legal requirements, and the Mexicali plant (construction and equipment) is financed through a synthetic lease. In addition, we entered into a sale-lease back transaction in 2001 through our Polish subsidiary which transfers ownership of tube manufacturing equipment. We also lease our Boulogne and Indianapolis office buildings. For more information on these leases, please refer to Note 25 to our consolidated financial statements.

 

Principal Manufacturing Units

 

Location


 

Division


 

Products


Americas:

       

Camarillo (California)

 

Digital Media Solutions

 

DVD & VHS

Livonia (Michigan)

 

Digital Media Solutions

 

VHS videocassettes

North Hollywood (California)

 

Digital Media Solutions

 

Film

Mexicali (Mexico)

 

Displays and Components

 

Tubes

Marion (Indiana)

 

Displays and Components

 

Tubes

Circleville (Ohio)

 

Displays and Components

 

Glass funnels, panels

Belo Horizonte (Brazil)

 

Displays and Components

 

Cable modems

Juarez (Mexico)

 

Consumer Products

 

Televisions

Europe:

       

West Drayton (UK)

 

Digital Media Solutions

 

Film

Bagneaux (France)

 

Displays and Components

 

Glass panels, funnels

Anagni (Italy)

 

Displays and Components

 

Tubes

Piaseczno (Poland)

 

Displays and Components

 

Tubes

Angers (France)

 

Consumer Products

 

Televisions

Zyrardow (Poland)

 

Consumer Products

 

Televisions

Asia:

       

Nantao (China)

 

Displays and Components

 

Components

Foshan (China)

 

Displays and Components

 

Tubes

Bangkok (Thailand)

 

Consumer Products

 

Televisions

Dongguan (China)

 

Consumer Products

 

Audio

 

Environmental, Health and Security (EH&S) policies and guidelines:

 

We have established a number of programs and initiatives to ensure that each of our locations meets its legal responsibilities and operates in a manner that identifies and takes measures to reduce harm to human health and the environment. The most significant of these are described below:

 

Corporate EH&S Policies and Guidelines have been developed since 1993. They assist the organization in meeting regulatory requirements and establishing best management practices.

 

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Each location knows the EH&S Policies and Guidelines and applicable laws and regulations, and is responsible for customizing programs that ensure conformance and address site-specific issues. We established homogeneous and consistent standards for all sites to conform to legal requirements of each country and to assure continual improvement.

 

An annual EH&S performance measurement process has been established in each location to track and report on our manufacturing locations conformance to key management programs and requirements and their progress toward corporate improvement goals. This process establishes benchmark criteria, helping us create consistent global action on key programs, requirements and initiatives. The process consists in filling in a precise evaluation schedule and allows us to implement regularly new improvement programs.

 

A comprehensive audit program was implemented in 1996 to review our manufacturing locations conformance with Corporate EH&S Policies and Guidelines and specific applicable EH&S laws and regulations. In 2002, 25 EH&S audits were completed as part of our objective of auditing each manufacturing location at least every 3 years.

 

We have established a process for reviewing locations prior to acquisition and upon closure to identify any potential contamination risk. This process not only helps us to assess our financial liability, but also to assess the level of capital expenditures necessary to assure the conformity of all locations according to the Group’s requirements.

 

A number of Thomson’s current and previously owned manufacturing sites have an extended history of industrial use, including the handling and disposal of wastes. Soil and groundwater contamination has occurred at some sites, including third-party disposal sites, and might occur or be discovered at other sites in the future, exposing Thomson to remediation costs and/or claims for damages to persons or property. Principal among these sites is a former production facility in Taoyuan, Taiwan, which Thomson owned from 1987 to 1992 when all production activities ceased and the site was sold.

 

In accordance with the agreement for the acquisition of General Electric Company’s consumer electronics business in 1987, General Electric Company has assumed or indemnified Thomson with respect to certain liabilities, including certain liabilities that could arise from the Taoyuan, Taiwan facility relating to environmental conditions existing prior to Thomson’s acquisition of the property.

 

The Group believes that the amounts budgeted and reserved will enable it to satisfy known and anticipated environmental, health and safety obligations to the extent they can be reasonably estimated and anticipated. These matters cannot be predicted with certainty and the Group cannot provide any assurance that these amounts will be adequate. In addition, future developments, such as changes in environmental, health and safety laws or the discovery or development of new or existing conditions, could result in increased costs and liabilities that could have a material effect on the Group’s financial condition or results of operations. Based on current information and provisions established for environmental, health and safety matters and subject to the uncertainties described in this section, the Group does not believe that environmental, health and safety compliance and remediation requirements will have a material adverse effect on the Group’s business, financial condition or results of operations.

 

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Insurance

 

To date, we have been able to obtain insurance coverage for our operations worldwide at levels that we consider to be prudent and in conformity with industry standards. We participate in a comprehensive insurance plan that provides global coverage for a variety of significant risks and activities. This insurance coverage includes damages to goods and resulting operating losses, general, environmental, executive (directors and officers), and public and products liability. The insurance plan also covers transportation, material damage, business interruption and contractor’s all-risks insurance, as well as employer’s liability insurance where required. Additional policies are maintained where necessary to comply with applicable laws or to provide additional coverage for particular circumstances and activities. For example, we maintain independent automobile and personal liability policies in the jurisdictions in which they are required.

 

We intend to continue our practice of obtaining global insurance coverage where practicable, increasing coverage where necessary and reducing costs through self-insurance where appropriate, although the Group does not have in place any captive insurance company. We do not anticipate any difficulty in obtaining adequate levels of insurance in the future.

 

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ITEM 5—OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

You should read these comments on our operating and financial results in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere herein. Our audited consolidated financial statements have been prepared in accordance with French GAAP, which differ in certain material respects from U.S. GAAP. Notes 31 and 32 to our consolidated financial statements describe the principal differences between French GAAP and U.S. GAAP as they relate to us and reconcile our net income and shareholders’ equity. We also summarize these differences below in “— Overview—Principal Differences between French GAAP and U.S. GAAP.”

 

A—Overview

 

Significant recent trends and developments

 

During the year 2002, we continued to implement repositioning plan and actively pursued our strategy by focusing on the more profitable activities of the video chain, while reducing in relative terms our retail consumer electronics activities. The success of our repositioning, and especially the growing contribution of our business with content owners is reflected in our financial results.

 

Consolidated net sales in 2002 totaled € 10.187 billion, € 10.391 billion in 2001, an € 8.995 billion in 2000. Consolidated operating income reached € 718 million in 2002, compared with € 636 million in 2001, and € 546 million in 2000. We recorded net income of € 373 million in 2002, compared with € 286 million in 2001, and € 394 million in 2000.

 

The basic elements of our TWICE program, aiming at doubling the Digital Media Solutions net sales by the end of 2004 compared to its contribution in 2001 when Technicolor was acquired, are today in place and the program is well underway. In 2002, we reinforced our position in DVD replication activities, notably through the acquisition of Panasonic Disc Services. Moreover, the integration of post-production businesses during the year gave us the opportunity to enlarge our global post-production service offering to content owners. In addition, the Grass Valley Group acquisition has broadened our offering of digital broadcast equipment. In 2002, the Digital Media Solutions division enlarged its customer base, providing Universal and Paramount with DVD replication services, and obtained two new contracts, effective 2003: one relating to VHS duplication in Europe with Paramount and one relating to film replication with Universal Studios.

 

In Broadband Access Products, the integration of the UK decoder business acquired from Grundig in June 2002 enabled us to add BSkyB as a new major customer. During the course of 2002, we also developed our customer relationship with Echostar, providing them with decoders purchased by consumers through retail channels. The expansion of our customer portfolio reinforced our leadership position in the decoder business. Indeed, we have succeeded in developing customer relationships with the four main satellite broadcasters worldwide.

 

The screen advertising business has been developed, jointly with Carlton, with the acquisitions

 

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of various activities in Europe and Val Morgan in the United States.

 

The acquisition of Canal Plus Technologies, completed in January 2003, significantly enhanced the Group’s intellectual property and technologies.

 

In the retail Consumer Products business, we continued our repositioning strategy towards high-end products with the launch in the second half 2002 of our Scenium range in the United States.

 

In the tubes business, we participated in the consolidation of the industry, through the acquisition of a very large size production line in the U.S. from Hitachi, which has been relocated in China.

 

Finally, we initiated new licensing programs within our Patents and Licensing division. In July 2002, we joined the MPEG-LA patent pool and we started new licensing programs with vendors of set-top boxes. In addition, we increased our portfolio of licenses with Chinese manufacturers.

 

External factors have, however, adversely affected our net sales growth, and, to a much lesser extent, our profitability during 2002. Currency exchange rate fluctuations, particularly of the U.S. dollar against the euro, had a significant negative impact on the Group’s net sales, mainly denominated in U.S .dollars, and also on the operating income with a more limited impact. Also, the U.S. West Coast port labor dispute in October 2002 affected the Group’s net sales and impacted our supply chain temporarily. Certain consumer electronic products could not reach the resellers’ locations and gave rise to loss of revenue and additional costs.

 

However, our external and organic growth programs combined with a solid cash management policy and strong cost controls allowed us to reach operating income of € 718 million and net sales of € 10,187 million within a weaker economic environment and difficult market conditions. We generated cash flow from operating activities of € 1,104 million in 2002 due to our increased profitability and our ability to extract cash from our net working capital, especially with substantial progress made to reduce our overdue receivables.

 

Net income increased by 30% in 2002 to reach € 373 million, compared with € 286 million in 2001. As a percentage of net sales, the net income represents 3.7% compared with 2.8% in 2001. Basic earnings per share reached € 1.35 in 2002 compared with € 1.04 in 2001, representing an increase of 30%.

 

On March 12, 2002, we issued convertible/exchangeable bonds maturing in 2008 for an aggregate amount of € 600 million. Please refer to Note 21 to our consolidated financial statements for more information.

 

Our Board of Directors and our shareholders approved the distribution of a dividend in respect of 2002 amounting to € 0.225 per share, the first dividend since the listing of the Group

 

Subsequent events

 

In February 2003, we finalized the acquisition of Canal Plus Technologies, announced in

 

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September 2002, as well as the purchase of Alcatel’s 50% stake in ATLINKS for € 68 million.

 

The Group also announced the acquisition of Pacific Media Affiliates (PMA), parent company of four entities located in Los Angeles and specialized in audio editorial and mixing for feature and broadcast production. This acquisition reinforced our post-production global offering as well as the customer portfolio of the Content and Networks division.

 

We reported on April 16, 2003 our unaudited consolidated net sales for the first quarter 2003 which amount to € 1,905 million, a 12% decrease at constant exchange rates compared to the first quarter 2002.

 

For more information about our first quarter 2003 results and the full text of that announcement, refer to our report on Form 6-K filed with the U.S. Securities and Exchange Commission on April 22, 2003, which, other than the section titled “2003 focus and outlook” on page 4 and 5 thereof, is incorporated herein by reference and included as Exhibit 99.1 to this report.

 

Seasonality

 

Our net sales tend to be higher in the second half of the year than in the first half. This is due to increases in consumer purchases and more films released at the time of the year-end holidays. Our consolidated net sales in the second half of 2002 totaled € 5,209 million, representing 51% of our 2002 consolidated net sales, the seasonality has been less important in 2002 than in 2001 (55% of our consolidated sales in the second half) due to a weaker year-end peak season in 2002 and a stronger effect of exchange rate fluctuations during the second half.

 

The impact of seasonality has tended to be higher at the operating income level, driven by the fact that fixed costs are spread relatively evenly over the year. Our consolidated operating income totaled € 471 million in the second half of 2002, or 66% of our 2002 consolidated operating income, compared with 64% in the last six months of 2001.

 

Geographic breakdown of net sales

 

Based on net sales by destination (classified by the location of the customer), our most important markets are the United States and Europe, accounting for 51% and 31%, respectively, of net sales in 2002, for 53% and 29%, respectively, in 2001, and for 53% and 26%, respectively, in 2000. Asia accounted for 10% of our net sales by destination in 2002 compared with 9% in 2001 and 11% in 2000.

 

Effect of exchange rate fluctuations

 

We estimate that the impact of translating revenues of operating entities that are denominated in currencies other than euro into euro had a negative impact of € 445 million on our net sales as expressed in euro in 2002. We estimate, however, that the impact of translating revenues of operating entities that are denominated in currencies other than euro into euro had a negative impact of € 24 million on our operating income as expressed in euro in 2002, or 3.3% of the

 

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Group 2002 operating income, reflecting a 16% fall in the euro/dollar exchange rate during 2002. We believe that the impact of exchange rate fluctuations is greater on our sales than on our operating income and net income due to certain natural hedges, complemented by our financial hedges. The impact of exchange rate fluctuations and natural and financial hedges on our net sales and on our income are discussed in Item 11: “Quantitative and Qualitative Disclosures about Market Risk—Impact of Exchange Rate and Interest Rate Fluctuations”.

 

Critical Accounting Policies

 

Thomson’s principal accounting policies are described in Note 1 to its consolidated financial statements included herein. Certain of Thomson’s accounting policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates which inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenues and expenses. Actual conditions and results may differ from these assumptions and estimates.

 

Thomson’s management believes the following are the critical accounting policies and related judgments and estimates used in the preparation of its consolidated financial statements under French GAAP.

 

Thomson’s management has discussed the development and the selection of its critical accounting policies with its Audit Committee and the Audit Committee has reviewed this disclosure.

 

·   Tangible and intangible fixed assets

 

The Group records intangible assets with finite useful life (mainly goodwill, software and certain rights on intellectual property acquired) and indefinite useful life (mainly market shares and trademarks) under “Intangible assets, net” and tangible assets under “Property, plant and equipments, net” (“PPE”) relating to operations and to production facilities.

 

Significant estimates and assumptions are required to decide (1) the expected useful lives of assets with finite useful life for purposes of their depreciation and (2) for all fixed assets, whether there is any impairment of their value requiring a write-down of their carrying value.

 

Estimates that are used to determine the expected useful lives of finite useful life fixed assets are defined in the Group’s accounting manual policies and are consistently applied throughout the Group. Such periods range from twenty to forty years for buildings, from one to twelve years for plants and equipment and from four to ten years for other PPE, excluding lands that have an indefinite useful life. Software development costs are capitalized and amortized over their economic useful lives, which usually do not exceed three years. Goodwill are amortized over a period ranging from five to twenty years. The Group applies systematically the original useful lives set forth for any tangible and intangible fixed assets.

 

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For the year ended December 31, 2002, the Group recognized a depreciation expense amounting to € 358 million related to tangible fixed assets, € 116 million for intangible with finite useful-life. As of December 31, 2002 the net book value of PPE, intangible assets with finite useful-life and intangible assets with indefinite useful-life amounted to € 1,622 million, to € 1,470 million and to € 713 million, respectively.

 

Estimates that relate to the determination of fair value are made on a regular basis throughout the year to take into consideration any change in competition, technology and other similar factors affecting the businesses. When certain operational and/or financial factors indicate an impairment of value, management evaluates the underlying carrying value of property, plant and equipment and intangible assets in relation to the operating performance and future cash flows of the underlying assets. Impairment losses, if any, are measured based on the difference between the estimated recoverable amount and the carrying amount of the asset. Management’s estimates of recoverable amounts for the individual asset or, if not possible, the reporting unit, are based on prices of similar assets, to the extent available in the circumstances, and the result of valuation techniques. These include net present values of estimated future cash flows and valuations based on market transactions in similar circumstances. Any negative change in relation to the operating performance or the expected future cash flow of individual assets or of reporting units will change the expected recoverable amount of these assets or units and therefore may require a write-down of their carrying value.

 

As of December 31, 2002, the Group has not identified any triggering event that requires an impairment test on PPE or intangible assets in any of the Group’s segments.

 

·   Warranty reserve

 

The Group provides for the estimated cost of product warranties at the time revenue is recognized in respect of the relevant products. Thomson’s products are covered by product warranty plans of varying periods, depending on local practices and regulations. A warranty provision is established based on the best estimates, as of the balance sheet date, of the amounts necessary to resolve future and existing product returns and customer claims. While Thomson believes that its warranty provisions are adequate and that the judgment applied is appropriate, the amounts estimated to be due and payable could differ materially from what will actually transpire in the future.

 

In order to determine the appropriate amount of its warranty reserve and related provisions, the Group has set up rules consistently applied which take into consideration assumptions, based on historical experience, of items such as the product return rates by product family and by country, the most recent figures of net sales and the average claim cost per product family. When determining the appropriate year-end warranty reserve amount, we assume no change in product mix or in the average claim cost per product family.

 

As of December 31, 2002, the Group’s warranty reserve amounted to € 92 million with new accruals for the year amounting to € 150 million and usages amounting to € 165 million, other changes being mainly due to foreign currency translation impacts.

 

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Thomson estimates that on a consolidated basis the financial impact on the warranty reserve at December 31, 2002 if the product return rates were increased by 1 percentage point, would have resulted in the recognition of an additional warranty accrual amounting to € 13 million.

 

·   Deferred tax assets allowances

 

Management judgment is required in determining the Group’s provision for income taxes, deferred tax assets and liabilities and the extent to which deferred tax assets can be recognized. Thomson recognizes deferred tax assets, (1) if the deferred tax asset can be compensated with a deferred tax liability that has the comparable maturity date, or (2) if it is probable that the Group will have future positive taxable income, from which the temporary differences or the tax-loss carry forwards can be deducted in a foreseeable future. When a specific subsidiary has a history of recent losses, future positive taxable income is assumed improbable, unless the asset recognition can be supported for reasons such as (i) the losses having resulted from exceptional circumstances which will not happen again in a nearby future, and/or the (ii) the expectation of exceptional gains. We have considered tax-planning in assessing whether deferred tax assets should be recognized.

 

As of December 31, 2002 the Group has recorded € 79 million of deferred tax liabilities and € 1,493 million of deferred tax assets, out of which € 1,154 million have been reversed through valuation allowance reflecting management’s estimates on un-recoverability of such assets.

 

·   Pension reserves and other benefits

 

The Group’s determination of its pension and post-retirement benefits obligations and expense for defined benefit pension plans is dependent on the use of certain assumptions needed by actuaries in calculating such amounts. Those assumptions are described in Note 18 to the consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and annual rate of increase in future compensation levels. A portion of our plan assets is invested in equity securities. The equity markets have experienced downward pressure and volatility, which affect the value of our pension plan assets and adversely impacts our ability to estimate the long-term rate of return on plan assets. Our assumptions are based on actual historical experience and external data regarding compensation and discount rate trends. While Thomson’s management believes that the assumptions used are appropriate, significant differences in actual experiences or significant changes in the assumptions may materially affect our pension and post-retirement benefits obligations under such plans and related future expense.

 

As of December 31, 2002 the pension, postretirement and termination benefits reserve amounts to € 705 million. For the year ended as of December 31, 2002, the Group recognized € 68 million of related expenses.

 

The following critical accounting applies to our U.S. GAAP financial statements (please refer to Notes 31 and 32 for further information on the following disclosed amounts, which refer solely to our U.S. GAAP financial statements).

 

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·   Goodwill and indefinite-lived intangible assets

 

Pursuant to FASB statement N°142 (“SFAF 142”), we review annually goodwill and other indefinite-lived intangible assets (mainly trademarks) impairment. Such review requires management to make material judgments and estimates when performing impairment tests.

 

The impairment test for goodwill involves a two-step process. Step one consists of a comparison of a reporting unit’s fair value to its carrying value. If the carrying value is greater than its fair value, then step two must also be completed. Step two requires a computation of the implied fair value of a reporting unit’s goodwill in comparison to the carrying amount of goodwill. Any excess of the carrying amount of goodwill over its implied fair value must be recorded as an impairment charge. SFAS 142 requires the initial impairment test of goodwill to be performed as of January 1, 2002. As of January 1, 2002, Thomson completed the transition impairment test for these assets and determined that the fair values of the reporting units were in excess of their carrying amount. Accordingly, there was no impairment of goodwill upon adoption of SFAS 142. Subsequently, Thomson performed its annual impairment test as of June 30, 2002, which did not result in any impairment charge.

 

As of December 31, 2002 the net book value of goodwill amount to € 1,360 million.

 

The impairment test for indefinite-lived intangible assets other than goodwill consists of comparing the carrying amount of these intangible assets to their fair value. Any excess of the carrying amount over an asset’s fair value is recorded as an impairment charge. Thomson completed the impairment test for these assets as of January 1, 2002 and determined that the fair value of these assets was in excess of the carrying amount. Accordingly, no impairment charges were recorded upon adoption of SFAS 142 related to indefinite lived intangible assets. Another test was realized as of a June 30, 2002 and did not resulted in any impairment charge.

 

As of December 31, 2002, the net book value of indefinite-lived intangible assets amounts to € 321 million.

 

Thomson’s management believes its policies relating to such impairment testing are critical accounting policies involving critical accounting estimates because determining the fair value of reporting units requires (1) determining the appropriate discount rate to be used to discount future expected cash flow of the reporting unit, (2) estimating the terminal value of each free cash flow computed, (3) estimating the growth rate of the revenues of each reporting unit tested for impairment, and (4) estimating the operating margin rates of underlying reporting units for related future periods.

 

Thomson elected to use the same discount rates that were used in planned acquisition projects, therefore taking into consideration the specificities of the underlying business trends.

 

In estimating the future revenues growth rates and operating margin rates, the Group used its internal budget, which is updated every six months. For discounted cash flow exercise purpose, following years growth rates and operating margin rates assumptions used for years after 2003 are consistent with the assumptions retained for the 2003 budget. Finally, the terminal value has been determined using a perpetual growth rate based on the inflation rate.

 

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Given the difference between estimated fair values and their underlying carrying values of the related reporting unit as of June 30, 2002, changes in assumptions, such as (1) a decrease or an increase of 1 point of the discount rate or (2) a decrease or an increase of 1 point of the perpetual growth rate, would not have led the Group to recognize an impairment charge in application of the SFAS 142.

 

Principal Differences between French GAAP and U.S. GAAP

 

The principal differences between accounting principles followed by the Company (“French GAAP”) and accounting principles generally applied in the United States of America (“U.S. GAAP”) affecting our consolidated financial statements mainly relate to (i) the criteria and the timing of recording of provisions, principally for restructuring activities, (ii) the recording of certain amortization and impairment charges that are classified below operating income under French GAAP but within operating income under U.S. GAAP, (iii) the recognition of revenue, (iv) the accounting treatment of investment securities and financial instruments, and (v) the accounting treatment of certain advantages in connection with employee share offerings.

 

Differences in the recognition of restructuring accruals have been reduced since the implementation of the new French rule on liability recognition. (Regulation n°2000-06 of the Comité de la Réglementation Comptable applied since January 1, 2002). However, U.S. GAAP remain more stringent than French GAAP since the former provide additional criteria in comparison with French GAAP to recognize a liability. As such, EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity” requires that the communication of the benefit arrangement includes sufficient details to enable employees to determine the type and amount of benefits they will receive if they are terminated. Furthermore, the provisions of EITF 95-3 “Recognition of Liabilities in Connection with a Purchase Business Combination” do not allow costs incurred by the acquiring company to be recognized as a liability assumed as of the consummation date of the acquisition. In addition, U.S. GAAP limit the window period to twelve months following the consummation date of the business combination whereas French GAAP extend this window period to the closing date of the fiscal year following the one in which the business combination occurred. Consequently, all differences between French and U.S. GAAP regarding restructuring are of temporary nature.

 

In addition certain early retirement plan are reserved under U.S. GAAP when rights are acquired by employees whereas under French GAAP such liability is accrued when the plan is announced.

 

The accounting treatment differences related to recognition of revenues at Technicolor occur, since under French GAAP, we recognize certain revenue related to the duplication of VHS cassettes and DVDs at the time duplication has been completed and title has contractually been transferred. Title transfers upon completion of the duplication process, prior to shipment to the customer, which is made upon customer request. Under U.S. GAAP, we apply the provisions of Staff Accounting Bulletin No. 101 (“SAB 101”) to recognize revenue. Therefore sales of VHS cassettes and DVDs are treated as “bill and hold” arrangements requiring revenue recognition only upon shipment of videocassettes and DVDs due to the absence of fixed delivery dates.

 

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The accounting treatment for derivative instruments may differ between French and U.S. GAAP. Under French GAAP, we defer premiums and discounts as well as gains and losses on forward exchange contracts that hedge the future anticipated commercial commitments and amortize them to income over the life of the underlying transactions being hedged. Under U.S. GAAP, these transactions do not qualify as hedging transactions, and therefore, derivative instruments are accounted for at their fair market value and the corresponding unrealized gains or losses are recorded in financial income.

 

Under U.S. GAAP we measure our available for sale investments at fair value and report temporary unrealized gains or losses as a separate component of shareholder’s equity. Under French GAAP such investments are carried at the lower of cost or fair market value.

 

Under French GAAP, goodwill is amortized over its estimated useful life (which ranges from 5 to 20 years). Whereas under U.S. GAAP, SFAS 142 “Goodwill and Other Intangible Assets” states that goodwill is no longer amortized but should be tested for impairment at least annually.

 

Purchase price allocation for our acquisitions differs from French to U.S. GAAP mainly due to accounting treatment differences regarding restructuring reserves as well as the recording, when applicable, of deferred tax assets related to customer relationships and trademarks. Such intangibles having a finite useful-life under U.S. GAAP are amortized, whereas they are not amortized under French GAAP.

 

Our financial statements under U.S. GAAP are also affected by the classification as compensation gain or expense of the reevaluation at fair market value of certain benefits granted by TSA, our main shareholder, to our employees in connection with employee share offerings. These benefits principally consist in discounts on the offering price and in bonus shares.

 

For more detailed information regarding the foregoing differences between French GAAP and U.S. GAAP, as well as certain additional differences between French GAAP and U.S. GAAP as it applies to Thomson (including regarding pensions and termination benefits, stay bonus, and reversal of deferred tax valuation allowance), please refer to note 31 of our consolidated financial statements.

 

New Accounting Pronouncements under U.S. GAAP

 

In June 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. As used in this statement, a legal obligation results from existing law, statute, ordinance, written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppels. SFAS 143 is effective for Thomson beginning on January 1, 2003. We do not expect the adoption of SFAS 143 to have a material impact on our financial position or results of operations.

 

In July 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 nullifies the current guidance in EITF Issue No. 94-3 (previously defined) for accounting for these types of costs. SFAS 146 generally requires a liability for a cost associated with an exit or disposal activity to be recognized only

 

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when the liability is incurred. In addition, SFAS 146 requires most liabilities to be recorded at their fair value. SFAS 146 is to be applied prospectively to exit or disposals of activities initiated after December 31, 2002 though early adoption is permitted. Thomson will adopt SFAS 146 as of January 1, 2003. Exit or disposal plans initiated prior to the adoption of SFAS 146 will continue to follow the guidance pursuant to EITF 94-3. The adoption of SFAS 146 is not expected to have a material impact on our financial position or results of operations. The statement will however, affect the timing and recognition of certain exit costs in the future for new exit plans and will generally result in those costs being recognized later than under EITF 943

 

In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”). This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS 123 to require prominent disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual financial statements. SFAS 148’s amendment of the transition and annual disclosure requirements are effective for fiscal years ending after December 15, 2002. Refer to Note 31 (e) to our consolidated financial statements for disclosures related to stock based compensation. Thomson intends to continue to account for stock-based compensation based on the provisions of APB Opinion No. 25.

 

In November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirement for Guarantees, including Indirect Guarantee of Indebtedness of Other” (“FIN 45”), which requires additional disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees. It also requires that a guarantor recognize, at the inception of certain types of guarantees, the liability for the fair value of the obligation when issuing the guarantee. The disclosure requirements of FIN 45 are effective for financial statements issued after December 15, 2002, and provided in Note 31 z xi) to our consolidated financial statements in the U.S. GAAP reconciliation. The liability recognition requirements of FIN 45 are applicable for guarantees issued or modified after December 31, 2002. Thomson is currently assessing what the impact of FIN 45 liability recognition will have on its consolidated financial statements.

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities an interpretation of ARB No. 51” (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure provisions of FIN 46 are effective for financial statements initially issued after January 31, 2003. Public companies with a variable interest in a variable interest entity created before February 1, 2003 shall apply the consolidation requirements of FIN 46 to that entity no later than the beginning of the first annual reporting period beginning after June 15, 2003. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. We are currently assessing what the impact of FIN 46 will be on our financial statements. The Company discloses in Note 25 a) to its consolidated financial statements two transactions with two special purposes entities. It is reasonably possible

 

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that these two entities will qualify as VIEs as defined by FIN 46 and that the Company will qualify as the primary beneficiary. Disclosure required by paragraph 26 of FIN 46 as it relates to these two entities is given in Note 25 a) to the consolidated financial statements.

 

In November 2002, the EITF reached a consensus on issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”) on a model to be used to determine when a revenue arrangement involving the delivery or performance of multiple products, services and/or rights to use assets should be divided into separate units of accounting. Additionally, EITF 00-21 addresses if separation is appropriate, how the arrangement consideration should be allocated to the identified accounting units. EITF 00-21 will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company is currently assessing what the impact of EITF 00-21 will be on its financial statements. In addition, companies are permitted to apply EITF 00-21 to all existing arrangements and the cumulative effect of a change in accounting principle will be recorded in accordance with APB Opinion No. 20, “Accounting Changes”.

 

Evolution of division structure

 

In 2002, Nextream, which was previously included in the Digital Media Solutions segment, was managed within the Consumer Products segment. Our consolidated financial statements for 2001 and 2000 have been restated accordingly.

 

Starting January 1st, 2003, in order to further stress customer focus and simplify the Group’s structure, Thomson formed four divisions and believes its activities can be summarized as set out below:

 

Clients


  

Content
owners


  

Network
operators


  

Manufacturers &
Technology


  

Retailers


Divisions


  

Content & Networks


  

Licensing


  

Components


  

Consumer products


Activities






  

Post-

production

 

Media

Asset

Management

 

Replication

services for

Film, DVD,

VHS

 

Distribution

Theater

services

  

Broadcast

Equipment

 

Network

Equipment

&

Software

 

Broadband

STBs




  

Thomson

Trademarks

 

Thomson

Licensing

 

Third Party

Licensing




  

Displays

 

Optical

modules

 

IC design




  

CP Services

 

Essentials (PAV—Portable

Audio/Video, Communications;

Accessories)

 

CP Mainstream (TV, HAV—Home audio/video)

 

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    Content and network activities (39% of 2002 Group net sales) comprising the video content preparation and distribution activities under the Technicolor® trademark (post-production, media asset management, replication and distribution services for Film, DVD and VHS) and Screen-Advertising businesses (ScreenVision, theater services), and the Broadcast and network equipment and services and Broadband access products businesses;

 

    Consumer Products (42% of 2002 Group net sales) comprising Televisions and Home Audio/Video products (Consumer Products Mainstream) and Accessories, Personal Audio/Video and Telephony products (Consumer Products Essentials). The Group is also seeking to expand the services it offers its retail clients;

 

    Components (15% of 2002 Group net sales) comprising the same activities as the former Displays and Components division;

 

    Licensing (4% of Group net sales), the former Patents and Licensing division.

 

The operations of the former New Media Services division has been absorbed in 2003 by Consumer Products activities (principally guide-related activities) and Content and Network activities (principally the screen-advertising activity).

 

Results of Operations for 2002 and 2001

 

These comments on our 2002 and 2001 results present an analysis of net sales and operating income by division, followed by comments on our consolidated results.

 

Changes in scope of consolidation

 

On December 17, 2001, Thomson acquired Alcatel’s DSL activity. This activity has been fully consolidated since January 1, 2002.

 

Thomson Zhaowei multimedia, a joint-venture formed in the second half of 2001 with Beijing C&W Electronics (Group) Co, Limited, situated in Beijing, China, is 55% held by Thomson multimedia Asia and consolidated under the pro rata method since January 1, 2002. This joint-venture develops, manufactures and sells TVs and digital set-top boxes. The subsidiary was shown at cost under “Other investments” in 2001 because no significant activities occurred during 2001.

 

On January 2, 2002, Victor Company of Japan Limited sold its 50% interest in J2T Holding GmbH to Thomson. After this transfer, J2T Video Tonnerre is now 100% owned by Thomson. This company has been fully consolidated since January 1, 2002.

 

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On January 31, 2002, in accordance with the contract signed in 2001, Thomson exercised its call option and purchased from Philips an additional 16.67% interest in BTS Holding International B.V. and in September 2002 purchased the remaining 16.67%. The Group now holds 100 % of BTS Holding International B.V.

 

On February 20, 2002, the Group acquired 100% of Vidfilm, a privately held digital post- production services company with operations in the Los Angeles area, London, and Singapore. This company has been fully consolidated since February 20, 2002.

 

On February 25, 2002, the Group acquired a business related to the DVD compression, authoring, regionalizing and related services business from Still In Motion LLC and two private vendors, which has been fully consolidated since February 25, 2002.

 

On March 1, 2002, the Group acquired all the shares of Grass Valley Group, a leading supplier of digital broadcasting equipment. This company has been fully consolidated since March 1, 2002.

 

On April 4, 2002, the Group acquired all the shares of Southern Star Duplitek Pty Limited in Australia. Duplitek is an Australian leader in manufacturing and distribution activities of pre-recorded DVD and videocassette. This company has been fully consolidated since April 4, 2002.

 

On May 7, 2002 the Group formed ScreenVision Holdings (Europe) Limited, a 50-50 joint venture with Carlton Communications Plc to purchase the entire issued share capital of Circuit A in France, and RMB II, a subsidiary formed by Régie Media Belge (RMB) in Europe in order to acquire the cinema screen advertising business owned by UGC and RTBF (Radio Télévision Belge de la Communauté Française) in certain European countries. This acquisition has been consolidated under pro rata method since the closing, which occurred on June 28, 2002.

 

On June 25, 2002, the Group acquired Panasonic Disc Services Corporation (PDSC), a company specialized in DVD replication services and distribution in the U.S. and DVD replication services in Europe. This company has been fully consolidated since June 25, 2002.

 

On June 28, 2002, Thomson acquired Grundig’s set-top box activity through the acquisition of the Digital Intermedia System Business (“DIS Business”). The DIS Business comprises a manufacturing and two research and development facilities. This company has been fully consolidated since June 28, 2002.

 

On September 19, 2002, ScreenVision U.S., a 50-50 joint-venture of the Group with Carlton Communications Plc., acquired 100% of the U.S. operations of Val Morgan, a division of Television Media Services specialized in cinema advertising business. This company has been consolidated using pro rata method since September 19, 2002.

 

In January, 2002, 33.33% of A Novo Comlink Espana (Spain) was sold by ATLINKS to A Novo, in accordance with a contract signed with the purchaser in 2000. ATLINKS sold its remaining interest of 33.33% in December 2002.

 

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Notification of threshold crossing in the share capital of French companies

 

Under article L.223-6 of the Code de Commerce, we disclosed that in 2002, Thomson increased its ownership percentage in KEYMRO (Paris) from 28% to 36% and in TECHFUND CAPITAL EUROPE (Paris) from 10% to 20% .

 

Changes in accounting principles

 

Regulation 00-06 of the “Comité de la Réglementation Comptable” relating to the accounting for liabilities was required to be adopted in 2002. The cumulative effect of this change in accounting principles as of January 1, 2002 is nil. The effect mainly relates to the recognition of restructuring accruals which are generally recognized later than under the previous French GAAP practice. Had the new accounting rules been applied retroactively, shareholders’ equity would have increased by an amount of € 118 million as of January 1, 2000 with a corresponding decrease in the restructuring reserve. Net income would have decreased by € 15 million and € 111 million respectively for the twelve months periods ended December 31, 2000 and December 31, 2001.

 

Reclassification in the presentation of Income Statements

 

In 2001, the Emerging Issues Task Force (EITF), issued EITF 01-09, which codified and reconciled EITF 00-14, EITF 00-22 and EITF 00-25. These EITF’s prescribe guidance regarding the timing of recognition and income statement classification of costs incurred for certain sales incentive programs to resellers and end consumers. The effect of this pronouncement on Thomson’s consolidated financial statements was a decrease in “net sales” of € 84 million, € 103 million and € 99 million respectively for the twelve month periods ended December 2002, 2001 and 2000, with a symmetrical change in “Selling, general and administrative expenses” for some cooperative advertising and promotion expenses previously classified under marketing expenses. There is consequently no impact on operating profit. Thomson elected to apply this rule, which is not specifically addressed under French GAAP, in order to limit the differences with the financial statements filed with the U.S. SEC.

 

Analysis by division

 

Digital Media Solutions

 

Consolidated net sales for the Digital Media Solutions division totaled € 2,686 million in 2002 compared with € 1,758 million in 2001. At constant 2001 exchange rates, consolidated net sales would have totaled € 2,814 million, an increase of 60% compared with 2001, attributable primarily to acquisitions of the year and a full year of operations for Technicolor.

 

This division, for which we reported results for the first time in 2001, combined our existing professional equipment business with the businesses that we acquired or formed during the first half of 2001, which include the Technicolor and Philips professional broadcast businesses. The acquisition in March 2002 of Grass Valley Group and in June 2002 of Panasonic Disc Services consolidated our position in the professional broadcast equipment and optical disc (DVD and CD) replication markets. A number of smaller acquisitions also focused on strengthening specific

 

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service capabilities and our geographical presence: post-production, DVD compression and authoring services in North America (Vidfilm and Still in Motion), VHS and optical disc replication in Australia (Southern Star Duplitek), distribution services in Canada (Victoria Films). On a constant scope of consolidation, consolidated net sales increased by 5.9% in 2002, or by 11% excluding currency effects.

 

Activity in the division’s core segments increased sharply during the year. Within Home Entertainment Services, 566 million DVD were replicated during the year, around three times last year volumes, as a result of rapidly growing demand for this entertainment format, with demand exceeding capacity. VHS replication volumes declined only by 3% in 2002 compared to last year. During 2002, DVD units represented 57% of video packaged media, as compared to 30% in 2001. The major releases in 2002 were Harry Potter, Ocean’s Eleven, Lord of the Rings, Minority Report, and Monsters’Inc. Increased packaging and distribution activity also contributed to growth in the year.

 

Within Technicolor’s Entertainment Services, Film replication remained strong with film footage up 4% compared to 2001, and exhibition print volumes up 32%. Post-production benefited from sharply higher volumes, notably in compression and authoring, preservation, sound and post-production activity.

 

In 2002, Broadcast net sales declined compared to 2001 reflecting a continued slow advertising market, that negatively affected Broadcaster’s equipment investments.

 

Operating income for the Digital Media Solutions division amounted to € 372 million in 2002 compared with € 242 million in 2001. The division’s profitability was negatively impacted by the translation of U.S. dollar denominated operating incomes into euros by € 19 million during the year. The division’s 2002 operating margin reached 13.9 % compared to 13.8% in 2001 driven by costs controls, the start of production moves to lower-cost facilities and facility consolidation in Home Entertainment and Creative and Theater Services, partially offset, as expected, by some price declines and lower profitability of the Panasonic Disc Services business acquired in June 2002, which still needs to be fully integrated within the division. The Broadcast Equipment segment remained profitable. Substantial progress was made in integrating the Grass Valley Group business, leading to improved operating results, especially during the last months of the year. Grass Valley has now been consolidated as the worldwide trademark and brand for Thomson’s professional broadcast equipment and services.

 

Displays and Components

 

Total net sales for the Displays and Components division amounted to € 2,224 million in 2002, including internal sales of € 664 million to the Consumer Products division. This represents a decrease in total net sales of 7.3% compared with € 2,398 million in 2001. Consolidated net sales for Displays and Components totaled € 1,560 million in 2002, a decrease of 5.1% compared with € 1,642 million in 2001. At constant 2001 exchange rates, consolidated net sales in 2002 would have totaled € 1,618 million, representing a decrease of 1.5% compared with 2001. This foreign exchange impact is mainly linked to the fall of the U.S. dollar compared to the euro in 2002.

 

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The 1.5% decrease in consolidated net sales at constant exchange rates reflected an increase of volumes in Europe and in China, offset by a decrease in the United States. Prices of large size tubes declined sharply, notably in North America, as significant competition from Asia imports of televisions impacted customers. Prices of very large size tubes remained more stable, with demand outstripping supply, notably for true flat. Volumes in North America were higher in large and very large sizes but decreased on a whole as Thomson exited the mid size tube business at the end of 2001. In Europe and Asia, volumes across all sizes increased, particularly in Asia, although price pressure stemming from a strengthening Euro resulted in broadly flat year-over-year sales. The Group gained value market shares both in North America and in Europe in large and very large size curved tubes.

 

Our optical components revenues increased during the first semester, but declined during the second as we had no revenues from games modules. The optical component activities were affected by significant price pressure, especially in the second part of the year, in core products such as optical drives for DVD players.

 

Operating income for the Displays and Components division amounted to € 84 million in 2002, compared with € 111 million in 2001. This decrease reflected primarily reduced net sales of the division resulting from a decline in tube net sales in the United States. This negative factor was partly offset by improved tube net sales in Europe and a reduced fixed and direct labor cost base. During the year, we took strong actions to contain costs and improve operational performance across all segments in the face of heavy pricing pressures, which allow us to improve our profitability semester after semester. Tubes profitability globally improved in the second semester. Profitability in Europe and China, for its first full year of operations, was maintained whereas the North American tube operations remained unprofitable, despite the improved mix and a first time contribution from Mexicali. The profitability of the optical components business was impacted by the DVD players volumes, especially at the end of the year and the lack of game consoles business in the second half.

 

In response to these operating conditions and in order to improve further the Displays and Components division’s cost structure, we continued the implementation of the TIGER reengineering program in North America in 2002, which aims to improve product mix, improve the division’s fixed cost structure and reduce overhead. In February 2003, we announced that the Group would reduce large screen picture tube output by approximately one-third in its Marion plant in the United States during the first quarter 2003, notably through the lay-off of one tube line in February 2003. In 2003, a large tube line will be fully operational in Mexicali, Mexico, where Thomson already produces very large size tubes, and in our Chinese production facilities a second production line will be installed during the second quarter 2003.

 

Consumer Products

 

Consolidated net sales for the Consumer Products division totaled € 5,444 million in 2002, a decrease of 16.8% compared with € 6,542 million in 2001. At constant exchange rates,

 

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consolidated net sales would have totaled € 5,686 million, a decrease of 13.1% compared with 2001.

 

Retail consumer products contributed to € 4,415 million to net sales in 2002, a decline of 13.2% from 2001, while Broadband Access Products contributed to € 1,029 million to net sales in 2002, a decline of 29.2% from 2001.

 

Retail consumer products

 

Key trends during the year were the successful launch of our higher-end Scenium range and the negative impact of increased competition from Asia. Overall revenues decreased largely due to slower overall market demand and increased competition. Progress was made in the higher-end segment, corresponding to the launch of the Scenium product range in autumn 2002 in the U.S market under RCA brand.

 

The Group noted impact on its Consumer Products—Retail activity of the labor dispute affecting U.S West Coast port deliveries in October and November 2002. This dispute resulted in lower sales and operating profits as well as higher inventories.

 

The TV business recorded value market share gains in higher-end-televisions and significant growth in sales of digital televisions. The improved product mix combined with the impact of strong cost-controls offset increased competition from lower priced imports, notably from Asia and for core value TVs, leading to increased profitability within the television business in the Americas. Revenues from television in Europe were stable compared to 2001 driven by volume and product mix improvements, which more than offset price pressures.

 

The Audio, Video and Communications businesses recorded market share gains and an improved mix offset price pressure and some areas of weaker demand, particularly in Audio. The U.S West Coast port dispute impact was felt mainly in these businesses, however, Audio, Video and Communications still improved profitability for the second half and the year.

 

The Accessories business improved operating results driven by mix, structure optimization associated with business relocation, and working capital improvements.

 

Broadband Access Products

 

The Broadband Access products activity suffered from continued weak demand in 2002, particularly in the Americas where the Group’s set-top-boxes sales decreased sharply compared to 2001. The Group sold 5.4 million decoders and cable modems (excluding DSL modems) worldwide in 2002 compared to 6.8 million in 2001. The integration of the UK decoder business (acquired from Grundig) in June 2002 was successful and over 400,000 decoders were sold during the second half of the year.

 

Consolidated operating income for the Consumer Products division totaled € 41 million in 2002, compared with € 138 million in 2001. The decrease in the Consumer Products’ division’s operating income in 2002 compared with 2001 reflected primarily reduced net sales for the division, in particular of the decoder business and core consumer electronics products in the Americas, partially offset by the positive effects of our repositioning strategy towards higher margin consumer electronics products (Scenium range) in the Americas, as well as strong cost controls and reduction in fixed and direct labor costs resulting from the implementation of the

 

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division’s restructuring and reengineering programs in the Americas and in Europe. Thus the contribution of Broadband Access Products to the Consumer Products division decreased by € 166 million to € 37 million, whereas the contribution of retail consumer electronics increased by € 69 million to € 4 million for the same period.

 

Patents and Licensing

 

Net sales from the Patents and Licensing division reached € 429 million in 2002 compared with € 395 million in 2001, an increase of 8.6%. At constant 2001 exchange rates, consolidated net sales would have totaled € 443 million in 2002, an increase of 12.2% compared to 2001. This performance reflects the success of the new programs launched during the year such as DVDs and Digital Set-Top-Boxes and the benefit of Thomson’s joining the MPEG LA patent pool in July 2002. Revenues from those sources more than offset volume declines in mainstream consumer products licensing programs. In 2002, Thomson filed 553 priority applications, an increase of 14.7% compared with 2001. 50% of the Division’s revenues in 2002 were from digital-based programs or sources.

 

Consolidated operating income for the division totaled € 387 million in 2002, an increase of € 49 million compared with 2001.

 

New Media Services

 

During 2002, the division benefited from the full year contribution of the ScreenVision U.S joint venture with Carlton, Val Morgan (acquired in September 2002) and ScreenVision Europe (acquired in June 2002). Our interactive television service TAK, launched in early 2001 was discontinued in 2002 and related services were transferred to a services provider.

 

The New Media Services division posted net sales of € 58 million in 2002, compared with € 44 million in 2001, out of which € 49 million related to the screen advertising activities.

 

The division recorded an operating loss of € 45 million in 2002, an improvement of € 37 million compared to 2001. This improvement results mainly from contributions from the U.S screen advertising businesses and cost-cutting efforts, and the recording of TAK operating loss as discontinued. These division’s remaining activities have been absorbed into other Group divisions in 2003.

 

Consolidated Results

 

Net sales

 

Consolidated net sales in 2002 totaled € 10,187 million, a decrease of 2% compared with € 10,391 million in 2001. At constant 2001 exchange rates, consolidated net sales increased by 2.3%. This revenue growth at constant exchange rates reflects the consolidation of the Digital Media Solutions division driven primarily by newly consolidated entities (Panasonic Disc Service

 

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Corporation, Southern Star Duplitek, Grass Valley Group, Vidfilm, Victoria Film, DSL modem business), as well as full year of revenues for Technicolor and also by organic growth programs and initiatives such as the TWICE program, aiming at doubling the Digital Media Solutions net sales by the end of 2004, and the consolidation of our customer base. On a constant scope of consolidation, consolidated net sales decreased by 11.9% in 2002, or by 8% at constant exchange rates.

 

Operating income

 

Cost of sales amounted to € 7,761 million in 2002, or 76.2% of net sales, a decrease of 4.4% compared with cost of net sales of € 8,116 million in 2001, or 78.1% of net sales. This positive performance was primarily attributable to strong gains in raw materials and finished goods sourcing.

 

As a result, gross margin was € 2,426 million in 2002, or 23.8% of net sales, compared with € 2,275 million in 2001, or 21.9% of net sales.

 

Selling and marketing expenses amounted to € 916 million or 9.0% of net sales in 2002, compared with € 888 million, or 8.5% of net sales in 2001. At constant 2001 exchange rate and constant scope of consolidation, the selling and marketing expenses decreased by 0.9%.

 

Administrative expenses amounted to € 418 million or 4.1% of net sales in 2002, compared with € 383 million, or 3.7% of net sales in 2001. On a constant scope of consolidation and at constant 2001 exchange rate, administrative expenses increased by 4.4% to € 400 million.

 

However, the selling and general administrative expenses fell in absolute terms by 2,8% during the second semester 2002 compared to the second semester 2001, and by 4% compared to the first semester 2002, due to strong cost controls throughout the Group in order to maintain its cost structure in the face of falling sales.

 

Research and development expenses net of external funding were € 374 million in 2002, an increase of 1.6% compared with € 368 million in 2001. External funding is comprised principally of grants from national or European Union (EU) government agencies and is accounted for as income based on the stage of completion of the project and is directly deducted from research and development costs. Excluding government agency subsidies of € 12 million in 2002 and € 15 million in 2001, research and development expenses were € 386 million in 2002 compared with € 383 million in 2001. For more information on the accounting treatment of research and development expenses, please refer to Note 4 to our consolidated financial statements.

 

As a result of the above factors, consolidated operating income reached € 718 million in 2002, or 7.0% of net sales, an increase of 13% compared with € 636 million in 2001, or 6.1% of net sales. This increase primarily reflects the success of the Group’s repositioning, and especially the expansion of its business with content owners through the Digital Media Solutions segment, which is showing strong organic growth with improved profitability.

 

·   Operating income under U.S. GAAP

 

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Under French GAAP, operating income was € 718 million in 2002 or 7.0% of net sales, an increase of € 82 million, as compared to operating income of € 636 million in 2001. Under U.S. GAAP, we recorded, in 2002, operating income of € 465 million compared to operating income of € 204 million in 2001.

 

There are material differences between French GAAP and U.S. GAAP. The difference in operating income as reported under U.S. GAAP versus French GAAP in 2002 resulted mainly from reclassifications and restatements related to restructuring reserves, pension plans interest costs, certain intangible assets amortization and accruals for a number of provisions which have different classifications under French and U.S. GAAP.

 

Reclassification and restatements due to differences in the criteria and the timing of recording restructuring provisions between U.S. GAAP and French GAAP represent € 140 million in 2002 compared to € 211 million in 2001.

 

Reclassifications of pension plans interest costs related to shut-down activities, included in the financial result under French GAAP and classified as operating expenses under U.S. GAAP amount to € 26 million in 2002 compared to € 20 million in 2001;

 

Excluding restructuring expenses, reclassifications from “Other income (expense), net” under French GAAP to “Operating income (loss)” under U.S. GAAP amount to € 10 million in 2002 and € 97 million in 2001.

 

Customer and supplier relationships having a finite useful-life are amortized under U.S. GAAP for an amount of € 26 million in 2002 whereas they are not under French GAAP.

 

Please refer to Note 31 and 32 to our consolidated financial statements for a further discussion of the principal differences between French and U.S. GAAP.

 

Financial result

 

Net interest income

 

Net interest income amounted to € 9 million in 2002, compared with a net interest expense of € 29 million in 2001. Net interest expense included primarily the interest on promissory notes issued to Carlton in connection with the acquisition of the Technicolor businesses and on the 1% convertible/exchangeable bonds issued in 2000 and 2002 (2000 OCEANE and 2002 OCEANE) and due respectively in 2006 and 2008. For more information on these convertible/exchangeable bonds, please refer to Note 21 to our consolidated financial statements. The change in net interest expense during 2002 in comparison to 2001 is mainly due to lower swap costs due to sharply lower U.S. dollar interest rates. The swap costs or income occur when we swap euro deposits of our European affiliates into U.S. dollar to lend to our U.S. affiliates.

 

Other financial expense

 

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Other financial expense totaled € 137 million in 2002, compared with € 160 million in 2001. Other financial expense in 2002 and 2001 primarily related to valuation allowances on other investments carried at the lower of cost or market value, generally investments in technology companies, and also included other expenses, such as pension plans interest cost in Germany and the United States related to shut-down activities. Please refer to Note 5 to our consolidated financial statements for additional information on other financial expense.

 

Other income and expense, net

 

Other income and expense represented a net expense of € 96 million in 2002, compared with net income of € 8 million in 2001.

 

Other income and expense also includes restructuring costs, nets, which were € 141 million in 2002 compared with € 107 million in 2001. Restructuring costs, nets, in 2002 mainly consist of:

 

    the TIGER program within the Displays and Components division for € 43 million relating to the closure of the Scranton tube plant in North America and the storage and digital modules activity.

 

    the continuation, notably in the United States, within the Consumer Products division, of the GROWL Program for productivity improvements for € 56 million, especially in manufacturing, sales, after-sales and accessories; and

 

    the continuation of the SAFE program for € 14 million within the communications manufacturing activity.

 

For more information on restructuring costs as they relate to our reengineering and restructuring programs please refer to Note 6 to our consolidated financial statements.

 

In 2002 and 2001 these amounts included gains on the disposal of investments, realized mainly from the disposal of shares of unconsolidated investments.

 

In 2002, the line “Other income (expense), net” also included fixed assets write-offs for € 15 million and the operating and restructuring costs of TAK activity, which has been discontinued in 2002 (€ 13 million).

 

For additional information on other income and expense, please refer to Notes 3 and 6 to our consolidated financial statements.

 

Amortization of goodwill

 

Goodwill amortization was € 78 million in 2002 compared with € 49 million in 2001. This increase reflects mainly the consolidation of the Panasonic Disc Services Corporation (€ 8

 

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million), Alcatel’s DSL activity (€ 7 million), and Grass Valley Group (€ 6 million).

 

Income tax

 

Income tax expense fell significantly in 2002 to € 56 million compared to € 139 million in 2001.

 

Pursuant to the provisions of the French Tax Code (article 209 quinquies) and in accordance with a tax agreement from the French tax authorities dated November 6th, 2002, Thomson S.A. (the parent company) files a worldwide consolidated tax return. This tax agreement has been retroactively applied as January 1, 2001 and will expire on December 31, 2005 unless renewed. Therefore, in 2002, the Group benefited from a refund related to its 2001 tax expense of € 33 million and from a lower current tax charge due to the worldwide tax consolidation.

 

In 2002, the Group recorded a net deferred tax asset of € 22 million. This amount includes in France a net of € 47 million corresponding to the recognition of a tax benefit related to long term capital losses and valuation allowances on ordinary tax rate deferred assets, and € (25) million related to foreign entities.

 

Our effective tax rate, defined as the ratio of income tax expense to consolidated income before taxes, goodwill amortization, minority interests and equity investments, was 11.3% in 2002 compared to 30.5% in 2001. For additional information, please refer to Note 7 to our consolidated financial statements.

 

Net income

 

Minority interests expense amounted to € 13 million in 2002 compared with € 22 million in 2001. The decrease of minority interest reflects mainly the improvement of ATLINKS net result in 2002.

 

As a result of the factors discussed above, we recorded net income of € 373 million in 2002 compared with € 286 million in 2001. Net income as a percentage of net sales reached 3.7%, compared with 2.8% in 2001.

 

Before amortization of goodwill, earnings per share reached € 1.63 in 2002, compared with € 1.22 in 2001, or an increase of 34%. Earnings per share take into account an increase in the average number of shares to 277.2 million shares in 2002 from 274.2 million in 2001 (after taking into account the issuance in March 2001 of redeemable bonds to Carlton which were redeemed in Thomson shares in 2002). Please refer to Notes 2 and 17 to our consolidated financial statements for more detailed information on these redeemable bonds.

 

·   Net income under U.S. GAAP

 

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Under U.S. GAAP we recorded net income of € 351 million in 2002 compared to € 191 million in 2001. The difference in net income under U.S. GAAP versus French GAAP in 2002 mainly relates to the accounting treatment of derivative instruments, the reversal of goodwill amortization recorded under French GAAP, and purchase price allocation and amortization of intangibles resulting from our recent acquisitions as well as pension and termination benefits.

 

There are material differences between French GAAP and U.S. GAAP. Please refer to Notes 31 and 32 to our consolidated financial statements for a further discussion on the principal differences between French and U.S. GAAP.

 

Results of Operations for 2001 and 2000

 

These comments on our 2001 and 2000 results present an analysis of net sales and operating income by division, followed by comments on our consolidated results.

 

Evolution of division structure

 

In 2001, Nextream was included in Digital Media Solutions. In 2002, it was managed as part of the Consumer Products division and our consolidated financial statements for 2001 and 2000 have been restated accordingly.

 

Changes in scope of consolidation

 

Effective January 1, 2001, we acquired 66.67% of the outstanding common stock of BTS Holding International B.V., under which Philips’ professional broadcast activities are grouped, and have consolidated this business since that date.

 

On February 15, 2001, we and Alcatel joined our interactive video network equipment activities by contributing our respective assets into Nextream, a business of which we hold 75% and Alcatel 25%. We have the control of the business and began consolidating this activity on February 15, 2001.

 

On March 16, 2001, we acquired the Technicolor businesses, which comprised 70 legal entities and involved the direct acquisition of all the shares of five holding companies. We started consolidating these activities on March 17, 2001. Refer to Note 2 to our consolidated financial statements for further information.

 

On July 31, 2001, we acquired 100% of a company called “Miles O’ Fun”, an audio post-production company which complements our post-production businesses acquired with Technicolor. We started consolidating this company at that date.

 

The above mentioned changes in scope of consolidation affected our Digital Media Solutions division and had a material impact on our results of operations in 2001. Changes in scope of consolidation are analyzed in further detail in Note 2 to our consolidated financial statements.

 

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In July 2001, we and Carlton joined our screen advertising business into a 50-50 joint venture called “Technicolor Cinema Advertising” in the United States (doing business as “ScreenVision”). We have joint control over the venture with Carlton. We began consolidating this company using the pro rata consolidation method in July 2001. This joint venture was included in the New Media Services division in 2001.

 

On December 17, 2001, we acquired from Alcatel its DSL modem activity and started consolidating this activity at January 1, 2002.

 

Changes in accounting principles

 

Until January 1, 2001, we amortized our RCA® trademark over 20 years. Beginning 2001 we adopted the policy of not amortizing intangible assets with indefinite economic life (excluding goodwill) in order to conform with the accounting method widely used in France. The RCA® trademark is the only previously amortized intangible asset that is no longer being amortized. Such intangibles are subject to an impairment test when there is indication of decline in value. The change in amortization has been accounted for prospectively, and previously recorded as accumulated amortization charges have not been reversed. If the same amortization policy had been used in 2000, cost of sales would have been reduced by € 4.1 million.

 

Analysis by division

 

Digital Media Solutions

 

Consolidated net sales for the Digital Media Solutions division totaled € 1,758 million in 2001 compared with € 62 million in 2000. This division, for which we reported results for the first time in 2001, combined our existing professional equipment and the businesses that we acquired or formed during the first half of 2001, which include the Technicolor and Philips Broadcast businesses. Due to the acquisition dates of the Technicolor businesses, the division’s results for 2001 reflect the results of these businesses for only part of the year. For the acquisition dates of these businesses, please refer to “—Changes in scope of consolidation” above.

 

The businesses in the Digital Media Solutions division posted positive net sales performance with the exception of Broadcast Solutions. More particularly, compared to 2000, Technicolor posted a 6% year-on-year unit growth in pre-recorded DVD and videocassette shipments. This increase in DVD and videocassette sales volumes primarily resulted from an increase in DVD unit sales compared to the previous year driven by major releases of new movies such as Shrek and Pearl Harbor and the increase in DVD catalog titles, which more than offset a gradual decline in videocassette sales volumes. The increase in DVD sales volumes also more than offset the reductions in average selling prices of DVDs. In addition, Technicolor content services net sales were stable despite the negative impact of the Hollywood Screen Actors Guild dispute and the effect of the events of September 11, which resulted in the postponement of certain box-office releases.

 

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In 2001, Broadcast Solutions net sales were negatively impacted by a difficult advertising environment for broadcasters, to which was added the negative effect of the events of September 11 which led to a significant reduction in their equipment investments. However, Broadcast Solutions maintained its global value market share positions in 2001.

 

Operating income for the Digital Media Solutions division amounted to € 242 million in 2001 compared with an operating loss of € 10 million in 2000. This performance mainly reflects the consolidation of the Technicolor and Philips Broadcast businesses but also increases in DVD shipment volume, economies of scale and operational synergies during the period, which more than offset the significant average unit price reductions in DVDs.

 

Displays and Components

 

Total net sales for the Displays and Components division amounted to € 2,398 million in 2001, including internal sales of € 756 million to the Consumer Products division. This represents a decrease in total net sales of 6.0% compared with € 2,550 million in 2000. Consolidated net sales for Displays and Components totaled € 1,642 million in 2001, a decrease of 2.6% compared with € 1,686 million in 2000. At constant 2000 exchange rates, consolidated net sales in 2001 would have totaled € 1,615 million, representing a decrease of 4.2% compared with 2000. This foreign exchange impact is mainly linked to the rise of the U.S. dollar compared to the euro in this period.

 

The 4.2% decrease in consolidated net sales, at constant exchange rates, reflected a decrease of 5.8% in sales volumes, primarily attributable to the difficult tube market in the United States. This negative factor was partially offset by an increase of 1.7% in average selling prices for the division in 2001 resulting mainly from a product mix improvement in our tube and optical component businesses.

 

Following strong demand in 2000, net sales in the tube business in North America were severely impacted by overcapacity in all segments, compounded by a weak general economic environment, which led to significant price decreases. In the context of these very difficult market conditions, we pursued our repositioning towards high-end tubes, increasing our value market share in the higher margin, very large tube size segment in the United States by approximately three percentage points. Tube net sales continued to grow in Europe, reflecting an 11% increase in large and very large-size tube unit sales and resulting in a one percentage point gain in value market share.

 

The optical components business posted net sales growth driven by sales of Xbox modules to Microsoft at the end of the year.

 

Operating income for the Displays and Components division amounted to € 111 million in 2001, compared with € 262 million in 2000. This decrease reflected primarily reduced net sales of the division resulting from a decline in tube net sales in the United States. This negative factor was partly offset by improved tube net sales in Europe and a reduced fixed and direct labor cost base.

 

In addition, our tube activity operations in the United States were impacted by a significant

 

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temporary interruption in a glass production line in our Circleville, Ohio plant related to defects in components, for which we filed an insurance claim.

 

In response to these operating conditions and in order to improve further its cost structure, we accelerated the implementation of the TIGER reengineering program in North America in 2001, which aims to improve product mix, improve the division’s fixed cost structure and reduce overhead. In July 2001, we closed our large tube manufacturing facility in Scranton (Pennsylvania). Additionally, in October 2001, we discontinued mid-size tube production at our Marion, Indiana facility. Finally, in December 2001, we closed our Mexico City production facility in order to discontinue our remaining mid-size tube production as well as concentrate gun production at our other sites. At the same time, we completed the construction of our very-large size tube production plant in Mexicali, Mexico, which started production in January 2002 and at which production ramped up during 2002.

 

Consumer Products

 

Consolidated net sales for the Consumer Products division totaled € 6,542 million in 2001, a decrease of 4.5% compared with € 6,849 million in 2000.

 

This decrease reflects a 4% decline in sales volumes, primarily attributable to lower television and VCR sales in the United States. In 2001, average selling prices for the division decreased by 2%, resulting from significant price reductions on certain product categories offset in part by an improvement in product mix. In particular, residential communication products, DVD players and cable modems experienced significant price reductions, while the positive development in the product mix was driven by unit sales growth in high-end products, notably in televisions in Europe and in audio products in the Americas.

 

Retail consumer electronics products

 

Following a very dynamic year in 2000, net sales in the television and video activity in the United States were affected by difficult market conditions for mainstream product categories, including VCRs and analog televisions, despite significant growth in digital product markets, such as for DVD players, and in certain high-end television markets, such as for projection televisions. In particular, the digital television and the DVD player markets in the United States increased in volume. Net sales in the United States were also negatively impacted by our decision in 2001 to carefully privilege price over sales volumes to protect our operating income. The weak performance in the United States was partly offset by increases in television and video net sales in Europe, resulting in continued value market share gains of the THOMSON® brand, with particularly strong improvement in projection televisions (increase of four percentage points in value market share).

 

Audio product net sales continued to grow in the United States and in Europe, gaining approximately one percentage point in value market share in the United States, while ATLINKS net sales were slightly down despite an approximate one percentage point gain in value market share in the United States.

 

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Broadband Access Products

 

Broadband Access Products net sales were impacted by a decline in sales to DIRECTV subscribers in the United States. However, net sales for our decoder operations in Europe and for cable modems in the United States continued to grow significantly. Unit sales of decoders and cable modems combined were 6.8 million in 2001, unchanged in comparison with 2000. Following an exceptional year in 2000, the decline in DIRECTV system unit sales in the United States in 2001 was partly offset as we gained approximately 4 percentage points in volume market share with DIRECTV, resulting in a 57% volume market share with this operator for 2001. This decline in the United States was partially offset by the strong performance in decoder sales in Europe, primarily to Canal+, and continued growth in cable modem unit sales in the United States. Nextream’s activities were negatively impacted by very difficult market conditions in 2001.

 

Consolidated operating income for the Consumer Products division totaled € 138 million in 2001, compared with € 185 million in 2000. The decrease in the Consumer Products division’s operating income in 2001 compared with 2000 reflected primarily reduced net sales for the division, in particular of the decoder business in the Americas, partly offset by the positive effects in Europe of our repositioning strategy towards higher margin consumer electronics products. The impact of reduced net sales on 2001 operating income was only partly offset by a reduction in fixed and direct labor costs resulting from the implementation of the division’s restructuring and reengineering programs in the Americas and in Europe. Within the division, Broadband Access Products recorded significantly higher profitability levels than other Consumer Products categories.

 

Patents and Licensing

 

Net sales from the Patents and Licensing division reached € 395 million in 2001 compared with € 378 million in 2000, an increase of 4.5%. At constant 2000 exchange rates, consolidated net sales would have totaled € 370 million in 2001, a decrease of 2.1% compared to 2000. This performance reflects the impact of foreign exchange variations largely attributable to the conversion of U.S. dollars into euro as well as the negative impact of the softening of worldwide industry sales volumes, particularly in the second and third quarters of the year. In 2001, Thomson filed 482 priority applications, an increase of 12% compared with 2000.

 

Consolidated operating income for the division totaled € 338 million in 2001, an increase of € 19 million compared with € 319 million in 2000.

 

New Media Services

 

We have enlarged the scope of our New Media Services division to take into account our repositioning towards media customers. Previously, the division was focused solely on the field of interactive television revenues from a consumer-orientated customer base. Thomson actively pursued a number of initiatives with business customers that have complemented and broadened our existing activities in this field.

 

The New Media Services division posted net sales of € 44 million in 2001, compared with € 9

 

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million in 2000. This amount includes € 24 million generated by ScreenVision, the in-theater advertising business developed by Technicolor and integrated into the division in 2001. In addition, we pursued two initiatives, namely the deployment of televisions equipped with on-screen electronic program guides (EPGs) in the United States and through TAK®, the interactive television service we launched in France in early 2001. At the end of 2001, we had an installed base of 6.5 million RCA® televisions equipped with electronic program guides in the United States, which enabled sales of advertising space to broadcasters and corporate advertisers.

 

The division recorded an operating loss of € 82 million in 2001, a level comparable with 2000. This level was maintained by tightly controlling the costs incurred in connection with the deployment of the two above-mentioned initiatives.

 

Consolidated Results

 

Net sales

 

Consolidated net sales in 2001 totaled € 10,391 million, an increase of 15.5% compared with € 8,995 million in 2000. At constant 2000 exchange rates, consolidated net sales increased by 13.5%. This revenue growth reflects the development of the Digital Media Solutions division driven by newly integrated entities (Technicolor, Philips Broadcast, Nextream). On a constant scope of consolidation, consolidated net sales decreased by 3.5% in 2001.

 

Operating income

 

Cost of sales amounted to € 8,116 million in 2001, or 78.1% of net sales, an increase of 17.4% compared with cost of net sales of € 6,915 million in 2000, or 76.9% of net sales. This negative performance in terms of cost of sales as a percentage of net sales was primarily attributable to our inability to adjust our cost of net sales in our Displays and Components and Consumer Products divisions to the decrease in net sales in those divisions.

 

As a result, gross margin was € 2,275 million in 2001, or 21.9% of net sales, compared with € 2,080 million in 2000, or 23.1% of net sales.

 

Selling and marketing expenses amounted to € 888 million or 8.5% of net sales in 2001, compared with € 899 million or 10.0% of net sales in 2000. This improvement reflected a 7% decrease in selling and marketing expenses on a constant scope of consolidation and the integration of the entities acquired in 2001 that recorded lower ratios of selling and marketing expenses on net sales.

 

Administrative expenses amounted to € 383 million or 3.7% of net sales in 2001, compared with € 284 million or 3.2% of net sales in 2000. This increase was principally driven by the integration of the entities acquired in 2001, which presented higher ratios of administrative expenses on net sales. On a constant scope of consolidation, administrative expenses declined by 3.2% to € 275 million.

 

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Research and development expenses net of external funding were € 368 million in 2001, an increase of 5% compared with € 351 million in 2000. External funding is comprised principally of grants from national or European Union government agencies and is accounted for as income based on the stage of completion of the project and is directly deducted from research and development costs. Excluding government agency subsidies of € 15 million in 2001 and € 14 million in 2000, gross research and development expenses were € 383 million in 2001 compared with € 365 million in 2000. For more information on the accounting treatment of research and development expenses, refer to Note 4 to our consolidated financial statements.

 

As a result of the above factors, consolidated operating income reached € 636 million in 2001, or 6.1% of net sales, an increase of 16.5% compared with € 546 million in 2000, or 6.1% of net sales. This increase primarily reflects the integration of the entities acquired in 2001, which recorded higher operating income as a percentage of net sales. On a constant scope of consolidation, operating income amounted to € 379 million in 2001, a decrease of 31% compared with € 546 million in 2000.

 

·   Operating income under U.S. GAAP

 

Under French GAAP, operating income was € 636 million in 2001 or 6.1% of net sales, an increase of € 90 million, as compared to an operating income of € 546 million in 2000. Under U.S. GAAP, we recorded an operating income of € 204 million compared to an operating income of € 284 million in 2000.

 

There are material differences between French GAAP and U.S. GAAP. The difference in operating income as reported under U.S. GAAP versus French GAAP in 2001 resulted mainly from restatements related to restructuring provisions and to accruals for a number of provisions which have different classifications under French and U.S. GAAP.

 

    Reclassification of restructuring costs from “Other income (expense), net” under French GAAP to “Operating income (loss)” under U.S. GAAP amounts to € 107 million in 2001 and € 105 million in 2000.

 

    Restatements generated mostly by timing differences between restructuring cost recognition under U.S. GAAP and under French GAAP. The timing differences generated increases of restructuring costs for an amount of € 104 million in 2001 and € 11 million in 2000 under U.S. GAAP as compared to French GAAP.

 

In 2001, the substantial reassessment of our product portfolio, resulting in finished goods and raw material inventory and fixed asset write-offs and cancellation of purchase orders and other contracts, is included under “Other income (expense), net” under French GAAP. Under U.S. GAAP these costs (€ 64 million) are recorded under “Operating expenses”.

 

Under French GAAP, goodwill amortization is excluded from results of operations. Under U.S. GAAP, goodwill amortization is classified as part of operating income. The amounts represent € 49 million in 2001 and € 7 million in 2000.

 

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Our operating income under U.S. GAAP was also affected by the accounting treatment of certain advantages granted by TSA to our employees in connection with the employee share offerings of 1999 and 2000 (an expense of € 78 million in 2000 and a gain of € 48 million in 2001). Since TSA bore the cost of these advantages, they do not represent actual cash expenses for the Group.

 

Please refer to Notes 31 and 32 of our consolidated financial statements for a further discussion of the principal differences between French and U.S. GAAP.

 

Financial result

 

Net interest expense

 

Net interest expense amounted to € 29 million in 2001, compared with € 10 million in 2000. Net interest expense included primarily the interest on promissory notes issued to Carlton in connection with the acquisition of the Technicolor businesses and interest expense relating to the 1% convertible/exchangeable bonds issued in 2000 and due in 2006 (obligations à option de conversion ou d’échange en actions nouvelles, or “2000 OCEANE”).

 

Other financial expense

 

Other financial expense totaled € 160 million in 2001, compared with € 67 million in 2000. Other financial expense in 2001 included primarily depreciation accruals on other investments (unconsolidated investments), generally in technology companies. Other financial expense also included other charges, such as pension plans interest costs in Germany. Please refer to Note 5 to our consolidated financial statements for additional information on other financial expense.

 

Other income and expense

 

Other income and expense represented a net gain of € 8 million in 2001, compared with a net expense of € 81 million in 2000. In 2001 this amount included gains on the disposal of investments, realized mainly from the disposal of shares of unconsolidated investments and the liquidation of related hedges.

 

Other income and expense also includes restructuring costs, which were € 107 million in 2001 compared with € 105 million in 2000. Restructuring costs in 2001 reflect mainly:

 

    the acceleration of the TIGER program within the Displays and Components division for € 63 million for measures aimed at optimizing industrial capacity and reduction of structural costs;

 

    the continuation in the United States, within the Consumer Products Division, of the GROWL Program for productivity improvements for € 27 million; and

 

    the continuation of the SAFE program for € 25 million, principally related to the exit of certain ATLINKS specific businesses and the closure of a manufacturing plant in Germany.

 

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These accruals have been offset by reversals in provisions. For more information on restructuring costs as they relate to our reengineering and restructuring programs refer to Note 6 to our consolidated financial statements.

 

In 2001, the line item “Other income (expense), net” also included expenses related to a reassessment of our product portfolio. We made the decision to carry out this substantial and extensive reassessment of our product portfolio during the year, which related principally to products not within the core of our activities or for which the outlook for profitability was limited. Ordinary adjustments to our product portfolio would have been reflected in operating income. The costs of this reassessment (€ 48.5 million) and the depreciation of related assets (€ 16.4 million) were recorded under “Other income (expense), net”. “Other income (expense), net” also included other items, notably a gain (€ 35 million) related to the sale of a derivative instrument acquired in 2000 and for which the underlying contract was terminated during 2001.

 

For additional information on other income and expense refer to Notes 3 and 6 to our consolidated financial statements.

 

Amortization of goodwill

 

Goodwill amortization was € 49 million in 2001 compared with € 8 million in 2000. This increase reflects mainly the acquisition of Technicolor, which resulted in amortization of goodwill in the amount of € 30 million beginning March 17, 2001.

 

Income tax

 

Income tax expense of € 139 million was recorded in 2001, compared with a gain of € 1 million in 2000.

 

The consolidation of the Technicolor businesses and the expiration of a tax indemnification agreement with TSA contributed to an increase of € 37 million in current income tax, which was € 142 million in 2001. As a result of the termination of this agreement, no tax indemnification amount was received in 2001. TSA paid us € 82 million in respect of the 2000 fiscal year (including € 31 million in respect of a tax gross-up payment provided for in this agreement).

 

In addition, the amount of deferred income tax amounted to a gain of € 3 million in 2001 compared to a gain of € 106 million in 2000, which included € 25 million due to timing differences and € 81 million on valuation allowance reversals concerning deferred tax assets. In 2001, we incurred income tax expenses mainly in France, the United States, the United Kingdom, Brazil, Poland, Mexico, Netherlands and Singapore.

 

Our effective tax rate, defined as the ratio of income tax expense to consolidated income before taxes, amortization of goodwill and equity investments, was 30.5% in 2001. For additional information, please refer to Note 7 to our consolidated financial statements.

 

Net income

 

Minority interests represented a net loss of € 22 million in 2001 compared with a net loss of €

 

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18 million in 2000.

 

As a result of the factors discussed above, particularly income taxation, we recorded net income of € 286 million in 2001 compared with € 394 million in 2000. Net income as a percentage of net sales reached 2.7%, compared with 4.3% in 2000.

 

Before amortization of goodwill, earnings per share reached € 1.22 in 2001, compared with € 1.59 in 2000, or a decrease of 23%. Earnings per share takes into account an increase in the average number of shares, which increased to 274.2 million shares in 2001 from 252.0 million in 2000 (after taking into account the two-for-one stock split realized on June 16, 2000) as a result of the October 2000 capital increase and the issuance in March 2001 of redeemable bonds to Carlton reimbursable into newly issued shares reserved for Carlton which have been recorded under “other equity” in shareholder’s equity. Please refer to Notes 2 and 17 to our consolidated financial statements for more detailed information on these redeemable bonds.

 

·   Net income under U.S. GAAP

 

Under U.S. GAAP we recorded net income of € 191 million in 2001 compared to € 136 million in 2000. There are material differences between French GAAP and U.S. GAAP. The difference in net income under U.S. GAAP versus French GAAP in 2001 resulted mainly from restatements related to restructuring, certain advantages in connection with employee share offerings, the accounting treatment of investment securities and financial instruments, revenue recognition, purchase price allocation and amortization of intangibles resulting from our acquisition of the Technicolor businesses, post-retirement transition obligations and minority interests.

 

Please refer to Notes 31 and 32 of our consolidated financial statements for a further discussion on the principal differences between French and U.S. GAAP.

 

Liquidity and Capital Resources

 

Cash Flows

 

    

2000


    

2001


    

2002


 
    

(€ in millions)

 

Cash flow from operating activities

  

410

 

  

1,005

 

  

1,104

 

Cash flow used in investing activities

  

(398

)

  

(1,173

)

  

(1,716

)

Cash flow from financing activities

  

1,413

 

  

(34

)

  

540

 

Net increase (decrease) in cash and cash equivalents

  

1,370

 

  

(240

)

  

(69

)

 

Cash flow from operating activities

 

Cash flow from operating activities reached € 1,104 million at the end of 2002, a 10% increase compared to 2001.

 

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This year-on-year change reflects increased operating profit and a reduction in other current assets and liabilities.

 

The cash flow generated by improved management of operating working capital, defined as inventories plus trade and other receivables, net, less trade accounts, notes payables and accrued expenses reached € 417 million compared to € 509 million in 2001.

 

This reflects the capabilities of the Group to further generate cash from its operating working capital (especially within the Consumer Products and Displays and Components divisions) through an improved management of inventories and receivables. We follow closely the ratio of operating working capital to net sales, because we believe it is a good indicator of the efficiency of our business operations from a cash flow perspective. At year-end 2002, our ratio of operating working capital to net sales decreased significantly to 13.3% from 17.1% at the end of 2001. In 2002, the main progress was made in trade and other receivables, with a substantial reduction in overdues. Inventories also decreased by € 155 million to represent 9.1% of the Group net sales, as compared to 10.4% at the end of 2001.

 

Cash flow used in investing activities

 

Cash flow used in investing activities totaled € 1,716 million in 2002, compared with € 1,173 million in 2001.

 

This increase reflects the acquisitions made in 2002, primarily of Panasonic Disc Service Corporation and Grass Valley and the first installment of the promissory notes due to Carlton for the acquisition of Technicolor, representing € 178 million (including the related interest).

 

Financial investments reached € 1,273 million in 2002, compared with € 1,022 million in 2001. For more information on the cash flow used for the acquisition of investments, please refer to Note 24 to our consolidated financial statements.

 

Net capital expenditures (defined as capital expenditures net of proceeds from disposal of fixed assets) amounted to € 592 million in 2002, compared with € 336 million in 2001.

 

Capital expenditures amounted to € 608 million in 2002, compared with € 499 million in 2001 with spending on intangible fixed assets reaching € 90 million. Spending on tangible fixed assets (largely DVD replication production lines, the tube production line in Mexico, and investments in glass and true flat tube production capacity) reached € 518 million in 2002.

 

Proceeds from fixed asset disposals totaled € 16 million in 2002, compared with € 163 million in 2001. In 2001, disposals of fixed assets included the € 138 million positive cash impact from the lease-back contracted for the tube manufacturing equipment at our Polkolor plant located in Piaseczno, Poland. Further details on this lease-back transaction are provided in “—Financial resources” below and in Note 25 to our consolidated financial statements.

 

Cash flow from financing activities

 

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Cash flow generated by financing activities was € 540 million in 2002, compared with € 34 million used by financing activities in 2001. In March 2002, we issued € 600 million of 1% convertible/exchangeable bonds (2002 OCEANE) due in 2008 for the development of our activities, including through acquisitions, as well as for general corporate purposes. In 2001, the amount primarily reflects repayment of our short-term debt of € 446 million and new short-term borrowings of € 449 million.

 

Financial resources

 

At the end of 2002, we had a net debt position (financial debt minus cash and cash equivalents), of € 231 million, compared with a net deposit position of € 401 million at the end of 2001. Our financial debt totaled € 1,694 million at the end of 2002 (including convertible/exchangeable bonds for € 1,414 million), compared with € 1,131 million at the end of 2001. Financial debt does not include promissory notes of U.S.$ 481 million (including accrued interest) due to Carlton for our acquisition of Technicolor, which are included in “Debt related to Technicolor acquisition”. We have the option of paying half of this amount in Thomson shares. On the first and second installment payments of the promissory notes in March 2002 and March 2003 respectively we paid the entire amounts in cash. Note 25 to our consolidated financial statements and the section “Contractual obligations and commercial commitments” below contain information about our off-balance sheet commitments. Cash and cash equivalents were € 1,463 million at the end of 2002, compared with € 1,532 million at the end of 2001.

 

At the end of 2002, we had committed undrawn credit facilities of € 1.192 billion with a consortium of banks, consisting of a € 392 million tranche maturing in December 2003 and of two tranches of € 400 million each maturing in December 2004 and 2006 respectively. Furthermore we have negotiated uncommitted credit lines from unaffiliated third-party lenders amounting to approximately € 1.331 billion of which € 105 million had been used as of December 31, 2002 for borrowings.

 

We put in place a new securitization program in the United States in December 2002 to increase further our financial flexibility. The program replaced a previous one, which matured in October 2002. The securitization program allows for the sale of our U.S. commercial receivables up to a maximum of U.S.$ 300 million (€ 286 million at the December 31, 2002 closing rate), increased from U.S.$ 225 million under the previous program. As of December 31, 2002, we had no outstanding receivable sales under this securitization program.

 

In 2000, in order to finance the construction and equipping of our television tube manufacturing facility in Mexicali, Mexico, we entered into a synthetic lease for an original amount of U.S.$ 257.5 million. At December 31, 2002, after repayment of principal, the amount outstanding was $ 247.3 million (€ 235,7 million at the December 31, 2002 closing rate), which includes U.S.$ 241.4 million (€ 230.1 million at the December 31, 2002 closing rate) relating to buildings and equipment, disclosed as an off-balance sheet commitment, and U.S.$ 5.9 million (€ 5.6 million at the December 31, 2002 closing rate) relating to land, considered as a capital lease and recorded as long-term debt. Under the terms of this seven-year lease, the manufacturing facility is owned by a special purpose entity in which Thomson has no interest. At the end of the term of the lease, we may opt to (i) purchase the manufacturing facility at its expected fair market

 

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value, calculated as the original price (U.S.$ 257.5 million) less amortization (this price changes over time), (ii) renew the lease, or (iii) return the facility to the lessor and arrange for its sale. Future minimum lease payments under the lease (through 2007) are € 67 million.

 

In December 2001, our wholly-owned subsidiary in Poland, Thomson Polska, entered into a sale-leaseback arrangement for a tube manufacturing equipment in our Polish tubes plant, generating € 138 million of cash flow (corresponding to the original fair value of the equipment at the transfer date) which was used by Thomson Polska to repay debt. Under the terms of this sale-leaseback, the manufacturing equipment is owned by a special purpose entity. Over the term of the lease, Thomson will continue to use the equipment, and Thomson Polska make lease payments of up to 22%, in the aggregate, of the original fair value of the equipment. At the end of the 5-year term of the leaseback, Thomson Polska may opt to (i) purchase the manufacturing equipment at its original fair value (€ 138 million), or (ii) arrange for the sale of the equipment to a third party. If Thomson Polska arranges for the sale of the equipment, the special purpose entity will be entitled to the proceeds of the sale, as well as a payment from Thomson Polska for the difference between the proceeds and the Original Fair Value, such amount not exceeding 87% of the Original Fair Value.

 

For more information on these leases, please refer to Note 25 to our consolidated financial statements.

 

We expect to fund the continued active development of the Group using our available cash and our cash flow from operating activities and to the extent appropriate, through borrowings from our available credit facilities or by accessing the capital markets.

 

Our cash on hand and access to other sources of funds is sufficient to meet our anticipated operating and capital expenditure requirements and the development of our strategic repositioning.

 

Contractual obligations and Commercial commitments

 

The two tables presented below provide information regarding contractual obligations and commercial commitments as of December 31, 2002 for which we are obliged to make future cash payments. These tables include firm commitments that would result in unconditional or contingent future payments, but exclude all options Thomson held since the latter are not considered as firm commitments or obligations. When an obligation leading to future payments can be cancelled through a penalty payment, the future payments included in the tables are those that management has determined most likely to occur given the two alternatives.

 

Guarantees given by entities of the Group securing debt, capital leases, operating leases or any other obligations or commitments of other entities of the Group are not disclosed as the related obligations are already included in the two tables below.

 

For more information regarding the terms and characteristics of our financial debt, including breakdown of maturity, currency and interest rate, please refer to Note 21 to our consolidated financial statements.

 

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Contractual Obligations


  

2001

Total


  

2002

Total


    

Amount of commitments expiring per period


                

Less than 1 year


    

> 1 and =< 5 years


    

After 5 years


    

(€ in millions)

Financial debt(1)

  

1,158

  

1,694

    

262

    

832

    

600

Debt related to Technicolor acquisition(1)

  

705

  

459

    

153

    

306

    

—  

Unconditional Future Payments

                              

Capital leases(2)

  

11

  

11

    

4

    

1

    

6

Operating leases(3)

  

549

  

588

    

119

    

313

    

156

Unconditional purchase obligations:

                              

—Financial investments(4)

  

62

  

322

    

259

    

61

    

2

—Property, plant & equipment

  

4

  

47

    

46

    

—  

    

1

    
  
    
    
    

Total

  

66

  

369

    

305

    

61

    

3

    
  
    
    
    

Other long-term obligations(5)

  

130

  

108

    

54

    

54

    

—  

Contingent Future Payments

                              

Guarantees given

  

108

  

2

    

1

    

1

    

—  

Other conditional obligations

  

198

  

—  

    

—  

    

—  

    

—  


(1)   Financial debt (Note 21 to our consolidated financial statements) and debt related to Technicolor acquisition (Note 23 to our consolidated financial statements) are reported for their principal amounts and accrued interest as of December 31, 2002. Future interest expense and the impact of interest rate swaps are not reported in this table. Currency swaps, hedging operations and foreign exchange options are described below in a separate table.
(2)   Capital leases relate mainly to building and equipment leases.
(3)   Operating leases are described below in Note 25 to our consolidated financial statements
(4)   Unconditional purchase obligations to buy financial investments are as follows:
  -   Thomson has an obligation to purchase from Alcatel its 50% interest in the ATLINKS joint venture. Agreement was reached in January 2003 involving a cash payment by Thomson of € 68 million in return for inter alia the 50% stake.
  -   Thomson has commitments to make payments to customers in its Digital Media Solutions Division through June 2004 for a total amount of € 143 million.
  -   In 2002 Thomson reached an agreement to purchase from Canal + Group its 89% interest in Canal + Technologies for an amount of € 190 million in 2003, of which a € 90 million advance was paid in 2002. As of December 31, 2002 the remaining commitment amounts to € 100 million of which a further amount of € 80 million was paid in 2003 and the balance of € 20 million will be paid subject to certain post-closing adjustments.
(5)   Other long-term obligations relate mainly to information technology service agreements and general sponsoring agreements entered into in the United States.

 

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Commercial Commitments


  

2001

Total


  

2002

Total


    

Amount of Commitments Expiring per period


          

Less than 1 year


    

> 1 and =< 5 years


    

After 5 years


    

(€ in millions)

Unconditional Future Payments

                              

Royalties(1)

  

100

  

60

    

14

    

46

    

—  

Contingent Future Payments

                              

Guarantees given(2):

                              

—to suppliers

  

24

  

1

    

1

    

—  

    

—  

—for legal court proceedings and custom duties

  

30

  

52

    

11

    

7

    

34

—other

  

15

  

49

    

42

    

7

    

—  

    
  
    
    
    

Total

  

69

  

102

    

54

    

14

    

34

    
  
    
    
    

Commercial purchase obligation(3)

  

—  

  

235

    

140

    

87

    

8

Standby letters of credit(4)

  

101

  

82

    

80

    

2

    

—  

Other commercial commitments

  

—  

  

18

    

10

    

7

    

1


(1)   Royalties to be paid for which future amounts are fixed. Royalties to be paid for which the amount is based on a per unit basis are not included except if a fixed minimum amount will be charged. These are mainly related to licensing fee agreements.
(2)   Guarantees given for legal court proceedings secure the future payment we would be obliged to make in case of unfavorable determination of the proceeding. For information regarding contingencies related to legal proceedings and environmental matters please refer to Note 28 to our consolidated financial statements. Other guarantees given relate mainly to guarantees given to our customers.
(3)   Commercial purchase obligations include mainly commitments to buy advertising space in the cinema industry.
(4)   Standby letters of credit relate mainly to guarantees in favor of suppliers.

 

Commitments related to financial instruments held by the Group generate both future cash payments and receipts. Therefore these commitments, as well as options, have not been disclosed in the two tables above. These commitments, as well as options, are disclosed in the following table for their related cash inflow and outflow amounts.

 

    

2001


  

2002


    

(€ in millions)

Currency swaps

  

1,308

  

1,609

Forward exchange contracts

  

649

  

957

Interest rate swaps

  

3

  

95

Foreign exchange options

  

28

  

16

    
  

Total commitments given

  

1,988

  

2,677

    
  

Currency swaps

  

1,300

  

1,680

Forward exchange contracts

  

650

  

988

Interest rate swaps

  

3

  

95

Foreign exchange options

  

27

  

16

    
  

Total commitments received

  

1,980

  

2,779

    
  

 

In addition to the commitments mentioned above, the Group has unrecognized retirement benefit obligations amounting to € 193 million, € 121 million and € 55 million as of December 31, 2002,

 

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2001 and 2000. These concern Germany for € 34 million, the United States for € 151 million and France for € 8 million, and are discussed in note 18 to our consolidated financial statements.

 

Guarantees and commitments received amount to € 23 million, € 35 million, and € 55 million as of December 31, 2002, 2001 and 2000.

 

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ITEM 6—DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A—Directors and Senior Management

 

Board of Directors

 

Our management is entrusted to a Board of Directors, which, as of December 31, 2002, has sixteen members. Members of the Board of Directors must hold at least one hundred shares.

 

Among the sixteen Directors on our Board, three have been appointed by the French State, two have been proposed by Carlton and Microsoft, two have been elected by the employees, and nine are qualified people. Among our Board members, seven are independent Directors. The appointment of two Directors representing the employee shareholders has been proposed and approved by the shareholders at the last ordinary general shareholders’ meeting held on May 6, 2003.

 

The Board of Directors met twelve times during 2002 (nine times during 2001).

 

Following the work performed by the Board during the second half of 2002, the Board adopted an internal by-laws (Réglement Intérieur) whose procedures and policies are applicable to the members of the Board.

 

Board Committees

 

In March 1999, the Board of Directors formed three advisory committees:

 

    The Strategy Committee advises the Board of Directors on projects linked to our development (investments and competitiveness), the development of industrial partnerships and the review of draft strategic memoranda of understanding. The Strategy Committee met five times in 2002 (three times in 2001).

 

    The People and Organization Committee examines questions relating to the operation of the Board of Directors, management compensation, employee shareholding projects and profit-sharing incentive plans. The People and Organization Committee met five times in 2002 (three times in 2001).

 

    The Audit Committee oversees the quality of our accounting and financial statements as well as all control procedures. The Audit Committee met four times in 2002 (twice in 2001). Following each meeting, the Audit Committee Chairman reports conclusions to the Board.

 

Since July 2002, the Audit Committee has been comprised of four Directors, three of whom are independent and one of whom is an employee of the French State.

 

When formed, the Audit Committee received a Charter setting out its role, internal policies, resources and guidelines. This Charter was updated early 2003.

 

In 2002, the Audit Committee read and discussed the annual consolidated financial statements for 2001 as well as the consolidated financial statements for the first half of 2002. The consolidated financial statements for 2002, as well as off-balance sheet items and the key figures and disclosures of the 20-F were reviewed by the Audit Committee in February and March 2003. Other items examined by the Audit Committee in 2002 were the internal audit plan for the year and conclusions of the major audits conducted in 2002, the

 

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situation of the auditors of the Group (notably events which affected the audit firm Arthur Andersen), specific due diligences conducted by the auditors and the auditors’ fees for 2002.

 

The following table shows the names of the members of the Board of Directors, their main occupations, the dates of their initial appointment and the expiration dates of their current term.

 

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Name


  

Principal Occupation

or Employment


  

Initially

Appointed

to Board


  

Term

Expires


  

Other business

activities outside

Thomson


Frank Dangeard(1)(3)

  

Chairman of the Board of Thomson, Senior Executive Vice-President of France Télécom

  

October 2002 (Board member since March 1999)

  

2004

  

Director of Orange, Wanadoo, and Equant

Christian Blanc(2)

  

Deputy at the French Chamber of Deputies

  

June 2001

  

2005

  

Director of Cap Gemini, Coface, JC Decaux, and Carrefour

Thierry Breton(1)

  

Chairman and CEO of France Télécom

  

March 1997

  

2004

  

Chairman of the Board of TSA

Chairman of Orange Director of Schneider Electric S.A. and Dexia Member of the Supervisory Board of AXA

Pierre Cabanes(3)

  

Chairman of Antée SAS

  

June 1998

  

2004

  

Managing Director of the Groupement Foncier de France

Emmanuel Caquot(1)

  

Director, French Ministry of Industry

  

March 1999

  

2007

  

Director of INRIA, La Française des Jeux, SFP and Groupe des Écoles desTélécommunications

Catherine Cavallari

  

Patents & Licensing Operations,Controlling Manager, Thomson

  

May 2002

  

2007

  

N/A

Thierry Francq(2)

  

Deputy Director, French Department of Treasury, Ministry of Economy, Finance and Industry

  

July 2002

  

2005

  

Director of Bull, France 3, Imprimerie Nationale and Société DCN Développement Director of La Poste and L’Etablissement Public de Financement et de Réalisation (EPFR)

Michael Green

  

Chairman of Carlton Communications Plc

  

March 2001

  

2006

  

Director of Independent Television News Ltd and GMTV Ltd.

Eddy W. Hartenstein(1)(3)

  

Senior Executive Vice President of Hughes Electronics Corp.

  

October 2002 (Board member since March 1999)

  

2007

  

Chairman and CEO of DirecTV Enterprises Inc., DirecTV International Inc., DirecTV Merchandising Inc. and DirecTV Operations Inc. Director of PanAmsat and DirecTV Latin America

Igor Landau(2)

  

Chairman of the

  

September

  

2004

  

Director of Essilor, CCF,

 

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“Directoire” (CEO) of Aventis

 

2002

     

Chairman of the Centre Européen d’Education Permanente (CEDEP). Director of the Institut de Développement Industriel (IDI), Rhône-Poulenc AGCO Ltd, Rhône-Poulenc Rorer Inc, and Hoechst AG, Chairman of the Supervisory Board of Aventis Pharma AG

Pierre Lescure(1)

 

Chairman and CEO of Le Monde Presse

 

September 2002

 

2004

 

Member of the Supervisory Board of Le Monde Director of Havas Advertising. Chairman of SAS AnnaRose Production

Didier Lombard(1)

 

French Ambassador-at-large, International Investment,

Vice-Chairman of the Conseil Général des Technologies de l’Information.

 

May 2002 (Board member since March 1999)

 

2007

 

Chairman of the Agence Française for International Investments

Director of La Poste Censor of France Télécom. (till he was appointed in March 2003 as Senior Executive VicePresident, Technology, France Télécom.)

Jean de Rotalier

 

Consumer Products Marketing Manager Italy, Thomson

 

October 1994

 

2007

 

N/A

Marcel Roulet(2)(3)

 

Former Chairman and CEO of TSA, France Télécom and Thalès

 

February 1999

 

2005

 

Director of Thalès S.A. (TSA representative) and CCF Chairman of the Supervisory Board of Gimar Finances Member of the Supervisory Board of Eurazéo.

Tadahiro Sekimoto

 

Chairman of the Institute for International Socio-Economic Studies

 

October 2002

 

2007

   

Bernard Vergnes(1)(3)

 

Emeritus Chairman, Microsoft E.M.E.A.

 

March 1999

 

2004

 

Director of S.A. France Finance et Technologie


(1)   Member of the Strategy Committee.
(2)   Member of the Audit Committee.

 

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(3)   Member of the People and Organization Committee.

 

During the shareholders’ meeting held on May 6th, 2003, two directors representing the employee shareholders were appointed:

 

Loïc Desmouceaux

 

Worldwide
Prospective
Marketing Manager,
France, Thomson

  

May 2003

  

2007

  

N/A

Gérard Meymarian

 

Vice-President
Business
Development and
Profit Center, Asia

  

May 2003

  

2007

  

N/A

 

Executive Committee

 

In accordance with French law and our by-laws, and following the decision of the Board of Directors held on October 8, 2002 pertaining to the dissociation of the Chairman of the Board of Directors and Chief Executive Officer functions, the Chief Executive Officer has full authority to manage the Company’s affairs and to represent the Company before third parties. On October 8, 2002 , Charles Dehelly was appointed Chief Executive Officer of Thomson.

 

Subject to the powers expressly reserved by law to shareholders’ meetings, as well as to those specifically reserved by law to the Board of Directors and to the Chairman of the Board of Directors, the Chief Executive Officer is vested with the broadest powers to act on our behalf in respect of our corporate purpose in any and all circumstances, in accordance with the internal by-laws (Réglement Intérieur).

 

Thomson formed a Management Board, composed of the Chief Executive Officer and four Senior Executive Vice-Presidents. The Management Board meets on average twice per month to implement the Group’s strategy defined by the Board.

 

The Executive Committee is composed of fifteen members and includes heads of key operational units and central functions. The Executive Committee meets on average four times per month to manage the Company’s affairs.

 

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The tables below indicate the names of the members of the Executive Committee, their current responsibilities within the Group and the dates of their initial appointment.

 

Name


  

Responsibility


  

Initially

appointed


Management Board

         

Charles Dehelly

  

Chief Executive Officer

  

2002

Al Arras

  

Senior Executive Vice President, Home and Portable Audio and Video, and ATLINKS, in charge of the “Quality TQS” program

  

1997

John Neville

  

Senior Executive Vice President, in charge of the “New Frontier” program

  

1993

Lanny Raimondo

  

Senior Executive Vice President, Digital Media Solutions, in charge of the “TARGET” program for growth

  

2001

Julian Waldron

  

Senior Executive Vice President, Chief Financial Officer

  

2001

Members of the Executive Committee

         

Christian Brière

  

Senior Vice President, Human Resources

  

2003

Tom Carson

  

Executive Vice President, Patents & Licensing

  

2002

Jean-Philippe Collin

  

Senior Vice President, Sourcing and in charge of the SPRING program

  

2002

Jean-Charles Hourcade

  

Senior Vice President, Research and Innovation

  

2000

Franck Lecoq

  

Executive Vice President, Displays and Components

  

2003

Patrice Maynial

  

Senior Vice President, Corporate Secretary and Legal Counsel

  

1997

Eric Meurice

  

Executive Vice President, TV and Accessories

  

2001

Mike O’Hara

  

Executive Vice President, Consumer Products Services

  

1999

Enrique Rodriguez

  

Executive Vice President, Broadband Access Products

  

1999

Stéphane Rougeot

  

Senior Vice President, Communication and Entrepreneurship

  

2002

 

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Biographies

 

Management Biographies

 

Management Board Members

 

Charles Dehelly was appointed Chief Executive Officer in October 2002. Prior to that, Charles Dehelly was Senior Executive Vice-President and Chief Operating Officer in charge of the coordination of the Strategic Business Units, sourcing, IT systems and Business Performance programs. From March 1992 to February 1998, Mr. Dehelly was Senior Executive Vice President of Bull Group, and in particular of Bull Europe, President of the PC division, President of Bull Electronics and President of Bull S.A. From 1987 to 1992, he was President of the Television Division of Thomson in Europe. From 1974 to 1987, he held various management positions for Thomson Grand Public, in charge of divisions and factories. Mr. Dehelly is a graduate of the École Nationale Supérieure des Arts et Métiers.

 

Al Arras was appointed Senior Executive Vice President, Home and Portable Audio and Video, and ATLINKS in March 2001. Al Arras is also responsible for the corporate “Quality TQS” program since 2003. Since July 1997, he was Chief Operating Officer and Executive Vice President for Audio and ATLINKS. He has also been responsible for the Worldwide Internet Device and E-business, or WIDE, since June 1999. From October 1995 to July 1997, Mr. Arras served as Vice President for Manufacturing Operations in Asia. From January 1993 to October 1995, he was Vice President for Audio and Communications. Between 1980 and 1993, he held various management positions in the Audio Division as Vice President of the Audio Division, Vice President for Home Audio Systems, Hi-Fi General Manager, Business Development Manager for Audio and Communications, Audio Market Manager, Tape Manager, Market Development Manager and Product Manager. Mr. Arras is a graduate of Cornell University.

 

John Neville was appointed Senior Executive Vice President in February 2001. Mr. Neville is responsible for the corporate “New Frontier” program, aimed at defining development initiatives for the Group all over the world and especially in Asia. Since June 1999, he has been responsible for Patents and Licensing. Mr. Neville was responsible from July 1997 to June 1999 for Operations Coordination, and has been in charge of the LIVE program since February 1998. From July 1993 to July 1997, he was Executive Vice President of Operations. He became Vice President for the North America Tube Division in 1988 and was appointed Senior Vice President in 1992. Since 1967, he has held various management positions within the RCA Group (which was acquired by Thomson), including Director of Financial Analysis, Director of Financial Planning, Vice President for Finance and Vice President for Technical Contacts. Mr. Neville holds a B.S. from Ohio State University and graduated from the Stanford University Executive M.B.A. Program.

 

Lanny Raimondo was appointed Senior Executive Vice President for Digital Media Solutions in July 2001. Since February 2003, he is also responsible for the corporate “TARGET” program for growth. Since March 2001, he has been Executive Vice President for Technicolor. Mr. Raimondo has worked at Technicolor since 1994 and was appointed President and Chief Executive Officer of the Technicolor Group in 1998, after having served as President of that company’s Packaged Media Group from 1996. Prior to working at Technicolor, Mr. Raimondo

 

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spent sixteen years with Pirelli Cable Corp. where he managed large subsidiary companies in Great Britain, Canada and the United States, holding the position of President and Chief Executive Officer from 1985 to 1994. Mr. Raimondo is a graduate of Purdue University with a degree in electrical engineering.

 

Julian Waldron was appointed Senior Executive Vice President for Finance in October 2002. Prior to joining Thomson as Chief Financial Officer in June 2001, he was Managing Director of UBS Warburg in London where he was co-Head of the European Equity Markets Group, coordinating this business for all of Europe. Mr. Waldron spent over fourteen years with UBS Warburg where he occupied several positions of increasing responsibility. He is a graduate of the Cambridge University.

 

Members of the Executive Committee

 

Christian Brière de la Hosseraye was appointed Senior Vice President of Human Resources in February 2003. Previously, Mr. Briere was Director of Human Resources of Kingfisher Electrical since 2000, after having served as Director of Human Resources of the CIC Group from 1994 to 2000. He was successively Director of Human Resources of Memorex-Telex (1991-1994), as an expatriate for the Bull Group (1989-1991) and of several units of the Thomson Group as formerly structured (1980-1989), including its components division and SGS-Thomson Microelectronics activity. In addition, Christian Brière is Chairman of the A.N.D.C.P. (Association Nationale des Directions et des Cadres de la fonction Personnel) since September 2002. Christian Brière holds a Ph.D from Institut d’Etudes Politiques (IEP) Paris and is a graduate from the Fondation Nationale de Science Politique (FNSP).

 

Tom Carson was appointed Executive Vice President of Patents & Licensing in October 2002. Prior to this, during 2001 and 2002, Mr. Carson held the position of Vice President Sales & Marketing Coordination and Americas Representative for Thomson’s Displays and Components SBU. From 1998 to 2001 he managed Thomson’s North American display operations as Vice President Americas Picture Tube Operations. From 1992 to 1998 Mr. Carson was General Manager Sales, Marketing and New Business Development for Thomson’s North America Picture Tube Division. Prior to this Mr. Carson held various positions of increasing responsibility in sales, marketing and international business with Thomson. Mr. Carson is a graduate of Villanova University with a Bachelors of Science degree in Business Administration and also holds an MBA from the same university.

 

Jean-Philippe Collin was appointed Senior Vice President of Sourcing and responsible for the corporate cost control “SPRING” program in October 2002. From 1995 until joining Thomson in 1999, Mr Collin served as Purchasing Group Director for Valeo and Purchasing Branch Director for Valeo Electronics. Prior to this, he worked for IBM in the United States as Purchasing Council Chairman and Purchasing Manager for Electronics Components. He has held several positions in IBM before as Engineer, Lab and Quality Manager. Mr Collin is a graduate of the Ecole Superieure d’Electricité.

 

Jean-Charles Hourcade was named Senior Vice President, Research and Innovation in February 2000. Prior to his current position, Mr. Hourcade served from 1995 to 2000 as Vice

 

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President Strategic Planning, Thalès, where he was in charge of Corporate Strategy, Strategic Alliances and Mergers and Acquisitions activities. He joined the Group in February 1986, coming from the Institut National de l’Audiovisuel where he worked as a research and development engineer in computer graphics and special effects. During the years prior to becoming Vice President of Strategic Planning, Thalès, he served as Chairman and CEO of Thomson Digital Image (TDI), a company specialized in 3D Computer Graphics software and systems. Mr. Hourcade is a graduate of the École Polytechnique and the École Nationale Supérieure des Télécommunications in Paris.

 

Franck Lecoq was appointed Executive Vice President of Displays and Components in January 2003. From 1998 to December 2002, he was Executive Vice President of the automotive equipment supplier Faurecia, in charge of the operations for vehicle interior systems. From 1985 to 1998, Mr. Lecoq held various positions at Bertrand Faure, an automotive seats supplier, where he was appointed Vice President for the Spanish and Portuguese subsidiaries, after having served as site manager in France. Mr. Lecoq is a graduate of the Ecole Nationale des Arts et Métiers and received his Advanced degree in Business Administration from the Institut d’Administration des Entreprises de Paris.

 

Patrice Maynial was appointed Senior Vice President, Corporate Secretary and Legal Counsel in July 1997. Since that date, Mr. Maynial has also served as Corporate Secretary of TSA. From August 1996 to April 1997, he was a judge at the French Cour de Cassation. From 1994 to 1996 he was General Manager of the Gendarmerie Nationale, the French national police force. From 1991 to 1994 he was President of the Cour d’Appel de Paris. From 1988 to 1991 he was Vice President of the Tribunal de Grande Instance de Paris. From 1986 to 1988 he was Technical Counsel for the French Defense Ministry. From 1982 to 1986 he was the Examining Magistrate of Paris courts. From 1976 to 1982 he held various positions in the French Justice Department. Mr. Maynial is a graduate of the École Nationale de la Magistrature.

 

Eric Meurice was appointed Executive Vice President, Television and Accessories Worldwide in February 2001. From 1995 to February 2001, he was Vice President and General Manager for the Southern Europe, Eastern Europe and Middle-East/Africa Divisions of Dell Computer Corp. Between 1989 and 1995, Mr. Meurice was Sales and Marketing director for ITT Semiconductors WW. Before 1989, he held various management positions at Intel Corporation Microcontroller division in Phoenix, Arizona, USA and Renault in France. Mr. Meurice earned a M.B.A. from the Standford Graduate School of Business, a Master’s degree from the Université de Paris —Sorbonne and is a graduate of the École Centrale de Paris.

 

Michael D. O’Hara was appointed Executive Vice President, Consumer Product Services Worldwide in July 2001. From July 1999 to July 2001, he was Executive Vice President America. From November 1997 to July 1999, he was Vice President, Worldwide Digital Multimedia Products. From December 1996 to November 1997, he was Vice President, Core Business Product Management and from September 1996 to December 1996, he was Vice President, DBS and DVD Product Management. From 1987 to 1996, Mr. O’Hara held various marketing and sales positions within Thomson. Mr. O’Hara holds a Bachelor degree in Management and Marketing from Montclair (NJ) State University and received his Master’s degree in Finance from Fairleigh Dickinson University in Rutherford, New Jersey.

 

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Enrique Rodriguez was appointed Executive Vice President, Broadband Access Products in July 1999, with worldwide responsibility for Thomson’s digital multimedia business. From January 1998 to July 1999, Mr. Rodriguez was Vice President of our worldwide Research and Development Group for Multimedia and Services. From March 1997 to January 1998, he was General Manager of the Indianapolis and Rennes Research Centers. Prior to 1997, he held various technology-related positions since joining Thomson in 1982. Mr. Rodriguez received his Bachelor’s degree in Electronics and Communications from Instituto Technologico de Monterrey, Mexico.

 

Stéphane Rougeot was appointed Senior Vice President for Corporate Communications and Entrepreneurship in October 2002. Prior to that, Stéphane Rougeot was Chairman’s Chief of Staff since March 2002. He joined Thomson in 1999 and was in charge of the Investor Relations department. Previously, he held several financial positions in the Total Group. Stéphane Rougeot is a graduate from Institut d’Etudes Politiques (IEP), Paris. He also holds a degree in International Finance from Paris-Dauphine University.

 

B—Compensation of Directors and Principal Executive Officers

 

In 2002, the compensation paid to the Directors, and members of the Management Board and of the Executive Committee, which included 21 persons (19 persons in 2001 and 17 persons in 2000), was € 7.6 million (€ 6.4 million in 2001 and € 5.9 million in 2000). This amount includes the compensation paid to these persons by Thomson and its subsidiaries for services in all capacities to the Group and any benefits in-kind, contingent or deferred compensation (but excluding stock options which are described below) and any amounts paid pursuant to our employee project-sharing plans described below in “—Employees”.

 

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The following table, sets forth the compensation (including any benefits in-kind, contingent or deferred compensation but excluding stock options) paid in 2002 by Thomson and its subsidiaries to its Directors (excluding Directors elected by the employees, not disclosed according to the French regulation), Chairman of the Board and Chief Executive Officer for services in all capacities to the Group:

 

    

Thomson


    

Compensation


    

Employer Charges


    

(€)

Thierry Breton(1)

  

1,112,927

    

277,724

Frank E. Dangeard(2)

  

1,227,818

    

363,340

Charles Dehelly(3)

  

894,235

    

283,046

Christian Blanc*

  

13,699

    

—  

Pierre Cabane*

  

30,000

    

—  

Emmanuel Caquot

  

0

    

—  

Thierry Frank

  

0

    

—  

Michael Green*

  

14,055

    

—  

Eddy W. Hartenstein*

  

11,000

    

—  

Igor Landau

  

0

    

—  

Pierre Lescure

  

0

    

—  

Didier Lombard*

  

0

    

—  

Marcel Roulet*

  

30,000

    

—  

Tadahiro Sekimoto*

  

10,000

    

—  

Bernard Vergnes*

  

0

    

—  


(1)   Thierry Breton was Chairman and Chief Executive Officer until October 2002. Since then, Thierry Breton is a Director of the Group.
(2)   Frank E. Dangeard, Vice-Chairman and Senior Executive Vice-President until October 2002, was named Chairman of the Board in October 2002.
(3)   Charles Dehelly, Chief Operating Officer and Senior Executive Vice-President until October 2002, was appointed Chief Executive Officer on October 2002.
*   Attendance fees only.

 

In 2002, the total amount which was set aside or accrued to provide pension, retirement or similar benefits for the Directors and principal members of the Executive Committee, which included 21 persons (19 persons in 2001, and 17 persons in 2000) was € 1.4 million (€ 1.2 million in 2001, and € 1.1 million in 2000).

 

As Chief Executive Officer, Mr. Charles Dehelly is entitled to receive compensation equal to twenty-one months of his then current compensation if we terminate his employment other than for cause.

 

In 2002, no stock options were granted to the Directors and members of the Management Board and principal members of the Executive Committee.

 

In 2001, the total number of stock options granted to the Directors and members of the Management Board and of the Executive Committee, which included 19 persons was 815,000 options. These options were granted pursuant to our 2001 stock option plan which is described in detail below in “—Employees”.

 

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In 2002, no stock options were granted to our Directors.

 

In 2001, M. Thierry Breton received 200,000 options, M. Frank Dangeard and M. Charles Dehelly received 150,000 options respectively. In 2002, none of them exercised their options.

 

In 2002, no stock options were granted to our employees.

 

In 2001, the total number of stock options granted to our ten employees (not including our Directors indicated above) who received the largest number of options was 900,000 options. None of these options was exercised in 2002.

 

No member of the Board of Directors or Executive Committee holds more than 1% of our outstanding shares.

 

C—Employees

 

Thomson’s workforce

 

At December 31, 2002, we employed 65,487 people, principally in Europe, Asia and North America. The table below shows the breakdown of the total number of employees in consolidated subsidiaries at the end of each of the years indicated and provides a break-down by region:

 

    

2000


  

2001


  

2002


Europe(1)

  

14,773

  

16,594

  

17,464

North America

  

6,745

  

12,119

  

14,405

Asia-Oceania(2)

  

20,494

  

20,024

  

20,268

Other countries(3)

  

18,397

  

13,097

  

12,967

    
  
  

Number of employees in consolidated subsidiaries

  

60,409

  

61,834

  

65,104

Number of employees in equity companies accounted for using the equity method

  

775

  

1,028

  

383

    
  
  

Total employees

  

61,184

  

62,862

  

65,487

    
  
  

              

(1) Includes Poland.

  

5,555

  

5,517

  

5,256

(2) Includes People’s Republic of China.

  

17,090

  

17,232

  

17,195

(3) Includes Mexico.

  

17,454

  

12,343

  

11,974

 

This table includes all of our executives, non-executives and workers, including hourly employee. Temporary employees and trainees are excluded. We had 7,789 temporary employees as of December 31, 2002.

 

In 2002, we recorded a net increase of our workforce in Europe and in the United States and a net decrease in Mexico while the workforce remained essentially stable in Asia.

 

The variation between 2001 and 2002 is the result of external growth initiatives (integration of Alcatel DSL business effects of external growth, Grass Valley, Panasonic Disc Services, Grundig’s set-top boxes business, and Southern Star Duplitek) partially offset by our continuing restructuring actions.

 

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The increase in North America is principally due to the acquisition of Panasonic Disc Services and Grass Valley and also to production volume increase in various Technicolor locations such as Livonia or Memphis and the headcount increase in Canada (film preparation and replication). Nevertheless important restructuring actions took place in miscellaneous other locations.

 

In the rest of the Americas, the headcount impact of the integration of Panasonic Disc Services in Guadalajara (Mexico), and the Mexicali plant ramp-up (Mexico), have been offset by restructuring actions and production line closures more particularly in our Juarez basin locations.

 

The variance in Europe is mainly the result of a combination between the new integration mentioned above, the launch of a new Technicolor plant in Poland, partially offset by restructuring actions.

 

The headcount increase in Asia-Oceania is mainly related to the integration of Grass Valley, Southern Star Duplitek in Sydney and Melbourne and, the ramp-up of the new plants in Nantou & Foshan in China, partially offset by restructuring actions or attrition.

 

Membership in trade unions by our employees varies from country to country. In Europe, unions are represented in almost all our facilities. The European Works Council agreement was signed in 2000 and in force until 2004. The committee meets several times a year and is composed of members of French, Italian, German, English, Dutch, Luxembourg and Polish unions or works councils. As generally required by law in European Union countries, our management holds annual negotiations with unions on wages, early retirement plans and general labor conditions.

 

In the Americas, many production sites are also unionized. Agreements in the United States generally run for three years and cover wages, benefits and work practices. In the United States, eight agreements were signed during 2002. In Mexico, labor agreements are renegotiated annually. In 2002, five agreements were signed for each production site.

 

In Asia, unions are present only in the Singapore facility, where labor agreements are reviewed annually.

 

Employee profit-sharing

 

Our Management Board, our Executive Committee, our Operational Committee (a group of 60 members) and our “Entrepreneurs” (a group of more than 350 members) are incentivized with plan based on Group and business unit results and the achievement of performance goals in individual contracts. Also, several of our subsidiaries in France and the United States offer their employees profit-sharing based on company results and/or achievement of individual objectives. In addition, five of our French subsidiaries will pay bonuses (primes d’intéressement) in 2002 to their employees in respect of fiscal year 2002 (nine of our French subsidiaries paid bonuses in 2001 to their employees in respect of fiscal year 2001) under incentive plans based on such subsidiary’s results (accords d’intéressement).

 

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Company stock options granted to personnel

 

With Thomson’s IPO and the sales of our shares by the French State, our employees have been associated with the different changes in the share capital of their company.

 

In February 1999, the employees subscribed for 1,531,604 shares. In October 1999, employees subscribed for 2,139,950 shares. In September 2000, the employees subscribed for 1,670,282 shares. In March 2002, the employees subscribed for 2,538,076 shares. Approximately 15,000 employees in 28 counties subscribed to the last offering.

 

As of December 31, 2002, we estimate that 25,000 Thomson’s employees or former employees hold 4.1% of our share capital.

 

Moreover, since 1999, we incentivize the members of our management with the development of the Group through stock options programs:

 

At the shareholders’ meeting held on November 10, 2000, our shareholders authorized the Board of Directors to allot share subscription or share purchase options to our salaried employees or to some of them and agents.

 

Pursuant to this decision, our Board of Directors decided, at its meetings held on December 18, 2000, March 16, 2001 and July 23, 2001 to grant a total of 4,018,500 share purchase options to 463 beneficiaries. Shares offered under this plan (“Stock Option Plan Number 1”) will be shares that we repurchase from the market. The exercise price has been set at € 55.90.

 

Plan number


  

1


Shareholders’ meeting resolution date

  

November 10, 2000

Date of the Board of Directors meeting
authorizing the implementation

  

December 18, 2000, March 16, 2001 and July 23, 2001

Total number of options allocated

  

4,018,500

Of which options dedicated to principal

members of the Executive Committee

and Directors

  

1,350,000

Number of beneficiaries at the time of the allocation

  

463

Total number of options
outstanding (at December 31, 2002)

  

3,433,000

Number of beneficiaries (at December
31,2002)

  

395

Exercise period

  

December 18, 2003 – July 23, 2011

Exercise price

  

€55.90

 

Our Board of Directors decided at its meeting held on October 12, 2001 to confer a total of 3,540,300 share subscription options to 556 beneficiaries under the November 10, 2000 authorization. Shares under this plan (“Stock Option Plan Number 2”) will be newly issued by us

 

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and not purchased in the open market. The exercise price has been set at € 31.50.

 

Plan number


  

2


Shareholders’ meeting resolution date

  

November 10, 2000

Date of the Board of Directors meeting
authorizing the implementation

  

October 12, 2001

Total number of options allocated

  

3,540,300

Of which options dedicated to principal

members of the Executive Committee and

Directors

  

815,000

Number of beneficiaries at the time of the allocation

  

556

Total number of options outstanding (at
December 31, 2002)

  

3,417,900

Number of beneficiaries (at December 31,
2002)

  

517

Exercise period

  

October 12, 2004 – October 12, 2011

Exercise price

  

€31.50

 

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Item 7—Major Shareholders and Related Party Transactions

 

A—Distribution of share capital

 

Current Shareholding

 

The table below shows our shareholding at February 28, 2003, to the best of our knowledge.

 

    

At February 28, 2003


Shareholders


  

Number

of shares held


  

% of

shares held


  

% of

voting right


TSA

  

58,400,062

  

20.81%

  

21.06%

Carlton Communications Plc

  

15,500,000

  

5.52%

  

5.59%

Microsoft

  

9,566,744

  

3.41%

  

3.46%

NEC

  

3,000,100

  

1.07%

  

1.08%

Public

  

179,266,609

  

63.89%

  

64.66%

Employees

  

11,506,063

  

4.10%

  

4.15%

Thomson

  

3,373,930

  

1.20%

  

—  

    
  
  

Total

  

280,613,508

  

100.00%

  

100.00%

    
  
  

*   In November 2001, Carlton issued bonds to a number of institutional investors exchangeable for 15.5 million of our shares.

 

TSA currently holds 20.81% of our shares. As long as TSA holds more than 20% of our shares, we will be subject to the French privatization laws described in “Description of Share Capital—Memorandum and Articles of Association—Authorized but Unissued Capital”.

 

The shares held by TSA include up to 648,780 shares reserved for bonus shares to be allocated to employees under the terms of the employee offerings of October 2000 and March 2002.

 

The number of shares held by employees and management at February 28, 2003 is an estimate based on actual levels of employee participation in the February/March 1999, October 1999, September/October 2000 and March 2002 employee offerings and shares owned in registered form by current and former employees. The total number of shares beneficially held by our directors and principal executive officers was less than 1% of our outstanding share capital.

 

As of December 31, 2002, there were 2,346,680 ADSs outstanding and 7,151 registered ADS holders.

 

Anticipated shareholding

 

Our share capital may be further diluted upon the conversion into new shares of our outstanding convertible/exchangeable bonds and the exercise of stock options under our Stock Option Plan Number 2. Our 2000 OCEANE due 2006 are convertible into, or exchangeable for, 10,762,385 of our shares (following the buy-back and cancellation during 2002 of 413,000 OCEANE) and have a nominal value of € 72.67 each and a conversion ratio of one bond to one share. Our 2002 OCEANE due 2008 are convertible into, or exchangeable for, 14,814,815 of our shares and have a nominal value of € 40.50 each. The stock options we issued in 2001 are

 

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exercisable into 3,417,900 of our shares between 2004 and 2011. In addition, pursuant to the agreements with Carlton in connection with the acquisition of Technicolor, and as approved by the shareholders on March 12, 2001, we will pay U.S.$ 600 million (plus interest) in the aggregate over four years in four equal installments on the first, second, third and fourth anniversaries of the closing, starting on March 16, 2002. However, we may pay up to half of the amount of these annual installments in the form of our shares, within the limit of 4,000,000 shares authorized by our shareholders’ meeting. The first two of these installments were fully paid in cash.

 

Assuming (i) all of the outstanding 2000 OCEANE and 2002 OCEANE are converted into newly issued shares, (ii) all outstanding stock options issued under our Stock Option Plan Number 2 are exercised, and (iii) 4,000,000 shares are issued pursuant to the payment in the form of shares in connection with the two remaining installments due to Carlton, our share capital would increase to 313,608,608 shares, a 11.8% increase compared to the number of outstanding shares as of December 31, 2002.

 

Recent changes in share capital

 

During 2002, the stakes of several strategic shareholders were sold and the stake of TSA was reduced as a result of open market sales and placements, as described below:

 

    On March 7, 2002, TSA sold 36,160,000 of our shares through a placement to institutional investors. Following this transaction, and taking into account the shares allocated to employees in January 2003 under the terms of the employee offering of October 1999, TSA held 20.81% of our outstanding share capital as of February 28, 2003.

 

    On March 16, 2001, we issued notes to Carlton that were reimbursed on March 16, 2002 in 15.5 million shares, or 5.52% of our outstanding share capital at this date. In November 2001, Carlton issued bonds to a number of institutional investors exchangeable for 15.5 million of our shares.

 

    On March 28, 2002 in conjunction with the March 7, 2002 sale of shares by TSA, we conducted an offering of shares provided by TSA to our qualifying current and former employees in certain jurisdictions, of which 2,538,076 shares were subscribed.

 

    On June 5, 2002 NEC sold 10.9 million of our shares through a placement to institutional investors. Following this transaction, NEC held 1.07% of our outstanding share capital.

 

    On July 25, 2002 Alcatel sold 8.2 million of our shares through a placement to institutional investors. During the year, their remaining stake of 1.4 million shares also was sold.

 

    On August 21, 2002 DIRECTV sold its stake of 8,818,388 of our shares through a placement to institutional investors.

 

    Between January 1, 2002 and February 28, 2003, Microsoft sold 3.3 million of our shares.

 

 

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Historical distribution of share capital

 

From the time of our formation until December 1998, we had been fully held by TSA which is wholly owned by the French State. TSA’s interest in Thomson as a percentage of outstanding share capital declined significantly in 1999, 2000 and 2002 as a result of dilution and sales on the market. On February 28, 2003, TSA held 20.81% of our outstanding share capital, based on the number of then outstanding shares.

 

The following table provides certain information concerning our major shareholders as of the dates indicated.

 

   

At December 31,

2000


 

At December 31,

2001


 

At February 28,

2003


Shareholders


 

Number

of shares

held


 

% of

shares

held


 

Number

of shares

held


 

% of

shares

held


 

Number

of shares

held


  

% of

shares

held


TSA (ex Thomson S.A.)

 

100,686,857

 

37.98%

 

100,677,233

 

37.98%

 

58,400,062

  

20.81%

Alcatel Participations

 

16,916,064

 

6.38%

 

9,654,217

 

3.64%

 

0

  

0%

Carlton Communications Plc.

 

0

 

0%

 

0

 

0%

 

15,500,000

  

5.52%

DIRECTV

 

12,918,484

 

4.87%

 

8,818,388

 

3.33%

 

0

  

0%

Microsoft

 

16,916,064

 

6.38%

 

12,916,064

 

4.87%

 

9,566,744

  

3.41%

NEC

 

16,916,064

 

6.38%

 

13,915,966

 

5.25%

 

3,000,100

  

1.07%

Public

 

84,879,847

 

32.02%

 

105,473,648

 

39.78%

 

179,266,609

  

63.89%

Employees

 

13,306,908

 

5.02%

 

10,284,062

 

3.88%

 

11,506,063

  

4.10%

Thomson

 

2,573,220

 

0.97%

 

3,373,930

 

1.27%

 

3,373,930

  

1.20%

   
 
 
 
        

Total

 

265,113,508

 

100.00%

 

265,113,508

 

100.00%

 

280,613,508

  

100.00%

   
 
 
 
 
  

 

There is no shareholders’ agreement among any of our major shareholders. Our major shareholders do not have different voting rights than other shareholders. Each shareholder is entitled to one vote per ordinary share. You should read Item 6: “Directors, Senior Management and Employees”, Item 7: “Major Shareholders and Related Party Transactions” and Item 10: “Additional Information—Memorandum and Articles of Association” for additional information regarding major shareholders, shareholders’ voting rights and related matters.

 

B—Related Party Transactions

 

·   TSA and its subsidiaries (“TSA”)

 

TSA (formerly Thomson S.A.) is a shareholder of Thomson and held a 21% ownership in the share capital of Thomson as of the end of December 2002. TSA is wholly owned by the French State.

 

Borrowing from TSA amounted to € 0 million, € 3 million and € 12 million as of December 31, 2002, 2001 and 2000, respectively. Interests charged by TSA at market rates to Thomson for the 12 month periods ended December 31, 2002, 2001 and 2000 were not significant.

 

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The group initiated in 1997 a tax indemnification agreement that ended in 2000. Please refer to Note 7 to our consolidated financial statements for further information.

 

Thomson and TSA entered into an agreement on July 1997 defining the relations between Thomson, TSA and Thalès S.A. (formerly Thomson-CSF), with respect to the management and the use of certain intellectual property rights. By amendments signed in 2000 and 2002, the parties have agreed to clarify and simplify the use of such intellectual property rights.

 

By the amendment effective in December 2000 and expiring in July 2006, Thalès S.A. and TSA have granted to Thomson Licensing S.A. (a wholly owned subsidiary of Thomson) an exclusive right to grant licenses to third parties on their patents covering optical disc technologies and have also authorized Thomson Licensing S.A. to negotiate and sign such licensing agreements.

 

In addition, in June 2002 and retroactive as of January 1, 2001 TSA agreed to transfer all of the patents covered by the contract signed in July 1997 to Thomson Licensing S.A., who was already the beneficiary of all revenues driven by such rights.

 

·   Alcatel and its subsidiaries (“Alcatel”)

 

Until July 2002, Alcatel was a shareholder of Thomson (3.4% ownership) and had one representative on the Board of Directors of Thomson. Therefore until this date, Alcatel was a related party of Thomson and transactions with Alcatel up to June 30, 2002 are disclosed hereafter.

 

In the normal course of its business and based on market conditions Thomson entered into the following transactions with Alcatel:

 

Thomson purchased from Alcatel different products, including modems, services, and trademark royalties totaling € 26 million, € 39 million and € 77 million for the 6 month period ended June 30, 2002 and the years ended as of December 31, 2001 and 2000, respectively

 

Also, the Group sold products (mainly modems) to Alcatel for € 97 million, € 82 million and € 74 million for the 6 month period ended June 30, 2002 and the 12 month periods ended December 31, 2001 and 2000, respectively.

 

Alcatel’s accounts payable in Thomson books were € 5 million, € 21 million and € 62 million as of June 30, 2002 and December 31, 2001 and 2000, respectively. The Group had receivables from Alcatel amounting to € 25 million, € 12 million and € 0 million as of the same dates.

 

Consistent with the ATLINKS Joint Venture agreement, Alcatel and Thomson have granted loans to ATLINKS in order to provide financial support to the operations of the joint venture. On a consolidated basis, the debt due to Alcatel by ATLINKS amounted to € 14 million and € 23 million as of June 30, 2002 and December 31, 2001, respectively. As of December 31,

 

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2000 the related debt outstanding amount was not significant.

 

The Group had an unconditional purchase obligation to acquire from Alcatel its 50% interest in the ATLINKS joint venture exercisable from October 2002. Agreement was reached in February 2003 involving a cash payment by Thomson of € 68 million in return for inter alia the 50% stake. (Please refer to Notes 25 and 29 to our consolidated financial statements)

 

·   NEC Corporation and its subsidiaries (“NEC”)

 

Until June 2002, NEC was a shareholder of Thomson (5% ownership) and had one representative on the Board of Directors of Thomson. Therefore until this date, NEC was a related party of Thomson and transactions with NEC up to June 30, 2002 are disclosed hereafter.

 

In the normal course of its business and based on market conditions Thomson entered into the following transactions with NEC:

 

The Group purchased from NEC primarily DVD spare parts and Plasma displays in the amounts of € 1 million, € 74 million and € 11 million for the 6 month period ended June 30, 2002 and the 12 month periods ended December 31, 2001 and 2000, respectively.

 

The Group sold products, mainly DVD drives and patent licensing to NEC in the amounts of € 18 million, € 93 million and € 2 million over the first 6 months of 2002 and over the full year 2001 and 2000, respectively.

 

As of June 30, 2002 and December 31, 2001 amounts due from NEC were € 1 million and € 8 million, respectively. As of the same dates, amounts due to NEC were € 0 million and € 8 million, respectively. Such balances as of December 31, 2000 were not significant.

 

In 2001, the Group acquired for USD 50 million (€ 57 million) the joint ownership of patents and related know-how related to plasma screen technology (including € 6 million in withholding taxes paid to the French Treasury) with the intention of setting up a joint venture dedicated to plasma screen manufacturing. At the beginning of 2002, NEC informed Thomson that it was not in a position to launch the industrial phase of the underlying contracts. At the end of 2002, the parties agreed upon the cancellation of these related contractual obligations. As a consequence of this settlement, NEC shall pay the Group € 48 million (the Group will also claim reimbursement of the withholding taxes from tax authorities).

 

·   DIRECTV and its subsidiaries (“DIRECTV”)

 

Until September 2002, DIRECTV was a shareholder of Thomson (3.1% ownership) and had one representative on the Board of Directors of Thomson. Since that time, the Chairman and CEO of DIRECTV has been a member of the Board of Directors of Thomson. Therefore transactions with DIRECTV through December 31, 2002 are disclosed hereafter.

 

In the normal course of its business and based on market conditions Thomson entered into

 

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the following transactions with DIRECTV:

 

The Group invoiced products, mainly digital decoders and satellite receivers, and services to DIRECTV amounting to € 40 million, € 298 million and € 445 million during the 12 month periods ended on December 31, 2002, 2001 and 2000, respectively.

 

As of December 31, 2002, 2001 and 2000, receivables from DIRECTV amounted to € 83 million, € 254 million and € 271 million, respectively.

 

In 1999, Thomson Inc. (a wholly-owned subsidiary of Thomson) paid DIRECTV € 25 million for marketing support and development of local channel programming. This expense was deferred and amortized over the development and promotional period, which ended in 2000. As a consequence, the group recognized in 2000 an expense amounting to € 22 million.

 

With regard to satellite receiver promotion and advertising activities, DIRECTV has committed to pay Thomson € 6 million over the course of 2003 as a contribution to promotional related programs.

 

·   Microsoft and its subsidiaries (“Microsoft”)

 

As of December 31, 2002, Microsoft has been a shareholder of Thomson (3.4% ownership) and has a representative on the Board of Directors of Thomson.

 

In the course of its business and based on market conditions, the Group sold products and services to Microsoft, mainly optical kits, royalties, distribution services and promotional services. These sales amounted to € 303 million and € 194 million for the 12 month periods ended December 31, 2002 and 2001. Such sales were not significant in 2000.

 

As of December 31, 2002 and 2001, Thomson had accounts receivable from Microsoft amounting to € 0 million and € 89 million and owed accounts payable amounting to € 3 million and € 5 million, respectively. These balances were not significant as of 2000 year-end.

 

·   A Novo Comlink Espana (“A NOVO”)

 

As of December 31, 2002, Thomson no longer has any interest in A NOVO (please refer to note 2 to our consolidated financial statements). Before the disposal, the Group accounted for such interest using the equity method.

 

In the course of its business and based on market conditions, the Group purchased kits, spare parts and raw materials for € 62 million and € 81 million for the 12 month periods ended December 31, 2002 and 2001. Accordingly, the Group owed € 15 million and € 18 million to A Novo as of December 31, 2002 and 2001, respectively. During 2000, A NOVO was not a related party.

 

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·   Carlton Communications Plc and its subsidiaries (“Carlton”)

 

Since March 16, 2002 Carlton has been a significant shareholder of Thomson and holds a 5.5% interest in the share capital of Thomson and has a representative on the Board of Directors of Thomson. As a consequence, transactions with Carlton entered into since this date are disclosed hereafter.

 

The Group partially financed the Technicolor acquisition (refer to note 2 to our consolidated financial statements) by issuing promissory notes (the “Notes”) to Carlton (refer to note 23 to our consolidated financial statements) in the amount of € 669 million (USD 600 million at historical exchange rate). The Notes are repayable over 4 equal installments on the first, second, third and fourth anniversaries of the Notes (March 2001).

 

In March 2002, an amount of € 178 million (USD 156 million at March 16, 2002 exchange rate) was reimbursed related to the first installment of the Notes; it includes € 7 million (USD 6 million) of accrued interest.

 

As of December 31, 2002, the outstanding debt due to Carlton amounts to € 459 million (USD 481 million) including € 29 million of accrued interest (USD 30 million), of which € 10 million (USD 10 million) relates to the period from March 16, 2002 to December 31, 2002.

 

On May 7, 2002 the group incorporated a new Joint Venture, ScreenVision Europe, with Carlton in order to purchase and operate the cinema screen advertising businesses formerly held by UGC and RTBF in Europe (note 2 to our consolidated financial statements).

 

Following the acquisition and during 2002, Carlton and the Group granted loans to ScreenVision Europe on an equal basis. As of December 31, 2002, the debt due to Carlton by ScreenVision Europe in the consolidated financial statement of the Group amounts to € 14 million.

 

Such loans bear interest at market rate. For the 6 month period ended December 31, 2002, ScreenVision Europe recognized an interest expense amounting to € 1 million, out of which € 0.5 million was eliminated in Thomson’s consolidated financial statements.

 

·   France Telecom and its subsidiaries (“FT”)

 

On October 2, 2002, Thierry Breton was appointed FT’s Chairman and CEO. Following these appointments, he remains a member of the Board of Directors of Thomson and Chairman of the strategy committee of Thomson. In addition, Frank E. Dangeard has been appointed as Chairman of Thomson on October 2, 2002 and became Senior Executive Vice President at FT on December 5, 2002. Following these appointments he resigned from his former positions of vice chairman of the Board and Senior Executive Vice President of Thomson. As a consequence, FT has been considered as a related party since October 2, 2002.

 

In the normal course of its business and based on market conditions Thomson entered into the following transactions with FT:

 

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In December 2000, Thomson initiated with FT (Equant) a telecommunication outsourcing agreement, which scope is to provide all of the Group’s global telecom requirements for voice, data and videoconferencing. The agreement is known as TINOS (Thomson Infrastructure Network Operations Services).

 

As of November 7, 2002, with effect as of September 1, 2002, Thomson and FT amended the TINOS agreement in order to expand its scope to all of Thomson’s recent acquisitions.

 

For the 3 month period ended December 31, 2002, Thomson recorded € 6 million in operating expenses related to the TINOS contract (as amended).

 

In the normal course of business, Thomson is a supplier of ADSL set top boxes to FT. For the 3 month period ended December 31, 2002 such sales amounted to € 10 million. As of December 31, 2002 amounts due from FT amounted to € 13 million.

 

·   Loans made by Thomson

 

We have an outstanding loan with Mr. Brian Kelly, the CFO of our Digital Media Solutions division, for the purchase of real estate in the amount of U.S. $ 276,000. This loan, which was granted in April 14, 2000, will begin bearing interest on April 15, 2005 at a rate equal to the interest rate of the underlying mortgage loan taken out by Mr. Kelly on the property. The interest rate on this mortgage was 5.3% on May 12, 2003. As of this date, the full amount of the loan was outstanding.

 

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ITEM 8—FINANCIAL INFORMATION

 

A—Consolidated Financial Statements and Other Financial Information

 

Please refer to the consolidated financial statements and the notes and exhibits thereto in Part III hereof and incorporated herein by reference.

 

B—Legal Proceedings

 

In the normal course of the business, the Group is involved in legal proceedings and is subject to tax, customs and administrative regulation. The Group’s general policy is to accrue a reserve when a risk of an obligation to a third party is identified, the outcome of which may result in a potential liability that can be reasonably estimated.

 

U.S. customs and Italian tax litigation

 

In January 1998, a grand jury investigation was initiated by the U.S. Attorney’s Office in Baltimore, Maryland. This investigation was conducted by the U.S. Department of Justice relating to the transfer pricing used in the importation of picture tubes by Thomson Inc. from an Italian subsidiary of the Group between 1993 and June 1998. In October 2002, the U.S. government informed the Company that it has declined to prosecute the grand jury case.

 

A civil investigation was also initiated by the U.S. Customs Service, which issued pre-penalty notices on December 21, 1998. A pre-penalty notice means that a claim is being contemplated. The pre-penalty notices allege that certain subsidiaries of the Group and five of its employees intentionally undervalued television tubes imported by the Group from the Italian affiliate. According to the preliminary pre-penalty notices, these tubes had an appraised domestic value of approximately US $419 million (€ 399 million at December 31, 2002 closing rate). On December 28, 2000, the Customs Service amended the pre-penalty notices and alleged an appraised domestic value of approximately US $ 425 million (€ 405 million at December 31, 2002 closing rate). In an agreement reached with the Customs Service in January 1999, all action with respect to the pre-penalty notices was suspended for a period of one year in exchange for waivers of the statute of limitations through January 2001. In July 2000, all of the parties who previously received pre-penalty notices agreed to waive the statute of limitations defense for an additional period of time in order to allow the U.S. government to complete its investigation and to seek resolution of the matter through administrative proceedings. The waivers were again extended in November 2001, and October 2002 and are now effective through January 6, 2004.

 

The amended pre-penalty notices estimate the loss of custom revenues at approximately US $ 12.5 million (€ 11.9 million at December 2002). Under applicable statutes, penalties could be levied in an amount equal to the appraised domestic value of the merchandise and against each of the five employees concerned in an amount up to eight times the loss of revenue. In addition, the Group has agreed to indemnify the five employees for the monetary penalties. To date, no charges have been filed. The U.S. Customs Service has requested that the parties who received pre-penalty notices respond to the pre-penalty notices on or before June 2, 2003. Based on information currently available, the Group is not in a position

 

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to estimate the liability and has not accrued for a reserve. The Group will defend itself vigorously against any allegations of wrongdoing.

 

In connection with the investigation being conducted by the U.S. Customs Service, the Italian “Guardia di Finanza” tax police conducted a tax verification of the Italian subsidiary of the Group, Videocolor SpA, which had exported picture tubes to Thomson, Inc. during the years 1993 through 1998. In its report transmitted to the Italian Direct Taxes Local Office in December 1999, the Guardia di Finanza recommended increasing the prices of the tubes exported to Thomson, Inc., and, as a consequence, increasing the taxable income of Videocolor SpA. The taxable income increase, as proposed for the years 1993 through 1998, with regard to picture tube prices, amounts to € 31 million. On December 28, 1999, the Direct Taxes Local Office formally advised that an assessment would be due with regard to 1993 amounting to € 5.6 million taxable income, resulting in (i) reversal of tax-loss carry-forwards and (ii) additional tax penalties and interest amounting to approximately € 2.1 million. On March 21, 2000, Videocolor S.p.A. challenged this assessment before the competent tax jurisdiction of Frosinone in Italy.

 

On February 13, 2001, the Court of Frosinone rendered its decision regarding the 1993 tax assessment, it maintained part of the assessment based on 1993 elements, yet it invalidated the valuation method of the exported tubes applied by the Italian Direct Taxes Local Office. Taking into account the tax-loss carry-forwards and the tax exemption system at that date, no tax or penalty is due concerning that year. Videocolor S.p.A. has decided to appeal against the decisions before the Appeal Court of Latina, which confirmed in February 2003 the initial judgment but without applying penalties.

 

On November 23, 2000, the Direct Taxes Local Office gave notice of an assessment with regard to 1994 amounting to € 9.7 million taxable income, resulting in (i) additional taxes amounting to € 5.2 million and (ii) tax penalties amounting to € 5.2 million (before interest). In February 2001, Videocolor S.p.A challenged this assessment before the Local Tax County Commission. Based on the valuation method of the Group, the Commission has considered that the tax assessment should amount to € 3.4 million and that the Group should pay an additional € 2.7 million for 1994 and € 2.5 million for penalties. As for 1993, the Group has challenged this assessment before the competent tax jurisdiction of Frosinone partially confirming the tax assessment but rejecting the valuation method of exported tubes used by the Italian tax authorities. On May 15th, Videocolor S.p.A elected to apply for the new tax amnesty, enacted by the Italian parliament in 2003 by paying a total amount of € 1.35 million. Videocolor will include the years 1993 and 1994 in the tax amnesty application and not the following years. Upon approval by the Italian tax authorities of the amnesty application, the calculations of which are based on a percentage of the total amount assessed by the tax authorities including the amounts rejected by the Courts, the years 1993 and 1994 will be closed. Videocolor will then be able to confirm the utilization in 1994 and 1995 of all the tax losses originating from 1993 and the previous years.

 

In 2001, the Direct Taxes Local Office gave notice of an assessment with regard to 1995 resulting in (i) additional taxes amounting to € 4.2 million and (ii) tax penalties amounting to € 4.2 million (before interest). The taxable income increase, as proposed for 1995, also mainly relates to picture tube prices. Videocolor SpA appealed this assessment on October 25, 2001, before the

 

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competent tax jurisdiction of Frosinone in Italy, which made a decision on March 21, 2003 to reject almost all of the assessment of the Italian Tax authorities.

 

On September 2002, the Direct Taxes Local Office gave notice of an assessment with regard to 1996 and 1997 fiscal years resulting in (i) additional taxes amounting to € 3.5 million and € 1.8 million, respectively and (ii) tax penalties amounting to € 3.5 million and € 1.8 million, respectively. Videocolor SpA. challenged the assessment before the competent tax jurisdiction of Frosinone.

 

Tanashin

 

In June 1998, Tanashin Denki Co. Ltd. filed suit in the U.S. District Court for the Eastern District of Virginia alleging infringement of four utility patents and one design patent that relate to various sub-components of audio cassette drive mechanisms purchased from third parties. The case was subsequently transferred to the U.S. District Court for the Southern District of Indiana. In October 2001, a jury trial was held and a verdict was returned in favor of Tanashin Denki in the amount of USD 10.65 million (€ 10.1 million at December 31, 2002 exchange rate). The jury also made a finding of willful infringement and the issue of damages was left to the discretion of the trial judge. In May 2002, the U.S. District Court, Southern District of Indiana entered final judgment in the action in favor of Tanashin awarding damages in the amount of USD 21.3 million plus interest and attorneys’ fees. On June 10, 2002, Thomson Inc. entered into a settlement and license agreement with Tanashin Denki, Co. Ltd. related to cassette deck patents. The agreement results in the dismissal of Tanashin’s lawsuit.

 

Superguide Corporation

 

In June 2000, Superguide Corporation filed suit in the U.S. District Court for the Western District of North Carolina against DirecTV Enterprises, Inc. et al., Thomson Inc. and Echostar Communications Corporation et al. alleging infringement with respect to three patents relating to program guide data retrieval, display, and program recordation. Gemstar Development Corporation was added as a defendant in March 2001. In July 2002, the U.S. District Court for the Western District of North Carolina granted summary judgment in favor of Thomson, DirecTV and Echostar, finding that none of the three patents owned by Superguide Corporation were infringed. Superguide Corporation and its licensee, Gemstar Development Corporation, have appealed the District Court’s decision with the U.S. Court of Appeals for the Federal Circuit in Washington D.C.

 

Pegasus Development Corporation and Personalized Media Communications, L.L.C.

 

In December 2000, Pegasus Development Corporation and Personalized Media Communications, L.L.C. filed suit in the U.S. District Court for the District of Delaware against Thomson Inc., DirecTV, Inc., Hughes Electronics Corporation, and Philips Electronics North America Corporation alleging infringement with respect to seven patents relating to digital satellite signal processing. In November 2001, StarSight Telecast, Inc., TVG-PMC, Inc., and Gemstar-TV Guide International, Inc. were added as third-party defendants. Subsequently, Thomson Inc. filed a Revised Second Amended Counterclaim and Amended Third-Party Complaint claiming violation of antitrust laws and unfair competition. Upon Thomson Inc.’s motion, the antitrust and

 

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unfair competition claims have been transferred to the U.S. District Court for the Northern District of Georgia by the Judicial Panel on Multi-District Litigation for inclusion in the coordinated or consolidated MDL-1274 pretrial proceedings occurring there involving Gemstar-TV Guide International Inc., Scientific Atlanta Inc. Pioneer Corp., EchoStar Communications Corp., and other parties. The parties are currently engaged in extensive discovery. In May 2003, the Delaware Court issued a stay of the Delaware patent case pending the re examination of several of the patents at issue by the U.S. Patent and Trademark Office.

 

Parental Guide of Texas

 

In December 2000, Parental Guide of Texas, Inc. filed suit against Thomson, Inc. and numerous other consumer electronics manufacturers in the U.S. District Court for the Eastern District of Texas, Marshall Division, alleging infringement of a patent, which relates to inhibiting the intelligible output of possibly undesirable sound and visual events of a television program. In October 2002, Thomson, Inc. entered into a Release and License Agreement with Parental Guide of Texas Inc. whereby the Company agreed to license Parental Guide’s V-Chip patents. The amount to be paid by Thomson was contingent upon the amount, if any, of the litigation royalty established by Parental Guide in the lawsuit. Thomson, Inc. understands that all of the other defendants have settled prior to trial and does not believe it owes Parental Guide any further license payments. On January 17, 2003, Thomson Inc. filed a Complaint for Declaratory Judgment against Parental Guide in the U.S. District Court for the Southern District of Indiana seeking a ruling that Thomson Inc. owes no additional payments to Parental Guide pursuant to the Release and License Agreement. On February 7, 2003, Parental Guide served Thomson Inc. with a complaint filed in the U.S. District Court for the Eastern District of Texas alleging that Thomson Inc. was in breach of the Release and License Agreement. On May 12, 2003, the U.S. District Court in Indiana stayed the case in Indiana and ruled that the Texas case should proceed.

 

Broadcast Innovation

 

In November 2001, Broadcast Innovation filed suit in the U.S. District Court for the District of Colorado against Echostar Communications Corporation, Hughes Electronics Corporation, DirecTV, Inc., Thomson, Inc., Dotcast, Inc., and Pegasus Satellite Television, Inc. alleging infringement with respect to two patents; one relating to receiving data broadcast on a carrier signal (the ‘094 patent), and one relating to the control of signal distribution through the use of scrambling and unscrambling techniques (the ‘066 patent). NDS Limited, the manufacturer of the conditional access card utilized in Thomson digital satellite set-top boxes, is currently defending Thomson with regard to the ‘066 patent, subject to a reservation of rights. Thomson believes that it has meritorious defenses and is defending itself against the allegations.

 

Gemstar

 

In November 2001, Thomson, Inc., filed a demand for arbitration and a Statement of Claims with the American Arbitration Association seeking to dissolve and/or terminate the @TV Media Joint Venture with Gemstar-TV Guide International, Inc. (“Gemstar”) and recover damages for breach of contract. Gemstar counterclaimed that Thomson terminated, without good cause, a Memorandum of Terms outlining a proposed joint venture relating to the development of an electronic program guide business in Europe. In May 2002, Thomson entered into a binding memorandum of terms with Gemstar which resolved the issues in the pending arbitration. The arbitration proceeding has been terminated.

 

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James Stalcup and Mary Gick class action

 

In February 2002, James Stalcup and Mary Gick filed an individual and purported class action pursuant to Section 5/2-801 of the Illinois Code of Civil Procedure on behalf of U.S. consumers who acquired certain television sets manufactured by Thomson, Inc. during the period between 1998-2001. The complaint alleges a defect in certain televisions which have a “software-like integrated chip” which can cause temporary audio failure. The Group does not believe that the alleged televisions or the “ICs” which it procures from third parties are defective, and it intends to defend itself against any such allegations.

 

IP Innovation

 

On January 14, 2003, IP Innovation LLC and Technology Licensing Corp. filed a complaint against Thomson, Inc. in the U.S. District Court for the Northern District of Illinois, Eastern District, alleging infringement of four patents which cover the fields of video noise reduction, audio video synchronization, and audio in video technologies. The Court, after reviewing the complaint, dismissed it without prejudice for failure to establish jurisdiction or appropriate venue. On February 14, 2003, IP Innovation LLC and Technology Licensing Corp. filed a new complaint alleging infringement of the above described patents in the U.S. District court for the Southern District of Indiana. The Company has filed an answer contesting the allegations.

 

Environmental matters

 

A number of Thomson’s current and previously owned manufacturing sites have an extended history of industrial use, including the handling and disposal of wastes. Soil and groundwater contamination has occurred at some sites, including third-party disposal sites, and might occur or be discovered at other sites in the future, exposing Thomson to remediation costs and/or claims for damages to persons or property. The Group has identified certain sites at which chemical contamination has required or will require remediation or other restorative measures. Principal among these sites is a former production facility in Taoyuan, Taiwan, which Thomson owned from 1987 to 1992 when all production activities ceased and the site was sold.

 

In accordance with the agreement for the acquisition of General Electric Company’s consumer electronics business in 1987, General Electric Company has assumed or indemnified Thomson with respect to certain liabilities, including certain liabilities that could arise from the Taoyuan, Taiwan facility relating to environmental conditions existing prior to Thomson’s acquisition of the property.

 

The Group believes that the amounts budgeted and reserved will enable it to satisfy known and anticipated environmental, health and safety obligations to the extent they can be reasonably estimated and anticipated. These matters cannot be predicted with certainty, however, and the Group cannot provide any assurance that these amounts will be adequate. In addition, future developments, such as changes in environmental, health and safety laws or the discovery or development of new or existing conditions, could result in increased costs and liabilities that could have a material effect on the Group’s financial condition or results of operations. Based on current information and provisions established for environmental, health and safety matters and

 

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subject to the uncertainties described in this section, the Group does not believe that environmental, health and safety compliance and remediation requirements will have a material adverse effect on the Group’s business, financial condition or results of operations.

 

C—Dividends

 

We may declare a dividend upon the recommendation of our Board of Directors and the approval of our shareholders at their annual general meeting. Under French company law, our right to pay dividends is limited in specific circumstances. For a description of these restrictions, refer to Item 10: “Additional Information—Memorandum and Articles of Association”.

 

We did not pay dividends in respect of the five years ending December 31, 2001.

 

On February 11, 2003, the Board, taking into account the Group’s new business model towards more value-added, higher organic growth businesses, its financial strength and its significant improvement in net income in 2002, proposed the distribution of a dividend amounting to € 0.225 per share, which was approved by the Shareholders’ at their meeting on May 6, 2003. This dividend will be paid from June 3, 2003.

 

Any future payments of dividends will depend on our financial condition and results of operations, especially net income, and our investment policy at that time.

 

Dividends on shares that are not claimed within five years of the actual dividend payment date revert to the French State.

 

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ITEM 9—THE OFFER AND LISTING

 

Trading Market for Shares and ADSs

 

Since November 3, 1999, our shares have been listed:

 

    on the Premier Marché of Euronext Paris S.A. and are eligible for the Service de Règlement Différé (deferred settlement service) under the Euroclear France code 18453, each described below; and

 

    on the New York Stock Exchange in the form of ADSs under the ticker symbol TMS.

 

A—Trading on the Euronext Paris S.A.

 

On September 22, 2000, the entity managing the Paris stock exchange (Société des Bourses Françaises, known as ParisBourse SBF S.A.) and the entities managing the Amsterdam and Brussels stock exchanges, respectively, merged to create Euronext NV, a Dutch holding company and the first pan-European stock exchange (“Euronext”). Subsequently, ParisBourse SBF S.A., now a wholly-owned French subsidiary of Euronext NV, changed its name to Euronext Paris S.A. (“Euronext Paris”). Securities quoted on any of the stock exchanges participating in Euronext are traded through a common platform, with central clearinghouse, settlement and custody structures. However, securities remain listed on their respective local exchanges. Euronext Paris retains responsibility for the admission of securities to its trading markets, as well as the regulation of these markets.

 

Securities approved for listing by Euronext Paris are traded in one of the three regulated markets, the Paris Bourse, which in turn comprises the Premier Marché, the Second Marché, and the Nouveau Marché. In addition, Euronext Paris operates a European depositary receipt (“EDR”) market. Aside from these regulated markets, securities of certain other companies are traded on a non-regulated market, the Marché Libre. These markets are all operated and managed by Euronext Paris, a market operator responsible for the admission of securities and the supervision of trading in listed securities.

 

Official trading of listed securities on Euronext Paris, including our shares, is transacted through authorized financial institutions that are members of Euronext Paris and takes place continuously on each business day in Paris from 9:00 a.m. to 5:25 p.m., with a pre-opening session from 7:15 a.m. to 9:00 a.m. and a post-closing session with a final fixing at 5:30 p.m. (during which time trades are recorded but not executed). Euronext Paris publishes a daily Official Price List that includes price information on each listed security. Euronext Paris has introduced continuous trading by computer for most listed securities, including our shares. Euronext Paris may reserve or suspend trading in a security listed on the Premier Marché if the quoted price of the security exceeds certain price limits defined by the regulations of Euronext Paris. In particular, if the quoted price of a security varies by more than 10% from the reference price, Euronext Paris may restrict trading in that security for up to four minutes (réservation à la hausse ou à la baisse). The reference price is the opening price or, with respect to the first quoted price of a given trading day, the last traded price of the previous trading day, as adjusted if

 

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necessary by Euronext Paris. Euronext Paris may also reserve trading for a four minute period if the quoted price of a security varies by more than 2% from the last traded price. However, subject to trading conditions and appropriate and timely information, Euronext Paris may modify the reservation period and may accept broader fluctuation ranges than above mentioned. Euronext Paris also may suspend trading of a security listed on the Premier Marché in certain other limited circumstances, including, for example, where there is unusual trading activity in the security (suspension de la cotation). In addition, in certain exceptional cases, the Conseil des Marchés Financiers, or “CMF”, the Commission des Opérations de Bourse, or “COB”, and the issuer also may request a suspension in trading.

 

Pursuant to a draft law, which is under discussion before the Parliament, the CMF and the COB are to be merged into one single entity which will be named the Autorité des Marchés Financiers and which will gather the current powers of both existing entities.

 

Trades of securities listed on the Premier Marché are settled on a cash basis on the third trading day following the trade (immediate settlement or Réglement Immédiat ). Market intermediaries are also permitted to offer investors a deferred settlement service (Service de Réglement Différé or “SRD”) for a fee. The deferred settlement service is only available for trades in securities which either (i) are a component of the Index SBF 120 or (ii) have both a total market capitalization of at least € 1 billion and a daily average volume of trades of at least € 1 million.

 

Our shares are eligible for the deferred settlement service. In the deferred settlement service, the purchaser may decide on the determination date (date de liquidation), which is the fifth trading day prior to the end of the month, either (i) to settle the trade no later than the last trading day of such month, or (ii) upon payment of an additional fee, to extend to the determination date of the following month the option either to settle no later than the last trading day of such month or to postpone again the selection of a settlement date until the next determination date. Such option may be maintained on each subsequent determination date upon payment of an additional fee.

 

Equity securities traded on a deferred settlement basis are considered to have been transferred only after they have been registered in the purchaser’s account. Under French securities regulations, any sale of a security traded on a deferred settlement basis during the month of a dividend payment date is deemed to occur after the dividend has been paid. Thus if the deferred settlement sale takes but during the month of a dividend payment, but before the actual payment date, the purchaser’s account will be credited with an amount equal to the dividend paid and the seller’s account will be debited by the same amount.

 

Trading by our company in our own shares

 

Under French law, our company may not issue shares to itself, but we may purchase our shares in the limited cases described in the section entitled “Description of Share Capital—Memorandum and Articles of Association—Purchase of our own shares” and “—Trading in our own shares”.

 

In France, our shares have been included in the SBF 120 and SBF 250 Indexes since March 7,

 

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2000 and in the CAC 40 Index since August 23, 2000. We are also part of the IT CAC Index, a Euronext Paris technology index.

 

The tables below set forth, for the periods indicated, the high and low quoted prices in euro for our outstanding shares on the Premier Marché of Euronext Paris.

 

Years ending December 31,

 

    

Euronext Paris


    

Volume of transactions(1)


    

Share price in euro(1)


    

euro

in millions


  

Shares


  

Average

volume


    

Average

closing price


  

High


  

Low


1999 (from Nov. 3)

  

645.3

  

40,365,298

  

974,414

    

20.16

  

27.25

  

12.43

2000

  

8,620.5

  

156,303,492

  

636,024

    

56.11

  

81.33

  

21.75

2001

  

9,321.0

  

257,851,594

  

801,793

    

40.26

  

58.90

  

17.25

2002

  

13,558.5

  

546,861,580

  

2,144,555

    

25.23

  

37.15

  

12.05


(1)   Data take into account the two-for-one split voted by the Extraordinary Shareholders’ meeting of May 26, 2000, effective June 16, 2000.

 

Source: Euronext Paris

 

Quarters for years ending December 31,

 

    

Euronext Paris


    

Volume of transactions(1)


    

Share price in euro(1)


    

euro

in millions


  

Shares


  

Average

volume


    

Average

closing price


  

High


  

Low


1999

                               

Fourth Quarter (from

November 3)

  

645.3

  

40,365,298

  

974,414

    

20.16

  

27.25

  

12.43

2000

                               

First Quarter

  

2,041.5

  

40,758,960

  

738,937

    

49.56

  

74.35

  

21.75

Second Quarter

  

1,269.1

  

23,136,596

  

379,288

    

55.85

  

69.60

  

39.98

Third Quarter

  

2,301.7

  

32,466,448

  

507,288

    

69.11

  

81.33

  

56.55

Fourth Quarter

  

3,008.2

  

59,941,488

  

925,544

    

49.90

  

62.00

  

42.00

2001

                               

First Quarter

  

2,351.1

  

50,618,418

  

790,913

    

47.52

  

58.90

  

33.50

Second Quarter

  

2,372.9

  

55,000,581

  

901,649

    

43.58

  

53.30

  

31.25

Third Quarter

  

2,055.7

  

66,945,423

  

1,030,234

    

31.43

  

39.80

  

17.25

Fourth Quarter

  

2,541.3

  

85,201,419

  

1,353,451

    

29.38

  

34.90

  

19.80

2002

                               

First Quarter

  

4,765.7

  

147,684,525

  

2,382,008

    

33.60

  

37.15

  

28.50

Second Quarter

  

3,313.7

  

116,607,097

  

1,850,906

    

29.04

  

35.90

  

20.40

Third Quarter

  

3,072.0

  

143,567,015

  

2,175,258

    

21.33

  

26.45

  

15.15

Fourth Quarter

  

2,407.1

  

139,002,943

  

2,171,921

    

17.48

  

23.58

  

12.05

2003

                               

First Quarter

  

1,342.6

  

100,997,052

  

1,603,128

    

13.17

  

18.12

  

9.25


(1)   Data take into account the two for one split voted by the Extraordinary Shareholders’ meeting of May 26, 2000, effective June 16, 2000.

 

Source: Euronext Paris

 

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Last six months

 

    

Euronext Paris


    

Volume of transactions


    

Share price in euro


    

euro

in millions


  

Shares


  

Average

volume


    

Average

closing price


  

High


  

Low


2003

                               

April

  

511,1

  

42,513,470

  

2,125,674

    

11.90

  

14.02

  

9.93

March

  

475,1

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