Item 9A: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in financial market conditions in the
normal course of business due to its operations in different foreign currencies
and its ongoing investing and financing activities. Market risk is the
uncertainty to which future earnings or asset/liability values are exposed due
to operating cash flows denominated in foreign currencies and various financial
instruments used in the normal course of operations. The Company has
41
established policies, procedures and internal processes governing its management
of market risks and the use of financial instruments to manage its exposure to
such risks.
The Company is exposed to changes in interest rates primarily as a
result of its borrowing activities which include long-term debt used to fund
business operations. The Company borrows in U.S. dollars as well as in other
currencies from banks and other sources. The Company primarily enters into debt
obligations to support general corporate and local purposes including capital
expenditures and working capital needs. The nature and amount of the Company's
long-term debt can be expected to vary as a result of future business
requirements, market conditions, and other factors. The principal interest rate
risks to which the Company is exposed relate to the Company's investment
portfolio and long-term debt obligations. The Company primarily utilizes
fixed-rate debt and does not expect changes in interest rates to have a material
effect on income or cash flows in 2000.
The functional currency of the Company's subsidiaries is generally the
local currency. The Company's operating cash flows are denominated in various
foreign currencies as a result of its international business activities and
certain of its borrowings are exposed to changes in foreign exchange rates. The
Company continually evaluates its foreign currency exposure based on current
market conditions and the business environment. In order to mitigate the impact
of changes in foreign currency exchange rates, the Company enters into forward
exchange contracts. The magnitude and nature of such activities are explained
further in Note 22 to the Consolidated Financial Statements.
The Company places its cash and cash equivalents with high credit
quality financial institutions. The Company manages the credit risks associated
with financial instruments through credit approvals, investment limits and
centralized monitoring procedures but does not normally require collateral or
other security from the parties to the financial instruments with off-balance
sheet risk. The Company is averse to principal loss and manages the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk.
The Company enters into forward contracts and foreign currency options
to protect against the volatility of foreign currency exchange rates and to
cover a portion of both its probable anticipated, but not firmly committed,
transactions and transactions with firm foreign currency commitments. The risk
of loss associated with purchased options is limited to premium amounts paid for
the option contracts. The risk of loss associated with forward contracts is
equal to the exchange rate differential from the date the contract is made until
the time it is settled.
Forward contracts outstanding as of December 31, 1999 have remaining
terms of one to 13 months, maturing mainly during first quarter 2000. The
notional amounts of foreign exchange forward contracts totaled $611,567 at
December 31, 1999, and $634,870 at December 31, 1998. The principal currencies
covered are the Italian lira, the Japanese yen, the Euro, the British pound and
the Swiss franc.
The Company does not anticipate any material adverse effect on its
financial position, result of operations or cash flows resulting from the use of
the Company's instruments in the future. There can be no assurance that these
strategies will be effective or that transaction losses can be minimized or
forecasted accurately. The Company does not use financial instruments for
speculative or trading purposes.
The information below summarizes the Company's market risks associated
with cash equivalents, debt obligations, and other significant financial
instruments as of December 31, 1999. The information below should be read in
conjunction with Notes 13 and 22 to the Consolidated Financial Statements.
The table below presents principal amounts and related weighted-average
interest rates by year of maturity for the Company's investment portfolio and
debt obligations (in thousands of U.S. dollars, except percentages):
Fair value at
2000 2001 2002 2003 2004 Thereafter TOTAL December 31, 1999
------------------------------------------------ ---------- ----- -----------------
Assets:
Cash equivalents 1,823,086 1,823,086 1,823,086
Average interest 6.18% 6.18%
rate
Long-term debt:
Fixed rate 96,669 86,976 87,168 9,688 10,795 1,153,850 1,445,146 2,845,234
Average interest 4.97% 5.54% 5.68% 4.25% 3.97% 2.20% 2.82%
rate
42
Amounts in thousands
of U.S. dollars
------------------------
Long-term debt by currency as of December 31, 1999:
U.S. dollar 1,157,366
Italian lira 192,432
French franc 82,993
Other currencies 12,355
------
TOTAL in U.S. dollars 1,445,146
=========
Amounts in thousands
of U.S. dollars
------------------------
Long-term debt by currency as of December 31, 1998:
U.S. dollar 455,885
Italian lira 231,752
French franc 98,628
Other currencies 14,844
------
TOTAL in U.S. dollars 801,109
=======
The following table provides information about the Company's foreign
exchange forward contracts at December 31, 1999 (in thousands of U.S. dollars):
Average Contractual
Buy Sell Notional Amount Forward Exchange Rate Fair Value
----------------- --------------------- ----------------------------- -------------------- ----------
Foreign currency forward exchange contracts to buy U.S. dollars for foreign
currencies:
U.S. dollar Euro 50,373 1.02 (943)
U.S. dollar British pound 34,790 1.62 61
U.S. dollar Italian lira 144,066 1,785.35 8,062
U.S. dollar Malaysian ringgit 131,760 3.79 185
------- -----
Total 360,989 7,365
------- -----
Foreign currency forward exchange contracts to buy Singapore dollars for foreign
currencies:
Singapore dollar Euro 4,968 1.68 31
Singapore dollar Japanese yen (1) 36,186 1.61 (410)
Singapore dollar U.S. dollar 77,600 1.66 180
------- -----
Total 118,754 (199)
------- -----
Foreign currency forward exchange contracts to buy French francs for foreign
currencies:
French franc U.S. dollar 43,000 6.43 (547)
------ -----
Total 43,000 (547)
------ -----
Foreign currency forward exchange contracts to buy Japanese yen for foreign
currencies:
Japanese yen Euro 19,558 104.92 460
Japanese yen(1) French franc 17,015 6.16 696
------ -----
Total 36,573 1,156
------ -----
Foreign currency forward exchange contracts to buy Euro for foreign currencies:
Euro Malaysian ringgit 781 3.85 (2)
Euro U.S. dollar 23,000 1.02 379
------ ---
Total 23,781 377
------ ---
Foreign currency forward exchange contracts to buy Swiss francs for foreign
currencies:
Swiss franc French franc 2,706 4.09 (2)
Swiss franc U.S. dollar 16,345 1.58 (236)
------ -----
Total 19,051 (238)
------ -----
Foreign currency forward exchange contracts to buy Swedish kroners for foreign
currencies:
Swedish kroner U.S. dollar 7,000 8.43 (56)
----- ----
Total 7,000 (56)
----- ----
Foreign currency forward exchange contracts to buy British pounds for foreign
currencies:
British pound French franc 2,419 10.19 81
----- --
Total 2,419 81
----- - --
TOTAL 611,567 7,939
======= =====
(1) Forward exchange rate for 100 Japanese yen.
43
The following table provides information about the Company's foreign
exchange forward contracts at December 31, 1998 (in thousands of U.S. dollars):
Average
Contractual
Forward Exchange
Buy Sell Notional Amount Rate Fair Value
------------------ ------------------- ----------------------------- -------------------- ----------
Foreign currency forward exchange contracts to buy U.S. dollars for foreign currencies:
U.S. dollar German mark 47,910 1.70 (827)
U.S. dollar Euro 1,757 1.19 26
U.S. dollar French franc 10,000 5.53 118
U.S. dollar Italian lira 121,832 1,738.98 (10,124)
U.S. dollar Japanese yen 1,304 121.55 (79)
U.S. dollar Malaysian ringgit 10,142 3.80 0
U.S. dollar Spanish peseta 2,337 144.50 (41)
----- --------
Total 195,282 (10,927)
------- --------
Foreign currency forward exchange contracts to buy French francs for foreign
currencies:
French franc Singapore dollar 1,136 0.30 (4)
French franc U.S. dollar 130,000 5.60 (418)
------- -----
Total 131,136 (422)
------- -----
Foreign currency forward exchange contracts to buy Italian lira for foreign
currencies:
Italian lira(1) Singapore dollar 565 1.00 (5)
Italian lira U.S. dollar 115,000 1,662.10 187
Italian lira(1) Malaysian ringgit 62 2.35 0
-- ---
Total 115,627 182
------- ---
Foreign currency forward exchange contracts to buy Singapore dollars for foreign
currencies:
Singapore dollar Japanese yen(2) 25,653 1.39 (839)
Singapore dollar U.S. dollar 78,000 1.64 (274)
------ -----
Total 103,653 (1,113)
------- -------
Foreign currency forward exchange contracts to buy Swiss francs for foreign
currencies:
Swiss franc French franc 2,851 4.11 (8)
Swiss franc Italian lira 731 1,218.50 2
Swiss franc Singapore dollar 202 1.23 (5)
Swiss franc U.S. dollar 40,205 1.36 (404)
------ -----
Total 43,989 (415)
------ -----
Foreign currency forward exchange contracts to buy German marks for foreign
currencies:
German marks Malaysian ringgit 396 2.28 0
German marks Singapore dollar 4,138 1.02 114
German marks U.S. dollar 14,000 1.69 132
------ ---
Total 18,534 246
------ ---
Foreign currency forward exchange contracts to buy Euro for foreign currencies:
Euro French franc 8,503 6.58 (30)
----- ----
Total 8,503 (30)
----- ----
Foreign currency forward exchange contracts to buy Japanese yen for foreign
currencies:
Japanese yen French franc 5,652 21.69 380
Japanese yen Italian lira 1,739 14.41 32
Japanese yen(2) Malaysian ringgit 104 3.20 0
--- ---
Total 7,495 412
----- ---
Foreign currency forward exchange contracts to buy Malaysian ringgit for foreign
currencies:
Malaysian ringgit U.S. dollar 5,470 3.80 0
----- ---
Total 5,470 0
----- ---
Foreign currency forward exchange contracts to buy British pounds for foreign
currencies:
British pound French franc 3,510 9.44 (32)
British pound Italian lira 1,671 2,730.00 19
----- ---
Total 5,181 (13)
----- ----
TOTAL 634,870 (12,080)
======= ========
-----------------
(1) Forward exchange rate for 1000 Italian lira.
(2) Forward exchange rate for 100 Japanese yen.
44
Item 10: Directors and Officers of Registrant
Supervisory Board
The management of the Company is entrusted to the Management Board
under the supervision of the Supervisory Board. The Supervisory Board advises
the Management Board and is responsible for supervising the policies pursued by
the Management Board and the general course of affairs of the Company and its
business. In fulfilling their duties under Dutch law, the members of the
Supervisory Board must serve the interests of the Company and its business.
The Supervisory Board consists of such number of members as is resolved
by the general meeting of shareholders upon proposal of the Supervisory Board,
with a minimum of six members. The members of the Supervisory Board are
appointed upon proposal of the Supervisory Board by the general shareholders'
meeting by a majority of the votes cast at a meeting where at least one-third of
the outstanding share capital is present or represented.
Pursuant to various shareholders agreements, the membership of the
Supervisory Board of the Company must include three members designated by the
French shareholders from the Board of Directors of FT1CI (following the merger
of FT2CI and FT1CI, a corporation owned by CEA-Industrie and France Telecom),
and three members designated by the Italian shareholder. See "Item 4: Control of
Registrant--Shareholder Agreements." The Supervisory Board of the Company
currently includes two members who are not affiliated with ST Holding and its
direct and indirect shareholders.
The members of the Supervisory Board appoint a chairman and vice
chairman of the Supervisory Board from among the members of the Supervisory
Board (with approval of at least three-quarters of the members of the
Supervisory Board) and may appoint one or more members as a delegate supervisory
director to communicate on a regular basis with the Management Board.
Resolutions of the Supervisory Board require the approval of at least
three-quarters of its members. The Supervisory Board must meet upon request by
two or more of its members or by the Management Board. The Supervisory Board has
adopted internal regulations to clarify the manner by which it carries out the
supervisory duties imposed upon it by law, the Company's Articles of Association
and resolutions of the shareholders and the Supervisory Board itself. By such
resolution the Supervisory Board has authorized (i) the establishment of a
secretariat (headed by an individual approved by it and appointed for a one-year
renewable term) whose functions are to: (a) assist the Chairman and Vice
Chairman of the Supervisory Board in the operations of the Board, (b) implement
and oversee the execution within the Company of decisions adopted by the
Supervisory Board, and (c) cooperate in and contribute to the execution of the
functions of the designated Secretary and Assistant Secretary of the Supervisory
Board; (ii) (a) the possibility of the appointment by the members of the
Supervisory Board of assistants and (b) the appointment by such board of two
controllers to exercise operational and financial control over the operations of
the Company who, with assistants, will also review operation reports and the
implementation of Supervisory Board decisions; and (iii) the establishment by
the Supervisory Board of advisory committees. In addition, the Supervisory Board
has established procedures for the preparation of Supervisory Board resolutions
and the setting of the Board's calendar.
Members of the Supervisory Board must retire no later than at the
ordinary general meeting of shareholders held after a period of three years
following their appointment, but may be re-elected. A member of the Supervisory
Board must retire at the ordinary general meeting of shareholders held in the
year in which he reaches the age prescribed by Dutch law for retirement of a
supervisory director (currently at age 72). Members of the Supervisory Board may
be suspended or dismissed by the general meeting of shareholders. The
Supervisory Board may make a proposal to the general meeting of shareholders for
the suspension or dismissal of one or more of its members. The members of the
Supervisory Board may receive compensation if authorized by the general meeting
of shareholders.
The shareholders agreement between the group of French shareholders and
the group of Italian shareholders, as shareholders of ST Holding, also includes
certain provisions requiring the approval of the Supervisory Board of ST Holding
for certain actions by ST Holding, the Company and its subsidiaries. In
addition, pursuant to the shareholders agreement among the group of French
shareholders and a decree issued by certain Ministries of The Republic of
France, the approval by members of the Supervisory Board appointed by the French
shareholders of certain actions to be taken by the Company or its subsidiaries
requires the approval of the Board of
45
Directors of FT1CI and is subject to a veto by certain Ministries of
The Republic of France. These requirements for the prior approval of various
actions to be taken by the Company and its subsidiaries may give rise to a
conflict of interest between the interests of the Company and the individual
shareholders approving such actions, and may result in a delay in the ability of
the Management Board to respond as quickly as may be necessary in the rapidly
changing environment of the semiconductor industry. Such approval process is
subject to the provisions of Dutch law requiring members of the Supervisory
Board to act independently in the supervision of the management of the Company.
The members of the Supervisory Board are:
Name Position Year Appointed Age
---- -------- -------------- ---
Jean-Pierre Noblanc Chairman 1994 61
Bruno Steve Vice Chairman 1989 58
Tom de Waard Member 1998 53
Remy Dullieux Member 1993 49
Riccardo Gallo Member 1997 56
Francis Gavois Member 1998 64
Alessandro Ovi Member 1994 56
Robert M. White Member 1996 61
Jean-Pierre Noblanc has been the Chairman of the Supervisory Board
since May 31, 1999, and has been a member of the Supervisory Board since 1994.
He served as Vice Chairman of the Supervisory Board from June 1996 to May 31,
1999. Mr. Noblanc is presently General Manager of the Components Sector of CEA
Industrie. Prior to joining CEA Industrie, Mr. Noblanc served at CNET, the
Research Center of France Telecom, as Director of the Applied Research Center of
Bagneux and of the Microelectronics Center of Grenoble. Mr. Noblanc holds a
degree in engineering from the Ecole Superieure d'Electricite and a doctoral
degree in physical sciences from the University of Paris. Mr. Noblanc is an
Associate Member of the Committee on Applications of the French Academy of
Sciences and a director of Thomson S.A. Mr. Noblanc also serves on the Board of
Directors of CEA Industrie, FT1CI and Picogiga S.A.
Bruno Steve has been a member of the Company's Supervisory Board since
1989 and its Chairman until May 31, 1999. He served as Vice Chairman of the
Supervisory Board from 1989 to July 1990. From July 1990 to March 1993, Mr.
Steve served as Chairman of the Supervisory Board. He has been with I.R.I.,
Finmeccanica's parent company, Finmeccanica and other affiliates of I.R.I. in
various senior positions for over 17 years. Mr. Steve is currently President of
the board of statutory auditors of Alitalia S.p.a., Italia Express S.p.a. and
Iritecna S.p.a. in liquidazione and member of statutory auditors of Stretto di
Messina S.p.A. and Sigma S.p.A. Until December 1999, he served as Chairman of
MEI. He served as the Chief Operating Officer of Finmeccanica from 1988 to July
1997 and Chief Executive Officer from May 1995 to July 1997. He was Senior Vice
President of Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior to
1984, Mr. Steve served in several key executive positions at Telecom Italia,
I.R.I.'s holding company for the telecommunications sector.
Tom de Waard was appointed to the Supervisory Board in 1998. Mr. de
Waard is a partner of Clifford Chance, a leading English law firm, since March
2000. Prior to that, he was a partner at Stibbe, Simont, Monahan, & Duhot, where
he has held several positions since 1979 and has gained extensive experience
working with major international companies, particularly with respect to
corporate finance. He is a member of the Amsterdam bar and received his law
degree from Leiden University in 1979.
Remy Dullieux has been a member of the Supervisory Board since 1993. He
is a graduate of the Ecole Polytechnique. Since June 1996, Mr. Dullieux has
served as a France Telecom Executive Manager for the Northern and Eastern areas
of France. From 1991 to June 1996, Mr. Dullieux served as Group Executive Vice
President for Strategic Procurement and Development of France Telecom. From 1985
to 1988, Mr. Dullieux served as Regional Manager of Creteil. Mr Dullieux also
serves on the Board of Directors of FT1CI.
Riccardo Gallo was appointed to the Supervisory Board in 1997. He is
Associate Professor of Industrial Economics at the Engineering Faculty of "La
Sapienza" University in Rome. He has also been a member of the board of
directors of Comitato Sir from 1981 until the present. From 1982 to 1991, he
served as Director General at
46
the Italian Ministry of the National Budget. In the early 1990s, he served as
Vice Chairman of I.R.I. In 1994, he was appointed by the Italian Minister of
Industry as Extraordinary Commissioner of Fidia, a research-oriented
pharmaceutical company.
Francis Gavois was appointed to the Supervisory Board in 1998. Mr.
Gavois is the Chairman of the Supervisory Board of ODDO et Cie. He is also a
member of the Board of Directors of Plastic Omnium, FT1CI and the Supervisory
Board of the Consortium de Realisation (CDR). From 1984 to 1997, Mr. Gavois held
several positions, including Chairman of the Board of Directors and President of
Banque Francaise du Commerce Exterieur (BFCE). Prior to that time Mr. Gavois
held positions in the French government. He is Inspecteur des Finances and a
graduate of the Institut d'Etudes Politiques de Paris and the Ecole Nationale
d'Administration.
Alessandro Ovi has been a member of the Supervisory Board since 1994.
He received a doctoral degree in Nuclear Engineering from the Politecnico in
Milan and a masters degree in operations research from Massachusetts Institute
of Technology. He currently serves on the boards Italtel, Carnegie Mellon
University and Corporation Development Committee of the Massachusetts Institute
of Technology. Until April 2000, Mr. Ovi was the Chief Executive Officer of
Tecnitel S.p.a., a subsidiary of Telecom Italia Group. Prior to joining Tecnitel
S.p.A., Mr. Ovi was the Senior Vice President of International Affairs and
Communications at I.R.I.
Robert M. White was appointed to the Supervisory Board in June 1996.
Mr. White is a University Professor and Director of the Data Storage Systems
Center at Carnegie Mellon University and serves as a member of several corporate
boards, including those of Ontrack Data Systems, Inc., and Read-Rite, Inc. He is
a member of the U.S. National Academy of Engineering. From 1990 to 1993, Mr.
White served as Under Secretary of Commerce for Technology in the United States
Government. Prior to 1990, Mr. White served in several key executive positions
at Xerox Corporation, Control Data Corporation and MCC. He received a doctoral
degree in physics from Stanford University and graduated with a degree in
physics from Massachusetts Institute of Technology.
The Supervisory Board has established an Audit Committee currently chaired by
Mr. de Waard and also comprised of Messrs. Gavois, Ovi and White, a Compensation
Committee comprised of the Chairman (Mr. Noblanc), the Vice Chairman (Mr. Steve)
and an independent director (Mr. White) and a Strategic Committee comprised of
Messrs. Noblanc and Steve.
Management Board
The management of the Company is entrusted to the Management Board
under the supervision of the Supervisory Board. Under the Articles of
Association, the Management Board must obtain prior approval from the
Supervisory Board for (i) all proposals to be submitted to a vote at the general
meeting of shareholders; (ii) the formation of all companies, acquisition or
sale of any participation, and conclusion of any cooperation and participation
agreement; (iii) all multi-year plans of the Company and the budget for the
coming year, covering investment policy, policy regarding research and
development, as well as commercial policy and objectives, general financial
policy, and policy regarding personnel; and (iv) all acts, decisions or
operations covered by the foregoing and constituting a significant change with
respect to decisions already taken by the Supervisory Board. The Management
Board must seek approval from the general meeting of shareholders for decisions
relating to (i) the sale of all or of an important part of the Company's assets
or concerns; and (ii) all mergers, acquisitions or joint ventures which the
Company wishes to enter into and which the Supervisory Board considers to be of
material significance. In addition, under the Articles of Association, the
Supervisory Board may specify by resolution certain actions by the Management
Board that require its prior approval. Following the adoption of such a
resolution, the actions by the Management Board requiring such prior approval
include the following: (i) modification of its Articles of Association; (ii)
change in its authorized share capital, issue, acquisition or disposal of its
own shares, change in any shareholder rights or issue of any instruments
granting an interest in its capital or profits; (iii) liquidation or disposal of
all or a substantial and material part of its assets or any shares it holds in
any of its subsidiaries; (iv) entering into any merger, acquisition or joint
venture agreement (and, if substantial and material, any agreement relating to
intellectual property) or formation of a new company; (v) approval of such
company's draft consolidated balance sheets and financial statements or any
profit distribution by such company; (vi) entering into any agreement with any
of the direct or indirect French or Italian shareholders outside the normal
course of business; (vii) submission of documents reporting on (a) approved
policy, expected progress and results and (b) strategic long-term business plans
and consolidated annual budgets or any modifications to such; (viii) preparation
of long-term business plans and annual budgets; (ix) adoption and implementation
of such long-term business plans and
47
annual budgets; (x) approval of all operations outside the normal course of
business, including operations already provided for in the annual budget; and
(xi) approval of the quarterly, semi-annual and annual consolidated financial
statements prepared in accordance with internationally accepted accounting
principles. Such resolution also requires that the Management Board obtain prior
approval from the Supervisory Board for (i) the appointment of the members of
the statutory management, administration and control bodies of the Company's
French and Italian subsidiaries; and (ii) the nomination of the statutory
management, administration and control bodies of the Company and each of the
Company's other direct and indirect subsidiaries followed by confirmation to the
Supervisory Board of such nominees' appointments. The general meeting of
shareholders may also specify certain actions of the Management Board that
require shareholder approval. The Company's Articles of Association provide that
the Management Board must obtain shareholder approval prior to (i) the sale of
all or an important part of the Company's assets and concerns; and (ii) all
mergers, acquisitions or joint ventures which the Company wishes to enter into
and which the Supervisory Board considers to be of material significance. See
"Item 1: Description of Business" and "Item 13: Interest of Management in
Certain Transactions."
The Management Board shall consist of such number of members as
resolved by the general meeting of shareholders upon the proposal of the
Supervisory Board. The members of the Management Board are appointed for three
year terms upon proposal by the Supervisory Board at the general shareholders'
meeting by a majority of the votes cast at a meeting where at least one-third of
the outstanding share capital is present or represented. The Supervisory Board
appoints one of the members of the Management Board to be chairman of the
Management Board (upon approval of at least three-quarters of the members of the
Supervisory Board). Resolutions of the Management Board require the approval of
a majority of its members. Mr. Pasquale Pistorio, the Company's President and
Chief Executive Officer, is currently the sole member of the Management Board.
His term expires in 2002.
The general meeting of shareholders may suspend or dismiss one or more
members of the Management Board at a meeting at which at least one-half of the
outstanding share capital is present or represented. No quorum is required if a
suspension or dismissal is proposed by the Supervisory Board. The Supervisory
Board may suspend members of the Management Board, but a general meeting of
shareholders must be convened within three months after such suspension to
confirm or reject the suspension. The Supervisory Board shall appoint one or
more persons who shall, at any time, in the event of absence or inability to act
of all the members of the Management Board, be temporarily responsible for the
management of the Company. Upon delegation from the Supervisory Board, the
Compensation Committee determines the compensation and other terms and
conditions of employment of the members of the Management Board.
Executive Officers
The executive officers of the Company support the Management Board in
its management of the Company, without prejudice to the Management Board's
ultimate responsibility. The Company is organized in a matrix structure with
geographical regions interacting with product divisions, bringing all levels of
management closer to the customer and facilitating communication among research
and development, production, marketing and sales organizations. The executive
officers of the Company are:
Years in
Years with Semiconductor
Name Position Company(1) Industry Age
---- -------- ---------- ------------- ---
Pasquale Pistorio President and Chief Executive Officer 20 36 64
Georges Auguste Corporate Vice President, Total Quality and 13 26 51
Environmental Management
Laurent Bosson Corporate Vice President, Front-end 17 17 57
Manufacturing
Carlo Bozotti Corporate Vice President, Memory Products Group 23 23 47
Salvatore Castorina Corporate Vice President, Discrete and 18 34 63
Standard ICs Group
48
Years in
Years with Semiconductor
Name Position Company(1) Industry Age
---- -------- ---------- -------- ---
Alain Dutheil Corporate Vice President, Strategic Planning 17 30 55
and Human Resources
Philippe Geyres Corporate Vice President, Consumer and 16 24 48
Microcontroller Group
Maurizio Ghirga Corporate Vice President, Chief Financial 17 17 62
Officer
Jean-Claude Marquet Corporate Vice President, Asia/Pacific 14 33 58
Region
Pier Angelo Martinotti Corporate Vice President, New Ventures 19 32 59
Group
Joel Monnier Corporate Vice President, Central Research 17 26 54
and Development
Piero Mosconi Corporate Vice President, Treasurer 36 36 60
Carmelo Papa Corporate Vice President, Region Five 16 16 51
Richard Pieranunzi Corporate Vice President, Americas Region 19 34 61
Aldo Romano Corporate Vice President, Telecommunications, 35 35 59
Peripherals and Automotive Group
Giordano Seragnoli Corporate Vice President, Back-end 35 37 63
Manufacturing and Subsystems Products Group
Keizo Shibata Corporate Vice President, Japan Region 8 35 63
Enrico Villa Corporate Vice President, European Region 32 32 59
(1) Including years with Thomson Semiconducteurs or SGS Microelettronica.
Pasquale Pistorio has more than 36 years of experience in the
semiconductor industry. After graduating in Electrical Engineering from the
Polytechnical University of Turin in 1963, he started his career selling
Motorola products. Mr. Pistorio joined Motorola in 1967, becoming Director of
World Marketing in 1977 and General Manager of the International Semiconductor
Division in 1978. Mr. Pistorio joined SGS Microelettronica as President and
Chief Executive Officer in 1980 and became President and Chief Executive Officer
of the Company upon its formation in 1987.
Georges Auguste has served as Corporate Vice President, Total Quality
and Environmental Management since 1999. Mr. Auguste received a degree in
engineering from the Ecole Superieure d'Electricite (SUPELEC) in 1974 and a
diploma in business administration from the Caen University in 1976. Prior to
joining the Company, Mr. Auguste worked with Philips Components from 1974 to
1986, in various positions in the field of manufacturing. From 1990 to 1997 he
headed the Company's operations in Morocco and from 1997 to 1999 Mr. Auguste
served as director of Total Quality and Environmental Management.
Laurent Bosson has served as Corporate Vice President, Front-end
Manufacturing and VLSI Fabs since 1989 and from 1992 to 1996 he was given
additional responsibility as President and Chief Executive Officer of the
Company's operations in the Americas. Mr. Bosson received a Masters degree in
Chemistry from the University of Dijon in 1969. He joined Thomson-CSF in 1964
and has held several positions in engineering and manufacturing. In 1982, Mr.
Bosson was appointed General Manager of the Tours and Alencon facilities of
Thomson Semiconducteurs. In 1985, he joined the French subsidiary of SGS
Microelettronica as General Manager of the Rennes, France manufacturing
facility.
Carlo Bozotti has served as Corporate Vice President, Memory Products
since August 1998. Mr. Bozotti joined SGS Microelettronica in 1977 after
graduating in Electronic Engineering from the University of Pavia. Mr. Bozotti
served as Product Manager for the Industrial, Computer Peripheral and Telecom
divisions and as Product
49
Manager for the Monolithic Microsystems' Telecom business unit from 1986 to
1987. He was appointed Director of Corporate Strategic Marketing and Key
Accounts for the Headquarters Region in 1988 and became Vice President,
Marketing and Sales, Americas Division in 1991. Mr. Bozotti has served as
Corporate Vice President, Memory Products since August 1998, after having served
as Corporate Vice President, Europe and Headquarters Region from 1994 to 1998.
Salvatore Castorina has served as Corporate Vice President, Discrete
and Standard ICs Group since 1989. Mr. Castorina received his engineering degree
in Electronics from the Polytechnical University of Turin and began his career
as a teacher of electrical and electronic technologies prior to joining
Thomson-CSF in Milan in 1965. In 1967, he joined Motorola Semiconductors and
held various positions in sales and marketing. In 1981, Mr. Castorina joined the
Company as General Manager of Transistors in Catania and became the General
Manager of the Company's Discrete Division in 1989.
Alain Dutheil has served as Corporate Vice President, Strategic
Planning and Human Resources since 1994 and 1992, respectively. Mr. Dutheil is
also President of the Company's French subsidiary. After graduating in
Electrical Engineering from the Ecole Superieure d'Ingenieurs de Marseilles
(ESIM), Mr. Dutheil joined Texas Instruments in 1969 as a Production Engineer,
becoming Director for Discrete Products in France and Human Resources Director
for Texas Instruments, France in 1980 and Director of Operations for Texas
Instruments, Portugal in 1982. He joined Thomson Semiconducteurs in 1983 as
General Manager of a plant in Aix-en-Provence, France and then became General
Manager of the Company's Discrete Products Division. From 1989 to 1994, Mr.
Dutheil served as Director for Worldwide Back-end Manufacturing, in addition to
serving as Corporate Vice President for Human Resources from 1992 until the
present.
Philippe Geyres has served as Corporate Vice President, General Manager
Consumer and Microcontroller Group (formerly Programmable Products Group) since
1990. Mr. Geyres graduated from the Ecole Polytechnique in 1973 and began his
career with IBM in France before joining Schlumberger Group in 1980 as Data
Processing Director. He was subsequently appointed Deputy Director of the IC
Division at Fairchild Semiconductors. Mr. Geyres joined Thomson Semiconducteurs
in 1983 as Director of the Bipolar Integrated Circuits Division. He was
appointed Strategic Programs Director in 1987 and, later the same year, became
Corporate Vice President, Strategic Planning of the Company.
Maurizio Ghirga became Corporate Vice President, Chief Financial
Officer in 1987, after having served as chief financial controller of SGS
Microelettronica since 1983. Mr. Ghirga has a degree in Business Administration
from the University of Genoa. He spent more than ten years of his career in
various financial capacities at ESSO Company (an Exxon subsidiary in Italy) and
prior to joining the Company was Financial Controller of one of the largest
refinery plants in Italy and of an ESSO chemical subsidiary.
Jean-Claude Marquet has served as Corporate Vice President,
Asia/Pacific Region since July 1995. After graduating in Electrical and
Electronics Engineering from the Ecole Breguet Paris, Mr. Marquet began his
career in the French National Research Organisation and later joined Alcatel. In
1969, he joined Philips Components. He remained at Philips until 1978, when he
joined Ericsson, eventually becoming President of Ericsson's French operations.
In 1985, Mr. Marquet joined Thomson Semiconducteurs as Vice President Sales and
Marketing, France. Thereafter, Mr. Marquet served as Vice President Sales and
Marketing for France and Benelux, and Vice President Asia Pacific and Director
of Sales and Marketing for the region.
Pier Angelo Martinotti has served as Corporate Vice President, General
Manager New Ventures Group since 1994. A graduate in Electronic Engineering from
the Polytechnical University of Turin, Mr. Martinotti began his career at the
Company in 1965 as an Application and Marketing Engineer. In 1968, he joined
Motorola Semiconductors in the area of strategic marketing in Europe, and in
1975 became the Marketing (Sales) Director for Europe. From 1986 to 1990, Mr.
Martinotti was Chief Executive Officer of Innovative Silicon Technology, a
former subsidiary of the Company. Mr. Martinotti was appointed Director of
Corporate Strategic Planning in 1990.
Joel Monnier has served as Corporate Vice President, Director of
Central Research and Development since 1989. After graduating in Electrical
Engineering from the Institut National Polytechnique of Grenoble, Ecole
Nationale Superieure de Radio Electricite, Mr. Monnier obtained a doctoral
degree in microelectronics at LETI/CENG. He began his career in the
semiconductor industry in 1968 as a researcher with CENG, and
50
subsequently joined the research and development laboratories of Texas
Instruments in Villeneuve Loubet, France and Houston, Texas, eventually becoming
Engineering Manager and Operation Manager at Texas Instruments. Mr. Monnier
joined Thomson-CSF in 1983 as head of the research and manufacturing unit of
Thomson Semiconducteurs. In 1987, he was appointed Vice President and Corporate
Director of Manufacturing.
Piero Mosconi has served as Corporate Vice President, Treasurer since
1987. After graduating in accounting from Monza in 1960, Mr. Mosconi joined the
faculty at the University of Milan. Mr. Mosconi worked with an Italian bank
before joining the Foreign Subsidiaries Department at SGS Microelettronica in
1964 and becoming Corporate Director of Finance in 1980.
Carmelo Papa has served as Corporate Vice President, Region Five since
January 2000. Mr . Papa received his degree in nuclear physics at Catania
University. Mr. Papa joined the Company in 1983 and since 1986 has been Director
of Product Marketing and Customer Service for Transistors and Standard ICs.
During this time, he has overseen a substantial growth both in the product
portfolio and the sales volume. He has also played a key role both in the
expansion of the Company's facility in Catania, Italy, from its origin as a
low-cost assembly plant to its present position as one of the Company's most
important and dynamic centres, hosting advanced R&D in areas ranging from
process technology to fuzzy logic and other "soft computing" disciplines,
leading-edge wafer manufacturing and Sales and Marketing HQ for the Company's
Discrete and Standard Circuits division.
Richard Pieranunzi has served as Corporate Vice President, Americas Region since
August 1996. Mr. Pieranunzi received his BSEE from the University of Rhode
Island, and started his career in process engineering. Later, he joined
Motorola's international marketing organization, including in Europe where he
held management positions in sales and strategic marketing and applications. Mr.
Pieranunzi joined SGS Semiconducteurs in 1981 as Marketing and Sales Manager
and, upon the formation of the Company in 1987, he became Vice President
Marketing and Sales for the U.S. organization. For three years, Mr. Pieranunzi
headed the Company's Corporate Strategic Marketing and Corporate Key Account
programs.
Aldo Romano has served as Corporate Vice President, General Manager
Telecommunications, Peripherals and Automotive Group (formerly Dedicated
Products Group) since 1987. Mr. Romano is also Managing Director of the
Company's Italian subsidiary. A graduate in Electronic Engineering from the
University of Padua in 1963, Mr. Romano joined SGS Microelettronica in 1965 as a
designer of linear ICs, becoming head of the linear IC design laboratory in 1968
and head of Marketing and Applications in 1976. Mr. Romano became Director of
the Bipolar IC Division (which has evolved into the Dedicated Products Group) in
1980.
Giordano Seragnoli has served as Corporate Vice President, General
Manager Subsystems Products Group since 1987 and since 1994, Director for
Worldwide Back-end Manufacturing. After graduating in Electrical Engineering
from the University of Bologna, Mr. Seragnoli joined the Thomson Group as RF
Application Designer in 1962 and joined SGS Microelettronica in 1965.
Thereafter, Mr. Seragnoli served in various capacities within the Company,
including Strategic Marketing Manager and Subsystems Division Manager,
Subsystems Division Manager (Agrate), Technical Facilities Manager, Subsystems
Division Manager and Back-End Manager.
Keizo Shibata has served as Corporate Vice President and President of
the Company's Japanese subsidiary since 1992. Mr. Shibata obtained bachelors and
masters degrees in Engineering from Osaka University and has 31 years of
experience in the semiconductor industry. Prior to joining the Company, Mr.
Shibata was employed with Toshiba Corporation since 1964 in various capacities.
From 1987 to 1988, Mr. Shibata served as Chairman of both World Semiconductor
Trade Statistics and the Trade Policy Committee of the Electric Industry
Association of Japan.
Enrico Villa has served as Corporate Vice President, Region Five since
January 1, 1998. Mr. Villa has served in various capacities within the Company
since 1968 after obtaining a degree in Business Administration from the
University of Genoa and has 30 years of experience in the semiconductor
industry. He is currently a member of the European Electronics Component
Association ("EECA") for which he is now Chairman of the European Semiconductor
Council as well as Chairman for Europe at the Joint Steering Committee of the
World Semiconductor Council.
51
As is common in the semiconductor industry, the Company's success
depends to a significant extent upon, among other factors, the continued service
of its key senior executives and research and development, engineering,
marketing, sales, manufacturing, support and other personnel, and on its ability
to continue to attract, retain and motivate qualified personnel. The competition
for such employees is intense, and the loss of the services of any of these key
personnel without adequate replacement or the inability to attract new qualified
personnel could have a material adverse effect on the Company. The Company does
not maintain insurance with respect to the loss of any of its key personnel.
Item 11: Compensation of Directors and Officers
The aggregate cash compensation payable for 1999 to the members of the
Supervisory Board by the Company was approximately $460,000. The amount of cash
compensation for 1999 paid to the executive officers of the Company and members
of the Management Board as a group by the Company and its subsidiaries was
approximately $8.5 million.
In 1989, the Company established a Corporate Executive Incentive
Program (the "EIP") that entitles selected executives and members of the
Management Board to a yearly bonus based upon the individual performance of such
executives. The maximum bonus awarded under the EIP is based upon a percentage
of the executive's or member's salary and is adjusted to reflect the overall
performance of the Company. The participants in the EIP must satisfy certain
personal objectives that are focused on customer service, profit, cash flow and
market share.
The executive officers and the Management Board were also covered in
1999 under certain group life and medical insurance programs provided by the
Company. The aggregate additional amount set aside by the Company in 1999 to
provide pension, retirement or similar benefits for executive officers and the
Management Board of the Company as a group is estimated to have been
approximately $3.3 million.
Item 12: Options to Purchase Securities from Registrant or Subsidiaries
Stock Option Plans
The following description of the Company's stock options plans has been
adjusted for the 2:1 stock split effected on June 16, 1999 and the 3:1 stock
split effected on May 5, 2000. Taking into account these stock splits, the total
options outstanding as of May 27, 2000 give the right to acquire 19,945,300
Common Shares by its employees and 319,500 Common Shares by members and
professionals of the Supervisory Board.
All options to purchase Common Shares under the Company's first stock
option plan (the "1989 Stock Option Plan") expired on December 18, 1999.
On October 20, 1995, the shareholders of the Company approved
resolutions authorizing the Supervisory Board for a period of five years to
adopt and administer a new stock option plan which provides for the granting to
managers and professionals of the Company of options to purchase up to a maximum
of 33.0 million Common Shares (the "1995 Stock Option Plan"). The Company has
granted options to acquire a total of 23,851,200 shares pursuant to the 1995
Stock Option Plan as follows:
o The Company granted options to purchase 7,200,000 Common
Shares with an exercise price per Common Share of $6.04. All
such options will expire on March 1, 2004. As of May 27, 2000,
options to purchase 3,352,910 shares were outstanding.
o The Company granted options to purchase 3,873,000 Common
Shares with an exercise price per Common Share of $14.23,
which will expire on September 12, 2005. As of May 27, 2000,
options to purchase 3,805,050 shares were outstanding.
o The Company granted options to purchase 3,900,000 Common
Shares with an exercise price per Common Share of $12.03,
which will expire on July 28, 2006. As of May 27, 2000,
options to purchase 3,861,300 shares were outstanding.
52
o The Company granted options to purchase 8,878,200 Common
Shares with an exercise price per Common Shares of $24.88,
which will expire on September 16, 2007. As of May 27, 2000,
options to purchase 8,779,200 shares were outstanding.
The Company also made a special grant of options under the 1995 Stock
Option Plan to former employees of Arithmos, a company which designs controller
ICs for flat panel displays and LCD monitors with an exercise price of $55.25
and which will expire on January 24, 2008. As of May 27, 2000, options to
purchase 126,840 shares were outstanding pursuant to this grant.
As of May 27, 2000, of the total options outstanding under the 1995
Stock Option Plan, options to purchase 4,868,280 shares were held by executive
officers as a group.
In June 1996, the general meeting of shareholders approved the granting
of options to members and professionals of the Supervisory Board which
correspond to the right to purchase approximately 432,000 Common Shares of the
Company over a period of three years, beginning in 1996. The following options
have been granted:
o In 1996, the Company granted to members and professionals of
the Supervisory Board options to purchase 198,000 Common
Shares with an exercise price per Common Share of $9.00, which
will expire on October 22, 2004. As of May 27, 2000, options
to purchase 63,000 shares were outstanding.
o In 1997, the Company granted to members and professionals of
the Supervisory Board options to purchase 90,000 Common Shares
with an exercise price per Common Share of $14.23, which will
expire on September 12, 2005. As of May 27, 2000, options to
purchase 31,500 shares were outstanding.
o In 1998, the Company granted to members and professionals of
the Supervisory Board options to purchase 90,000 Common Shares
with an exercise price per Common Share of $12.03, which will
expire on July 28, 2006. As of May 27, 2000, options to
purchase 45,000 shares were outstanding.
In 1999, the general meeting of the shareholders voted to renew the
Supervisory Board Option Plan whereby members of the Supervisory Board may
receive, during the three-year period 1999-2001, at least the same number of
options as were granted during the first three-year period. The following
options have been granted:
o The Company granted options to members and professionals of
the Supervisory Board to purchase 180,000 Common Shares with
an exercise price per Common Share of $24.88 which will expire
on September 16, 2007. As of May 27, 2000, options to purchase
180,000 shares were outstanding.
Item 13: Interest of Management in Certain Transactions
The Company has formed a joint venture research and development center
with France Telecom R&D in the form of a GIE. France Telecom R&D is a research
laboratory that is wholly owned by France Telecom, one of the indirect
shareholders of the Company. See "Item 1: Description of Business--Research and
Development" and "Item 4: Control of Registrant." The research center is housed
at the Company's Crolles, France manufacturing facility, and is developing
submicron process technologies. The joint venture between the Company and France
Telecom R&D was created in 1990 before France Telecom became an indirect
shareholder of the Company.
The Company has signed an agreement providing for a research and
development cooperation with GRESSI, the research and development GIE formed by
France Telecom R&D and LETI, a research laboratory that is a department of
CEA-Industrie, the parent of one of the indirect shareholders of the Company.
See "Item 4: Control of Registrant." The objectives of the cooperation is to
develop basic know-how on innovative aspects of VLSI technology evolution which
can be transferred to industrial applications, and to address the development of
innovative process steps and process modules to be used in future generations of
VLSI products. The cooperation agreement was based upon a multi-year plan
through 1998, of which the Company bore half of the total cost. The cooperation
with GRESSI was superseded, as of January 1, 1999, by a tripartite cooperation
arrangement between the Company, France Telecom R&D and LETI, within the
framework of an extended GIE named Centre Commun de Microelectronique de
Crolles. This cooperation is directed towards sub 0.18 micron technologies with
a view to
53
preparing the technology to begin production of 12-inch wafers and associated
wafer fabrication processes. The tripartite cooperation is intended to last
until the end of 2002.
The Company participates in certain programs sponsored by the French
and Italian governments for the funding of research and development and
industrialization through direct grants as well as low interest financing. See
"Item 1: Description of Business--Public Funding." The shareholders of ST
Holding, the corporate parent of the Company's principle shareholder, are
controlled, directly or indirectly, by the governments of the Republics of
France and Italy. See "Item 4: Control of Registrant."
Sales to shareholders of the Company and their affiliates totaled $19.0
million in 1999.
PART II
Item 14: Description of Securities to be Registered
Not applicable.
PART III
Item 15: Default Upon Senior Securities
None.
Item 16: Changes in Securities and Changes in Security for
Registered Securities and Use of Proceeds
On April 26, 2000, the Company's shareholders approved a 3:1 stock
split, changing the par value of each Common Share to EUR 1.04. The changes
became effective May 5, 2000. After these changes and as of May 27, 2000 the
Company's authorized share capital was EUR 1,809,600,000 consisting of
1,200,000,000 Common Shares and 540,000,000 Preference Shares of EUR 1.04
nominal value each.
PART IV
Item 17: Financial Statements
Not applicable.
Item 18: Financial Statements
See "Item 19: Financial Statements and Exhibits" for a list of
financial statements filed pursuant to this Item 18.
54
Item 19: Financial Statements and Exhibits
With the exception of the items incorporated by reference elsewhere in
this annual report, the 1999 Annual Report is not deemed to be filed as part of
this annual report.
(a) Financial Statements
The financial statements, together with the report thereon of
PricewaterhouseCoopers N.V. dated January 25, 2000, appearing on pages 44-59
of the 1999 Annual Report, are incorporated herein by reference.
Reference Page
--------------------------------
1999 Annual
Form 20-F Report
-------------- -----------------
Financial Statements:
Report of Independent Accountants for Years Ended
December 31, 1999, 1998 and 1997.................................. -- 59
Consolidated Statement of Income for the Years Ended
December 31, 1999, 1998 and 1997.................................. -- 44
Consolidated Balance Sheet as of December 31, 1999 and 1998............ -- 45
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997....................................... -- 46
Consolidated Statement of Changes in Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997....................................... -- 47
Notes to Consolidated Financial Statements............................. -- 48-58
Financial Statement Schedules:
For each of the three years in the period ended December 31, 1999
Schedule II Valuation and Qualifying Accounts..................... S-1 --
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto..................................................
Report of Independent Accountants on Financial Statement Schedule...... S-2 --
(b) Exhibits
1.1 Articles of Association, as amended as of May 5, 2000, of the
Company
2.1 Subsidiaries of the Company (see Note 3 to the Consolidated
Financial Statements)
2.2 Consent of PricewaterhouseCoopers N.V.
99.1 Pages 34 to 59 of the 1999 Annual Report, submitted to the
Securities and Exchange Commission as a Report on Form 6-K by
STMicroelectronics N.V. on June 19, 2000. With the exception
of the information on these pages, the 1999 Annual Report is
not deemed filed as part of this annual report on Form 20-F.
55
CERTAIN TERMS
ASD........................ application-specific discrete technology
ASIC....................... application-specific IC
ASSP....................... application-specific standard product
ATM........................ asynchronous transfer mode
BCD........................ bipolar, CMOS and DMOS process technology
BiCMOS..................... bipolar and CMOS process technology
CAD........................ computer aided design
CIM........................ computer integrated manufacturing
CMOS....................... complementary metal oxide silicon
DMOS....................... diffused metal oxide silicon
DRAMS...................... dynamic random access memory
DSP........................ digital signal processor
EMAS....................... The Eco-Management and Audit Scheme (EAMS) is the voluntary European
Community scheme for companies performing industrial activities for the
evaluation and improvement of environmental performance
EEPROM..................... electrically erasable programmable read-only memory
EPROM...................... erasable programmable read-only memory
GPS........................ global positioning system
HCMOS...................... high-speed complementary metal-oxide-silicon
IC......................... integrated circuit
IGBT....................... insulated gate bipolar transistors
ISDN....................... integrated services digital network
JavaCard(TM)applets........ application software for smartcard developed on Java platform
Java....................... operating system developed by Sun Microsystems
Kbit....................... Kilobit
Mbit....................... Megabit
MCUs....................... microcontroller units
MIPS....................... million instructions per second
MOS........................ metal oxide silicon process technology
MOSFET..................... metal oxide silicon field effect transistor
MPEG....................... motion picture experts group
NVRAM...................... nonvolatile SRAM
OEM........................ original equipment manufacturer
OTP........................ one-time programmable
PROM....................... programmable read-only memory
RAM........................ random access memory
RF......................... radio frequency
RISC....................... reduced instruction set computing
ROM........................ read-only memory
SAM........................ serviceable available market
SLIC....................... subscriber line interface card
SPC........................ statistical process control
SRAM....................... static random access memory
STB........................ set-top box
TAM........................ total available market
VLSI....................... very large scale integration
VoIP....................... Voice over Internet protocol
56
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STMICROELECTRONICS N.V.
Date: June 27, 2000
By: /S/ PASQUALE PISTORIO
-----------------------
Name: Pasquale Pistorio
Title: President and Chief Executive Officer
57
STMICROELECTRONICS N.V.
VALUATION AND QUALIFYING ACCOUNTS
(Currency - Thousands of U.S. dollars)
Balance
as Charged to Balance at
Valuation and qualifying accounts beginning Translation costs and end of
deducted from the related asset accounts of period adjustment expenses Deductions period
--------- ----------- ---------- ---------- ----------
1999
Inventories......................... 53,955 -- 42,137 (53,955) 42,137
Accounts Receivable ................ 10,494 (452) 1,662 (114) 11,590
1998
Inventories......................... 68,182 -- 53,955 (68,182) 53,955
Accounts Receivable ................ 15,228 89 (3,741) (1,082) 10,494
1997
Inventories......................... 45,176 -- 68,182 (45,176) 68,182
Accounts Receivable................. 18,152 (1,902) 7 (1,029) 15,228
S-1
Report of Independent Accountants on
Financial Statement Schedule
To the Supervisory Board and Shareholders of STMicroelectronics N.V.
Our audits of the consolidated financial statements referred to in our report
dated January 25, 2000 appearing on page 59 of the 1999 Annual Report to
Shareholders of STMicroelectronics N.V. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 20-F)
also included an audit of the financial statement schedule listed in Item 19 of
this Form 20-F. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers N.V.
Amsterdam, The Netherlands
January 25, 2000
S-2
INDEX TO EXHIBITS
Name Page
---- ----
1.1 Articles of Association, as amended as of May 5, 2000,
of the Company..................................................................
2.2 Consent of PricewaterhouseCoopers N.V...........................................
99.1 Pages 34 to 59 of the 1999 Annual Report, submitted to the Securities and
Exchange Commission as a Report on Form 6-K by STMicroelectronics N.V. on June
19, 2000........................................................................
ARTICLES OF ASSOCIATION
of:
STMicroelectronics N.V.,
established in Amsterdam
dated May 5, 2000
NAME, SEAT AND DURATION.
Article 1.
1.1. The name of the company is: STMicroelectronics N.V.
1.2. The company is established at Amsterdam.
1.3. The company will continue for an indefinite period.
OBJECTS.
Article 2.
The objects of the company shall be to participate or take in any manner any
interests in other business enterprises, to manage such enterprises, to carry on
the business in semi-conductors and electronic devices, to take and grant
licenses and other industrial property interests, assume commitments in the name
of any enterprises with which it may be associated within a group of companies,
to take financial interests in such enterprises and to take any other action
which in the broadest sense of the term, may be related or contribute to the
aforesaid objects.
SHARE CAPITAL.
Article 3.
3.1. The authorised capital of the company amounts to one billion eight
hundred nine million six hundred thousand euro (EUR 1,809,600,000),
consisting of
2
one billion two hundred million (1,200,000,000) ordinary shares and
five hundred forty million (540,000,000) preference shares of one
euro and four eurocents (EUR 1.04) each.
3.2. Where in these articles of association reference is made to shares
and shareholders this shall include the shares of each class as
well as the holders of shares of each class respectively, unless
explicitly provided otherwise.
ISSUE OF SHARES.
Article 4.
4.1. The supervisory board shall have the power to issue shares and to
determine the terms and conditions of such issue if and in so far
as the supervisory board has been designated by the general meeting
of shareholders as the authorized body for this purpose. A
designation as referred to above shall only take place for a
specific period of no more than five years and may not be extended
by more than five years on each occasion.
4.2. If a designation as referred to in the first paragraph is not in
force, the general meeting of shareholders shall have the power,
upon the proposal of and on the terms and conditions set by the
supervisory board to resolve to issue shares.
4.3. In the event of an issue of ordinary shares, shareholders shall
have a pre-emptive right in proportion to the number of ordinary
shares which they own, notwithstanding the provisions of the law.
In respect of the issue of shares there shall be no pre-emptive
right to shares issued against a contribution other than in cash or
issued to employees of the company or of a group company. In the
event of an issue of preference shares none of
3
the shareholders shall have a pre-emptive right. The supervisory
board shall have the power to limit or debar the pre-emptive right
accruing to shareholders, if and in so far as the supervisory board
has also been designated by the general meeting of shareholders for
this purpose as the authorized body for the period of such
designation. The provisions in the second sentence of the first
paragraph shall equally apply.
4.4. If a designation as referred to in the third paragraph is not in
force, the general meeting of shareholders shall have the power,
upon the proposal of the supervisory board to limit or debar the
pre-emptive right accruing to shareholders.
4.5. A resolution of the general meeting of shareholders to limit or
debar pre-emptive rights requires a majority of at least two-thirds
of the votes cast in a meeting of shareholders in which at least
fifty per cent (50 %) of the issued capital is present or
represented.
4.6. Without prejudice to what has been provided in section 80,
paragraph 2, Civil Code:2, shares shall at no time be issued below
par.
4.7. Ordinary shares shall be issued only against payment in full;
preference shares may be issued against partial payment, provided
that the proportion of the nominal amount that must be paid on each
preference share, irrespective of when it was issued, shall be the
same and that at least one quarter of the nominal amount is paid up
in full when the share is taken.
4.8. Payment must be made in cash to the extent that no other
contribution has been agreed upon. If the company so allows,
payment in cash can be made in a
4
foreign currency.
In the event of payment in a foreign currency the obligation to pay
is for the amount which can be freely exchanged into Dutch
currency. The decisive factor is the rate of exchange on the day of
payment, or as the case may be after application of the next
sentence, on the day mentioned therein. The company can require
payment at the rate of exchange on a certain day within two months
prior to the last day when payment shall have to be made provided
the shares or depositary receipts for shares after having been
issued - shall immediately be incorporated in the price list of an
exchange abroad.
4.9. This article shall equally apply to the granting of rights to take
shares, but shall not apply to the issue of shares to someone who
exercises a previously acquired right to take shares.
4.10. The managing board shall determine, subject to approval by the
supervisory board, when and in what amount payment is to be made in
respect of partially paid preference shares. The managing board
shall notify the shareholders concerned thereof in writing at least
thirty days before the date on which the payment must finally be
made.
4.11. All notifications to shareholders will be made in accordance with
the provisions relating to giving of notice to convene a general
meeting as set out in article 27.2.
REPURCHASE OF SHARES.
Article 5.
5.1. The company may acquire, for valuable consideration, shares in its
own share capital if and in so far as:
5
a. its equity less the purchase price of these shares is not
less than the aggregate amount of the paid up and called up
capital and the reserves which must be maintained pursuant
to the law;
b. the par value of the shares in its capital which the company
acquires, holds or holds in pledge, or which are held by a
subsidiary company, amounts to no more than one-tenth of the
issued share capital; and
c. the general meeting of shareholders has authorized the
managing board to acquire such shares, which authorization
may be given for no more than eighteen months on each
occasion,
notwithstanding the further statutory provisions.
5.2. The company may, without being authorized thereto by the general
meeting of shareholders and notwithstanding to what is provided in
paragraph 1 under a and b, acquire shares in its own share capital
in order to transfer those shares to the employees of the company
or a group company under a scheme applicable to such employees.
5.3. Shares thus acquired may again be disposed of. The company shall
not acquire shares in its own share capital as referred to in
paragraph 1 -if an authorization as referred to in such paragraph
is in force- or as referred to in paragraph 2 without the prior
approval of the supervisory board. The company shall also not
dispose of shares in its own share capital -with the exception of
shares in the company's own share capital acquired pursuant to
paragraph 2- without the prior approval of the supervisory board.
If depositary receipts for shares in the company
6
have been issued, such depositary receipts shall for the
application of the provisions of this paragraph and the preceding
paragraph be treated as shares.
5.4. In the general meeting no votes may be cast in respect of (a)
share(s) held by the company or a subsidiary company; no votes may
be cast in respect of a share the depositary receipt for which is
held by the company or a subsidiary company. However, the holders
of a right of usufruct and the holders of a right of pledge on
shares held by the company and its subsidiary companies, are
nonetheless not excluded from the right to vote such shares, if the
right of usufruct or the right of pledge was granted prior to the
time such share was held by the company or a subsidiary company.
Neither the company nor a subsidiary company may cast votes in
respect of a share on which it holds a right of usufruct or a right
of pledge.
Shares in respect of which voting rights may not be exercised by
law or by the articles of association shall not be taken into
account, when determining to what extent the shareholders cast
votes, to what extent they are present or represented or to what
extent the share capital is provided or represented.
5.5. Upon the proposal of the supervisory board the general meeting of
shareholders shall have the power to decide (i) to cancel shares
acquired by the company from its own share capital, and (ii) to
cancel all preference shares against repayment of the amount paid
up on those shares, all subject however to the statutory provisions
concerned.
7
SHARES, SHARE CERTIFICATES, SHARE REGISTER.
Article 6.
6.1. Shares shall be in registered form.
6.2. Ordinary shares shall be available:
- in the form of an entry in the share register without issue
of a share certificate; shares of this type are referred to
in these articles as type I shares;
- and - should the supervisory board so decide - in the form
of an entry in the share register with issue of a
certificate, which certificate shall consist of a main part
without dividend coupon; shares of this type and share
certificates of this type are referred to in these articles
as type II shares.
Preference shares shall only be made available in the form of type
I shares.
6.3. The supervisory board can decide that the registration of type I
shares may only take place for one or more quantities of shares -
which quantities are to be specified by the supervisory board - at
the same time.
6.4. Type II share certificates shall be available in such denominations
as the supervisory board shall determine.
6.5. All share certificates shall be signed by or on behalf of a
managing director; the signature may be effected by printed
facsimile. Furthermore type II share certificates shall, and all
other share certificates may, be countersigned by one or more
persons designated by the managing board for that purpose.
6.6. All share certificates shall be identified by numbers and/or
letters.
8
6.7. The supervisory board can determine that for the purpose of
effecting trading or transfer of shares at foreign exchanges share
certificates shall be issued in such form as the supervisory board
may determine, complying with the requirements set by said foreign
exchange(s) and not provided with any dividend sheet.
6.8. The expression "share certificate" as used in these articles shall
include a share certificate in respect of more than one share.
Article 7.
7.1. Upon written request from a shareholder, missing or damaged share
certificates, or parts thereof, may be replaced by new certificates
or by duplicates bearing the same numbers and/or letters, provided
the applicant proves his title and, in so far as applicable, his
loss to the satisfaction of the supervisory board, and further
subject to such conditions as the managing board may deem fit.
7.2. In appropriate cases, at its own discretion, the managing board may
stipulate that the identifying numbers and/or letters of missing
documents be published three times, at intervals of at least one
month, in at least three newspapers to be indicated by the managing
board announcing the application made; in such a case new
certificates or duplicates may not be issued until six months have
expired since the last publication, always provided that the
original documents have not been produced to the managing board
before that time.
7.3. The issue of new certificates or duplicates shall render the
original document invalid.
Article 8.
8.1. Notwithstanding the statutory provisions in respect
9
of registered shares a register shall be kept by or on behalf of
the company, which register shall be regularly updated and, at the
discretion of the managing board, may, in whole or in part, be kept
in more than one copy and at more than one place. A part of the
register may be kept abroad in order to meet requirements set out
by foreign statutory provisions or provisions of the foreign
exchange.
8.2. Each shareholder's name, his address and such further data as the
managing board deems desirable, whether at the request of a
shareholder or not, shall be entered in the register.
8.3. The form and the contents of the share register shall be determined
by the managing board with due regard to the provisions of
paragraphs 1 and 2 of this article.
The managing board may determine that the records shall vary as to
their form and contents according to whether they relate to type I
shares or to type II shares.
8.4. Upon request a shareholder shall be given free of charge a
declaration of what is stated in the register with regard to the
shares registered in his name, which declaration may be signed by
one of the specially authorized persons to be appointed by the
managing board for this purpose.
8.5. The provisions of the last four paragraphs shall equally apply to
those who hold a right of usufruct or of pledge on one or more
registered shares, with the proviso that the other data required by
law must be entered in the register.
Article 9.
9.1. Subject to the provisions of article 6, the holder of an entry in
the share register for one or more
10
type I shares may, upon his request and at his option, have issued
to him one or more type II share certificates for the same nominal
amount.
9.2. Subject to the provisions of article 6, the holder of a type II
share certificate registered in his name may, after lodging the
share certificate with the company, upon his request and at his
option, either have one or more type I shares entered in the share
register for the same nominal amount.
9.3. A request as mentioned in this article shall, if the supervisory
board so requires, be made on a form obtainable from the company
free of charge, which shall be signed by the applicant.
TRANSFER OF SHARES.
Article 10.
10.1. The transfer of a registered share shall be effected either by
service upon the company of the instrument of transfer or by
written acknowledgement of the transfer by the company, subject
however to the provisions of the following paragraphs of this
article.
10.2. Where a transfer of a type II share is effected by service of an
instrument of transfer on the company, the company shall, at the
discretion of the managing board, either endorse the transfer on
the share certificate or cancel the share certificate and issue to
the transferee one or more new share certificates registered in his
name to the same nominal amount.
10.3. The Company's written acknowledgement of a transfer of a type II
share shall, at the discretion of the managing board, be effected
either by endorsement of the transfer on the share certificates or
by the issue to the transferee of one or more new share
11
certificates registered in his name to the same nominal amount.
10.4. The provisions of the foregoing paragraphs of this article shall
equally apply to the allotment of registered shares in the event of
a judicial partition of any community of property or interests, the
transfer of a registered share as a consequence of a judgement
execution and the creation of limited rights in rem on a registered
share.
If a share certificate has been issued, the acknowledgement can
only be effected either by putting an endorsement to that effect on
this document, signed by or on behalf of the company, or by
replacing this document by a new certificate in the name of the
acquirer.
10.5. The submission of requests and the lodging of documents referred to
in articles 7 to 10 inclusive shall be made at a place to be
indicated by the managing board and in any case the places where
the company is admitted to a stock exchange.
Different places may be indicated for the different classes and
types of shares and share certificates.
10.6. The company is authorized to charge amounts to be determined by the
managing board not exceeding cost price to those persons who
request any services to be carried out by virtue of articles 7 up
to and including 10.
USUFRUCTUARIES, PLEDGEES, HOLDERS OF DEPOSITARY RECEIPTS.
Article 11.
11.1. The usufructuary, who in conformity with the provisions of section
88, Civil Code:2 has no right to vote, and the pledgee who in
conformity with the provisions of section 89, Civil Code:2 has no
right
12
to vote, shall not be entitled to the rights which by law
have been conferred on holders of depositary receipts for shares
issued with the cooperation of the company.
11.2. Where in these articles of association persons are mentioned,
entitled to attend meetings of shareholders, this shall include to
holders of depositary receipts for shares issued with the
cooperation of the company, and persons who in pursuance of
paragraph 4 in section 88 or section 89, Civil Code:2 have the
rights that by law have been conferred on holders of depositary
receipts for shares issued with the cooperation of the company.
MANAGING BOARD.
Article 12.
12.1. The company shall be managed by a managing board consisting of one
or more managing directors under the supervision of the supervisory
board. The number of members of the managing board shall be
resolved upon by the general meeting of shareholders upon the
proposal of the supervisory board. The members of the managing
board shall be appointed for three years, a year being understood
as meaning the period between two Annual General Meetings of
Shareholders adopting the Accounts of the previous fiscal year or
the meeting in which a postponement of this is granted.
12.2. Managing directors shall be appointed by the general meeting of
shareholders upon the proposal of the supervisory board for each
vacancy to be filled.
12.3. Without prejudice to the provisions of article 28, paragraph 2, a
proposal to make one or more
13
appointments to the managing board may be placed on the agenda of a
general meeting of shareholders by the supervisory board.
12.4. The supervisory board shall determine the salary, the bonus, if
any, and the other terms and conditions of employment of the
managing directors.
12.5. The general meeting of shareholders shall decide in accordance with
the provisions of article 32, paragraph 1.
Votes in respect of persons who have not been so nominated shall be
invalid.
Article 13.
13.1. The general meeting of shareholders shall be entitled to suspend or
dismiss one or more managing directors, provided that at least half
of the issued share capital is represented at the meeting. No such
quorum shall be required where the suspension or dismissal is
proposed by the supervisory board.
13.2. Where a quorum under paragraph 1 is required but is not present, a
further meeting shall be convened, to be held within four weeks
after the first meeting, which shall be entitled, irrespective of
the share capital represented, to pass a resolution in regard to
the suspension or dismissal.
13.3. The managing directors can be jointly or individually suspended by
the supervisory board. After suspension a general meeting of
shareholders shall be convened within three months, at which
meeting it shall be decided whether the suspension shall be
cancelled or maintained. The person involved shall be given the
opportunity to account for his actions at that meeting.
REPRESENTATION.
14
Article 14.
14.1. The entire managing board as well as each managing director may
represent the company.
14.2. The managing board may grant powers of attorney to persons, whether
or not in the service of the company, to represent the company and
shall thereby determine the scope of such powers of attorney and
the titles of such persons.
14.3. The managing board shall have power to perform legal acts as
specified in section 2:94, paragraph 1, Civil Code in so far as
such power is not expressly excluded or limited by any provision of
these articles or by any resolution of the supervisory board.
Article 15.
15.1. The supervisory board shall appoint one of the managing directors
as chairman of the managing board. Appointment of the chairman
shall be resolved with the majority mentioned in article 22,
paragraph 1.
15.2. Resolutions of the managing board shall be passed by simple
majority of votes. In the event of a tie of votes the chairman of
the managing board shall have a casting vote.
Article 16.
16.1. Without prejudice to provisions made elsewhere in these articles,
the managing board shall require the prior express approval:
(i) from the supervisory board for decisions relating to:
1. all proposals to be submitted to a vote at the
general meeting of the shareholders;
2. the formation of all companies, acquisition or sale
of any participation, and conclusion
15
of any cooperation and participation agreement;
3. all pluriannual plans of the company and the budget
for the first coming year, covering the following
matters:
- investment policy;
- policy regarding research and development,
as well as commercial policy and objectives;
- general financial policy;
- policy regarding personnel;
4. all acts, decisions or operations covered by the
above list and constituting a significant change with
respect to decisions already adopted by the
supervisory board or not provided for in the above
list and as specifically laid down by the supervisory
board by resolution passed by it to that effect.
(ii) from the general meeting of shareholders for
decisions relating to:
- sale of all or of an important part of the company's
assets or business enterprise(s);
- entering into mergers, acquisitions or joint
ventures, which the supervisory board considers of
material significance,
the absence of the approval provided for above may not be raised by
or against third parties.
16.2. Without prejudice to provisions made elsewhere in these articles,
the managing board shall require the approval of the general
meeting of shareholders according to the law and the provisions of
these articles as well as such resolutions as are clearly defined
by a resolution of the general meeting of
16
shareholders to that effect.
Article 17.
In the event of the absence or inability to act of one of more managing
directors the remaining managing directors or managing director shall
temporarily be responsible for the entire management. In the event of the
absence or inability to act of all managing directors, one or more persons
appointed by the supervisory board for this purpose at any time shall be
temporarily responsible for the management.
SUPERVISORY BOARD.
Article 18.
18.1. The supervisory board shall be responsible for supervising the
policy pursued by the managing board and the general course of
affairs of the company and the business enterprise which it
operates. The supervisory board shall assist the managing board
with advice relating to the general policy aspects connected with
the activities of the company. In fulfilling their duties the
supervisory directors shall serve the interests of the company and
the business enterprise which it operates.
18.2. The managing board shall provide the supervisory board in good time
with all relevant information as well as the information the
supervisory board requests, in connection with the exercise of its
duties.
Article 19.
19.1. The supervisory board shall consist of at least six members, to be
appointed by the general meeting of shareholders upon the proposal
of the supervisory board for each vacancy to be filled. The number
of supervisory directors shall without prejudice to the preceding
sentence be resolved upon by the general meeting of shareholders
upon the proposal
17
of the supervisory board.
19.2. The general meeting of shareholders shall decide in accordance with
the provisions of article 32 paragraph 1.
19.3. Without prejudice to the provisions of article 28, paragraph 2, a
proposal to make one or more appointments to the supervisory board
may be placed on the agenda of the general meeting of shareholders
by the supervisory board.
19.4. The supervisory board shall appoint from their number a chairman
and a vice-chairman of the supervisory board with the majority
mentioned in article 22, paragraph 1.
19.5. Upon the appointment of the supervisory directors the particulars
as referred to in section 142, paragraph 3, Civil Code:2 shall be
made available for prior inspection.
Article 20.
20.1. The supervisory board may appoint one or more of its members as
delegate supervisory director in charge of supervising the managing
board on a regular basis. They shall report their findings to the
supervisory board. The offices of chairman of the supervisory board
and delegate supervisory director are compatible.
20.2. With due observance of these articles of association, the
supervisory board may adopt rules regulating the division of its
duties among its various supervisory directors.
20.3. The supervisory board may decide that one or more of its members
shall have access to all premises of the company and shall be
authorized to examine all books, correspondence and other records
and to be fully informed of all actions which have taken
18
place, or may decide that one or more of its supervisory directors
shall be authorised to exercise a portion of such powers.
20.4. At the expense of the company, the supervisory board may obtain
such advice from experts as the supervisory board deems desirable
for the proper fulfilment of its duties.
Article 21.
21.1. A supervisory director shall retire no later than at the ordinary
general meeting of shareholders held after a period of three years
following his appointment.
A retired supervisory director may immediately be re-elected.
21.2. A supervisory director shall retire at the annual general meeting
of the year in which he reaches the age prescribed by law for
retirement of a supervisory director.
21.3. The supervisory board may establish a rotation scheme.
21.4. The supervisory directors may be suspended or dismissed by the
general meeting of shareholders. The supervisory board may make a
proposal to the general meeting of shareholders for the suspension
or dismissal of one or more of its supervisory directors.
Article 22.
22.1. The supervisory board may pass resolutions by at least three
quarters of the votes of the members in office. Each supervisory
director has the right to cast one vote. In case of absence a
supervisory director may issue a proxy, however, only to another
supervisory director. The proxy should explicitly indicate in which
way the vote must be
19
cast. The supervisory board may pass resolutions in writing without
holding a meeting provided that the proposals for such resolutions
have been communicated in writing to all supervisory directors and
no supervisory director is opposed to this method of passing a
resolution.
22.2. A certificate signed by two supervisory directors to the effect
that the supervisory board has passed a particular resolution shall
constitute evidence of such a resolution in dealings with third
parties.
22.3. The managing directors shall attend meetings of the supervisory
board at the latter's request.
22.4. The supervisory board shall meet whenever two or more of its
members or the managing board so requests. Meetings of the
supervisory board shall be convened by the chairman of the
supervisory board, either on request of two or more supervisory
directors or on request of the managing board, or by the
supervisory directors requesting the meeting to be held. If the
chairman fails to convene a meeting to be held within four weeks of
the receipt of the request, the supervisory board members making
the request are entitled to convene the meeting.
22.5. The supervisory board shall draw up standing orders regulating
inter alia the manner of convening board meetings and the internal
procedure at such meetings. These meetings may be held by telephone
as well as by video.
Article 23.
The general meeting of shareholders determines the compensation to the members
of the Supervisory Board or to one or more of its members. The meeting shall
have
20
authority to decide whether such compensation will consist of a fixed
amount and/or an amount that is variable in proportion to profits or any other
factor. The Supervisory Board members shall be reimbursed for their expenses.
INDEMNIFICATION.
Article 24.
24.1. The company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the company) by reason of the fact that he is or was a
supervisory director, managing director, officer or agent of the
company, or was serving at the request of the company as a
supervisory director, managing director, officer or agent of
another company, a partnership, joint venture, trust or other
enterprise, against all expenses (including attorneys' fees)
judgements, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
company, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful or out
of his mandate. The termination of any action, suit or proceeding
by a judgement, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and not in a
manner which he reasonably believed to be in or not opposed to the
21
best interests of the company, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
24.2. The company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action or proceeding by or in the right of the company to
procure a judgement in its favor, by reason of the fact that he is
or was a supervisory director, managing director, officer or agent
of the company, or is or was serving at the request of the company
as a supervisory director, managing director, officer or agent of
another company, a partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or
settlement of such action or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to
the best interests of the company and except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable for gross negligence or wilful misconduct in the performance
of his duty to the company, unless and only to the extent that the
court in which such action or proceeding was brought or any other
court having appropriate jurisdiction shall determine upon
application that, despite the adjudication of liability but in view
of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnification against such expenses which
the court in which such action or proceeding was brought or such
other court having appropriate
22
jurisdiction shall deem proper.
24.3. To the extent that a supervisory director, managing director,
officer or agent of the company has been successful on the merits
or otherwise in defense of any action, suit of proceeding, referred
to in paragraphs 1 and 2, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including
attorney's fees) actually and reasonable incurred by him in
connection therewith.
24.4. Any indemnification by the company referred to in paragraphs 1 and
2 shall (unless ordered by a court) only be made upon a
determination that indemnification of the supervisory director,
managing director, officer or agent is proper in the circumstances
because he had met the applicable standard of conduct set forth in
paragraphs 1 and 2. Such determination shall be made:
a. either by the supervisory board by a majority vote in a
meeting in which a quorum as mentioned in article 22,
paragraph 1, and consisting of supervisory directors who
where not parties to such action, suit or proceeding, is
present;
b. or, if such a quorum is not obtainable or although such a
quorum is obtained if the majority passes a resolution to
that effect, by independent legal counsel in a written
opinion;
c. or by the general meeting of shareholders.
24.5. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the company in advance of the final
disposition of such action, suit or proceeding upon a resolution of
the supervisory board with respect to the specific case upon
receipt of an undertaking by or on behalf of
23
the supervisory director, managing director, officer or agent to
repay such amount unless it shall ultimately be determined that he
is entitled to be indemnified by the company as authorized in this
article.
24.6. The indemnification provided for by this article shall not be
deemed exclusive of any other right to which a person seeking
indemnification may be entitled under any by-laws, agreement,
resolution of the general meeting of shareholders or of the
disinterested supervisory directors or otherwise, both as to
actions in his official capacity and as to actions in another
capacity while holding such position, and shall continue as to a
person who has ceased to be a supervisory director, managing
director, officer or agent and shall also inure to the benefit of
the heirs, executors and administrators of such a person.
24.7. The company shall have the power to purchase and maintain insurance
on behalf of any person who is or was a supervisory director,
managing director, officer or agent of the company, or is or was
serving at the request of the company as a supervisory director,
managing director, officer, employee or agent of another company, a
partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such
capacity or arising out of his capacity as such, whether or not the
company would have the power to indemnify him against such
liability under the provisions of this article.
24.8. Whenever in this article reference is being made to the company,
this shall include, in addition to the
24
resulting or surviving company also any constituent company
(including any constituent company of a constituent company)
absorbed in a consolidation or merger which, if its separate
existence had continued, would have had the power to indemnify its
supervisory directors, managing directors, officers and agents, so
that any person who is or was a supervisory director, managing
director, officer or agent of such constituent company, or is or
was serving at the request of such constituent company as a
supervisory director, managing director, officer or agent of
another company, a partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions
of this article with respect to the resulting or surviving company
as he would have with respect to such constituent company if its
separate existence had continued.
GENERAL MEETING OF SHAREHOLDERS.
Article 25.
25.1. The ordinary general meeting of shareholders shall be held each
year within six months after the close of the financial year.
25.2. At this general meeting shall be dealt with:
a. the written report of the managing board on the course of
business of the company and the conduct of its affairs
during the past financial year, and the report of the
supervisory board on the annual accounts;
b. adoption of the annual accounts and the declaration of
dividend in the manner laid down in article 37;
c. filling vacancies on the managing board in accordance with
the provisions of article 12;
25
d. filling vacancies on the supervisory board in accordance
with the provisions of article 19;
e. the proposals placed on the agenda by the managing board or
by the supervisory board, together with proposals made by
shareholders in accordance with the provisions of these
articles.
Article 26.
26.1. Extraordinary general meetings of shareholders shall be held as
often as deemed necessary by the supervisory board and shall be
held if one or more shareholders and other persons entitled to
attend the meetings of shareholders jointly representing at least
one-tenth of the issued share capital make a written request to
that effect to the managing board or supervisory board, specifying
in detail the business to be dealt with.
26.2. If the managing board or supervisory board fail to comply with a
request under paragraph 1 above in such manner that the general
meeting of shareholders can be held within six weeks after the
request, the persons making the request may be authorized by the
President of the Court within whose jurisdiction the company is
established to convene the meeting themselves.
Article 27.
27.1. General meetings of shareholders shall be held at Amsterdam,
Haarlemmermeer (Schiphol Airport), Rotterdam or The Hague; the
notice convening the meeting shall inform the shareholders and
other persons entitled to attend the meetings of shareholders
accordingly.
27.2. The notice convening a general meeting of shareholders shall be
published by advertisement
26
which shall at least be published in a national daily newspaper and
abroad in at least one daily newspaper appearing in each of these
countries other than the United States, where, on the application
of the company, the shares have been admitted for official
quotation. In addition, holders of registered shares shall be
notified by letter that the meeting is being convened.
27.3. The notice convening the meeting shall be issued by the managing
board, by the supervisory board or by those who according to the
law or these articles are entitled thereto.
Article 28.
28.1. The notice convening the meeting referred to in the foregoing
article shall be issued no later than on the twenty-first day prior
to the meeting.
28.2. The agenda shall contain such business as may be placed thereon by
the person(s) entitled to convene the meeting, and furthermore such
business as one or more shareholders, representing at least
one-tenth of the issued share capital, have requested the managing
board or supervisory board to place on the agenda at least five
days before the date on which the meeting is convened. Nominations
for appointment to the managing board and the supervisory board
cannot be placed on the agenda by the managing board. No resolution
shall be passed at the meeting in respect of matters not on the
agenda.
28.3. Without prejudice to the relevant provisions of law, dealing with
withdrawal of shares and amendments to articles of association, the
notice convening the meeting shall either mention the business on
the agenda or state that the agenda is
27
open to inspection by the shareholders and other persons entitled
to attend the meetings of shareholders at the office of the
company.
Article 29.
29.1. General meetings of shareholders shall be presided over by the
chairman of the supervisory board or in his absence by the
vice-chairman of the supervisory board. In case of absence of the
chairman and the vice-chairman of the supervisory board the meeting
shall be presided by any other person nominated by the supervisory
board.
29.2. Minutes shall be kept of the business transacted at a general
meeting of shareholders, which minutes shall be drawn up and signed
by the chairman and by a person appointed by him immediately after
the opening of the meeting.
29.3. Where the minutes are drawn up before a civil law notary, the
chairman's signature, together with that of the civil law notary,
shall be sufficient.
Article 30.
30.1. All shareholders and other persons entitled to vote at general
meetings of shareholders are entitled to attend the general
meetings of shareholders, to address the general meeting of
shareholders and to vote. The general meeting of shareholders may
lay down rules regulating, inter alia, the length of time for which
shareholders may speak. In so far as such rules are not applicable,
the chairman may regulate the time for which shareholders may speak
if he considers this to be desirable with a view to the orderly
conduct of the meeting.
30.2. In order to exercise the rights mentioned in paragraph 1, the
holders of registered shares shall notify the company in writing of
their intention to
28
do so no later than on the day and at the place mentioned in the
notice convening the meeting, and also - in so far as type II
shares are concerned - stating the serial number of the shares
certificate.
They may only exercise the said rights at the meeting for the
shares registered in their name both on the day referred to above
and on the day of the meeting.
30.3. The company shall send a card of admission to the meeting to
holders of registered shares who have notified the company of their
intention in accordance with the provision in the foregoing
paragraph.
30.4. The provisions laid down in paragraphs 2 up to and including 4 are
mutatis mutandis applicable to shares from which usufructuaries and
pledgees who do not have the voting right attached to those shares
derive their rights.
Article 31.
31.1. Shareholders and other persons entitled to attend meetings of
shareholders may be represented by proxies with written authority
to be shown for admittance to a meeting.
31.2. All matters regarding the admittance to the general meeting, the
exercise of voting rights and the result of votings, as well as any
other matters regarding the affairs at the general meeting shall be
decided upon by the chairman of that meeting, with due observance
of the provisions of section 13, Civil Code:2.
Article 32.
32.1. Unless otherwise stated in these articles, resolutions shall be
adopted by simple majority of
29
votes of the shareholders having the right to vote in a meeting of
shareholders where at least one/third of the issued capital is
present or represented. Blank and invalid votes shall not be
counted. The chairman shall decide on the method of voting and on
the possibility of voting by acclamation.
32.2. Where the voting concerns appointments, further polls shall, if
necessary, be taken until one of the nominees has obtained a simple
majority, such with due observance of the provision of paragraph 1
of this article. The further poll or polls may, at the chairman's
discretion, be taken at a subsequent meeting.
32.3. Except as provided in paragraph 2, in case of an equality of the
votes cast the relevant proposal shall be deemed to have been
rejected.
Article 33.
At the general meeting of shareholders each share shall confer the right to cast
one vote.
MEETINGS OF HOLDERS OF SHARES OF A PARTICULAR CLASS.
Article 34.
34.1. A meeting of holders of preference shares shall be held whenever
required by virtue of the provisions of these articles of
association and further whenever the managing board and/or the
supervisory board shall decide, and also whenever one or more
holders of preference shares so request the managing board and/or
the supervisory board in writing, stating the items of business to
be transacted.
If after receipt of a request as referred to in the preceding
sentence neither the managing board nor the supervisory board has
called a meeting in such
30
a way that the meeting is held within four weeks of receipt, the
applicant(s) shall be authorised to call the meeting themselves,
with due observance of the relevant provisions of these articles of
association.
34.2. The managing directors and the supervisory directors shall have the
right to attend meetings of holders of preference shares; in that
capacity they shall have an advisory vote. Notice of a meeting of
holders of preference shares shall be given by letters sent to all
holders of preference shares. The notice shall state the items of
business to be transacted.
34.3. Article 27, paragraphs 1 and 3, article 28, article 29, article 30,
paragraph 1, article 31, article 32 and article 33 shall apply
mutatis mutandis to meetings of holders of preference shares.
34.4. At a meeting of holders of preference shares at which the entire
issued capital in shares of those class is represented, valid
resolutions may be adopted, provided that they are passed by
unanimous vote, even if the requirements in respect of the place of
the meeting, the manner of notice, the term of notice and the
stating in the notice of the items of business to be transacted,
have not been observed.
34.5. All resolutions which may be adopted by the holders of preference
shares at a meeting may also be adopted outside a meeting.
Resolutions may be adopted outside a meeting only if all holders of
preference shares and holders of a right of usufruct on preference
shares entitled to vote have declared themselves in favour of the
proposal by letter, by telegram, by telex
31
communication or telecopier.
The resolution shall be recorded in the minute book of the meeting
of holders of preference shares by a managing director.
34.6. A meeting of holders of ordinary shares shall be held whenever
required by virtue of the provisions of these articles of
association. Articles 27 up to and including 33 shall apply mutatis
mutandis to meetings of holders of ordinary shares.
ANNUAL ACCOUNTS, REPORT OF THE BOARD OF MANAGEMENT AND DISTRIBUTIONS.
Article 35.
35.1. The financial year shall run from the first day of January up to
and including the thirty-first day of December.
35.2. Each year the managing board shall cause annual accounts to be
drawn up, consisting of a balance sheet as at the thirty-first day
of December, of the preceding year and a profit and loss account in
respect of the preceding financial year with the explanatory notes
thereto.
35.3. The managing board shall be bound to draw up the aforesaid annual
accounts in accordance with established principles of business
management.
35.4. The supervisory board shall cause the annual accounts to be
examined by one or more registered accountant(s) designated for the
purposes by the general meeting of shareholders or other experts
designated for the purpose in accordance with section 393, Civil
Code:2, and shall report to the general meeting of shareholders on
the annual accounts, notwithstanding the provisions of the law.
35.5. Copies of the annual accounts which have been made
32
up, of the report of the supervisory board, of the report of the
managing board and of the information to be added pursuant to the
law shall be deposited for inspection by shareholders and other
persons entitled to attend meetings of shareholders, at the office
of the company as from the date of serving the notice convening the
general meeting of shareholders at which meeting those items shall
be discussed, until the close thereof.
Article 36.
Adoption by the general meeting of shareholders of the annual accounts, referred
to in article 35, shall fully discharge the managing board and the supervisory
board from liability in respect of the exercise of their duties during the
financial year concerned, unless a proviso is made by the general meeting of
shareholders, and without prejudice to the provisions of sections 138 and 149,
Civil Code:2.
PROFIT AND LOSS.
Article 37.
37.1. Distribution of profits pursuant to this article shall be made
following approval of the annual accounts which show that the
distribution is permitted.
The company may only make distributions to shareholders and other
persons entitled to distributable profits to the extent that its
equity exceeds the total amount of its issued capital and the
reserves which must be maintained by law.
A deficit may only be offset against the reserves prescribed by law
in so far as permitted by law.
37.2. Upon proposal of the managing board, the supervisory board shall
determine what portion of the profit shall be retained by way of
reserve, having regard to the legal provisions relating to
33
obligatory reserves.
37.3. The portion of the profit that remains after application of
paragraph 2, shall be at the disposal of the general meeting of
shareholders, with due observance of the provisions of article 38,
paragraph 2.
37.4. In case the general meeting of shareholders resolves upon
distribution of profits made in the latest financial year, first,
if possible, an amount equal to the percentage referred to below of
the paid up part of their par value shall be paid as dividend on
the preference shares. No further distributions shall be made on
the preference shares. The percentage referred to above is equal to
the average of the Euro Interbank Offered Rates applying to cash
loans with a term of one year - weighted on the basis of the number
of days for which these rates applied - during the financial year
in respect of which the distribution takes place. If the amount to
be paid on the preference shares has been reduced or, pursuant to a
resolution for further payment, has been increased in the financial
year in respect of which the distribution referred to above is
made, the distribution on these shares shall be reduced or, as the
case may be, increased if possible by an amount equal to the
percentage referred to above of the amount of the reduction or, as
the case may be, the increase, calculated from the time of the
reduction or, as the case may be, from the time at which further
payments become obligatory.
37.5. The general meeting of shareholders is empowered either to
distribute the profits in cash or in kind or to withhold
distribution of the said portion of
34
the profit in whole or in part.
Article 38.
38.1. Upon the proposal of the supervisory board, the general meeting of
shareholders shall be entitled to resolve to make distributions
charged to the share premium reserve or charged to the other
reserves shown in the annual accounts not prescribed by the law,
with due observance of the provisions of paragraph 2.
38.2. The supervisory board shall be entitled to resolve that
distributions, the amount of which distributions has been resolved
upon by the general meeting of shareholders, to shareholders under
article 37, article 38, paragraph 1 and article 39 may be made in
full or partially in the form of the issue of shares in the share
capital of the company.
The distribution to a shareholder according to the preceding
sentence shall be made to a shareholder in cash or in the form of
shares in the share capital of the company, or partially in cash
and partially in the form of shares in the share capital of the
company, such, if the supervisory board so resolves, at the option
of the shareholders.
Article 39.
At its own discretion and subject to section 105, paragraph 4, Civil Code:2, the
supervisory board may resolve to distribute one or more interim dividends on the
shares before the annual accounts for any financial year have been approved and
adopted at a general meeting of shareholders.
Article 40.
40.1. Distributions under articles 37, 38 or 39 shall be payable as from
a date to be determined by the
35
supervisory board. The date of payment set in respect of shares for
which certificates are outstanding or in respect of type I shares
may differ from the date of payment set in respect of shares for
which type II share certificates are outstanding.
40.2. Distributions under articles 37, 38 or 39 shall be made payable at
a place or places, to be determined by the supervisory board; at
least one place shall be designated thereto in The Netherlands.
40.3. The supervisory board may determine the method of payment in
respect of cash distributions on type I shares.
40.4. Cash distributions under articles 37, 38 or 39 in respect of shares
for which a type II share certificate is outstanding shall, if such
distributions are made payable only outside the Netherlands, be
paid in the currency of a country where the shares of the company
are listed on a stock exchange not being the Euro, converted at the
rate of exchange determined by the European Central Bank at the
close of business on a day to be fixed for that purpose by the
supervisory board. If and in so far as on the first day on which a
distribution is payable, the company is unable, in consequence of
any governmental action or other exceptional circumstances beyond
its control, to make payment at the place designated outside the
Netherlands or in the relevant currency, the supervisory board may
in that event designate one or more places in the Netherlands
instead. In such event the provisions of the first sentence of this
paragraph shall no longer apply.
40.5. The person entitled to a distribution under
36
articles 37, 38 or 39 on registered shares shall be the person in
whose name the share is registered at the date to be fixed for that
purpose by the supervisory board in respect of each distribution
for the different types of shares.
40.6. Notice of distributions and of the dates and places referred to in
the preceding paragraphs of this article shall at least be
published in a national daily newspaper and abroad in at least one
daily newspaper appearing in each of those countries other than the
United States, where the shares, on the application of the company,
have been admitted for official quotation, and further in such
manner as the supervisory board may deem desirable.
40.7. Distributions in cash under articles 37, 38 or 39 that have not
been collected within five years after they have become due and
payable shall revert to the Company.
40.8. In the case of a distribution under article 38, paragraph 2, any
shares in the company not claimed within a period to be determined
by the supervisory board shall be sold for the account of the
persons entitled to the distribution who failed to claim the
shares. The period and manner of sale to be determined by the
supervisory board, as mentioned in the preceding sentence, shall be
notified according to paragraph 6. The net proceeds of such sale
shall thereafter be held at the disposal of the above persons in
proportion to their entitlement; distributions that have not been
collected within five years after the initial distributions in
shares have become due and payable shall revert to the Company.
40.9. In the case of a distribution in the form of shares
37
in the company under article 38, paragraph 2, on registered shares,
those shares shall be added to the share register. A type II share
certificate for a nominal amount equal to the number of shares
added to the register shall be issued to holders of type II shares.
40.10. The provisions of paragraph 5 shall apply equally
in respect of distributions - including pre-emptive subscription
rights in the event of a share issue - made otherwise than under
articles 37, 38 or 39, provided that in addition thereto in the
"Staatscourant" (Dutch Official Gazette) shall be announced the
issue of shares with a pre-emptive subscription right and the
period of time within which such can be exercised.
Such pre-emptive subscription right can be executed during at least
two weeks after the day of notice in the "Staatscourant" (Dutch
Official Gazette).
ALTERATIONS TO ARTICLES OF ASSOCIATION, WINDING UP, LIQUIDATION.
Article 41.
41.1. A resolution to alter the articles of association or to wind up the
company shall be valid only provided that:
a. the proposal to such a resolution has been proposed to the
general meeting of shareholders by the supervisory board;
b. the full proposals have been deposited for inspection by
shareholders and other persons entitled to attend meetings
of shareholders, at the office of the company as from the
day on which the notice is served until the close of that
meeting.
41.2. A resolution to amend the articles of association
38
by which the rights conferred on holders of shares of a specific
class as such are changed shall require the approval of the
relevant class meeting.
Article 42.
42.1. If the company is wound up, the liquidation shall be carried out by
any person designated for that purpose by the general meeting of
shareholders, under the supervision of the supervisory board.
42.2. In passing a resolution to wind up the company, the general meeting
of shareholders shall upon the proposal of the supervisory board
fix the remuneration payable to the liquidators and to those
responsible for supervising the liquidation.
42.3. The liquidation shall take place with due observance of the
provisions of the law. During the liquidation period these articles
of association shall, to the extent possible, remain in full force
and effect.
42.4. After settling the liquidation, the liquidators shall render
account in accordance with the provisions of the law.
42.5. After the liquidation has ended, the books and records of the
company shall remain in the custody of the person designated for
that purpose by the liquidators during a ten-year period.
Article 43.
From what is left of the company's assets after all creditors have been
satisfied, first, if possible, all holders of preference shares shall have
returned to them the paid up part of the nominal amount of their preference
shares.
The residue shall be divided amongst the holders of ordinary shares pro rata to
their respective holdings of ordinary shares.
39
Article 44.
Any amounts payable to shareholders or due to creditors which have not been
claimed within six months after the last distribution was made payable, shall be
deposited with the Public Administrator of Unclaimed Debts.
EXHIBIT 2.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-80797, No. 33-90616, No. 333-06390, No. 333-06862
and No. 333-07226) of STMicroelectronics N.V. of our report dated January 25,
2000 relating to the financial statements, which appears on page 59 of the
Annual Report to Shareholders, which is incorporated in this Annual Report on
Form 20-F. We also consent to the incorporation by reference of our report dated
January 25, 2000 relating to the financial statement schedule, which appears in
this Form 20-F.
PRICEWATERHOUSECOOPERS N.V.
Amsterdam, The Netherlands
June 22, 2000
Selected Consolidated Financial Data
The table below sets forth selected consolidated financial data for the
Company for each of the years in the five-year period ended December 31, 1999.
Such data have been derived from the consolidated financial statements of the
Company. Consolidated audited financial statements for each of the years in the
three-year period ended December 31, 1999, including the Notes thereto
(collectively, the "Consolidated Financial Statements"), are included elsewhere
in this annual report.
The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the related notes
thereto included elsewhere in this annual report.
Year ended December 31,
(in millions except per share
and ratio data) 1995(1) 1996(1) 1997(1) 1998(1) 1999(1)
-----------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Income Data:
Net sales $ 3,520.7 $ 4,078.3 $ 3,969.8 $ 4,210.6 $ 5,023.1
Other revenues 33.7 44.1 49.4 37.2 33.2
-----------------------------------------------------------------------------------------------------------------------
Net revenues 3,554.4 4,122.4 4,019.2 4,247.8 5,056.3
Cost of sales(2) (2,096.0) (2,414.7) (2,457.4) (2,623.0) (3,054.5)
-----------------------------------------------------------------------------------------------------------------------
Gross profit(2) 1,458.4 1,707.7 1,561.8 1,624.8 2,001.8
Operating expenses:
Selling, general & administrative (413.2) (421.1) (454.3) (488.1) (534.2)
Research and development(3) (440.3) (532.3) (610.9) (689.8) (836.0)
Restructuring costs (13.0) -- -- -- --
Other income and expenses(3) 59.1 45.1 23.2 76.5 39.9
-----------------------------------------------------------------------------------------------------------------------
Total operating expenses (807.4) (908.3) (1,042.0) (1,101.4) (1,330.3)
-----------------------------------------------------------------------------------------------------------------------
Operating Income 651.0 799.4 519.8 523.4 671.5
Net interest income (expense) (16.8) (11.2) (2.6) 8.7 35.6
Gain on disposal of investment -- 7.3 -- -- --
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes
and minority interests 634.2 795.5 517.2 532.1 707.1
Income tax expense (108.3) (171.6) (113.0) (120.4) (157.2)
-----------------------------------------------------------------------------------------------------------------------
Income before minority interests 525.9 623.9 404.2 411.7 549.9
Minority interests 0.6 1.6 2.4 (0.6) (2.6)
-----------------------------------------------------------------------------------------------------------------------
Net income $ 526.5 $ 625.5 $ 406.6 $ 411.1 $ 547.3
-----------------------------------------------------------------------------------------------------------------------
Earnings per share (basic)(1) $ 2.01 $ 2.25 $ 1.46 $ 1.46 $ 1.91
-----------------------------------------------------------------------------------------------------------------------
Earnings per share (diluted)(1) $ 2.00 $ 2.25 $ 1.45 $ 1.44 $ 1.87
-----------------------------------------------------------------------------------------------------------------------
Number of shares used in calculating
earnings per share (basic) 261.3 277.4 278.2 281.7 286.4
-----------------------------------------------------------------------------------------------------------------------
Number of shares used in calculating
earnings per share (diluted) 262.6 278.4 279.7 288.1 300.4
-----------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges(4) 13.2 18.6 13.4 12.7 16.3
Consolidated Balance Sheet Data
(end of period):
Cash, cash equivalents and
marketable securities $ 758.4 $ 556.4 $ 702.2 $ 1,100.7 $ 1,823.1
Working capital(5) 417.4 611.8 443.5 855.1 398.5
Total assets 4,486.0 5,005.5 5,445.7 6,434.0 7,930.3
Short-term debt (including current
portion of long-term debt) 492.8 428.2 424.6 191.2 123.2
Long-term debt (excluding current
portion)(1) 200.7 194.9 356.4 755.8 1,348.5
Shareholders' equity(1) 2,661.7 3,260.0 3,307.4 4,083.3 4,563.9
Consolidated Operating Data:
Capital expenditures(6) $ 1,001.9 $ 1,125.2 $ 1,035.4 $ 947.3 $ 1,347.5
Net cash provided by operating activities 825.1 980.7 983.8 1,012.5 1,469.3
Depreciation and amortization(6) 392.4 535.9 608.1 704.0 806.8
-----------------------------------------------------------------------------------------------------------------------
(1) All share information has been adjusted to reflect the 2-for-1 stock split
effected in June 1999. Earnings per share have been restated to reflect the
adoption in 1997 of Statement of Financial Accounting Standards No.128
"Earnings per share." See Note 2.10 and Note 11 to the Consolidated
Financial Statements. On September 22, 1999, the Company completed an
equity offering of 2,990,000 shares of capital stock at $74.6250 per share
("1999 Share Offering"). The net proceeds to the Company in connection with
the 1999 Share Offering were $216.8 million. On September 22, 1999, the
Company also completed a debt offering of $720.9 million aggregate initial
principal amount of zero-coupon convertible Liquid Yield OptionTM Notes due
2009 (the "1999 LYONs"), with yield to maturity of 2.4375% per annum (the
"1999 LYONs Offering"). The net proceeds to the Company in connection with
the 1999 LYONs Offering was $708.3 million. On June 10, 1998, the Company
completed an equity offering of 6,000,000 shares of capital stock at $36.09
per share (after the 2-for-1 stock split) ("1998 Share Offering"). The net
proceeds to the Company in connection with the 1998 Share Offering were
$208.8 million. On June 10, 1998, the Company also completed a debt
offering of $431.7 million aggregate initial principal amount of
zero-coupon convertible Liquid Yield OptionTM Notes due 2008 (the "1998
LYONs"), with yield to maturity of 1.75% per annum (the "1998 LYONs
Offering"). The net proceeds to the Company in connection with the 1998
LYONs Offering was $421.8 million.
(2) Cost of sales is net of certain funds received through government agencies
for industrialization costs (which include certain costs incurred to bring
prototype products to the production stage) included therein. See Note 17
to the Consolidated Financial Statements. For a discussion of certain
significant charges reflected in cost of sales in 1996, 1997 and 1998, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Results of Operations."
(3) Other income and expenses include, among other things, funds received
through government agencies for research and development expenses, and the
cost of new plant start-ups, as well as foreign currency gains and losses,
and the costs of certain activities relating to intellectual property and
goodwill amortization. The Company's reported research and development
expenses do not include design center, process engineering, pre-production
or industrialization costs.
(4) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and minority interests, plus
fixed charges. Fixed charges consist of interest expenses.
(5) Working capital is calculated as current assets (excluding cash, cash
equivalents and marketable securities) less current liabilities (excluding
bank overdrafts, short-term debt and current portion of long-term debt).
(6) Capital expenditures are net of certain funds received through government
agencies, the effect of which is to decrease depreciation.
- 34 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
annual report. The following discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended. The
Company's actual results may differ significantly from those projected in the
forward-looking statements. Factors that might cause future actual results to
differ materially from the Company's recent results or those projected in the
forward-looking statements include, but are not limited to, those discussed in
"Cautionary Statement Regarding Forward-Looking Statements," under the caption
"Risk Factors" in the Company's Prospectuses dated September 16, 1999 and below.
The Company assumes no obligation to update the forward-looking statements or
such factors.
Overview
The semiconductor industry experienced a strong recovery in 1999, after a severe
slowdown in 1998. According to preliminary trade association data, worldwide
sales of semiconductor products (the total available market or "TAM") increased
18.9% in 1999 over 1998. According to preliminary trade association data, the
estimated market for products produced by the Company (the serviceable available
market or "SAM") (which consisted of the TAM without DRAMs and opto-electronic
products) increased approximately 14.9% in 1999 over 1998.
While the semiconductor market in 1999 registered a significant
increase, the Company's net revenues for 1999 increased 19.0% compared to net
revenues for 1998 with an increase equivalent to the total semiconductor market.
However, the Company's net revenues increased more than the SAM increased. The
Company benefited from increased volumes in virtually all product families and
an improved product mix, including sales of new products. During this period,
however, the Company continued to experience increased competition and pricing
pressure in its core product markets.
Despite difficult market conditions in recent years, from 1995 to 1999
the Company's net revenues increased from $3,554.4 million to $5,056.3 million,
representing a compound annual growth rate of 9.2%. According to preliminary
trade association data, the TAM increased from $144.4 billion in 1995 to $149.4
billion in 1999, representing a compound annual growth rate of 0.9%, while the
SAM increased from $99.2 billion in 1995 to $122.9 billion in 1999, representing
a compound annual growth rate of 5.5%. During the same period, the Company's
share of the TAM increased from 2.4% to 3.4%, while the Company's share of the
SAM increased from 3.5% to 4.1%. The Company's revenue growth from 1995 through
1999 was particularly significant for differentiated ICs (which the Company
defines as being its dedicated products, semicustom devices and
microcontrollers).
As a result of the Company's performance during the period 1995 to
1999, the Company not only gained market share against both the TAM and SAM,
but, according to preliminary ranking by leading market analysts, became the
eighth largest semiconductor company in the world during 1999, up from ninth in
1998. However, the Company believes that recent difficult market conditions have
led certain of its competitors to redirect their marketing focus and
manufacturing capacity toward products that compete with the Company's products.
The Company believes increased competition in its core product markets is
generating greater pricing pressure, increased competition for market share in
the SAM and a generally more challenging market environment for the Company.
The Company continues to focus on differentiated ICs and analog ICs.
Differentiated ICs accounted for approximately 63% of the Company's net revenues
in 1999, compared to approximately 62% in 1998. Such products foster close
relationships with customers, resulting in early knowledge of their evolving
requirements and opportunities to access their markets for other products, and
are less vulnerable to competitive pressures than standard commodity products.
Analog ICs (including mixed signal ICs), the majority of which are also
differentiated ICs, accounted for approximately 51% of the Company's net
revenues in 1999 and 50% in 1998, while discrete devices accounted for
approximately 12% of the Company's net revenues in 1999 and approximately 13% in
1998. In recent years, these families of products, in particular analog
ICs, have experienced less volatility in sales growth rates and average selling
prices than the overall semiconductor industry. However, the difficult
competitive environment in the semiconductor market in more recent years has led
to price pressures in these product families as well.
In order to reinforce the Company's presence in certain strategic
business segments, the Company has recently completed the acquisition of
Peripherals Technology Solutions (in the area of data storage), Vision Group and
Arithmos (both in the imaging market).
The Company's gross profit margin decreased from 41.0% in 1995 to 38.3%
in 1998 and recovered to 39.6% in 1999. Benefiting from a favorable environment
in 1995 and 1996, the Company had a stable gross profit margin of approximately
41%. In 1997 and 1998, in an unfavorable industry environment, which generated
lower margins due to the negative impact of pricing pressures, gross profit
margin declined to slightly above 38%. This decline in gross profit margin
coupled with a higher level of research and development expenditure, resulted in
a lower operating income as a percentage of net revenues which, however,
remained above 12%. Benefiting from the market recovery in 1999, gross profit
increased in 1999 to 39.6% while operating income as a percentage of net
revenues was 13.3%.
There can be no assurance that the Company will experience revenue
growth at or above the growth rate for the TAM or the SAM, or that increased
competition in the Company's core product markets will not lead to further price
erosion, lower revenue growth rates and lower margins for the Company.
- 35 -
Results of Operations
The tables below set forth information on the Company's net revenues by product
group and by geographic region:
Year ended December 31,
(in millions except per share and ratio data)
1995 1996 1997 1998 1999
-----------------------------------------------------------------------------------------------------------------------
Net Revenues by Product Group: (1)
Telecommunications, Peripherals and
Automotive(1)(2) $1,250.4 $1,614.0 $1,606.9 $1,855.2 $2,305.5
Discrete and Standard ICs(1) 833.4 778.1 839.5 816.7 927.9
Memory Products (2) 653.3 736.8 708.6 659.6 835.9
Consumer and Microcontrollers(1) 649.2 870.2 738.8 805.8 881.7
New Ventures Group and Others (3) 168.1 123.3 125.4 110.5 105.3
-----------------------------------------------------------------------------------------------------------------------
Total $3,554.4 $4,122.4 $4,019.2 $4,247.8 $5,056.3
-----------------------------------------------------------------------------------------------------------------------
Net Revenues by Geographic Region: (4)
Europe $1,593.8 $1,788.5 $1,753.3 $1,768.9 $1,833.6
North America 812.5 903.0 899.1 937.3 1,156.1
Asia Pacific 916.7 1,125.7 1,065.8 1,247.9 1,658.2
Japan 155.4 228.2 214.5 180.7 239.7
Region Five (4) 76.0 77.0 86.5 113.0 168.7
-----------------------------------------------------------------------------------------------------------------------
Total $3,554.4 $4,122.4 $4,019.2 $4,247.8 $5,056.3
-----------------------------------------------------------------------------------------------------------------------
As a percentage of net revenues
-----------------------------------------------------------------------------------------------------------------------
Net Revenues by Product Group:
Telecommunications, Peripherals and
Automotive(1)(2) 35.2% 39.1% 40.0% 43.6% 45.6%
Discrete and Standard ICs(1) 23.4 18.9 20.9 19.2 18.4
Memory Products(2) 18.4 17.9 17.6 15.5 16.5
Consumer and Microcontrollers(1) 18.3 21.1 18.4 19.0 17.4
New Ventures Group and Others(3) 4.7 3.0 3.1 2.7 2.1
-----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
-----------------------------------------------------------------------------------------------------------------------
Net Revenues by Geographic Region: (4)
Europe 44.8% 43.4% 43.6% 41.6% 36.3%
North America 22.9 21.9 22.4 22.1 22.9
Asia Pacific 25.8 27.3 26.5 29.4 32.8
Japan 4.4 5.5 5.3 4.3 4.7
Region Five (4) 2.1 1.9 2.2 2.6 3.3
-----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
-----------------------------------------------------------------------------------------------------------------------
(1) In January 1999, we implemented organizational changes to better orient our
product groups to end-use applications. As a result, net revenues have been
restated for prior periods to reflect these changes. In addition, the
former Dedicated Products Group has become the Telecommunications,
Peripherals and Automotive Groups, while the former Programmable Products
Group has become the Consumer and Microcontrollers Groups. Revenues for the
Dedicated Products Group and the Programmable Products Group have been
restated in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for prior periods to reflect this
change.
(2) 1996 revenues for the Dedicated Products Group include $5.6 million of
revenues from certain foundry activities which were moved from the Memory
Products Group in January 1996. Revenues for the Dedicated Products Group
and the Memory Products Group have been restated for prior periods to
reflect this change.
(3) Includes revenues from sales of subsystems and other products and from the
New Ventures Group, which was created in May 1994 to act as a center for
the Company's new business opportunities.
(4) Revenues are classified by location of customer invoiced. For example,
products ordered by U.S.-based companies to be invoiced to Asia Pacific
affiliates are classified as Asia Pacific revenues. Net revenues by
geographic region have been reclassified to reflect the creation of Region
Five in January 1998 which includes emerging markets such as South America,
Africa, Eastern Europe, the Middle East and India. Prior years have been
restated to reflect this reclassification.
- 36 -
The following table sets forth certain financial data from the
Company's consolidated statements of income since 1995, expressed in each case
as a percentage of net revenues:
Year ended December 31, 1995 1996 1997 1998 1999
---------------------------------------------------------------------------------------------------------
Net sales 99.1% 98.9% 98.8% 99.1% 99.3%
Other revenues 0.9 1.1 1.2 0.9 0.7
---------------------------------------------------------------------------------------------------------
Net revenues 100.0 100.0 100.0 100.0 100.0
Cost of sales (59.0) (58.6) (61.1) (61.7) (60.4)
---------------------------------------------------------------------------------------------------------
Gross profit 41.0 41.4 38.9 38.3 39.6
Operating expenses:
Selling, general and administrative (11.6) (10.2) (11.3) (11.5) (10.6)
Research and development (12.4) (12.9) (15.2) (16.2) (16.5)
Restructuring costs (0.4) -- -- -- --
Other income and expenses 1.7 1.1 0.5 1.7 0.8
---------------------------------------------------------------------------------------------------------
Total operating expenses (22.7) (22.0) (26.0) (26.0) (26.3)
---------------------------------------------------------------------------------------------------------
Operating income 18.3 19.4 12.9 12.3 13.3
Net interest income (expense) (0.5) (0.3) -- 0.2 0.7
Gain on disposal of investment -- 0.2 -- -- --
---------------------------------------------------------------------------------------------------------
Income before income taxes &
minority interests 17.8 19.3 12.9 12.5 14.0
Income tax expense (3.0) (4.2) (2.9) (2.8) (3.1)
---------------------------------------------------------------------------------------------------------
Income before minority interests 14.8 15.1 10.0 9.7 10.9
Minority interests -- 0.1 0.1 -- (0.1)
---------------------------------------------------------------------------------------------------------
Net income 14.8% 15.2% 10.1% 9.7% 10.8%
---------------------------------------------------------------------------------------------------------
1999 vs. 1998
In 1999, the Company benefitted from the industry recovery and its strong market
position, and increased its net revenues, gross profit, operating income, net
income and earnings per share in each successive quarter. The Company continued
to invest significant amounts in research and development and completed several
strategic acquisitions which enhanced its intellectual property portfolio. The
Company accelerated its capital spending in the second half of the year.
Net revenues. Net sales increased 19.3%, from $4,210.6 million in 1998 to
$5,023.1 million in 1999. The increase in net sales was primarily the result of
higher volume and an improved product mix, including sales of new products,
partly offset by declining average selling prices. The exchange rate impact on
net sales in 1999 was estimated to be negligible. Other revenues decreased from
$37.2 million in 1998 to $33.2 million in 1999 due primarily to a reduction in
licensing revenues. Net revenues increased 19.0%, from $4,247.8 million in 1998
to $5,056.3 million in 1999.
The Telecommunications, Peripherals and Automotive Groups' net revenues
increased 24.3% primarily as a result of volume increases in wireless
telecommunications, data storage and automotive products and a more favorable
product mix. The Discrete and Standard ICs Group's net revenues increased 13.6%,
as the volume increases in basically all major product families and the more
favorable product mix in standard commodities more than offset the price
declines in all product families. Net revenues of the Memory Products Group
increased by 26.7% as the volume increases in all product families more than
offset the price declines in nearly all product families (such as EPROMs,
EEPROMs, smartcard ICs and flash memories). The Consumer and Microcontrollers
Groups' net revenues increased 9.4% as a result of significantly higher volumes
in digital video and microcontrollers products, partially offset by decreased
volumes in graphics products and lower prices in all product families.
Gross profit. The Company's gross profit increased 23.2%, from $1,624.8 million
in 1998 to $2,001.8 million in 1999 primarily as a result of higher net
revenues. As a percentage of net revenues, gross profit increased from 38.3% in
1998 to 39.6% in 1999, due to higher sales volumes and improved manufacturing
efficiency.
Cost of sales. Cost of sales increased from $2,623.0 million in 1998 to $3,054.5
million in 1999, primarily due to a significant increase in production volume
and the increased depreciation associated with new capital investments.
The exchange rate impact on gross profit in 1999 compared to 1998 was
estimated to be favorable, as the negligible impact of the variation of the U.S.
dollar on net revenues was more than offset by the positive impact on cost of
sales of the appreciation of the U.S. dollar versus the euro. See "--Impact of
Changes in Exchange Rates." Cost of sales in 1999 and 1998 was net of $2.4
million and $3.1 million, respectively, of funds received through government
agencies to offset industrialization costs (which include certain costs incurred
to bring prototype products to the production stage) included in cost of sales.
- 37 -
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 9.4%, from $488.1 million in 1998 to $534.2
million in 1999, reflecting higher expenditure for information technology,
marketing and administrative functions, including the expenses for year 2000
compliance. As a percentage of net revenues, selling, general and administrative
expenses decreased slightly from 11.5% in 1998 to 10.6% in 1999.
Research and development expenses. Research and development expenses increased
21.2%, from $689.8 million in 1998 to $836.0 million in 1999. The Company
continued to invest heavily in research and development and plans to continue
increasing its research and development staff. The Company continues to allocate
significant financial resources to expand its market leadership in key
applications, reflecting its commitment to service and continuous innovation.
The Company's reported research and development expenses do not include design
center, process engineering, pre-production or industrialization costs. As a
percentage of net revenues, research and development expenses increased from
16.2% in 1998 to 16.5% in 1999.
Other income and expenses. Other income and expenses decreased from income of
$76.5 million in 1998 to income of $39.9 million in 1999. Other income and
expenses include primarily funds received from government agencies in connection
with the Company's research and development programs, the cost of new plant
start-ups, as well as foreign currency gains and losses, the costs of certain
activities relating to intellectual property, goodwill amortization, and
miscellaneous revenues and expenses. The decrease in other income and expenses
resulted primarily from higher start-up costs of new production facilities, from
the inclusion of the goodwill amortization and from a slight decrease in funds
received from government agencies in connection with the Company's research and
development programs.
Operating income. The Company's operating income increased by 28.3%, from $523.4
million in 1998 to $671.5 million in 1999. The exchange rate impact on operating
income in 1999 was favorable since the appreciation of the U.S. dollar against
the euro had a favorable impact on cost of sales and operating expenses.
Net interest income (expense). Net interest income increased from income of $8.7
million in 1998 to income of $35.6 million in 1999 primarily as a result of the
increase in cash and cash equivalents following the 1999 Share Offering and the
1999 LYONs Offering completed on September 22, 1999.
Income tax expense. Provision for income tax was $157.2 million in 1999 compared
to $120.4 million in 1998, primarily as a result of the increase in income
before income taxes and minority interests. The accrued effective tax rate
decreased from 22.6% in 1998 to 22.2% in 1999 mainly due to the application of
benefits in certain countries. As such benefits may not be available after 1999,
an increase in the effective tax rate could result in the coming years.
Net income. The Company's net income increased 33.1%, from $411.1 million to
$547.3 million. As a percentage of sales, 1999 net income was 10.8%, up from
9.7% of 1998 net income. The increase was mainly due to higher net sales.
Earnings per diluted share reached $1.87, an increase of 29.9% compared to
earnings per diluted share of $1.44 in 1998. All per share numbers have been
adjusted to reflect the 2-for-1 stock split effected in June 1999.
1998 vs. 1997
The Company distinguished itself during 1998 by the solid
performance achieved during an unprecedented downturn in the semiconductor
industry. In 1998, the Company increased net revenues, gross profit and net
income compared to 1997. In addition, the Company increased significantly its
investments in research and development activities during the year, continuing
the trend established during the last five years. The improved financial results
reflect the Company's business strategy, including the high level of
differentiated products within its product portfolio, its focus on high growth
markets and its geographic balance.
Net revenues. Net sales increased 6.1%, from $3,969.8 million in 1997
to $4,210.6 million in 1998. The increase in net sales was primarily the result
of higher volume and an improved product mix, including sales of new products,
partly offset by declining average selling prices. The exchange rate impact on
net sales in 1998 due to a stronger U.S. dollar was estimated to be marginally
unfavorable. Other revenues decreased from $49.4 million in 1997 to $37.2
million in 1998 due primarily to a reduction in licensing revenues. Net revenues
increased 5.7%, from $4,019.2 million in 1997 to $4,247.8 million in 1998.
The Telecommunications, Peripherals and Automotive Groups' net revenues
increased 15.5% primarily as a result of volume increases in wireless
telecommunications, automotive and printer products (partly offset by lower
volumes in data storage products) and a more favorable product mix in data
storage, automotive and printer products. The Discrete and Standard ICs Group's
net revenues decreased 2.7%, as volume increases in basically all major product
families and a more favorable product mix in transistors and standard
commodities were more than offset by price declines in transistors, discrete
devices, standard commodities and standard logic products. Net revenues of the
Memory Products Group declined by 6.9% as the volume increases in EEPROMs, flash
memories and smartcard ICs were more than offset by significant price declines
in basically all product families (such as EPROMs, EEPROMs, smartcard ICs and
flash memories). The Consumer and Microcontrollers Groups' net revenues
increased 9.1% as a result of significantly higher volumes in digital image
processing and graphics products.
Gross profit. The Company's gross profit increased 4.0%, from $1,561.8 million
in 1997 to $1,624.8 million in 1998 primarily as a result of higher net
revenues. As a percentage of net revenues, gross profit decreased from 38.9% in
1997 to 38.3% in 1998, being primarily impacted by the reduction in average
selling prices and a higher depreciation charge.
- 38 -
Cost of sales. Cost of sales increased from $2,457.4 million in 1997 to $2,623.0
million in 1998, primarily due to a significant increase in production volume
and the increased depreciation associated with new capital investments.
The exchange rate impact on gross profit in 1998 compared to 1997 was
estimated to be marginally favorable, as the negative impact of the appreciation
of the U.S. dollar on net revenues was more than offset by the positive impact
on cost of sales. See "-- Impact of Changes in Exchange Rates." Cost of sales in
1998 and 1997 was net of $3.1 million and $6.2 million, respectively, of funds
received through government agencies to offset industrialization costs (which
include certain costs incurred to bring prototype products to the production
stage) included in cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 7.4%, from $454.3 million in 1997 to $488.1
million in 1998, reflecting higher expenditure for information technology,
marketing and administrative functions. As a percentage of net revenues,
selling, general and administrative expenses increased slightly from 11.3% in
1997 to 11.5% in 1998.
Research and development expenses. Research and development expenses increased
12.9%, from $610.9 million in 1997 to $689.8 million in 1998. The Company
continued to invest heavily in research and development. The Company's reported
research and development expenses do not include design center, process
engineering, pre-production or industrialization costs. As a percentage of net
revenues, research and development expenses increased from 15.2% in 1997 to
16.2% in 1998.
Other income and expenses. Other income and expenses increased from income of
$23.2 million in 1997 to income of $76.5 million in 1998. Other income and
expenses include primarily funds received from government agencies in connection
with the Company's research and development programs, the cost of new plant
start-ups, as well as foreign currency gains and losses, the costs of certain
activities relating to intellectual property and miscellaneous revenues and
expenses. The increase in other income and expenses resulted primarily from
lower start-up costs of new production facilities and from an increase in funds
received from government agencies in connection with the Company's research and
development programs.
Operating income. The Company's operating income increased slightly, from $519.8
million in 1997 to $523.4 million in 1998. The exchange rate impact on operating
income was estimated to be favorable, since the negative impact on net revenues
was more than compensated by the favorable impact on cost of sales and operating
expenses.
Net interest income (expense). Net interest income increased from an expense of
$2.6 million in 1997 to an income of $8.7 million in 1998 primarily as a result
of the increase in cash and cash equivalents following the 1998 Share Offering
and the 1998 LYONs Offering completed on June 10, 1998.
Income tax expense. Provision for income tax was $120.4 million in 1998 compared
to $113.0 million in 1997, primarily as a result of the increase in income
before income taxes and minority interests and a higher effective tax rate. The
accrued effective tax rate increased from 21.8% in 1997 to 22.6% in 1998. The
still favorable 1998 rate was mainly due to the application of benefits in
certain countries.
Net income. Net income in 1998 was $411.1 million, a slight increase from the
1997 net income of $406.6 million. As a percentage of sales, 1998 net income was
9.7%, compared to 10.1% of 1997 net income. Earnings per diluted shares were
$1.44, basically equivalent to 1997 earnings per diluted share of $1.45. All per
share numbers have been adjusted to reflect the 2-for-1 stock split effected in
June 1999.
Quarterly Results of Operations
The following table sets forth certain financial information for the years 1998
and 1999. Such information is derived from unaudited consolidated financial
statements, prepared on a basis consistent with the audited consolidated
financial statements, that include, in the opinion of management, only normal
recurring adjustments necessary for a fair presentation of the information set
forth therein. Operating results for any quarter are not necessarily indicative
of results for any future period. In addition, in view of the significant growth
experienced by the Company in recent years, the increasingly competitive nature
of the markets in which the Company operates, the changes in product mix and the
currency effects of changes in the composition of sales and production among
different geographic regions, the Company believes that period-to-period
comparisons of its operating results should not be relied upon as an indication
of future performance.
The Company's quarterly and annual operating results are also affected
by a wide variety of other factors that could materially and adversely affect
revenues and profitability or lead to significant variability of operating
results, including, among others, capital requirements and the availability of
funding, competition, new product development and technological change and
manufacturing. In addition, a number of other factors could lead to fluctuations
in operating results, including order cancellations or reduced bookings by key
customers or distributors, intellectual property developments, international
events, currency fluctuations, problems in obtaining adequate raw materials on a
timely basis, and the loss of key personnel. As only a portion of the Company's
expenses varies with its revenues, there can be no assurance that the Company
will be able to reduce costs promptly or adequately in relation to revenue
declines to compensate for the effect of any such factors. As a result,
unfavorable changes in the above or other factors have in the past and may in
the future adversely affect the Company's operating results.
- 39 -
Quarter ended (unaudited)
(in millions, except
percentages April 4, July 4, Oct. 3, Dec. 31, April 3, July 3, Oct. 2, Dec. 31,
and per share data)(1) 1998 1998 1998 1998 1999 1999 1999 1999
----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement
of Income Data
Net revenues $1,005.4 $1,070.3 $1,039.4 $1,132.7 $1,113.3 $1,190.6 $1,274.2 $1,478.2
Cost of sales (620.4) (660.3) (643.7) (698.6) (685.4) (719.9) (766.8) (882.4)
----------------------------------------------------------------------------------------------------------------------------------
Gross profit 385.0 410.0 395.7 434.1 427.9 470.7 507.4 595.8
----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general &
administrative (119.9) (126.2) (120.1) (121.9) (119.1) (130.3) (136.8) (148.0)
Research & development (166.4) (176.2) (168.0) (179.2) (193.5) (202.8) (205.5) (234.1)
Other income & expenses 16.2 17.2 21.4 21.8 16.1 14.9 5.0 3.8
----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (270.1) (285.2) (266.7) (279.3) (296.5) (318.2) (337.3) (378.3)
----------------------------------------------------------------------------------------------------------------------------------
Operating income 114.9 124.8 129.0 154.8 131.4 152.5 170.1 217.5
Net interest income (expense) (1.1) -- 5.2 4.6 3.7 6.0 8.2 17.7
----------------------------------------------------------------------------------------------------------------------------------
Income before income
taxes & minority interests 113.8 124.8 134.2 159.4 135.1 158.5 178.3 235.2
Income tax expense (23.6) (26.7) (32.5) (37.6) (29.9) (35.4) (41.6) (50.3)
----------------------------------------------------------------------------------------------------------------------------------
Income before minority
interests 90.2 98.1 101.7 121.8 105.2 123.1 136.7 184.9
Minority interests -- (0.6) (0.1) -- (0.1) (0.6) (1.4) (0.6)
----------------------------------------------------------------------------------------------------------------------------------
Net income $ 90.2 $ 97.5 $ 101.6 $ 121.8 $ 105.1 $ 122.5 $ 135.3 $ 184.3
----------------------------------------------------------------------------------------------------------------------------------
Earnings per share (basic) $ 0.32 $ 0.35 $ 0.36 $ 0.43 $ 0.37 $ 0.43 $ 0.47 $ 0.64
----------------------------------------------------------------------------------------------------------------------------------
Earnings per share (diluted) $ 0.32 $ 0.35 $ 0.35 $ 0.42 $ 0.36 $ 0.42 $ 0.46 $ 0.62
----------------------------------------------------------------------------------------------------------------------------------
Number or shares used in
calculating earnings
per share (basic) 278.2 279.8 284.4 284.4 285.0 285.5 286.1 288.9
Number or shares used in
calculating earnings
per share (diluted) 279.6 283.8 294.6 294.8 296.0 296.9 298.7 310.2
----------------------------------------------------------------------------------------------------------------------------------
As a Percentage of Net Revenues
----------------------------------------------------------------------------------------------------------------------------------
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (61.7) (61.7) (61.9) (61.7) (61.6) (60.5) (60.2) (59.7)
----------------------------------------------------------------------------------------------------------------------------------
Gross profit 38.3 38.3 38.1 38.3 38.4 39.5 39.8 40.3
----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general &
administrative (11.9) (11.8) (11.6) (10.8) (10.7) (10.9) (10.7) (10.0)
Research & development (16.6) (16.5) (16.2) (15.8) (17.4) (17.0) (16.1) (15.8)
Other income & expenses 1.6 1.7 2.1 2.0 1.5 1.2 0.3 0.2
----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (26.9) (26.6) (25.7) (24.6) (26.6) (26.7) (26.5) (25.6)
----------------------------------------------------------------------------------------------------------------------------------
Operating income 11.4 11.7 12.4 13.7 11.8 12.8 13.3 14.7
Net interest income
(expense) (0.1) -- 0.5 0.4 0.3 0.5 0.7 1.2
----------------------------------------------------------------------------------------------------------------------------------
Income before income
taxes & minority
interests 11.3 11.7 12.9 14.1 12.1 13.3 14.0 15.9
Income tax expense (2.3) (2.5) (3.1) (3.3) (2.7) (3.0) (3.3) (3.4)
----------------------------------------------------------------------------------------------------------------------------------
Income before minority
interests 9.0 9.2 9.8 10.8 9.4 10.3 10.7 12.5
Minority interests -- (0.1) -- -- -- -- (0.1) --
----------------------------------------------------------------------------------------------------------------------------------
Net income 9.0% 9.1% 9.8% 10.8% 9.4% 10.3% 10.6% 12.5%
----------------------------------------------------------------------------------------------------------------------------------
(1) All share information has been adjusted to reflect the 2-for-1 stock split
effected in June 1999.
- 40 -
In the fourth quarter 1999, the Company achieved very solid results of
operations. The combination of strong contributions by all major applications,
product groups and geographic regions and the Company's efficient worldwide
manufacturing infrastructure enabled the Company to post the highest quarterly
revenues and earnings in its history.
Net revenues. Fourth quarter 1999 net revenues recorded a 16.0% sequential
improvement over the third quarter of 1999 and a 30.5% increase over the fourth
quarter of 1998. The Company experienced strong sequential sales gains across
all product groups in the fourth quarter of 1999. Third quarter 1999 revenues
showed a 7.0% sequential increase over the second quarter of 1999 in spite of
seasonal factors that generally reduce sales during the summer months and were
22.6% above 1998 third quarter net revenues. Second quarter 1999 net revenues
increased 6.9% compared to the first quarter, and were 11.2% above second
quarter 1998 net revenues. First quarter 1999 net revenues declined 1.7%
compared to the fourth quarter of 1998 due to normal seasonal patterns, and were
10.7% above first quarter 1998 net revenues.
With respect to the product groups, the Memory Products Group had the
highest year-over-year and quarter-over-quarter results; its revenues in the
1999 fourth quarter rose nearly 41% in comparison to the 1998 fourth quarter and
increased approximately 22% in comparison to the 1999 third quarter, reflecting
the Company's significant progress in penetrating the market with new generation
flash products. In the 1999 fourth quarter, net revenues from the
Telecommunications, Peripherals and Automotive Group increased sequentially
nearly 17%, reflecting the strength in sales of ICs for telecommunications,
mainly wireless, hard disk drives, digital cellular phones and automotive
applications. For the same period, net revenues from the Consumer and
Microcontrollers Groups increased 15% and net revenues from the Discrete and
Standards ICs Products Group increased slightly more that 13%. Overall, the
Company's 16% sequential revenue growth of the 1999 fourth quarter resulted from
the rapidly increasing demand for its products as well as its ability to
effectively deploy its resources.
In 1999, approximately 36% of the Company's net revenues originated in
Europe, compared to approximately 42% in 1998. The Company's third quarter
revenues in Europe have averaged slightly less than average revenues during
other quarters due to production slowdowns by its European customers in July and
August. Quarterly results have also been and may be expected to continue to be
substantially affected by the cyclical nature of the semiconductor and
electronic systems industries, the timing and success of new product
introductions and the levels of provisions and other unusual charges incurred.
Gross profit. In the fourth quarter, 1999, gross profit was $595.8 million,
37.2% above the year-ago period. Gross margin in the 1999 fourth quarter was
40.3%, representing a significant improvement compared to 38.3% in the fourth
quarter 1998, and to 39.8% in the third quarter 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $148.0 million in the fourth quarter 1999, or 10.0%
of net revenues, compared to $121.9 million, or 10.8% of net revenues in the
fourth quarter 1998.
Research and development expenses. In the fourth quarter 1999, research and
development costs of $234.1 million increased 30.6% compared to the fourth
quarter 1998. Research and development represented 15.8% of net revenues in the
fourth quarter 1999, unchanged from a year-ago period.
Operating income. Operating income reached $217.5 million in the fourth quarter
1999 which represented an increase of 40.5% compared to the level of the fourth
quarter 1998. Operating margin for the 1999 fourth quarter was 14.7% compared to
13.7% in the 1998 fourth quarter, and to 13.3% in the 1999 third quarter.
Net income. Net income for the 1999 fourth quarter rose sharply, increasing
51.3% to $184.3 million compared to $121.8 million in the 1998 fourth quarter
and 36.2% compared to $135.3 million in the third quarter 1999. Earnings per
diluted share increased 47.6% to $0.62 from $0.42 in the fourth quarter 1998.
All per share figures have been adjusted to reflect the 2-for-1 stock split
effected in June 1999.
Looking ahead, due to improved order visibility, the Company believes
that, in contrast to normal seasonal patterns, revenues may increase
sequentially in the first quarter of 2000 compared to fourth quarter 1999
levels. Moreover, a modest sequential increase in gross margin may be expected
in the first quarter, despite the use of external foundry services to complement
the Company's internal capacity. The Company has entered 2000 very well
positioned in terms of product portfolio and technology, strategic partnerships,
financial position and backlog. In the fourth quarter, the Company made cap-ital
investments of $536 million designed to progressively increase and enhance its
capacity and ability to meet the high level of demand for its products during
this market recovery.
Impact of Changes in Exchange Rates
The Company's results of operations and financial condition can be significantly
affected by changes in exchange rates between the U.S. dollar and other
currencies, particularly the euro (with respect to prior periods, the Italian
lira, the French franc, the German mark), the Japanese yen and other Asian
currencies.
Revenues for certain products (primarily dedicated products sold in
Europe and Japan) that are quoted in currencies other than the U.S. dollar are
directly affected by fluctuations in the value of the U.S. dollar. Revenues for
all other products, which are quoted in U.S. dollars and translated into local
currencies for payment, tend not to be affected significantly by fluctuations in
exchange rates except to the extent that there is a lag between changes in
currency rates and adjustments in the local currency equivalent price paid for
such products.
Certain significant costs incurred by the Company, such as
manufacturing labor costs and depreciation charges, selling, general and
administrative expenses, and research and development expenses, are incurred in
the currencies of jurisdictions where the Company's operations are located.
Fluctuations in the value of these currencies, particularly the euro, compared
to the U.S. dollar can affect the Company's costs and therefore its
profitability.
The appreciation in the U.S. dollar in 1999 compared to 1998 against
the principal European and Asian currencies (excluding Japanese yen, which
appreciated compared to the U.S. dollar) that have a material impact on the
Company resulted in a favorable impact on results of operations for the period
because of the favorable impact on cost of sales and operating expenses.
- 41 -
The Company's principal strategies to reduce the risks associated with
exchange rate fluctuations have been (i) to increase the proportion of sales to
customers denominated in U.S. dollars, (ii) to purchase raw materials and
services in transactions denominated in U.S. dollars (thereby reducing the
exchange rate risk for costs relative to revenues, which are principally
denominated or determined by reference to the U.S. dollar), and (iii) to manage
certain other costs, such as financial costs, to maintain an appropriate balance
between U.S. dollars and other currencies based upon the currency environment at
the time. From time to time, the Company purchases or sells currencies forward
to cover currency risk in obligations or receivables. The Company has not
experienced significant gains or losses as a result of exchange coverage
activities. Its management strategies to reduce exchange rate risks have served
to mitigate, but not eliminate, the positive or negative impact of exchange rate
fluctuations. Furthermore, the introduction of the euro as of January 1, 1999,
has served to reduce the number of currencies whose exchange rate fluctuations
versus the U.S. dollar may impact the Company's results, thus making the
Company's exposure to exchange rate fluctuations more concentrated.
Assets and liabilities of subsidiaries are, for consolidation purposes,
translated into U.S. dollars at the period-end exchange rate. See Note 2.3 to
the Consolidated Financial Statements. Income and expenses are translated at the
average exchange rate for the period. Adjustments resulting from the translation
are recorded directly in shareholders' equity, and are shown as "accumulated
other comprehensive income (loss)" in the consolidated statements of changes in
shareholders' equity. The balance sheet impact of such translation adjustments
has been, and may be expected to be, significant from period to period.
At December 31, 1999, the Company's outstanding indebtedness was
denominated principally in U.S. dollars, Italian lire, and French francs. See
Note 13 to the Consolidated Financial Statements.
Liquidity and Capital Resources
On September 22, 1999, the Company completed an equity offering of
2,990,000 shares of capital stock at $74.6250 per share (the "1999 Share
Offering"). The net proceeds to the Company in connection with the 1999 Share
Offering were $216.8 million. On September 22, 1999, the Company also completed
a debt offering of $720.9 million aggregate initial principal amount of
zero-coupon convertible Liquid Yield Option NotesTM due 2009 (the "1999 LYONs"),
with yield to maturity of 2.4375% per annum (the "1999 LYONs Offering"). The net
proceeds to the Company in connection with the 1999 LYONs Offering was $708.3
million. The Company's net cash generated from operations totalled $1,469.3
million in 1999 compared to $1,012.5 million in 1998 and $983.8 million in 1997.
Significant amounts of net cash generated from operations in 1997, 1998 and 1999
coupled with the capital increases and debt offering undertaken by the Company
in September 1999, and in June 1998, enabled the Company to finance capital
expenditures and strengthen its balance sheet over the last five years. The
Company had a positive net financial position (cash, cash equivalents and
marketable securities net of total debt) of $351.4 million at December 31, 1999
compared to a positive net financial position of $153.7 million at December 31,
1998. At December 31, 1999, cash and cash equivalents totalled $1,823.1 million,
compared to $1,100.7 million at December 31, 1998 and $702.2 million at December
31, 1997. At December 31, 1999, the aggregate amount of the Company's long-term
credit facilities was approximately $1,445 million, all of which was
outstanding, and additionally the aggregate amount of the Company's short-term
facilities was approximately $1,063 million, under which approximately $26
million of indebtedness was outstanding. At December 31, 1999, the Company had
approximately $97 million of long-term indebtedness that will become due within
one year and expects to fund such debt repayments from available cash. During
the fourth quarter 1999, certain holders of the 1998 LYONs Offering converted
their debt into shares of common stock for an amount of $52.5 million principal
amount at maturity.
In 1999, the Company's capital expenditure payments totalled $1,347.5
million, compared to $947.3 million in 1998. Capital expenditures for 1999 were
devoted principally to (i) expand a 6-inch facility and the construction of a
new 8-inch front-end facility in Agrate, Italy, (ii) equip and upgrade both the
new 8-inch and existing 6-inch front-end facilities at the Catania, Italy,
plant, (iii) expand the 8-inch front-end wafer fabrication plant in Crolles,
France, (iv) expand the 6-inch facility in Carrollton, Texas, (v) upgrade the
6-inch front-end facility in Rousset, France, (vi) ramp-up of production at the
Phoenix, Arizona, 8-inch front-end facility, (vii) construct the new 8-inch
front-end plant in Rousset, France, (viii) expand the back-end facilities in
Muar, Malaysia and (ix) expand the back-end facilities in Morocco, Malta and
Shenzhen, China. Capital expenditures for 1998 were devoted principally to (i)
expand the 8-inch front-end wafer fabrication plant in Crolles, France, (ii)
equip and upgrade both the new 8-inch and existing 6-inch front-end facilities
at the Catania, Italy, plant, (iii) extend and convert an existing facility in
Agrate, Italy, (iv) expand the 6-inch facility in Carrollton, Texas, (v) ramp-up
production at the Phoenix, Arizona, 8-inch front-end facility, (vi) expand the
back-end facilities in Muar, Malaysia and (vii) expand the back-end facilities
in Morocco, Malta and Shenzhen, China.
The Company currently expects approximately $2.3 billion capital
spending for 2000, significantly higher than in 1998 and 1999. The most
significant of the Company's 2000 capital expenditure projects are expected to
be (i) the conversion from 6-inch to 8-inch and expansion at one of its
front-end wafer fabrication plants in Agrate, Italy, (ii) the increase of
capacity of the 8-inch facilities in Catania, Italy, (iii) the completion of
construction of its new 8-inch front-end wafer fabrication facility in Rousset,
France, (iv) the conversion of its facilities in Crolles, France, to 0.25 micron
and 0.18 micron processes, (v) the construction of a new 8-inch fab facility and
the equipment of a new 6-inch facility in Singapore, (vi) the increase of
capacity of its 8-inch facilities in Phoenix, Arizona, and of the 6-inch
facility in Carrollton and (vii) the expansion of the back-end facilities in
Muar, Morocco and Singapore. The Company has also identified an additional
8-inch wafer fabrication facility to be built in Italy that is planned to be
operational by the year 2001. The Company has decided to build a new 300
millimeter, 12-inch wafer research fabrication and pilot line at Crolles
(France) using 0.18 micron and below process technology. The pilot line will be
operated in partnership with LETI and CNET, which are already working with the
Company in Crolles. As of December 31, 1999, the Company had commitments of
approximately $1.2 billion for equipment purchases. The Company will continue to
monitor its level of capital spending, however, taking into consideration
factors such as trends in the semiconductor market, capacity utilization and
announced additions.
- 42 -
At December 31, 1999, the Company's receivables from government
agencies totalled $152.2 million compared to $261.2 million in 1998 and $154.9
million in 1997. The decrease in 1999 was due primarily to the cash recognition
of certain government contracts. See Note 6 to the Consolidated Financial
Statements. In 1999, the Company's advances from government agencies totalled
$38.7 million compared to $14.1 million in 1998 and $10.1 million in 1997. See
Note 14 to the Consolidated Financial Statements. The timing of receipt of funds
under government contracts has been delayed from time to time in the past, and
while generally the Company has received the amounts recorded in such
receivables, there have been instances in which such funds ultimately have not
been paid.
The Company expects to have significant capital requirements in the
coming years and intends to continue to devote a substantial portion of its net
revenues to research and development. The Company plans to fund its capital
requirements from cash from operations, available funds, available support from
third parties (including state support) and may make recourse to borrowings
under available credit lines and, to the extent necessary or attractive based on
market conditions prevailing at the time, the sale of debt or additional equity
securities. There can be no assurance that additional financing will be
available as necessary to fund the Company's working capital requirements,
research and development, industrialization costs or expansion plans, or that
any such financing, if available, will be on terms acceptable to the Company.
The Company believes that its available funds, available support from
third parties, and additional borrowings will be sufficient to meet its
anticipated needs for liquidity through at least 2001.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 is required to be adopted for
fiscal years beginning after June 15, 2000. This statement establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the balance sheet,
and the measurement of those instruments at fair value. The Company will adopt
the standards required by this statement in 2001. Management has not fully
evaluated the impact, if any, that this new standard may have on future
consolidated results of operations, financial position, or financial statement
disclosure.
Year 2000
The overall cost of the Company's year 2000 readiness was below the Company's
expectations and totalled approximately $30 million, including both expenses and
capital expenditures. The Company instituted heightened year 2000 procedures to
detect and remedy year 2000-related problems from December 31, 1999 to January
9, 2000, and at the end of January no significant year 2000-related problems
were detected. The Company will institute similar year 2000 follow- up
procedures at the end of February (a leap year), March (first quarter) and
December (year end), with support teams available in case of need.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing national currencies
and the euro. The participating countries have agreed to adopt the euro as their
common legal currency on that date. Until January 1, 2002, either the euro or a
participating country's present currency (a "national currency") will be
accepted as legal currency. On January 1, 2002, euro-denominated bills and coins
will be issued and national currencies will be withdrawn from circulation.
The Company does not expect that introduction and use of the euro will
materially affect its foreign exchange activities, or its use of derivatives and
other financial instruments, or will result in any material increase in costs to
the Company. The Company will continue to assess the impact of the introduction
of the euro currency over the transition period as well as the period subsequent
to the transition, as applicable.
- 43 -
Consolidated Statement of Income
Year ended December 31,
(in thousands of US dollars except per share amounts)
1997 1998 1999
-----------------------------------------------------------------------------------------
Net sales 3,969,773 4,210,618 5,023,109
Other revenues 49,372 37,134 33,167
-----------------------------------------------------------------------------------------
Net revenues 4,019,145 4,247,752 5,056,276
Cost of sales (2,457,386) (2,622,943) (3,054,476)
-----------------------------------------------------------------------------------------
Gross profit 1,561,759 1,624,809 2,001,800
Selling, general and administrative (454,311) (488,072) (534,178)
Research and development (610,847) (689,785) (835,964)
Other income and expenses 23,218 76,458 39,840
-----------------------------------------------------------------------------------------
Operating income 519,819 523,410 671,498
Net interest income (expense) (2,646) 8,691 35,624
-----------------------------------------------------------------------------------------
Income before income taxes & minority interests 517,173 532,101 707,122
Income tax expense (113,017) (120,351) (157,214)
-----------------------------------------------------------------------------------------
Income before minority interests 404,156 411,750 549,908
-----------------------------------------------------------------------------------------
Minority interests 2,398 (629) (2,656)
-----------------------------------------------------------------------------------------
Net income 406,554 411,121 547,252
-----------------------------------------------------------------------------------------
Earnings per share (Basic) 1.46 1.46 1.91
-----------------------------------------------------------------------------------------
Earnings per share (Diluted) 1.45 1.44 1.87
-----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- 44 -
Consolidated Balance Sheet
As at December 31,
(in thousands of US dollars)
1998 1999
--------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 1,100,752 1,823,086
Trade accounts and notes receivable 779,489 913,282
Inventories 644,279 619,402
Other receivables and assets 496,582 435,784
--------------------------------------------------------------------------------
Total current assets 3,021,102 3,791,554
--------------------------------------------------------------------------------
Intangible assets, net 33,571 179,947
Property, plant and equipment, net 3,333,005 3,873,019
Investments and other non-current assets 46,351 85,783
--------------------------------------------------------------------------------
3,412,927 4,138,749
--------------------------------------------------------------------------------
Total assets 6,434,029 7,930,303
--------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Bank overdrafts 146,040 26,471
Current portion of long-term debt 45,245 96,669
Trade accounts and notes payable 564,457 998,881
Other payables and accrued liabilities 327,681 381,845
Accrued and deferred income tax 173,097 189,308
--------------------------------------------------------------------------------
Total current liabilities 1,256,520 1,693,174
--------------------------------------------------------------------------------
Long-term debt 755,864 1,348,477
Reserves for pension and termination indemnities 111,803 108,294
Other non-current liabilities 204,520 191,660
--------------------------------------------------------------------------------
1,072,187 1,648,431
--------------------------------------------------------------------------------
Total liabilities 2,328,707 3,341,605
Minority interests 22,012 24,757
--------------------------------------------------------------------------------
Common stock 1,096,743 1,112,680
Capital surplus 1,135,526 1,395,307
Accumulated result 2,027,413 2,551,817
Accumulated other comprehensive income (176,372) (495,863)
--------------------------------------------------------------------------------
Shareholders' equity 4,083,310 4,563,941
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity 6,434,029 7,930,303
--------------------------------------------------------------------------------
Commitments and contingencies: Notes 20 and 21
The accompanying notes are an integral part of these financial statements.
- 45 -
Consolidated Statement of Cash Flows
Year ended December 31,
(in thousands of US dollars)
1997 1998 1999
-----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 406,554 411,121 547,252
Add (deduct) non-cash items:
Depreciation and amortization 608,123 704,004 806,789
Other non-cash items 19,015 13,016 4,527
Minority interest in net income of subsidiaries (2,398) 629 2,656
Deferred taxes (3,157) 34,333 28,711
Changes in assets and liabilities:
Trade accounts and notes receivable (74,721) (115,879) (164,564)
Inventories (149,642) (18,807) (38,340)
Trade accounts and notes payable 73,790 45,982 208,899
Other assets and liabilities, net 106,227 (61,852) 73,352
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities 983,791 1,012,547 1,469,282
-----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payment for purchases of tangible assets (1,035,434) (947,253) (1,347,537)
Other investing activities (11,576) (18,997) (190,290)
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (1,047,010) (966,250) (1,537,827)
-----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 250,759 424,955 756,836
Repayment of long-term debt (80,238) (72,396) (48,080)
Increase (decrease) in short-term facilities 68,869 (233,261) (110,308)
Capital increase 9,669 233,334 230,437
Dividends paid -- -- (22,848)
-----------------------------------------------------------------------------------------------
Net cash provided by financing activities 249,059 352,632 806,037
-----------------------------------------------------------------------------------------------
Effect of changes in exchange rates (35,579) (334) (15,158)
-----------------------------------------------------------------------------------------------
Net cash increase 150,261 398,595 722,334
-----------------------------------------------------------------------------------------------
Cash and cash equivalents
at beginning of the period 551,896 702,157 1,100,752
-----------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of the period 702,157 1,100,752 1,823,086
-----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- 46-
Consolidated Statement of Changes in Shareholders' Equity
Accumulated
Other
(in thousands of US dollars, Common Capital Accumulated Comprehensive Shareholders'
except per share amounts) Stock Surplus Result Income (Loss) Equity
--------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1996 1,072,933 930,330 1,209,738 47,019 3,260,020
--------------------------------------------------------------------------------------------------------------------
Capital increase 1,057 615 1,672
Comprehensive income
Net Income 406,554 406,554
Other comprehensive income, net of tax (360,800) (360,800)
-----------
Comprehensive income 45,754
--------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1997 1,073,990 930,945 1,616,292 (313,781) 3,307,446
--------------------------------------------------------------------------------------------------------------------
Capital increase 22,753 204,581 227,334
Comprehensive income
Net Income 411,121 411,121
Other comprehensive income, net of tax 137,409 137,409
-----------
Comprehensive income 548,530
--------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1998 1,096,743 1,135,526 2,027,413 (176,372) 4,083,310
--------------------------------------------------------------------------------------------------------------------
Capital increase 15,937 259,781 275,718
Comprehensive income
Net Income 547,252 547,252
Other comprehensive income, net of tax (319,491) (319,491)
-----------
Comprehensive income 227,761
Dividends, $0.08 per share (22,848) (22,848)
--------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1999 1,112,680 1,395,307 2,551,817 (495,863) 4,563,941
--------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
- 47 -
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars, except per share amounts)
1 The Company
STMicroelectronics N.V. (formerly known as SGS-THOMSON Microelectronics N.V.)
(the "Company") was formed in 1987 by the combination of the semiconductor
business of SGS Microelettronica (then owned by Societa Finanziaria Telefonica
(S.T.E.T.), an Italian corporation) and the non-military business of Thomson
Semiconducteurs (then owned by Thomson-CSF, a French corporation) whereby each
company contributed their respective semiconductor businesses in exchange for a
50% interest in the Company. The Company designs, develops, manufactures and
markets a broad range of semiconductor integrated circuits and discrete devices
that are used in a wide variety of microelectronic applications.
The Company is registered in The Netherlands with its statutory
domicile in Amsterdam.
At December 31, 1999, the Company was 44.80% (December 31, 1998:
56.05%) owned by STMicroelectronics Holding II B.V., and 55.20% by the public
(December 31, 1998: 43.95%).
At December 31, 1998, and at December 31, 1999, STMicro-electronics
Holding II B.V. was 100% owned by STMicroelectronics Holding N.V.
At December 31, 1998, STMicroelectronics Holding N.V. was owned as
follows:
o 50% by FT1CI, a French holding company, whose shareholders are
CEA-Industrie (51%) and France Telecom (49%).
o 50% by M.E.I.--Microelettronica Italiana s.r.l. ("M.E.I."), an
Italian holding company, whose shareholders are Comitato per l'Intervento nella
SIR ed in Settori ad Alta Tecnologia ("Comitato SIR") (49.9%) and Istituto per
la Ricostruzione Industriale S.p.a. (I.R.I.) (50.1%).
At December 31, 1999, STMicroelectronics Holding N.V. was owned as
follows:
o 50% by FT1CI, a French holding company, whose shareholders are
CEA-Industrie (51%) and France Telecom (49%).
o 50% by Finmeccanica, an Italian holding company, whose
shareholders are Istituto per la Ricostruzione Industriale S.p.a. (I.R.I.)
(54.2%), the Italian Ministry of Treasury (28.9%) and the public (16.9%).
2 Summary of accounting policies
2.1 Principles of consolidation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP). The Company's consolidated financial statements include the
assets, liabilities and results of operations of its majority-owned
subsidiaries. The ownership of other interest holders is reflected as minority
interests. Intercompany balances and transactions have been eliminated in
consolidation.
2.2 Use of estimates
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes to the financial statements.
Actual results could differ from those estimates and may affect amounts reported
in future periods.
2.3 Foreign currency
The U.S. dollar is the reporting currency for the Company because the dollar is
the currency of reference in terms of market pricing in the world-wide
semiconductor industry. Furthermore, there is no currency in which the majority
of transactions are denominated, and revenues from external sales in U.S.
dollars exceed revenues in any other currency.
The functional currency of each subsidiary throughout the group is
generally the local currency. For consolidation purposes, assets and liabilities
of these subsidiaries are translated at current rates of exchange at the balance
sheet date. Income and expense items are translated at the average exchange rate
for the period. The effects of translating the financial position and results of
operations from local functional currencies are included in "other comprehensive
income."
Assets, liabilities, revenue, expenses, gains or losses arising from
foreign currency transactions are recorded in the functional currency of the
recording entity at the exchange rate in effect at the date of the transaction.
At each balance sheet date, recorded balances denominated in a currency other
than the recording entity's functional currency are translated at the exchange
rate prevailing at that date. The related exchange gains and losses are recorded
in the income statement.
The Company conducts its business on a global basis in various major
international currencies. As a result, it is exposed to adverse movements in
foreign currency exchange rates. The Company covers certain portions of its
foreign currency exposure primarily through the use of foreign exchange forward
contracts and option contracts. Generally, gains and losses associated with
exchange rate changes on foreign exchange forward contracts are recorded
currently in "other income and expenses," while the interest element is
recognized over the life of each contract and is included in operations. The
Company utilizes foreign exchange forward contracts and foreign exchange options
to manage the effect of currency fluctuations on its probable anticipated
transactions. The Company does not enter into foreign exchange forward contracts
or option contracts for speculative or trading purposes.
2.4 Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2.5 Income recognition
Sales: Revenue on sales of semiconductor products is recognized upon shipment of
the products. A portion of the Company's sales are made to distributors who
participate in certain programs common in the semiconductor industry whereby the
distributors are allowed to return merchandise under certain circumstances and
may receive future price reductions. Provision is made at the time of sale for
estimated product returns and price protection which may occur under programs
the Company has with these customers.
Subsidies: Government subsidies are recognized as the related costs are
incurred, commencing when the subsidies' contract is signed with the relevant
government department or agency. Government subsidies for research and
development are included in "other income and expenses." Government subsidies
for industrialization costs (certain costs incurred to bring prototype products
to the production stage) are offset against related expenses in "cost of sales."
Government subsidies for capital expenditures are deducted
- 48 -
from the cost of the related fixed assets and reduce depreciation over the
assets' remaining estimated useful lives.
2.6 Advertising costs
Advertising costs are expensed as incurred. Advertising expenses for 1997, 1998
and 1999 were $14,523, $16,012 and $21,102, respectively.
2.7 Research and development
Research and development costs are charged to expense as incurred. Research and
development costs include costs incurred by the Company as well as the Company's
share of costs incurred by other research and development interest groups.
2.8 Start-up costs
Start-up costs incurred to expand the Company's manufacturing facilities are
included in "other income and expenses" in the accompanying consolidated
statement of income.
2.9 Income taxes
The provision for current taxes represents the income taxes expected to be
payable for the current year. Deferred tax assets and liabilities are recorded
for all temporary differences arising between the tax and book bases of assets
and liabilities and for the benefits of tax credits and loss carryforwards.
Those deferred tax assets and liabilities are measured using the enacted tax
rates at which they are expected to be realized or paid. A valuation allowance
is provided where necessary to reduce deferred tax assets to the amount expected
to be "more likely than not" realized in the future.
2.10 Earnings per share
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share are computed by dividing net income (less interest expense, net of tax
effects, related to convertible debt) by the weighted average number of common
shares and common share equivalents outstanding during the period. The weighted
average shares used to compute diluted earnings per share include the
incremental shares of common stock relating to outstanding options and
convertible debt to the extent such incremental shares are dilutive.
2.11 Cash equivalents
All highly liquid investments purchased with an original maturity of ninety days
or less are considered to be cash equivalents.
2.12 Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a
currently adjusted standard basis which approximates actual cost on a current
average basis.
2.13 Intangible assets
Intangible assets include the cost of technologies and licenses purchased from
third parties, amortized over a period ranging from five to ten years, and
goodwill acquired in business combinations amortized over its estimated useful
life, generally five years.
The carrying value of long-lived assets, including intangibles, is
evaluated whenever changes in circumstances indicate the carrying amount of such
assets may not be recoverable. In performing such review for recoverability, the
Company compares the expected future cash flow to the carrying value of
long-lived assets and identifiable intangibles. If the anticipated undiscounted
future cash flows are less than the carrying amount of such assets, the Company
recognizes an impairment loss for the difference between the carrying amount of
the assets and their estimated fair value.
2.14 Property, plant and equipment
Property, plant and equipment are stated at cost, net of government subsidies.
Major renewals and improvements are capitalized; minor replacements, maintenance
and repairs are charged to current operations. Depreciation is computed using
the straight-line method over the following estimated useful lives:
-------------------------------------------------------------------------------
Buildings 33 years
Leasehold improvements 10 years
Machinery and equipment 6 years
Computer and R&D equipment 3-6 years
Other 2-5 years
-------------------------------------------------------------------------------
Assets subject to leasing agreements and classified as capital leases are
included in property, plant and equipment and depreciated over the shorter of
the estimated useful life or the lease term.
2.15 Investments
The equity accounting method is used when the Company has both a 20% to 50%
equity interest and the ability to exercise significant influence over the
investee. The Company also holds certain equity investments constituting less
than 20% ownership of the investee. These investments are carried at historical
cost. Although the market value of the investments is not readily determinable,
management believes the fair value of these investments exceed their carrying
amounts.
2.16 Pension and termination indemnities
The Company sponsors various retirement plans for its employees; such plans
include both defined benefit and defined contribution plans. Upon retirement,
the Company's employees receive benefits provided by the pension plan
arrangements. These plans conform with local regulations and practices of the
countries in which the Company operates.
2.17 Comprehensive income
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 established standards
for reporting comprehensive income and its components and accumulated balances.
Comprehensive income is defined as the change in equity of a business during a
period from transactions and circumstances related to non-owner sources, and
includes all changes in equity except those resulting from investment by owners
and distributions to owners. In the Company's case, "other comprehensive income"
consists of foreign currency translation adjustments.
- 49 -
2.18 Stock split
In May 1999, the Company's shareholders approved a two-for-one stock split of
the Company's common stock. The record date for the stock split was June 16,
1999, and the distribution date was June 17, 1999. All earnings per share
amounts, references to common stock, shareholders' equity amounts and stock
option plan data have been restated as if the stock split had occurred as of the
earliest period presented.
2.19 New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 is required to be adopted for
fiscal years beginning after June 15, 2000. This statement establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the balance sheet,
and the measurement of those instruments at fair value. The Company will adopt
the standards required by this statement in 2001. Management has not fully
evaluated the impact, if any, that this new standard may have on future
consolidated results of operations, financial position, or financial statement
disclosure.
3 Consolidated Entities
--------------------------------------------------------------------------------------------
The consolidated financial statements include the accounts of STMicroelectronics N.V. and
the following entities as of December 31, 1999:
Percentage
Ownership
(Direct or
Legal Seat Name Indirect)
--------------------------------------------------------------------------------------------
United Kingdom London STMicroelectronics LTD 100
London Thomson Components LTD 100
Bristol STMicroelectronics E.E.I.G. 100
Edinburgh VLSI Vision LTD 100
Sweden Stockholm STMicroelectronics A.B. 100
Germany Munich STMicroelectronics GmbH 100
Switzerland Geneva STMicroelectronics S.A. 100
Malta Malta STMicroelectronics LTD 100
Spain Madrid STMicroelectronics S.A. 100
France Paris STMicroelectronics S.A. 100
Paris STMicroelectronics S.A.S. 100
Italy Milano STMicroelectronics S.R.L. 100
Catania CO.RI.M.ME. 100
Milano Accent S.R.L. 51
Singapore Singapore STMicroelectronics PTE LTD 100
Singapore STMicroelectronics ASIA PACIFIC PTE LTD 100
Malaysia Muar STMicroelectronics SDN BHD 100
Muar STMicroelectronics (Malaysia) SDN BHD 100
Japan Tokyo STMicroelectronics KK 100
Hong Kong Hong Kong STMicroelectronics LTD 100
Australia Sydney STMicroelectronics PTY LTD 100
United States Dallas STMicroelectronics Inc. 100
Rancho Bernardo STMicroelectronics (RB), Inc. 100
Dallas STMicroelectronics Leasing Co. Inc. 100
La Jolla Metaflow Technologies Inc. 100
Santa Clara Arithmos Inc. 100
Brazil Sao Paulo STMicroelectronics Ltda 100
Morocco Casablanca STMicroelectronics S.A. 100
Casablanca Electronic Holding S.A. 100
China Shenzhen Shenzhen STS Microelectronics Co. LTD 60
Shenzhen STMicroelectronics (Shenzhen) Co. LTD. 100
India New Delhi STMicroelectronics PTE LTD 100
Finland Helsinki STMicroelectronics OY 100
--------------------------------------------------------------------------------------------
- 50 -
4 Trade accounts and notes receivable
Trade accounts and notes receivable consist of the following:
December 31, 1998 1999
--------------------------------------------------------------------------------
Trade accounts and notes receivable 789,983 924,872
Less valuation allowance (10,494) (11,590)
--------------------------------------------------------------------------------
Total 779,489 913,282
--------------------------------------------------------------------------------
During 1997 and 1998 no customer individually represented over ten percent of
consolidated net revenues. In 1999, one customer represented 11.4% of
consolidated net revenues.
5 Inventories
Inventories consist of the following:
December 31, 1998 1999
--------------------------------------------------------------------------------
Raw materials 107,546 101,590
Work-in-process 392,666 395,320
Finished products 144,067 122,492
--------------------------------------------------------------------------------
Total 644,279 619,402
--------------------------------------------------------------------------------
6 Other receivables and assets
--------------------------------------------------------------------------------
Other receivables and assets consist of the following:
December 31, 1998 1999
--------------------------------------------------------------------------------
Receivables from government
agencies 261,194 152,237
Taxes and other government
receivables 64,573 61,523
Down payment to suppliers 6,274 11,394
Loans to employees 3,580 3,557
Prepaid expenses 18,222 17,648
Sundry debtors 23,989 35,053
Deferred tax assets 80,247 73,079
Other 38,503 81,293
--------------------------------------------------------------------------------
Total 496,582 435,784
--------------------------------------------------------------------------------
Receivables from government agencies relate to research and development
contracts, industrialization contracts and capital expenditures.
7 Intangible assets
Intangible assets consist of the following:
December 31, 1998 1999
--------------------------------------------------------------------------------
Goodwill 6,734 67,417
Technologies and licenses 86,368 202,560
Less accumulated amortization (59,531) (90,030)
--------------------------------------------------------------------------------
Total 33,571 179,947
--------------------------------------------------------------------------------
8 Property, plant and equipment
--------------------------------------------------------------------------------
Property, plant and equipment consist of the following:
December 31, 1998 Gross Depreciation Net
--------------------------------------------------------------------------------
Land and buildings 506,140 (118,415) 387,725
Machinery and
equipment 5,357,281 (2,866,957) 2,490,324
Other tangible
fixed assets 360,123 (253,956) 106,167
Construction in
progress 348,789 -- 348,789
--------------------------------------------------------------------------------
Total 6,572,333 (3,239,328) 3,333,005
--------------------------------------------------------------------------------
December 31, 1999 Gross Depreciation Net
--------------------------------------------------------------------------------
Land and buildings 616,035 (132,973) 483,062
Machinery and
equipment 6,216,830 (3,266,819) 2,950,011
Other tangible
fixed assets 321,494 (235,968) 85,526
Construction in
progress 354,420 -- 354,420
--------------------------------------------------------------------------------
Total 7,508,779 (3,635,760) 3,873,019
--------------------------------------------------------------------------------
9 Investments and other non-current assets
Investments and other non-current assets consist of the following:
Public offerings of shares: In connection with a secondary offering of common
stock in June 1998, the Company issued 6,000,000 new shares of common stock,
which resulted in an increase in common stock and capital surplus of $20,378 and
$188,320, respectively. In connection with a secondary offering of common stock
in September 1999, the Company issued 2,990,000 new shares of common stock,
which resulted in an increase in common stock and capital surplus of $9,740 and
$207,027, respectively.
Outstanding shares: The authorized share capital of the Company is EUR
1,809,600,000, consisting of 400,000,000 common shares and 180,000,000
preference shares each with a nominal value of EUR 3.12. As of December 31,
1997, 1998 and 1999, the number of shares of common stock outstanding at a par
value of EUR 3.12 was 278,264,794 shares, 284,956,212 shares and 289,808,140
shares, respectively. There were no preference shares outstanding as of December
31, 1998 and 1999.
- 51 -
Preference shares: In May 1999, the Company's shareholders approved the creation
of 180,000,000 preference shares. The preference shares entitle a holder to full
voting rights and to a preferential right to dividends and distributions upon
liquidation. In May 1999, the Company entered into an option agreement with ST
Holding II B.V. in order to protect the Company from a hostile takeover or other
similar action. The option agreement provides for 180,000,000 preference shares
to be issued to ST Holding II B.V. upon their request based on approval by the
Company's Supervisory Board. ST Holding II B.V. would be required to pay at
least 25% of the par value of the preference shares to be issued, and to retain
ownership of at least 33% of the Company's issued share capital.
Stock option plans: In 1989, the Shareholders voted to adopt the 1989 Stock
Option Plan (the "1989 Plan") and approved the issuance of 3,268,800 options to
136 employees to purchase common stock. Under the 1989 Plan, the options vested
over four years and were exercisable for ten years at an exercise price of NLG
8.75.
In 1995, the Shareholders voted to adopt the 1995 Stock Option Plan
(the "1995 Plan") whereby options for up to 11,000,000 shares may be granted in
installments over a five year period. Under the 1995 Plan, the options may be
granted to purchase shares of common stock at a price not lower than the market
price of the shares on the date of grant, and generally vest over four years and
are exercisable over a period of eight years. In March 1996, the Company granted
2,400,000 options to employees at an exercise price of $18.13 per share. In
September 1997, the Company granted 1,291,000 options to employees at an
exercise price of $42.69 per share. In July 1998, the Company granted 1,300,000
options to employees at an exercise price of $36.09 per share. In September
1999, the Company granted 2,959,400 options to employees at an exercise price of
$74.63 per share.
In 1996, the Shareholders voted to adopt the Supervisory Board
Option Plan whereby members of the Supervisory Board were eligible to receive,
during the three year period 1996-1998, 6,000 options for 1996 and 3,000 options
for both 1997 and 1998, to purchase shares of common stock at the closing market
price of the shares on the date of the grant. In the same three-year period,
professionals of the Supervisory Board were eligible to receive 3,000 options
for 1996 and 1,500 options for both 1997 and 1998. Under the Plan, the options
vest over one year and are exercisable for a period expiring eight years from
the date of grant. In October 1996, options to purchase 66,000 shares were
granted at an exercise price of $27.00 per share. In September 1997, options to
purchase 30,000 shares were granted at an exercise price of $42.69 per share. In
July 1998, options to purchase 30,000 shares were granted at an exercise price
of $36.09 per share.
In 1999, the Shareholders voted to renew the Supervisory Board
Option Plan whereby members of the Supervisory Board may receive, during the
three year period 1999-2001, 6,000 options for 1999 and 3,000 options for both
2000 and 2001, to purchase shares of capital stock at the closing market price
of the shares on the date of the grant. In the same three-year period,
professionals of the Supervisory Board may receive 3,000 options for 1999 and
1,500 options for both 2000 and 2001. Under the Plan, the options vest over one
year and are exercisable for a period expiring eight years from the date of
grant. In September 1999, options to purchase 60,000 shares were granted at an
exercise price of $74.63 per share.
A summary of stock option activity for the plans for the three years
ended December 31, 1999, follows:
Number of Price Per Share
-----------------------------
Shares Range Average
----------------------------------------------------------------------------------------------
Outstanding at
December 31, 1996 2,989,820 $5.20-$27.00 $16.08
Options granted:
1995 Plan 1,291,000 $42.69 $42.69
Supervisory Board Plan 30,000 $42.69 $42.69
Options cancelled (36,000) $18.13-$42.69 $22.49
Options exercised (274,760) $4.51-$18.13 $ 5.18
----------------------------------------------------------------------------------------------
Outstanding at
December 31, 1997 4,000,060 $4.51-$42.69 $25.43
Options granted:
1995 Plan 1,300,000 $36.09 $36.09
Supervisory Board Plan 30,000 $36.09 $36.09
Options cancelled (19,130) $18.13-$42.69 $23.99
Options exercised (114,820) $4.61-$27.00 $ 6.41
----------------------------------------------------------------------------------------------
Outstanding at
December 31, 1998 5,196,110 $4.61-$42.69 $28.59
Options granted:
1995 Plan 2,959,400 $74.63 $74.63
Supervisory Board Plan 60,000 $74.63 $74.63
Options cancelled (53,880) $18.13-$74.63 $42.90
Options exercised (922,400) $4.00-$42.69 $16.42
----------------------------------------------------------------------------------------------
Outstanding at
December 31, 1999 7,239,230 $18.13-$74.63 $49.22
----------------------------------------------------------------------------------------------
Stock options exercisable were as follows:
Year Ended December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Options exercisable 348,060 273,640 877,110
Weighted average
exercise price $9.27 $14.75 $19.37
--------------------------------------------------------------------------------
The weighted average remaining contractual life of options outstanding as of
December 31, 1999 was 6.4 years.
Employee stock purchase plans: In June 1998, the Company offered to certain of
its employees world-wide the right to acquire up to 800 shares of capital stock
per employee, at a price of $31.76 (189 French francs, 55,400 Italian lira) per
share, representing a discount of twelve percent from the market price. A total
of 576,598 shares were issued to participating employees world-wide as a result
of the offering.
Fair value of stock-based compensation: The Company has various stock option
plans and employee stock purchase plans, as described above. The Company applies
the intrinsic-value-based method prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations, in accounting for stock-based awards to employees. Under APB
25, the Company generally recognizes no compensation expense with respect to
such awards.
- 52 -
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (FAS 123) as if the Company had accounted for its
stock-based awards to employees under the fair value method prescribed by FAS
123. The fair value if the Company's stock-based awards to employees was
estimated using a Black-Scholes option pricing model. The fair value was
estimated using the following weighted-average assumptions:
The weighted average fair value of options granted during 1997, 1998 and 1999
was $19.20, $16.95 and $33.24 per option, respectively.
If compensation cost for the Company's stock-based compensation
plans had been determined based on the fair value at the grant dates consistent
with FAS 123, the Company's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below:
Year ended December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Net income
Pro forma 399,509 393,949 522,593
Pro forma earnings
per share
Basic 1.44 1.40 1.82
Diluted 1.43 1.38 1.78
--------------------------------------------------------------------------------
These pro forma amounts include amortized fair values attributable to
stock-based awards granted after December 31, 1995 only, and are therefore not
representative of future pro forma amounts.
Retained earnings: At December 31, 1999, the amount of retained earnings
available to pay dividends under Dutch law was approximately $3,653,000 (1998:
$2,987,000). Retained earnings for purposes of this calculation are based upon
generally accepted accounting principles in The Netherlands. The Company's
subsidiaries are subject to the laws of the countries in which they are
domiciled. These laws may restrict the ability of the subsidiaries to transfer
funds to the Company. Such restrictions are not considered to be significant as
of December 31, 1999.
11 Earnings per share
For the years ended December 31, 1997, 1998 and 1999 earnings per share (EPS)
was calculated as follows:
Year Ended
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Basic EPS
Net income 406,554 411,121 547,252
Weighted average
shares outstanding 278,185,800 281,704,016 286,370,556
Basic EPS 1.46 1.46 1.91
Diluted EPS
Net income 406,554 411,121 547,252
Convertible debt
interest, net of tax 0 4,566 13,387
--------------------------------------------------------------------------------
Net income adjusted 406,554 415,687 560,639
Weighted average
shares outstanding 278,185,800 281,704,016 286,370,556
Dilutive effect of
stock options 1,515,392 1,265,126 2,665,186
Dilutive effect
of convertible debt 0 5,141,918 11,372,228
--------------------------------------------------------------------------------
Number of shares
used in calculating EPS 279,701,192 288,111,060 300,407,970
Diluted EPS 1.45 1.44 1.87
--------------------------------------------------------------------------------
12 Retirement plans
--------------------------------------------------------------------------------
The Company and its subsidiaries have a number of defined benefit pension plans
covering employees in various countries. The plans provide for pension benefits,
the amounts of which are calculated based on factors such as years of service
and employee compensation levels. Eligibility is generally determined in
accordance with local statutory requirements. The Company also has a defined
benefit termination plan in Italy whereby an indemnity is paid to personnel upon
termination of employment.
- 53 -
December 31, 1998 1999
--------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year 169,455 195,115
Service cost 17,045 20,318
Interest cost 7,551 8,642
Benefits paid (8,293) (8,883)
Actuarial losses 4,034 9,137
Foreign currency
translation adjustments 7,258 (19,939)
Other (1,935) (1,737)
--------------------------------------------------------------------------------
Benefit obligation at end of year 195,115 202,653
--------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value at beginning
of year 77,455 83,238
Actual return on plan assets 8,228 13,424
Employer contributions 5,223 13,853
Benefits paid (8,293) (8,883)
Foreign currency translation
adjustment 1,062 (2,236)
Other (437) 53
--------------------------------------------------------------------------------
Plan assets at fair value at end of year 83,238 99,449
--------------------------------------------------------------------------------
Funded status (111,877) (103,204)
Unrecognized prior service cost 7,848 7,853
Unrecognized transition obligation (3,281) (3,022)
Unrecognized net actuarial gain (loss) 820 (2,034)
--------------------------------------------------------------------------------
Accrued benefit cost (106,490) (100,407)
--------------------------------------------------------------------------------
Net amount recognized in the balance
sheet consists of the following:
Prepaid benefit cost 3,883 5,663
Accrued benefit liability (111,803) (108,294)
Intangible asset 1,430 2,224
--------------------------------------------------------------------------------
Net amount recognized (106,490) (100,407)
--------------------------------------------------------------------------------
Each year, the liability for the Italian indemnity plan is adjusted to reflect
current year compensation as well as a revaluation of prior years' accruals
based on an index. The plan is unfunded, and all participants are fully vested.
The components of the net periodic benefit cost includes the
following:
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Service cost 17,501 17,045 20,318
Interest cost 8,155 7,551 8,642
Expected return on
plan assets (4,478) (6,147) (5,955)
Amortization of
unrecognized
transition obligation (282) (366) (324)
Recognized gains
and losses 56 56 503
Recognition of prior
service cost 553 762 850
--------------------------------------------------------------------------------
Net periodic benefit cost 21,505 18,901 24,034
--------------------------------------------------------------------------------
The weighted average assumptions used in the determination of the net pension
cost for the pension plans were as follows:
Long-term debt, all of which is unsecured, includes debt held by the following
subsidiaries:
1998 1999
--------------------------------------------------------------------------------
STMicroelectronics SA (France)
- 4.97% Bank Loan due 2002 35,712 30,718
- 4.95% Bank Loan due 2002 35,712 30,718
- 4.39% Other Bank Loans 27,204 21,557
STMicroelectronics s.r.l. (Italy)
- 5.68% Bank Loan due 2002 60,492 52,033
- 5.35% Bank Loan due 2006 44,914 34,322
- 2.15% Government Loan
due 2000 40,276 18,507
- 4.70% Other Bank Loans 86,070 76,727
STMicroelectronics N.V. (Netherlands)
- 1.75% Liquid Yield Option Notes
(LYONs due 2008) 435,885 398,251
- 2.44% Liquid Yield Option Notes
(LYONs due 2009) -- 725,813
STMicroelectronics (other countries)
- 6.01% Other Bank Loans 34,844 56,500
--------------------------------------------------------------------------------
Total long-term debt 801,109 1,445,146
Less current portion 45,245 96,669
--------------------------------------------------------------------------------
Total long-term debt, less
current portion 755,864 1,348,477
--------------------------------------------------------------------------------
Long-term debt is denominated in the following currencies:
December 31, 1998 1999
--------------------------------------------------------------------------------
U.S. dollar 455,885 1,157,366
Italian lira 231,752 192,432
French franc 98,628 82,993
Other 14,844 12,355
--------------------------------------------------------------------------------
Total 801,109 1,445,146
--------------------------------------------------------------------------------
Aggregate future maturities of long-term debt outstanding are as follows:
In June 1998, the Company issued $513,852 face value of zero-coupon subordinated
convertible notes (LYONs), due 2008, for net proceeds of $421,837. The notes are
convertible at any time by the holders at the rate of 17.904 shares of the
Company's common stock for each one thousand dollar face value of the notes. The
notes may be redeemed by the holders on June 10, 2003 or by the Company on or
after that date at the book value, payable in cash. The notes are subordinated
to all the other existing and future indebtedness of the Company.
In September 1999, the Company issued $918,530 face value of
zero-coupon subordinated convertible notes (LYONs), due 2009, for net proceeds
of $708,288. The notes are convertible at any time by the holders at the rate of
8.764 shares of the Company's common stock for each one thousand dollar face
value of the notes. The notes may be redeemed by the holders on September 22,
2004 or by the Company on or after that date at the book value, payable in cash.
The notes are subordinated to all the other existing and future indebtedness of
the Company.
During 1999, $52,476 face amount of LYONs were converted into
939,528 shares of common stock.
Credit facilities: The Company has revolving line of credit agreements with
several financial institutions totaling $1,062,600. At December 31, 1999,
amounts available under the lines of credit are reduced by borrowings of $26,471
at an average interest rate of 4.73%.
14 Other payables and accrued liabilities
Other payables and accrued liabilities consist of the following:
December 31, 1998 1999
--------------------------------------------------------------------------------
Taxes other than income taxes 29,825 64,950
Salaries and wages 78,493 111,125
Social charges 74,064 53,781
Advances received on fundings 14,050 38,686
Commercial rebates 37,577 23,775
Royalties payable 12,778 13,195
Other 80,894 76,333
--------------------------------------------------------------------------------
Total 327,681 381,845
--------------------------------------------------------------------------------
15 Other revenues
--------------------------------------------------------------------------------
Other revenues consist of the following:
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Licensing revenues 27,598 1,765 --
Miscellaneous sales 17,250 27,833 30,205
Other 4,524 7,536 2,962
--------------------------------------------------------------------------------
Total 49,372 37,134 33,167
--------------------------------------------------------------------------------
16 Personnel
--------------------------------------------------------------------------------
Labor costs consist of the following:
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Salaries and wages 753,275 825,961 957,950
Social security
contribution 214,023 219,942 247,550
Other 57,929 60,871 65,099
--------------------------------------------------------------------------------
Total 1,025,227 1,106,774 1,270,599
Labor costs are allocated to cost of sales, selling, general and administrative
expenses and research and development costs. At December 31, 1999 the Company
employed 34,498 persons (1998: 29,182).
17 Other income and expenses
Other income and expenses consist of the following:
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Research and
development funding 55,269 63,531 60,352
Start-up costs (47,867) (12,609) (24,736)
Exchange gain
(loss), net 15,158 19,019 14,653
Other 658 6,517 (10,429)
--------------------------------------------------------------------------------
Total 23,218 76,458 39,840
--------------------------------------------------------------------------------
Research and development finding does not include certain other funding received
for industrialization costs (which include certain costs incurred to bring
prototype products to the production stage). Such funding and costs are netted
in cost of sales in the income statement ($6,192 for 1997, $3,081 for 1998 and
$2,417 for 1999).
18 Net interest income
Net interest income consists of the following:
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Income 39,009 54,294 81,888
Expenses (41,655) (45,603) (46,264)
--------------------------------------------------------------------------------
Total (2,646) 8,691 35,624
--------------------------------------------------------------------------------
Cash paid for interest was $43,305 in 1997, $48,569 in 1998 and $48,086 in 1999.
Capitalized interest was $1,673 in 1997, $5,487 in 1998 and $8,317 in 1999.
- 55 -
19 Income tax
Income before income tax expense is comprised of the following:
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Income from domestic
operations (8,437) (18,730) (17,494)
Income from foreign
operations 525,610 550,831 724,616
--------------------------------------------------------------------------------
Income before income
tax expense 517,173 532,101 707,122
--------------------------------------------------------------------------------
STMicroelectronics N.V. and its subsidiaries are individually liable for income
tax. Tax losses can only offset profits generated by the taxable entity
incurring such loss.
Income tax expense is comprised of the following:
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Domestic taxes -- current (8,377) (3,886) (4,353)
Foreign taxes -- current (107,797) (82,132) (130,904)
--------------------------------------------------------------------------------
Current taxes (116,174) (86,018) (135,257)
Deferred taxes 3,157 (34,333) (21,957)
--------------------------------------------------------------------------------
Income tax expense (113,017) (120,351) (157,214)
--------------------------------------------------------------------------------
The principal items comprising the differences in income taxes computed at The
Netherlands statutory rate (35%) and the effective income tax rate are the
following:
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Income tax expense
computed at
statutory rate (181,011) (186,235) (247,493)
Benefit (deductions) for
financial reporting
with no tax effect (2,056) 7,864 (699)
Variation in valuation
allowance (294) 397 3,107
Other tax and credits (627) 2,995 8,549
Earnings of subsidiaries
taxed at different rates 70,971 54,628 79,322
--------------------------------------------------------------------------------
Income tax expense (113,017) (120,351) (157,214)
--------------------------------------------------------------------------------
Permanent differences reflect mainly the effects of capital allowance programs
existing in certain Southeast Asian and Mediterranean countries, of special tax
incentive programs existing in Asia Pacific regions, and of various
non-deductible items.
Deferred tax assets and liabilities consist of the following:
December 31, 1998 1999
--------------------------------------------------------------------------------
Tax loss carryforwards and
capital allowances 41,375 74,321
Inventory 46,856 41,256
Other assets 95,353 111,447
--------------------------------------------------------------------------------
Total deferred tax assets 183,534 227,024
Valuation allowance (4,053) (12,251)
--------------------------------------------------------------------------------
Deferred tax assets, net 179,531 214,773
--------------------------------------------------------------------------------
Fixed assets depreciation (240,116) (272,184)
Other liabilities (34,472) (52,979)
--------------------------------------------------------------------------------
Deferred tax liabilities (274,588) (325,163)
--------------------------------------------------------------------------------
Net deferred income tax liability (95,057) (110,390)
--------------------------------------------------------------------------------
Deferred income taxes were classified in the consolidated balance as follows:
December 31, 1998 1999
--------------------------------------------------------------------------------
Other receivables and assets 80,247 73,079
Investments and other non-current
assets 12,547 33,373
Accrued and deferred income tax (15,695) (31,072)
Other non-current liabilities (172,156) (185,770)
--------------------------------------------------------------------------------
Net deferred income tax liability (95,057) (110,390)
--------------------------------------------------------------------------------
As of December 31, 1999, the Company and its subsidiaries have net operating
loss carryforwards and capital allowances of which $6,282 expire in the year
2000 and $252,544 have indefinite expiration dates.
The Company paid $37,207 cash for income taxes in 1997, $75,886 cash
for income taxes in 1998 and $99,930 cash for income taxes in 1999.
20 Commitments
Lease commitments: The Company leases land, building, plant and equipment under
non-cancellable lease agreements. As of December 31, 1999 the future minimum
lease payments to which the Company was committed under operating leases were as
follows:
Year 1999
--------------------------------------------------------------------------------
2000 18,789
2001 14,431
2002 10,496
2003 8,188
2004 6,682
Thereafter 16,250
--------------------------------------------------------------------------------
Total 74,836
--------------------------------------------------------------------------------
Other commitments: As of December 31, 1999, the Company had commitments of
$1,248,218 for equipment purchases.
- 56 -
21 Contingencies
The Company is involved in various lawsuits, claims, investigations and
proceedings incidental to the normal conduct of its operations. These matters
mainly include the risks associated with external patents utilization, various
investigations, claims from customers and tax disputes. Management believes that
these contingencies will not have a material adverse effect on the business,
financial condition or results of operations of the Company.
22 Financial Instruments and Risk Management
Financial instruments and derivatives are used exclusively for purposes other
than trading.
Foreign exchange forward contracts and currency options: The Company enters into
foreign exchange forward contracts and currency options to manage exposure to
fluctuations in foreign currency exchange rates and to cover a portion of both
its probable anticipated, but not firmly committed, transactions and
transactions with firm foreign currency commitments. These transactions include
international sales by various subsidiaries in foreign currencies, foreign
currency denominated purchases, intercompany sales and other intercompany
transactions. Such contracts outstanding as of December 31, 1999 have remaining
terms of one to 13 months, maturing mainly during the first quarter of 2000.
The notional amounts of foreign exchange forward contracts totaled
$634,870 and $611,567 at December 31, 1998 and 1999, respectively. The principal
currencies covered are the Italian lira, the Japanese Yen, the Euro, the British
pound and the Swiss franc.
The risk of loss associated with purchased options is limited to
premium amounts paid for the option contracts. The risk of loss associated with
forward contracts is equal to the exchange rate differential from the time the
contract is entered into until the time it is settled. Realized and unrealized
gains and losses on forward contracts are included in "other income and
expenses." The discount or premium on forward contracts have been amortized over
the life of the forward contract and included in "net interest expenses."
Concentration of credit risk: Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of interest-bearing
investments, financial instruments with off-balance sheet risks (primarily
forward contracts), and trade receivables. The Company places its cash and cash
equivalents and certain other financial instruments with a variety of high
credit quality financial institutions and has not experienced any material
losses relating to such instruments. The Company invests its excess cash in
accordance with its investment policy which aims to minimize credit risk.
The Company controls the credit risks associated with financial
instruments through credit approvals, investment limits and centralized
monitoring procedures but does not normally require collateral or other security
from the parties to the financial instruments with off-balance sheet risk.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers and their dispersion across many geographic
areas. The Company monitors the creditworthiness of its customers to which it
grants credit terms in the normal course of business. The Company does not
anticipate non-performance by counterparties which could have a significant
impact on its financial position or results of operations.
Fair value of financial instruments: The estimates of fair value were obtained
using prevailing financial market information resulting from various valuation
techniques. The methodologies used to estimate fair value are as follows:
Cash and cash equivalents, accounts and notes receivable, bank overdrafts,
short-term borrowings, accounts and notes payables: The carrying amounts
reflected in the consolidated financial statements are reasonable estimates of
fair value because of the relatively short period of time between the
origination of the instruments and their expected realization.
Long-term debt and current portion of long-term debt: The fair values of
long-term debt were determined based on quoted market prices, and by estimating
future cash flows on a borrowing-by-borrowing basis and discounting these future
cash flows using the Company's incremental borrowing rates for similar types of
borrowing arrangements.
Foreign exchange forward contracts: The fair values of these instruments are
estimated based upon quoted market prices for the same or similar instruments.
Transactions with significant shareholders and their affiliates were
as follows:
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
Sales 148,172 5,608 19,033
Research and
development expenses (12,794) (16,215) (16,958)
Other purchases and
expenses (29,757) (12,406) (2,772)
Accounts receivable 17,244 1,872 6,222
Accounts payable 9,745 10,509 1,876
--------------------------------------------------------------------------------
As at December 31, 1997, the transactions with the shareholders included
transactions with Thomson S.A. and Thomson CSF, who were shareholders during
that year.
24 Segment information
In June 1997, the United States Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (FAS 131), which the Company adopted
effective December 31, 1998. FAS 131 requires that enterprises report certain
information about operating segments. It also requires that enterprises report
certain information about their products and services, the geographic areas in
which they operate, and their major customers. The Company concluded that it has
two principal businesses and operates in two segments: the Semiconductor segment
and the Subsystems segment. In the Semiconductor segment, the Company designs,
develops, manufactures and markets a broad range of products, including
discrete, memories and standard commodity components, ASICSs (full custom
devices and semicustom devices) and ASSPs for analog, digital, and mixed-signal
applications. In the Subsystems segment, the Company designs, develops,
manufactures and markets subsystems and modules for the Telecom, Automotive and
Industrial markets including mobile phone accessories, battery chargers, ISDN
power supplies and in-vehicle equipment for electronic toll payment. The
Subsystems segment does not meet the requirements for a reportable segment as
defined in FAS 131. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies.
The following is a summary of operations by entities located within
the indicated geographic areas for 1997, 1998 and 1999. Long-lived assets
consist of net property and equipment and other intangible assets.
Net revenues
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
France 455,663 474,580 451,243
Italy 189,222 171,143 174,087
Germany 427,211 444,362 470,554
Other European
countries 728,128 737,112 828,879
USA 935,010 978,662 1,222,743
Singapore 1,031,020 1,261,165 1,669,129
Other countries 252,891 180,728 239,641
--------------------------------------------------------------------------------
Total 4,019,145 4,247,752 5,056,276
--------------------------------------------------------------------------------
Long-lived assets
December 31, 1997 1998 1999
--------------------------------------------------------------------------------
France 980,250 1,169,273 1,239,540
Italy 837,307 899,689 1,117,241
Germany 869 1,134 1,094
Other European
countries 7,402 19,922 236,202
USA 605,666 587,734 736,187
Singapore 227,888 216,817 245,386
Other countries 413,854 472,007 477,316
--------------------------------------------------------------------------------
Total 3,073,236 3,366,576 4,052,966
--------------------------------------------------------------------------------
25 Subsequent events (unaudited)
--------------------------------------------------------------------------------
In March 2000, the Supervisory Board approved the submission of several
resolutions for shareholder approval at the annual shareholders' meeting to be
held on April 26, 2000. The resolutions include the payment of a cash dividend
of $0.09 per share and a three for one stock split to be effective the day after
the cash dividend payment date.
- 58 -
report of independent accountants
To the Supervisory Board and Shareholders of STMicroelectronics N.V.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
STMicroelectronics N.V. and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers N.V.
Amsterdam, January 25, 2000
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