As filed with the Securities and Exchange Commission on June 30, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the fiscal year ended: December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
Commission file number: 1-13546
STMicroelectronics N.V.
(Exact name of Registrant as specified in its charter)
Not Applicable The Netherlands
(Translation of Registrant's (Jurisdiction of incorporation
name into English) or organization)
Technoparc du Pays de Gex -- B.P. 112 Route de Pre-Bois
165, rue Edouard Branly ICC Bloc A
01637 Saint Genis Pouilly 1215 Geneva 15
France Switzerland
(Addresses of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class: which registered:
Common Shares, nominal value Euro 3.12 per share New York Stock Exchange
Liquid Yield OptionTM Notes due June 10, 2008 New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
142,478,106 Common Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No __
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 __ Item 18 |X|
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TABLE OF CONTENTS
PART I
Cautionary Statement Regarding Forward-Looking Statements..................... 3
Presentation of Financial Information......................................... 3
Item 1. Description of Business............................................. 4
Item 2. Description of Property.............................................31
Item 3. Legal Proceedings...................................................34
Item 4. Control of Registrant...............................................36
Item 5. Nature of Trading Market............................................40
Item 6. Exchange Controls and Other Limitations Affecting Security Holders..44
Item 7. Taxation............................................................44
Item 8. Selected Consolidated Financial Data................................48
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................48
Item 9A. Quantitative and Qualitative Disclosures About Market Risk..........48
Item 10. Directors and Officers of Registrant................................51
Item 11. Compensation of Directors and Officers..............................59
Item 12. Options to Purchase Securities from Registrant or Subsidiaries......60
Item 13. Interest of Management in Certain Transactions......................61
PART II
Item 14. Description of Securities to be Registered *........................62
PART III
Item 15. Defaults Upon Senior Securities *...................................62
Item 16. Changes in Securities and Changes in Security for
Registered Securities *
PART IV
Item 17. Financial Statements *..............................................62
Item 18. Financial Statements................................................62
Item 19. Financial Statements and Exhibits...................................62
Certain Terms ................................................................64
* Omitted because item is not applicable.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this annual report that are not
historical facts, including without limitation, certain statements made in the
sections hereof entitled "Item 1: Description of Business" and "Item 9:
Management's Discussion and Analysis of Financial Condition and Results of
Operations," are statements of future expectations and other forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933, as
amended) that are based on management's current views and assumptions and
involve known and unknown risks and uncertainties that could cause actual
results, performance or events to differ materially from those in such
statements due to, among other factors, (i) the highly cyclical nature of the
semiconductor industry, (ii) competition, (iii) increased industry capacity,
(iv) variability of operating results, (v) capital requirements, (vi) new
product developments and technological change, (vii) manufacturing risks, (viii)
the loss of key personnel, (ix) economic downturn in any of our major markets,
(x) possible acquisitions, (xi) control of the Company and potential conflicts
of interest, (xii) key customers and strategic relationships, (xiii)
intellectual property issues, (xiv) certain legal proceedings, (xv) the
uncertainties of state support for research and development and other funding,
(xvi) international operations, (xvii) currency fluctuations, (xviii) dependence
on certain sources of supply, (xix) environmental regulations and (xx) year 2000
compliance. See "Risk Factors" included in the Company's Prospectuses dated June
5, 1998.
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
References in this annual report to published industry data are
references to data published by Dataquest, Inc. ("Dataquest") and references to
trade association data are references to World Semiconductor Trade Statistics
("WSTS"). Except as otherwise disclosed herein, all references to the Company's
market positions in this annual report are based on 1998 revenues according to
published industry data. Certain terms used in this annual report are defined in
"Certain Terms."
In this annual report, references to the "EU" are to the European Union,
references to the "Euro" and the "euro" are to the euro currency of the EU,
references to the "United States" are to the United States of America and
references to "$" or to "U.S. dollars" are to United States dollars.
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PART I
Item 1: Description of Business
The Company
STMicroelectronics N.V. (the "Company") is a global independent limited
liability semiconductor company that designs, develops, manufactures and markets
a broad range of semiconductor integrated circuits and discrete devices used in
a wide variety of microelectronic applications, including automotive products,
computer peripherals, telecommunications systems, consumer products, industrial
automation and control systems. According to published industry data, in 1998
STMicroelectronics ranked ninth among worldwide suppliers of semiconductor
devices. On the basis of 1998 revenues, STMicroelectronics was the world's
leading supplier of MPEG 2 decoder ICs, smartcard MCUs, special automotive ICs
and EPROM memories, the second leading supplier of EEPROM memories and the third
leading supplier of analog monolithic and mixed-signal ICs and EEPROM memories.
The Company currently offers more than 3,000 main types of products to
approximately 800 direct customers. Major customers include Alcatel, Bosch,
Chrysler, Ericsson, Ford, Gemplus, Hewlett-Packard, IBM, Matsushita, Motorola,
Nokia, Nortel Networks, Philips, Pioneer, Samsung, Schlumberger, Seagate
Technology, Siemens, Sony, Thomson Multimedia and Western Digital. The Company
also sells its products through distributors.
The Company offers a diversified product portfolio and develops products
for a wide range of market applications to reduce its dependence on any single
product, industry or application market. Within its diversified portfolio, the
Company has focused on developing products that exploit its technological
strengths in creating customized, system-level solutions with substantial analog
and mixed-signal content. Products include differentiated ICs (which the Company
defines as being its dedicated products, semicustom devices and
microcontrollers) and analog ICs (including mixed-signal ICs), the majority of
which are also differentiated ICs. As a leading provider of differentiated ICs,
the Company has developed close relationships with customers, resulting in early
knowledge of their evolving requirements and opportunities to access their
markets for other products. Differentiated ICs, which are less vulnerable to
competitive pressures than standard commodity products, accounted for
approximately 62% of the Company's net revenues in 1998 compared to
approximately 57% in 1997. The Company also targets applications that require
substantial analog and mixed-signal content and can exploit the Company's system
level expertise. Analog ICs accounted for approximately 51% of the Company's
1998 net revenues compared to approximately 49% in 1997, while discrete devices
accounted for approximately 13% of the Company's net revenues in 1998 compared
to approximately 14% in 1997. In recent years differentiated ICs, in particular
analog ICs, have experienced less volatility in sales growth rates and average
selling prices than the overall semiconductor industry.
STMicroelectronics' products are manufactured and designed using a broad
range of manufacturing processes and proprietary design methods.
STMicroelectronics uses all of the prevalent function-oriented process
technologies, including CMOS, bipolar and nonvolatile memory technologies. In
addition, by combining basic processes, the Company has developed advanced
systems-oriented technologies that enable it to produce differentiated and
application- specific products, including BiCMOS technologies (bipolar and CMOS)
for mixed-signal applications, BCD technologies (bipolar, CMOS and DMOS) for
intelligent power applications and embedded memory technologies. This broad
technology portfolio, a cornerstone of the Company's strategy for many years,
enables the Company to meet the increasing demand for "system-on-a-chip"
solutions. To complement this depth and diversity of process and design
technology, the Company also possesses a broad intellectual property portfolio
that it has used to enter into cross-licensing agreements with many major
semiconductor manufacturers.
In September 1997, STMicroelectronics was awarded the 1997 European
Quality Award for Business Excellence in the category of large businesses by the
European Foundation for Quality Management (the "EFQM"). In presenting
STMicroelectronics with the award, the EFQM committee cited the Company's
commitment to the principles
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of Total Quality Management ("TQM") in its business practices. TQM defines a
common set of objectives and performance measurements for employees in all
geographic regions, at every stage of product design development and production
for all product lines. See "Item 2: Description of Property--Manufacturing."
The Company introduced in 1998 several new products and plans to further
develop and produce superintegrated, system-level silicon solutions for a set of
targeted applications such as computer peripherals (including hard disk drives,
inkjet printers and monitors), digital consumer devices (including set-top
boxes, DVDs and digital television), wireless telecommunications products
(digital cellular handsets, digital cordless and pagers), digital networks
(ADSL, already in high volume production, and ATM, currently under development)
as well as automotive electronics (including injection control, safety, and car
multimedia navigation).
In addition to the many dedicated and semicustom ICs developed using
power analog, digital and mixed signal technologies, the Company has focused its
research and manufacturing efforts on developing an advanced range of the key
technological building blocks required by the targeted applications. These
building blocks include (i) MPEG 2 ICs, (ii) a family of 16 bit (ST10) and 32
bit (ST20) microcontrollers, (iii) a family of DSP cores for embedded
applications based on the current D950 solution and the ST100 (currently under
development), (iv) microprocessor architecture (x86 equivalent) aimed at
integrated applications and (v) the ability to integrate nonvolatile memory
(particularly EEPROM and flash) functionality.
Applying its broad range of technologies and its expertise in diverse
application domains, the Company is currently embedding dedicated, semicustom
circuits and these advanced building blocks on the same chip. Superintegrated
products developed to date include the STi5500 Omega chip (a platform for
digital consumer applications such as set-top boxes), which has achieved
significant design wins.
At the beginning of 1999, the Company implemented organizational changes
to better orient its product groups to end use applications. As a result, the
former Dedicated Products Group ("DPG") has become the Telecommunications,
Peripherals and Automotive Groups ("TPA"), while the former Programmable
Products Group has become the Consumer and Microcontroller Groups ("CMG").
Consequently, the Company's products are now organized into the following
principal groups:
o Telecommunications, Peripherals and Automotive,
o Consumer and Microcontroller,
o Memory Products,
o Discrete and Standard ICs.
As part of its activities outside the above principal product groups, the
Company also has a New Ventures Group, which identifies and develops new
business opportunities to complement the Company's existing businesses, and a
Subsystems Product Group, which produces subsystems for industrial and other
applications.
The Telecommunications, Peripherals and Automotive Groups (formerly the
Dedicated Products Group) produce application-specific semiconductor products
using advanced bipolar, CMOS, BiCMOS, mixed-signal and power technologies. The
Groups' products are used in all major end-user applications, including emerging
applications such as mobile communications networks, asynchronous transfer mode
communications systems, global positioning systems, flat panel displays, hard
disk drives and printers. The breadth of the Groups' customer and application
base provides it with a source of stability in the cyclical semiconductor
market, while their position as a strategic supplier of application-specific
products provides it with opportunities to supply customers' requirements for
other products, including discrete devices, microcontrollers and memories.
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The Consumer and Microcontroller Groups (formerly the Programmable
Products Group) produce microcontrollers, graphic controllers and MPEG decoder
ICs and image processing semicustom devices for digital set-top boxes, DVDs,
digital cameras, TVs, monitors and other products particularly targeted at high
growth digital applications.
The Memory Products Group produces a broad range of memory products,
including EPROMs, chips for smartcards, EEPROMs, flash memories and specialty
nonvolatile SRAMs. According to published industry data, the Company was the
leading supplier of EPROMs in 1998, accounting for approximately 38% of
worldwide EPROM sales, as well as the leading supplier of microcontroller-based
smartcard ICs and the second leading supplier of EEPROMs. The Company has
developed proprietary know-how for flash memory devices and has started mass
production for this market. The Group does not produce DRAMs, a commodity memory
product.
The Discrete and Standard ICs Group produces discrete power devices, power
transistors, standard linear and logic ICs and radio frequency ("RF") products.
The Group's discrete and standard products are manufactured using mature
technological processes that are less capital intensive than the Company's other
principal products. The Group has a diverse customer base and broad product
portfolio.
One of the significant new product introductions of 1998 by the New
Ventures Group was the STPC Industrial, a superintegrated PC-on-a-chip that
offers full PC functionality for applications such as information kiosks,
point-of-sale terminals, Internet-surfing boxes, security access systems and
industrial PCs.
The Company has substantially increased its front-end manufacturing
capacity in recent years through the addition of new 8-inch submicron
fabrication plants designed to meet the growing demand for its products. Volume
production of 8-inch wafers is now underway in Crolles, France which is already
operating at close to full capacity, and production is ramping up in Phoenix,
Arizona and Catania, Italy. The buildings for new 8-inch submicron fabrication
plants have been completed at existing sites in Rousset (France) and Agrate
(Italy) and construction of a new submicron facility is underway in Singapore.
An additional 8-inch submicron fabrication plant in Italy is planned to become
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. The Company has also announced plans for a new center for
advanced research and development and industrialization in the field of
nonvolatile memories in Agrate (Italy) to target 0.13 micron CMOS technology
generation by 2003.
STMicroelectronics is international in scope. The Company operates
front-end and/or back-end manufacturing facilities in Europe, the United States,
the Mediterranean and Asia Pacific regions, and conducts research and
development primarily in France and Italy and design, marketing and sales
activities in each of the electronics industry's major economic regions: Europe,
the United States, the Asia Pacific region and Japan. In 1998, approximately
41.6% of the Company's net revenues originated in Europe (compared to 43.6% in
1997), approximately 22.1% in the Americas (compared to 22.4% in 1997),
approximately 29.4% in the Asia Pacific region (compared to 26.5% in 1997),
approximately 4.3% in Japan (compared to 5.3% in 1997) and approximately 2.6% in
Region Five (including emerging markets such as South America, Africa, Eastern
Europe and the Middle East) (compared to 2.2% in 1997). See "--Sales,
Marketing and Distribution." In 1998, more than 30% of the 6-inch equivalent
wafers manufactured by the Company were manufactured outside Europe and
approximately 56% of the Company's employees were located outside Europe.
STMicroelectronics believes that strategic alliances are critical to
success in the semiconductor industry, and has entered into strategic alliances
with customers, other semiconductor manufacturers and major suppliers of design
software. The Company has entered into several strategic customer alliances,
including alliances with Alcatel, Bosch, Daewoo Electronics, Hewlett-Packard,
Marelli, Nokia, Nortel Networks, Pioneer, Seagate Technology, Thomson Multimedia
and Western Digital, among others. Customer alliances provide the Company with
valuable systems and
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application know-how and access to markets for key products, while allowing the
Company's customers to share some of the risks of product development with the
Company and gain access to the Company's process technologies and manufacturing
infrastructure. Alliances with other semiconductor manufacturers, such as the
cooperation with Philips Semiconductors in Crolles, France, for the development
of advanced CMOS logic manufacturing processes, the agreement with Mitsubishi
for CMOS flash memory processes using 0.20 through 0.18 micron and the agreement
with Hitachi on SuperH microprocessors, permit costly research and development
and manufacturing resources to be shared to mutual advantage for joint
technology development. Other agreements include the cooperation with Nortel
Networks for the development of 0.5/0.35 micron BiCMOS technology. The Company
has established joint development programs with leading suppliers such as Air
Liquide, Applied Materials, ASM Lithography, Canon, Hewlett-Packard, KLA-
Tencor, LAM, MEMC, Schlumberger, Teradyne and Wacker and with CAD tool producers
including Cadence and Synopsys. It is a participant in Sematech I 300I for the
development of 300 millimeter wafer manufacturing processes. STMicroelectronics
is active in joint European research efforts such as the new MEDEA program
(which succeeded JESSI in 1997), and also cooperates with major research
institutions and universities.
In March 1998, STMicroelectronics with its partners Philips Semiconductors
and CNET completed the first phase of the development of HCMOS-8, the next
generation CMOS process, at Crolles, France. This process is targeted at
high-performance and low-power applications and will have a 0.15 micron
effective gate length (equivalent to 0.18 micron drawn). Prototyping in this
process began in the second half of 1998. At the same time, STMicroelectronics
has started production of its 0.20 micron effective gate length (0.25 micron
drawn) CMOS technology, known as HCMOS- 7. This process is used to produce
"system-on-chip" products incorporating tens of millions of transistors combined
with embedded memory for telecom, digital consumer and PC applications.
Industry Background
Semiconductors are the basic building blocks used to create an increasing
variety of electronic products and systems. Since the invention of the
transistor in 1948, continuous improvements in semiconductor process and design
technologies have led to smaller, more complex and more reliable devices at a
lower cost per function. As performance has increased and size and cost have
decreased, semiconductors have expanded beyond their original primary
applications (military applications and computer systems), to applications such
as telecommunications systems, automotive products, consumer goods and
industrial automation and control systems. In addition, system users and
designers have demanded systems with more functionality, higher levels of
performance, greater reliability and shorter design cycle times, all in smaller
packages at lower costs. These demands have resulted in increased semiconductor
content as a percentage of system cost. Calculated on the basis of the total
available market (the "TAM"), which includes all semiconductor products, as a
percentage of worldwide revenues from production of electronic equipment
according to published industry data, semiconductor pervasiveness has increased
from approximately 9% in 1991 to approximately 13% in 1998. The demand for
electronic systems has also expanded geographically with the emergence of new
markets, particularly in the Asia Pacific region.
Semiconductor sales have increased significantly over the long term but
have experienced significant cyclical variations in growth rates. According to
trade association data the TAM increased from $17.8 billion in 1983 to $125.6
billion in 1998 (growing at a compound annual rate of approximately 14%). At the
same time the serviceable available market (the "SAM"), which prior to 1995
consisted of the TAM without DRAMS, microprocessors and opto-electronic products
and commencing in 1995 and for all subsequent periods presented, includes
microprocessors as a result of the Company's production of x86 products,
increased from approximately $15.0 billion in 1983 to $107.0 billion in 1998
(growing at a compound annual rate of approximately 14%). In 1998, the TAM
decreased by 8.4 %. Based on trade association data for the first quarter of
1999, the TAM increased in the first quarter of 1999 by 6.8% compared to the
first quarter of 1998. The SAM decreased 5.2% in 1998 compared to 1997; however,
based on trade association data for the first quarter of 1999, the SAM increased
by 3.5% compared to the first quarter of 1998. In 1998, approximately
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33% of all semiconductors were shipped to the Americas, 21% to Japan, 23% to
Europe, and 23% to the Asia Pacific region.
Although cyclical changes in production capacity in the semiconductor
industry and demand for electronic systems have resulted in pronounced cyclical
changes in the level of semiconductor sales and fluctuations in prices and
margins for semiconductor products from time to time, the semiconductor industry
has experienced substantial growth over the long term. Factors that are
contributing to long-term growth include the development of new semiconductor
applications, increased semiconductor content as a percentage of total system
cost, emerging strategic partnerships and growth in the electronic systems
industry in the Asia Pacific region.
Semiconductor Classifications
The process technologies, levels of integration, design specificity,
functional technologies and applications for different semiconductor products
vary significantly. As differences in these characteristics have increased, the
semiconductor market has become highly diversified as well as subject to
constant and rapid change. Semiconductor product markets may be classified
according to each of these characteristics.
Semiconductors can be manufactured using different process technologies,
each of which is particularly suited to different applications. Since the
mid-1970s, the two dominant processes have been bipolar (the original technology
used to produce integrated circuits) and CMOS (complementary
metal-oxide-silicon). Bipolar devices typically operate at higher speeds than
CMOS devices, but CMOS devices consume less power and permit more transistors to
be integrated on a single IC. While bipolar semiconductors were once used
extensively in large computer systems, CMOS has become the prevalent technology,
particularly for devices used in personal computer systems. In connection with
the development of new semiconductor applications and the demands of system
designers for more integrated semiconductors, advanced technologies have been
developed during the last decade that are particularly suited to more
systems-oriented semiconductor applications. For mixed-signal applications,
BiCMOS technologies have been developed to combine the high speed and high
voltage characteristics of bipolar technologies with the low power consumption
and high integration of CMOS technologies. For intelligent power applications,
BCD technologies have been developed that combine bipolar, CMOS and DMOS
technologies. Such systems-oriented technologies require more process steps and
mask levels, and are more complex than the basic function-oriented technologies.
The use of systems- oriented technologies requires knowledge of system design
and performance characteristics (in particular, analog and mixed-signal systems
and power systems) as well as expertise and experience with several
semiconductor process technologies.
Semiconductors are often classified as either discrete devices (such as
individual diodes, thyristors, transistors as well as opto-electronic products)
or integrated circuits (in which thousands of functions are combined on a single
"chip" of silicon to form a more complex circuit). Compared to the market for
ICs, there is typically less differentiation among discrete products supplied by
different semiconductor manufacturers. Also, discrete markets have generally
grown at slower, but more stable, rates than IC markets.
Semiconductors may also be classified as either standard components or
application-specific ICs ("ASICs"). Standard components are used by a large
group of systems designers for a broad range of applications, while ASICs are
designed to perform specific functions in specific applications. Generally,
there are three types of ASICs: full-custom devices, semicustom devices and
application-specific standard products ("ASSPs"). Full custom devices are
typically designed to meet the particular requirements of one specific customer.
Semicustom devices are more standardized ICs that can be customized with
efficient CAD tools within a short design cycle time to perform specific
functions. ASSPs are standardized ASICs that are designed to perform specific
functions in a specific application, but are not proprietary to a single
customer.
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The two basic functional technologies for semiconductor products are
analog and digital. Analog (or linear) devices monitor, condition, amplify or
transform analog signals, which are signals that vary continuously over a wide
range of values. Analog circuits are critical as an interface between electronic
systems and a variety of real world phenomena such as sound, light, temperature,
pressure, weight or speed. Electronics systems continuously translate analog
signals into digital data, and vice versa.
The analog semiconductor market consists of a large and growing group of
specific markets that serve numerous and widely differing applications,
including applications for automotive systems, instrumentation, computer
peripheral equipment, industrial controls, communications devices, video
products and medical systems. Because of the varied applications for analog
circuits, manufacturers typically offer a greater variety of devices to a more
diverse group of customers. Compared to the market for commodity digital devices
such as standard memory and logic devices, the analog market is characterized by
longer product life cycles, products that are less vulnerable to technological
obsolescence, and lower capital requirements due to the use of mature
manufacturing technologies. Such characteristics have resulted in growth rates
that have been less volatile than growth rates for the overall semiconductor
industry.
Digital devices perform binary arithmetic functions on data represented by
a series of on/off states. Historically, the digital IC market has been
primarily focused on the fast growing markets for computing and information
technology systems. Increasing demands for high-throughput computing and
networking and the proliferation of more powerful personal computers and
workstations in recent years have led to dramatic increases in digital device
density and integration. As a result, significant advances in electronic system
integration have occurred in the design and manufacture of digital devices.
There are two major types of digital ICs: memory products and logic
devices. Memory products, which are used in electronic systems to store data and
program instructions, are generally classified as either volatile memories
(which lose their data content when power supplies are switched off) or
nonvolatile memories (which retain their data content without the need for
constant power supply). Volatile memories are used to store data in virtually
all computer systems, from large and mid-range computers to personal computers
and workstations. Memory products are typically standard, general purpose ICs
that can be manufactured in high volumes using basic CMOS processes, and they
are generally differentiated by cost and physical and performance
characteristics, including data capacity, die size, power consumption and access
speed.
The primary volatile memory devices are DRAMs, which accounted for 60.9%
of semiconductor memory sales in 1998, and SRAMs (static RAMs). DRAMs are
volatile memories that lose their data content when power supplies are switched
off, whereas SRAMs are volatile memories that allow the storage of data in the
memory array but without the need for clock or refresh logic circuitry. SRAMs
are roughly four times as complex as DRAMs (four transistors per bit of memory
compared to one transistor) and are significantly more expensive than DRAMs per
unit of storage. DRAMs are used in a computer's main memory to temporarily store
data retrieved from low cost external mass memory devices such as hard disk
drives. SRAMs are principally used as caches and buffers between a computer's
microprocessor and its DRAM-based main memory.
Nonvolatile memories are typically used to store program instructions that
control the operation of microprocessors and electronic systems. Among such
nonvolatile memories, read-only memories ("ROMs") are permanently programmed
when they are manufactured while programmable ROMs (PROMs) can be programmed by
system designers or end-users after they are manufactured. Erasable PROMs
(EPROMs) may be erased and reprogrammed several times, but to do so EPROMs must
be physically removed from electronic systems, exposed to ultraviolet light,
reprogrammed using an external power supply and then returned to the systems.
Electrically erasable PROMs (EEPROMs) can be erased byte by byte and
reprogrammed "in-system" without the need for removal. Using EEPROMs, a system
designer or user can program or reprogram systems at any time. "Flash" memories
are products
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that represent an intermediate solution for system designers between EPROMs and
EEPROMs based on their cost and functionality.
Flash memories are typically less expensive than EEPROMs, but can also be
erased and rewritten. The entire contents of a flash memory or large blocks of
data (not individual bytes) can be erased with a "flash" of current. Because
flash memories can be erased and reprogrammed electrically and in-system, they
are more flexible than EPROMs and, therefore, may replace EPROMs in many of
their current applications. Flash memories may also be used for solid state mass
storage of data, a potentially high volume application, and in other
applications including, in particular, mobile telephone systems.
Logic devices process digital data to control the operation of electronic
systems. The largest segment of the logic market, standard logic devices,
includes microprocessors, microcontrollers and digital signal processors.
Microprocessors are the central processing units of computer systems.
Microcontrollers are complete computer systems contained on single integrated
circuits that are programmed to specific customer requirements. They contain
microprocessor cores as well as logic circuitry and memory capacity.
Microcontrollers control the operation of electronic and electromechanical
systems by processing input data from electronic sensors and generating
electronic control signals, and are used in a wide variety of consumer products
(alarm systems, household appliance controls and video products), automotive
systems (engine control and dashboard instrumentation), computer peripheral
equipment (disk drives, facsimile machines, printers and optical scanners),
industrial applications (motor drives and process controllers), and
telecommunications systems (telephones, answering machines and digital cellular
phones). Digital signal processors ("DSPs") are parallel processors used for
high complexity, high speed real-time computations in a wide variety of
applications, including answering machines, modems, digital cellular telephone
systems, audio processors and data compression systems. Standard devices are
intended to be utilized by a large group of systems designers for a broad range
of applications. Consequently, standard devices usually contain more functions
than are actually required and, therefore, may not be cost-effective for certain
specific applications. In addition to standard logic devices, a broad range of
full-custom, semicustom and ASSP logic devices has been developed for a wide
variety of applications. These devices are typically designed to meet particular
customer requirements. Compared to memory markets, logic device markets are much
more differentiated and dependent upon intellectual property and advanced
product design skills.
Analog/digital (or "mixed-signal") ICs combine analog and digital devices
on a single chip to process both analog signals and digital data. Historically,
analog and digital devices have been developed separately as they are
fundamentally different and it has been technically difficult to combine analog
and digital devices on a single IC. System manufacturers have generally
addressed mixed-signal requirements using printed circuit boards containing many
separate analog and digital circuits acquired from multiple suppliers. However,
system designers are increasingly demanding system level integration in which
complete electronic systems containing both analog and digital functions are
integrated on a single IC.
Mixed-signal ICs are typically characterized as analog ICs due to their
similar market characteristics, including longer product life cycles, diverse
applications and customers and more stable growth through economic cycles as
compared to digital devices. However, certain parts of the mixed-signal market
are becoming higher volume markets as the increasing use of mixed-signal devices
has enhanced the options of system designers and contributed to the development
of new applications, including multimedia, video conferencing, automotive, mass
storage and personal communications.
10
<PAGE>
The Semiconductor Market
The following table sets forth information with respect to worldwide
semiconductor sales by type of semiconductor and geographic region:
<TABLE>
<CAPTION>
Worldwide Semiconductor Sales(1) Compound Annual Growth Rates(2)
------------------------------------------ --------------------------------------
1983 1988 1993 1996 1997 1998 83-88 88-93 93-95 97-98 93-98
---- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
(in billions $) (expressed as percentages)
--------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Integrated Circuits. $13.3 $35.9 $66.0 $114.9 $119.5 $109.1 22.0% 13.0% 38.2% (8.8)% 10.6%
Analog (linear and
mixed-signal)... 2.8 7.2 10.7 17.0 19.7 19.1 20.8 8.2 24.6 (3.4) 12.3
Digital Logic...... 6.7 17.8 34.1 61.9 70.4 67.0 21.6 13.9 28.1 (4.9) 14.5
Memory:
DRAM.......... 1.7 6.3 13.1 25.1 19.7 14.0 30.0 15.8 76.5 (29.2) 1.3
Others........ 2.0 4.6 8.1 10.9 9.6 9.0 18.1 12.0 24.7 (5.8) 2.0
----- ----- ----- ------ ------ --- ----- ----- ------ ------ -----
Total Memory.... 3.7 10.9 21.2 36.0 29.3 23.0 24.1 14.2 58.7 (21.6) 1.6
Total digital....... 10.4 28.7 55.3 97.9 99.6 90.0 22.5 14.0 40.7 (9.8) 10.2
Discrete............. 3.7 7.0 8.6 12.9 13.1 11.9 13.6 4.2 27.6 (9.4) 6.7
Opto-electronics.... 0.7 2.1 2.6 4.1 4.5 4.6 24.6 4.4 28.6 2.5 11.7
----- ----- ----- ------ ------ ------ ----- ----- ------ ------ -----
TAM............. 17.8 45.0 77.3 132.0 137.2 125.6 20.4 11.4 36.7 (8.4) 10.2
===== ===== ===== ====== ====== ====== ===== ===== ====== ====== =====
Europe............... 3.3 8.1 14.6 27.6 29.1 29.4 19.7 12.5 39.0 1.1 15.0
Americas............ 7.8 13.4 24.7 42.7 45.9 41.4 11.4 13.0 37.9 (9.6) 10.9
Asia Pacific........ 1.2 5.4 14.2 27.5 30.1 28.9 35.1 21.3 44.1 (4.4) 15.3
Japan................ 5.5 18.1 23.8 34.2 32.1 25.9 26.9 5.6 29.2 (19.2) 1.7
------ ----- ----- ------ ------ ---- ----- ----- ------ ------ -----
TAM............. $ 17.8 $45.0 $77.3 $132.0 $137.2 $125.6 20.4% 11.4% 36.7% (8.4)% 10.2%
===== ===== ===== ====== ====== ====== ===== ===== ====== ====== =====
- --------------
<FN>
(1) Source: WSTS.
(2) Calculated using end points of the periods specified.
</FN>
</TABLE>
During the 1960s and 1970s, the development of semiconductor process
technologies was critical to the success of participants in the industry. As
process technologies matured, manufacturing sciences became important; in the
1980s, the emphasis shifted to increasing production volumes and yields and
lowering production costs. The large capital expenditures and other resources
required during this period to develop advanced manufacturing capabilities
resulted in a stratification of the industry between broad range suppliers
operating multiple front-end and back-end manufacturing facilities and specialty
niche players operating small wafer fabs or subcontracting wafer production.
With the continuing development of new semiconductor applications and
increasing demands of system designers for more integrated systems-oriented
products, semiconductor manufacturers must continually improve their core
technology and manufacturing competencies. In addition, the increasing diversity
and complexity of semiconductor products, the demands of technological change,
and the costs associated with keeping pace with industry developments have
contributed to the growth of cooperative product design and development and
manufacturing alliances with customers as well as among semiconductor suppliers.
Alliances with customers provide the manufacturer with valuable systems and
application know-how and access to markets for key products, while allowing the
manufacturer's customers to share some of the risks and benefits of product
development. Customers also gain access to the manufacturer's process
technologies and manufacturing infrastructure. Alliances with other
semiconductor manufacturers permit costly
11
<PAGE>
research and development and manufacturing resources to be shared to mutual
advantage for joint technology development.
The Company believes that major new growth segments in the semiconductor
market are developing, in particular for digital multimedia, networking and
wireless communications applications. New applications have emerged, such as
set-top boxes, digital television, digital video discs, digital mobile computing
and communications, smartcards, automotive multimedia, digital still imaging and
mass storage, that are requiring new and rapidly evolving semiconductor
technologies. The Company believes many of these new products will require a
high level of semiconductor integration, combining various technologies such as
bipolar, analog, CMOS, power and nonvolatile memory, on a single chip.
To compete as a broad line semiconductor manufacturer, management
believes that it is important to have: (i) a broad and diverse customer base;
(ii) a diversified product portfolio (including analog, digital mixed-signal and
power products) and experience in several application markets; (iii) a broad
range of process technologies (including basic function-oriented and advanced
systems-oriented technologies); (iv) design extension and CAD tools in both
analog and digital technologies; (v) an efficient, quality, global manufacturing
infrastructure; (vi) global marketing and technical support; and (vii) a
worldwide network of strategic alliances with customers and other semiconductor
manufacturers. The Company also believes that its independence from any single
system group manufacturer is an advantage for STMicroelectronics in working
closely with customers in different market segments.
Strategy
In 1996 the Company achieved its Vision 2000 objective, originally
adopted in 1993, to become one of the world's top ten semiconductor suppliers
and to achieve operating results better than the average of the top ten
semiconductor suppliers. In 1998, according to published industry data,
STMicroelectronics ranked ninth among worldwide suppliers of semiconductor
devices. Management's objective is to consolidate and improve its ranking within
the top ten semiconductor suppliers while sustaining or improving its operating
results relative to its peer group. The key elements of the Company's strategy
are set forth below.
Broad Range Supplier. The Company offers a diversified product portfolio
and develops products for a wide range of market applications to reduce its
dependence on any single product, industry or application market. Within its
diversified portfolio, the Company has focused on developing products that
exploit its technological strengths in creating customized, system-level
solutions with substantial analog and mixed-signal content. Products include
differentiated ICs (which the Company defines as being its dedicated products,
semicustom devices and microcontrollers) and analog ICs (including mixed-signal
ICs), the majority of which are also differentiated ICs. As a leading provider
of differentiated ICs, the Company has developed close relationships with
customers, resulting in early knowledge of their evolving requirements and
opportunities to access their markets for other products. Differentiated ICs,
which are less vulnerable to competitive pressures than standard commodity
products, accounted for approximately 62% of the Company's net revenues in 1998
compared to approximately 57% in 1997. The Company also targets applications
that require substantial analog and mixed-signal content and can exploit the
Company's system level expertise. Analog ICs accounted for approximately 51% of
the Company's 1998 net revenues compared to approximately 49% in 1997, while
discrete devices accounted for approximately 13% of the Company's net revenues
in 1998 compared to approximately 14% in 1997. In recent years differentiated
ICs, in particular analog ICs, have experienced less volatility in sales growth
rates and average selling prices than the overall semiconductor industry.
However, as a broad range supplier, the Company can also benefit from
selling standard products. Consistent with this view, the Company has
established the Gold Standard program to promote the sale of certain standard
products meeting specified quality, cost and lead-time criteria. The related
initiatives include worldwide advertising, promotional task forces in all
regions, special distribution initiatives and worldwide training of sales and
marketing personnel.
12
<PAGE>
Total standard products (including all nonvolatile memories, discrete
devices, and all standard logical and linear ICs) represented approximately 38%
of the Company's sales in 1998 and, in management's view, increased sales of
these products represent an opportunity to improve cash flow because the
manufacture of standard products requires little capital investment.
Leader in a Broad Range of Process and Design Technologies. The Company
intends to continue to exploit its expertise and experience with a wide range of
process and design technologies to develop its capabilities. The Company is
committed to continuing to increase research and development expenditures in the
future as well as continuing to develop alliances with other semiconductor
companies and suppliers of software development tools. Technological advances in
the areas of transistor performance and interconnection technologies are being
developed through the Company's logic products and semicustom devices. In 1998
the Company pursued the development of the advanced process steps necessary for
its 0.18 micron seven metal layer process that can operate at high clock speeds
(frequency of 500 MHZ at 1.8V) and capable of densities of up to 50,000 gates
per square millimeter. The Company continually works with key suppliers to
develop advanced and standardized design methodologies for its CMOS processes as
well as libraries of macrofunctions and megafunctions for many of its products,
and is focusing on improving its concurrent engineering practices to better
coordinate design activities and reduce overall time-to-market. It is also
working closely with many of its key suppliers to develop easy-to-use design
tools for specific applications. Alliances with other semiconductor
manufacturers are generally designed both to permit costly research and
development and manufacturing resources to be shared to mutual advantage for
joint technology development and to reduce time to market.
Diversified Customer Base with Focus on Strategic Alliances. The Company
works with its key customers to identify evolving needs and new applications and
to develop innovative products and product features. The Company also seeks to
use its access to key customers as a supplier of application-specific products
to establish itself as a supplier across a broad range of products. Alliances
with customers allow the Company and its customers to share some of the risks of
product development and the customers to gain access to the Company's process
technologies and manufacturing infrastructure. The Company has targeted
alliances with customers in each of its key application markets of
telecommunications, automotive, consumer and computer. It has established
alliances with, among others, Alcatel, Bosch, Daewoo Electronics,
Hewlett-Packard, Marelli, Nokia, Nortel Networks, Pioneer, Seagate Technology,
Thomson Multimedia and Western Digital. In establishing these alliances, the
Company has also aimed to cover its key geographical markets.
Integrated Presence in Key Regional Markets. The Company has consistently
sought to develop a competitive advantage by building an integrated presence in
each of the world's three major economic zones: Europe, Asia and North America.
An integrated presence means having manufacturing, design, sales and marketing
capabilities in each region, in order to ensure that the Company is well
positioned to anticipate and meet its customers' business requirements in local
markets. Therefore, the Company has established front-end manufacturing
facilities in the United States (in Phoenix, Carrollton and Rancho Bernardo), in
Europe (Agrate, Casteletto, Catania, Crolles, Rennes, Rousset and Tours) and in
Asia (Singapore); the more labor-intensive back-end facilities have been located
in Malaysia, Malta, Morocco, Singapore and China, enabling the Company to take
advantage of favorable production costs (particularly labor costs). With major
design centers and local sales and marketing groups within close proximity of
key customers in each region, the Company believes it can maintain strong
relationships with its customers. STMicroelectronics intends to continue to
build its integrated local presence in each region where it competes in its
efforts to better serve its customers and to develop an early presence in
potential high growth markets such as China, where the Company has both a
back-end facility and a design center, and India, where the Company has a design
center.
Balanced Sales by Application and Region in High Growth Market Segments.
The Company has developed a strong product portfolio across major application
markets including computer peripherals, wireless communications, digital
consumer electronics, smartcards, automotive and power management. While the
Company is consolidating its
13
<PAGE>
position in its established high volume businesses, including switching, engine
management, car safety, traditional analog TV, VCR, computer peripherals, power
and industrial and consumer appliances, it has also been investing research and
development and design resources to develop the next generation of high growth
applications, such as smartcards, portable computing, digital consumer (DVD, new
generations of set-top boxes, digital TV), wireless communications (digital
cellular phones), high speed modems (xDSL), new automotive products (car
multimedia) and new generations of mass storage devices. The Company also
maintains a geographically diverse customer base across a broad range of market
applications.
To date, the Company's growth has been attributable primarily to internal
growth. However, in 1998, the Company announced the acquisition from Adaptec of
Peripheral Technology Solutions Group which is specialized in the design of
products for the hard disk drive market, as well as the purchase of Vision
Group, a leading designer and supplier of CMOS sensors. These purchases and
acquisitions were completed in 1999. Furthermore, the Company may, from time to
time, consider making selected acquisitions that the Company believes would
complement or expand its existing business. Announcements concerning potential
acquisitions could be made at any time. Acquisitions involve a number of risks
that could adversely affect the Company's operating results, including: (i) the
diversion of management's attention; (ii) the assimilation of the operations and
personnel of the acquired companies; (iii) the assumption of potential
liabilities, disclosed or undisclosed, associated with the business acquired,
which liabilities may exceed the amount of indemnification available from the
seller; (iv) the risk that the financial and accounting systems utilized by the
business acquired will not meet the Company's standards; (v) the risk that the
businesses acquired will not maintain the quality of products and services that
the Company has historically provided; (vi) the inability to attract and retain
qualified management for the acquired business; and (vii) the inability of the
Company to retain customers of the acquired entity. There can be no assurance
that (a) the Company will be able to consummate future acquisitions on
satisfactory terms, if at all, (b) adequate financing will be available for
future acquisitions on terms acceptable to the Company, if at all, or (c) any
operations acquired will be successfully integrated or that such operations will
ultimately have a positive impact on the Company. See "Item 9: Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Customers and Applications
STMicroelectronics designs, develops, manufactures and markets over 3,000
main types of products that it sells to approximately 800 direct customers. The
Company also sells its products through distributors. To many of its key
customers the Company provides a wide range of products, including dedicated
products, discrete devices, memory products and programmable products. The
Company's position as a strategic supplier of application-specific products to
certain customers fosters close relationships that provide it with opportunities
to supply such customers' requirements for other products, including discrete
devices, programmable products and memory products.
The following table sets forth certain of the Company's significant
customers and certain applications for its products:
14
<PAGE>
Telecommunications
- --------------------------------------------------------------------------------
Customers: Alcatel Lucent Technologies Nortel Network Samsung
Bosch Motorola Philips Siemens
Ericsson Nokia Sagem Telital
Applications: Answering machines Modems
Central office switching systems PBX systems
Digital cellular telephones Telephone sets
(corded and cordless)
xDSL chip set
- --------------------------------------------------------------------------------
Computer Systems
Customers: ACER Creative Technology NEC 3D Labs
Adaptec Epson Olivetti Western Digital
ATI Technologies Hewlett-Packard Quantum Xerox
Bull IBM Samsung
Compaq Maxtor Seagate Technology
Applications: Data storage Photocopiers
Monitors and displays Printers
Graphics chip sets
- --------------------------------------------------------------------------------
Automotive
Customers: Bosch Delphi Marelli Siemens
Chrysler Ford Motorola Valeo
Daimler-Benz Kenwood Pioneer
Applications: Alternator regulators Ignition circuits
Airbags Injection circuits
Antiskid braking systems Multiplex wiring kits
Automotive entertainment systems Transmission control systems
Body and chassis electronics Global positioning systems
Engine management systems
- --------------------------------------------------------------------------------
Consumer Products
Customers: Bose Corporation Kenwood Philips Sony
Daewoo Matsushita Pioneer Thomson Multimedia
General Instrument NEC Samsung
Lucky Goldstar Nokia Networks Scientific Atlanta
Grundig Pace Sharp
Applications: Audio power amplifiers Digitial TVs
Audio processors Digital video disks
Cable television systems Set-top boxes
Compact disk players TV sets and monitors
Digital cameras Video cassette recorders
- --------------------------------------------------------------------------------
(continued)
15
<PAGE>
- --------------------------------------------------------------------------------
Industrial and Other Applications
Customers: Astec Giescke & Devrient Philips Siemens
Delta Liton Schlumberger
De La Rue Mannesman Schneider
Emerson Orga
Gemplus
Applications: Battery chargers Motor controllers
Smartcards ICs Power supplies
Industrial automation and control Switch mode power supplies
systems
Intelligent power switches
Lighting systems (lamp ballasts)
- --------------------------------------------------------------------------------
In 1998, no single customer accounted for more than 10% of the Company's
net revenues, and sales to the Company's top ten customers accounted for
approximately 43% of the Company's net sales in 1998 (39% in 1997). The Company
has several large customers, certain of whom have entered into strategic
alliances with the Company. Many of the Company's key customers operate in
cyclical businesses and have in the past, and may in the future, vary order
levels significantly from period to period. In addition, approximately 18% of
the Company's net revenues in 1998 were made through distributors, compared to
approximately 22% in 1997. There can be no assurance that such customers or
distributors, or any other customers, will continue to place orders with the
Company in the future at the same levels as in prior periods. The loss of one or
more of the Company's customers or distributors, reduced bookings or product
returns by its key customers or distributors, could adversely affect the
Company's operating results. In addition, in a declining market the Company has
been in the past and may in the future be driven to lower prices in response to
competitive pressures. Despite price reductions, however, in an industry
downturn order cancellations may be expected, particularly by distributors and
for commodity products.
Products and Technology
STMicroelectronics designs, develops, manufactures and markets a broad
range of products used in a wide variety of microelectronic applications,
including telecommunications systems, computer systems, consumer goods,
automotive products and industrial automation and control systems. The Company's
products include standard commodity components, full custom devices, semicustom
devices and ASSPs for analog, digital and mixed-signal applications.
Historically, the Company has not produced DRAMs or x86 microprocessors.
In 1998, the Company had four principal products groups: Dedicated
Products, Programmable Products, Memory Products and Discrete and Standard ICs.
Certain information with respect to revenues for these product groups for 1998
is shown in the table below. For a breakdown of the Company's net revenues by
Group and geography for the last three years, see "Item 9: Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations." Revenues for future periods will be
calculated according to the new groups described below.
16
<PAGE>
<TABLE>
<CAPTION>
1998 Group Revenues by Region
------------------------------------------------------------------
(percentage of Group net revenues)
Total
Total (% of total North
(in millions) net revenues) Europe America Asia Pacific (1) Region Five Japan
--------------- ------------- -------- --------- ---------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Dedicated Products
Group...................... $ 1,865.6 43.9% 36% 21% 37% 2% 4%
Programmable
Products................... 783.4 18.4% 37% 33% 24% 3% 3%
Memory Products............ 659.6 15.5% 54% 16% 18% 2% 10%
Discrete and Standard
ICs........................ 828.7 19.5% 44% 21% 30% 4% 1%
<FN>
- ---------------
(1) Many of the products sold in the Asia Pacific region are sold to
U.S.-based original equipment manufacturers located in the region.
</FN>
</TABLE>
At the beginning of 1999, the Company implemented organizational changes
to better orient its products groups to end use applications. Its products are
now organized into the following principal product groups: Telecommunications,
Peripherals and Automotive (formerly Dedicated Products), Consumer and
Microcontroller (formerly Programmable Products), Memory Products and Discrete
and Standard ICs. As part of its activities outside the principal product
groups, the Company also has a New Ventures Group, which identifies and develops
new business opportunities to complement the Company's existing businesses, and
a Subsystem Product Group, which produces subsystems for industrial and other
applications.
Telecommunications, Peripherals and Automotive Groups
The Dedicated Products Groups was reorganized into the Telecommunications
Group, which has two applications divisions, and the Automotive and Peripherals
Group, which has four divisions. The video products which formed part of the
former Dedicated Products Group are today encompassed within the Consumer and
Microcontroller Groups. The Groups also have two support divisions (i) digital
signal processing and microcontrollers cores and (ii) digital and mixed
analog/digital semi-custom. The Telecommunications, Peripherals and Automative
Groups are responsible for the design, development and manufacture of
application-specific products using advanced bipolar, CMOS, BiCMOS mixed-signal
and power technologies as well as mixed analog/digital semicustom devices. The
Groups offer complete system solutions to customers in several application
markets. All of the Groups' products are ASSPs, full-custom or semicustom
devices that may also include DSP and micro-controllers cores.
The Telecommunications, Peripherals and Automotive Groups work closely
with customers to develop application-specific products using
STMicroelectronics' technologies and manufacturing capabilities. The breadth of
the Groups' customer and application base provides it with a source of stability
in the cyclical semiconductor market. In addition, the Company's position as a
strategic supplier of application-specific products fosters close relationships
that provides them with opportunities to supply such customers' requirements for
other products, including discrete devices, microcontrollers and memory
products.
The Telecommunications, Peripherals and Automotive Groups particularly
emphasize dedicated ICs for automotive, computer peripherals and industrial
application segments, as well as for communication, computing and networking
application segments.
17
<PAGE>
The Telecommunications Group has two divisions:
(i) Wireline Telecommunications Products. The Company's
telecommunications products are used primarily in telephone sets,
modems and subscriber line interface cards (SLICs) for digital
central office switching equipment. The Company is targeting
applications in high speed communications networks and telephone
sets and asynchronous transfer mode ("ATM") communication systems.
During 1998, significant developments in the Company's
telecommunications product area included the introduction of the
ToscaTM two-chip set for Asymmetric Digital Subscriber Loop (ADSL)
and the delivery of more than 300,000 full-rate ADSL chip sets to
the leading equipment manufacturer. The Company also formed a
partnership with Telia Research AB to develop a Very high bit-rate
Digital Subscriber Loop (VDSL) system to support broadband
communications facilities for interactive multimedia Internet
access, video-on-demand, and other advanced services. The Company
furthermore announced the Pegas.usBTM chip set, the first host
signal processing modem to take advantage of the Universal Serial
Bus for connection to personal computers, as well as a super-
integrated IC that includes a digital signal processor (DSP) plus
all of the analog functions needed for phone, fax, modem and
answering machine functions.
(ii) Wirelesss Telecommunications Products. In wireless
telecommunications, the Company focuses its product offerings on
cellular phones, pagers and wireless local loop applications,
serving the major OEMs in each of these areas with differentiated
ICs. In cellular phones, the Company is supplying products for
both the analog and digital market segments (including GSM and
CDMA) and reinforcing its leading position in energy management
(50 million units shipped in 1998), audio CODEC (30 million units
shipped in 1998), and RF/IF ICs (30 million units shipped in
1998). The Company has gained experience and know-how with the
major silicon components of cellular phone applications, and is
developing system and software capabilities to provide full
solutions for specifically targeted applications, particularly in
the baseband processor, where in 1998 the Company shipped
approximately 7 million D950 and pursued the development of its
new ST100 DSP cross core currently under development.
The Peripherals and Automotive Group has four divisions:
(i) Data Storage. STMicroelectronics produces ICs for several data
storage applications, in particular disk drives with advanced
solutions for read and write digital channels, controllers, host
interfaces, digital power processing and micromachinery. The group
is working actively on super-integrating these macro-functions. In
1998, the Company announced the acquisition from Adaptec of
Peripheral Technology Solutions Group which is specialized in the
design of products for the hard disk drive market. The acquisition
was completed in 1999. The acquisition complements the Company's
activities with respect to (i) product line, giving the Company
access to leading disk controller products and know-how, (ii)
design teams, contributing Adaptec's designers with CMOS read
channel product design expertise, (iii) geography, providing the
Company a base in Silicon Valley, and (iv) customer base, adding
customers in Asia Pacific and Japan. In 1998, the Company also
signed a cooperation agreement with IBM to accelerate the
development of advanced system-on-a-chip products, particularly
ICs for data storage applications and PC-compatible information
appliances.
(ii) Printers. STMicroelectronics is focusing on inkjet printer
components and is an important supplier of pen chips, motor
drivers, head drivers and image processors. The Company is an
important partner of Hewlett-Packard for technology development
and manufacturing. Since the beginning of the cooperation with
Hewlett-Packard, the Company has supplied more than 400,000 wafers
for pen chip applications.
18
<PAGE>
(iii) Audio and Automotive Products. STMicroelectronics' audio products
include audio power amplifiers, audio processors and graphic
equalizer ICs. The Company has sold more than 1.2 billion audio
power amplifier ICs since 1972. The Company's automotive products
include alternator regulators, airbag controls, antiskid braking
systems, ignition circuits, injection circuits, multiplex wiring
kits and products for body and chassis electronics, engine
management and instrumentation systems. The Company is currently
developing solutions for global positioning systems (GPS) and
multi-media in the car. In 1998, the Company signed a strategic
alliance for car entertainment systems with Pioneer Electronics of
Japan. Due to its super-integration know-how, the Company has
successfully expanded its presence beyond Europe to the United
States and Japan, further accessing key customers such as
Mitsubishi and Denso.
In 1998, the Company announced the launch of two devices (ST20 GPG
and STB 5600) that for the first time allow a complete GPS system
to be implemented by using just two chips. In the fourth quarter
of 1998, the Company also delivered the first working prototypes
of a single chip system called Euterpe, that combines voice
recognition, voice synthesis and text to speech technologies.
(iv) Industrial and Power Supplies. STMicroelectronics designs and
manufactures products for industrial automation systems, lighting
applications (lamp ballast), battery chargers and switch mode
power supplies (SMPS). Its key products are power ICs for motor
controllers and read/write amplifiers, intelligent power ICs for
spindle motor control and head positioning in computer disk drives
and battery chargers for portable electronic systems, particularly
mobile telephone sets.
The Groups also have two support divisions (i) digital signal
processing and microcontroller cores and (ii) digital and mixed analog/digital
semicustom. These two divisions are centers of excellence to develop key
competences in the field of semicustom (digital and analog) as well as in DSP
and microcontrollers cores. The Company is currently developing superintegrated
solutions using its broad range of technologies (CMOS, BiCMOS, BCD) and its
expertise in microcontrollers/DSP cores, dedicated IC megacells and embedded
memory capability for hard disk drive applications. The same methodology is
being applied to develop ICs for other computer peripherals such as monitors and
inkjet printers.
Consumer and Microcontroller Groups
The Consumer and Microcontroller Groups are the successors to the
Programmable Products Group and is responsible for the design, development and
manufacture of designs, develops and manufactures microcomponents (including
microcontrollers and digital signal processors), digital semicustom devices,
graphic controllers and MPEG decoder ICs and image processing semicustom devices
for many diverse products targeted at high growth digital applications,
including information technology, automotive and multimedia.
The Consumer and Microcontroller Groups are divided into the Consumer
Group and the Microcontrollers Group, each further divided into several
divisions.
The Consumer Group has four divisions:
(i) Digital Video. Emerging digital video technologies offer a number
of advantages over traditional analog video, including the ability
to compress video data for transmission and storage, to transmit
and reproduce video data without perceptible image degradation and
to randomly access and edit video data. In 1998, the digital
consumer market grew due to the strong growth of digital TV
satellite broadcasting in the United States and digital TV in the
United Kingdom.
19
<PAGE>
This division delivers large volumes of MPEG decoder ICs suitable
for video CD products, personal computers, set-top boxes
(including cable, satellite and terrestrial DVD) and digital TV
applications. The majority of these products implement the MPEG 2
standard. In 1998, STMicroelectronics started volume production of
the STi5500 Omega chip, the first in a family of highly integrated
devices that combine an MPEG 2 audio/video decoder with a 32-bit
microprocessor and other functions to create a complete set-top
box back-end section on a single chip. Among recent important
developments for digital TV, the Company introduced the STi5505,
the world's first device to integrate a complete DVD back-end
decoder and a 32-bit host processor on a single. In April 1998,
STMicroelectronics introduced the STi7000 chip, the first
integrated solution for High-Definition Television (HDTV)
combining an MPEG 2 decoder with an advanced display and format
converter into one single chip. Production of the STi7000 started
in the fourth quarter of 1998. The Company has also been selected
to provide the conditional access module to Canal+ for digital TV.
(ii) Consumer Broad Band Division. This division develops chip sets for
the front-end section of all major digital video applications. For
example, this division designs and manufactures semi-custom
products for data input from compact disc-audio and digital video
players, digital broadcast and data exchange on cable as well as
for the IEEE 1394 serial digital interface.
(iii) TV, Monitor and Camera Division. This division targets analog
television and video camera recorders, monitors and flat panel
displays and image capturing and transmission. In addition to the
traditional analog TV and monitor businesses, in 1998, the
division started to address the market for digital cameras. In
order to achieve its goals with respect to this market, the
Company made in late 1998 an offer to acquire Vision Group plc, a
U.K. company based in Edinburgh, Scotland, which has developed a
technology for the production of CMOS sensors, and completed the
acquisition in 1999. The Company also signed a partnership
agreement with Live Picture to design a new microchip that will
enable digital camera users to create instantly 360-degree
panoramic photos and to introduce other virtual reality features.
With CMOS imaging technology it is thus possible to produce the
principal features of a camera on a single IC, which is
significantly cheaper than using a multi-component chip set based
on traditional Charge Coupled Devices (CCD) technology. Potential
applications of the technology include PC cameras for transmitting
images across the Internet, digital still cameras, camcorders,
security cameras, videophones, automotive applications, biometrics
and toys.
(iv) Graphics Products. In 1998, the Company produced over 5 million
Riva 128 and 128ZY graphic accelerators to deliver visual
computing on PC platforms. The RIVA 128 was developed in
conjunction with nVidia. In early 1999, the Company entered into a
partnership agreement with Videologic of the United Kingdom for
developing the next generation 3D accelerator aimed at the PC and
digital consumer market.
The Microcontroller Group has one division and two support groups:
(i) Microcontroller Division. This division provides competitive,
high-volume 8-bit microcontrollers for all major application
segments and 16-bit DSP for the mass market. This family of
products has been developed with a wide portfolio of processes
capable of embedding nonvolatile memories such as EPROM, EEPROM
and flash memories.
Within the support groups, the Microcontroller Core Development group
develops 32- and 64-bit microcontroller cores. Current products include the
successful ST20 and ST40 products. The Company has entered an agreement with
Hitachi to co-develop a 64-bit microcontroller core (ST50) based on Hitachi
original Super H architecture and STMicroelectronics know-how in 64-bit
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microprocessors for interactive set-top boxes, digital video products, car
multimedia systems and other consumer oriented products.
The Microcontroller Development Tools Group is concerned with software and
hardware development tools for microcontroller cores and with software
methodology for the microcontrollers and application divisions.
Memory Products Group
The Memory Products Group designs, develops and manufactures a broad range
of semiconductor memory products but does not produce DRAMs. According to
published industry data, on the basis of 1998 revenues, STMicroelectronics was
the leading producer of EPROMs, with a 38% market share, and the second leading
supplier of EEPROMs.
According to published industry data, the total market for memory devices
in 1998 was approximately $23.0 billion including DRAMs (61%), SRAMs (17%) and
nonvolatile memories (22%).
The Company's Memory Products Group is organized into the following
divisions: (i) EPROMs; (ii) flash memories; (iii) smartcard products; (iv)
EEPROMs and application-specific memories; and (v) SRAMs.
EPROMs. STMicroelectronics produces a broad range of EPROMs, from 16 Kbit
to 32 Mbit. According to published industry data, STMicroelectronics
consolidated its world's leading market position for EPROMS in 1998, with
revenues of $188 million or approximately 38% of worldwide EPROM sales. The
Company currently produces EPROMs using 0.40 micron CMOS technologies.
The EPROM market is relatively mature, and worldwide sales declined in
1998 according to published industry data. The Company has succeeded in
maintaining its market leadership because of its EPROM technology, which has
allowed the Company to build one of the broadest product portfolios currently
offered in the market. At the same time, this technology has permitted
continuous improvement of manufacturing yields and reduction of die size, giving
the Company an advantageous cost position. Efficient manufacturing in its
Singapore assembly plant together with STMicroelectronics' sales and
distribution channels have contributed to the exploitation of the Company's
technological advantage.
Flash Memories. The Company currently supplies single voltage (down to 3.0
volt) NOR cell structure flash memory products up to 16 Mbit, and is introducing
into production a family of 32 Mbit flash memories operating at 1.8 volt and
manufactured using 0.25 micron technology. The Company is jointly developing
with Mitsubishi a new generation of flash memory products, starting with
multi-level 64 Mbit, as well as associated processes from 0.20 through 0.18
micron. The market for flash memories is growing fast, according to published
industry data, driven by cellular phones and digital consumer applications
growth.
Smartcard Products. Smartcards are credit card-like devices containing
integrated circuits that store data and provide an array of security
capabilities. They are used in a wide and growing variety of applications,
including public pay telephone systems (primarily in France and Germany),
cellular telephone systems (primarily in Europe), bank cards (primarily in
France) and pay television systems (primarily in the United States, United
Kingdom and France). Other applications include medical record applications,
card-access security systems and toll-payment applications. In 1998, the
Company's total number of smartcard chips sold since 1983 exceeded one billion,
with more than 100 million microcontroller-based smartcard ICs shipped per year
since 1997. According to independent market analysts, the 1998 volume confirmed
the Company's leading market position with approximately a 43% share in
microcontroller-based smartcard ICs that form the basis for such advanced
applications as electronic purses, bankcards, pay TV and GSM systems.
In 1998, the Company was awarded certifications to ITSEC level E3 High,
the most stringent level normally required in commercial applications, for two
products that will be used in the French health card project, indicating the
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Company's leadership position in terms of independent security certifications.
The Company also introduced the ST16RF product range, the world's first dual
mode (contact/contactless) smartcard microcontrollers. Originally developed for
the French public transport system in Paris (RATP) and rail operator (SNCF),
these devices have potential uses in public transport ticketing, with trial now
underway in Nice, France. In November 1998, the Company also announced the
world's first ISO 1443 type B contactless memory designed for use in electronic
tags, RF/ID and similar applications where the memory is powered by the received
carrier electromagnetic wave as well as a new addition to the ST19 family of
smartcard chips, the ST19 SF64, which is a device particularly suited to high
end telecoms, Java Cards and similar multiapplication cards.
EEPROMs and Application-Specific Memories. The Company offers serial
EEPROMs up to 256 Kbit and parallel EEPROMs up to 1 Mbit. Serial EEPROMs are the
most popular type of EEPROMs and are generally used in computer, automotive and
consumer applications. Parallel EEPROMs account for a smaller portion of the
EEPROM market, being used mainly in telecommunications equipment.
STMicroelectronics entered the parallel EEPROM market in late 1993. The Company
intends to work closely with its key customers and strategic allies to identify
and develop new application-specific memory devices using mixed technologies. In
1998, the sales of this division represented, according to industry data,
approximately 17% of the world market for EEPROM and other nonvolatile memory
compared to approximately 14% in 1997.
SRAMS. The Company focuses on producing nonvolatile SRAMs (battery
back-up) used in computers and telecommunications equipment.
Discrete and Standard ICs Group
The Discrete and Standard ICs Group designs, develops and manufactures
discrete power devices, power transistors, standard linear and logic ICs, and RF
products. According to published industry data, based on 1998 revenues,
STMicroelectronics is among the leading suppliers of power transistors and among
the top two suppliers of thyristors, worldwide.
The Group's discrete and standard products are manufactured using mature
technological processes. Although such products are less capital intensive than
the Company's other principal products, the Company is continuously improving
product performance and developing new product features. The Group has a diverse
customer base, and a large percentage of the Group's products are sold through
distributors.
Discrete Power Devices. STMicroelectronics manufactures and sells a
variety of discrete power devices, including rectifiers, protection devices and
thyristors (SCRs and triacs). The Company's devices are used in various
applications, including in particular telecommunications systems (telephone
sets, modems and line cards), household appliances and industrial systems (motor
control and power control devices). More specifically, rectifiers are used in
voltage converters and voltage regulators, protection devices are used to
protect electronic equipment from power supply spikes or surges, and thyristors
are used to vary current flows through a variety of electrical devices,
including lamps and household appliances. The Company offers a highly successful
range of standard products built with its proprietary Application Specific
Discretes (ASDTM) technology, which allows a variety of discrete structures to
be merged into a single device optimized for specific applications such as EMI
filtering for cellular phones.
Power Transistors. STMicroelectronics designs, manufactures and sells
power transistors, which (like the Company's discrete power devices) operate at
high current and voltage levels in a variety of switching and pulse mode
systems. The Company has three power transistor divisions: bipolar transistors,
power MOSFETs (metal-oxide-silicon field effect transistors) and new power
transistors such as IGBTs.
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The Company's bipolar power transistors are used in a variety of
high-speed, high-voltage applications, including SMPS (switch mode power supply)
systems, television/monitor deflection circuits and lighting systems. According
to published industry data, on the basis of 1998 revenues, STMicroelectronics is
among the leading suppliers of bipolar transistors, including RF power
transistors. The Company introduced power MOSFETs in 1991 to extend the use of
power transistors to new high-frequency, high-voltage applications, including
automotive components, crowbar protection devices, resonant converters and power
factor correction devices. A new family of products, low voltage power MOSFETs
known as the NE series, is being produced with a new technology that provides
substantial advantages over conventional cellular power MOSFET processes.
The Company also offers a family of VIPower (vertical integration power)
products, as well as omnifets and application-specific devices. VIPower products
exhibit the operating characteristics of power transistors while incorporating
full thermal, short circuit and overcurrent protection and allowing logic level
input. VIPower products are used in consumer goods (lamp ballasts) and
automotive products (ignition circuits, central locking systems and transmission
circuits). Omnifets are power MOSFETs with fully integrated protection devices
that are used in a variety of sophisticated automotive and industrial
applications. Application-specific devices are semicustom ICs that integrate
diodes, rectifiers and thyristors on the same chip, thereby providing
cost-effective and space-saving components with a short design time.
In the first quarter of 1998, the Company extended its offer of VIPower
technology by introducing a Smart H Bridge Driver that can sustain high peak
current streams for short time periods. The Company also introduced innovative
front-end and packaging technologies that significantly increase MOSFET power
density and a new range of products based on its Application Specific Discrete
(ASD) technology that integrate two key telephone set functions into a single
surface mounting package.
Standard Logic and Linear ICs. The Company produces a variety of bipolar
and HCMOS logic devices, including clocks, registers, gates and latches. Such
devices are used in a wide variety of applications, including increasingly in
portable computers, computer networks and telecommunications systems. The
Company also offers standard linear ICs covering a variety of applications,
including amplifiers, comparators, decoders, detectors, filters, modulators,
multipliers and voltage regulators.
Radio Frequency Products. The Company supplies components for RF
transmission systems used in television broadcasting equipment, radar systems,
telecommunications systems and avionic equipment. The Company is targeting new
applications for its RF products, including two-way wireless communications
systems (in particular, cellular telephone systems) and commercial radio
communication networks for business and government applications.
Sales, Marketing and Distribution
In 1998, the Company derived approximately 82% of its revenues from sales
directly to customers through its regional sales organizations (compared to
approximately 78% in 1997) and 18% of its net revenues from sales through
distributors (compared to approximately 22% in 1997). The Company operates
regional sales organizations in Europe, North America, the Asia Pacific region,
Japan and, since January 1, 1998, in "Region Five" which includes emerging
markets such as South America, Africa, Eastern Europe, the Middle East and
India. In 1998, approximately 41.6% of the Company's revenues originated in
Europe (compared to approximately 43.6% in 1997), while 22.1% originated in the
Americas (compared to approximately 22.4% in 1997), 29.4% originated in the Asia
Pacific region (compared to approximately 26.5% in 1997), 4.3% originated in
Japan (compared to approximately 5.3% in 1997) and 2.6% originated in Region
Five (compared to approximately 2.2% in 1997). In 1998, no single customer
accounted for more than 10% of the Company's net revenues, and sales to the
Company's top ten customers accounted for approximately 43% of the Company's net
sales in 1998 (39% in 1997).
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The European region is divided into ten sales and marketing units: five
major accounts groups organized by market segments (telecom, industrial and
smartcards, consumer, automotive and computer), four geographically configured
units to cover mid-sized OEM customers (France and the Benelux, Central Europe,
Northern Europe and Southern Europe) and a distribution unit.
In North America, the sales and marketing team is organized into five
business units that are located near major centers of activity for either a
particular application or geographic region: automotive (Detroit, Michigan),
industrial and consumer (Chicago, Illinois), computer and peripheral equipment
(San Jose, California and Longmont, Colorado following the acquisition of
Adaptec), communications (Dallas, Texas) and distribution (Boston,
Massachusetts). Each business unit has a sales force that specializes in the
relevant business sector, providing local customer service, market development
and specialized application support for differentiated system oriented products.
This structure allows STMicroelectronics to monitor emerging applications, to
provide local design support, and to identify new products for development in
conjunction with the various product divisions as well as to develop new markets
and applications with its current product portfolio. A central product marketing
operation in Boston provides product support and training for standard products
for the North America region, while a logistics center in Phoenix supports
just-in-time delivery throughout North America. In addition, a comprehensive
distribution business unit provides product and sales support for the nationwide
distribution network.
In the Asia Pacific region, sales and marketing is organized by country
and is managed from the Company's regional sales headquarters in Singapore. The
Company has sales offices in Taiwan, Korea, China, Hong Kong, Malaysia, Thailand
and Australia. The Singapore sales organization provides central marketing,
customer service, technical support, shipping, laboratory and design services
for the entire region. In addition, there are design centers in Taiwan, Korea,
Hong Kong and Shenzhen.
In Japan, the large majority of the Company's sales are made through
distributors, as is typical for foreign suppliers to the Japanese market.
However, the Company's sales and marketing engineers in Japan work directly with
the customers as well as with the distributors to meet customers' needs. The
Company provides marketing and technical support services to customers through
sales offices in Tokyo and Osaka. In addition, the Company has established a
design center and application laboratory in Tokyo. The design center designs
custom ICs for Japanese clients, while the application laboratory allows
Japanese customers to test STMicroelectronics' products in specific
applications.
Region Five was created as of January 1, 1998 and includes emerging
markets such as South America, Africa, Eastern Europe, the Middle East and
India. Prior to that time, these markets had been covered, where appropriate, by
the other existing sales and marketing organizations. Region Five also includes
the design center in India, which employs 428 people in a wide range of
activities. The Company intends to increase its focus on the new sales and
marketing region to enhance its presence in these new markets.
The Company's central marketing efforts are organized into a central
strategic marketing organization and a key account management organization. The
strategic marketing organization is organized by application market. The focus
is on system research and development and the timely generation of the advanced
system know-how and intellectual property that is critical to the successful
introduction of future generations of differentiated products.
In 1996, the Company undertook the Gold Standard program, a long-term
commitment to excellence in standard products. The program consists of
manufacturing and offering standard products at the same price level as the
market but with a superior level of quality, service and lead time. The related
initiatives included worldwide advertising, promotional task forces in all
regions, special distribution initiatives and worldwide training of salespeople
and marketing personnel.
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In addition to the central strategic marketing team, the Company has
established key account management teams to serve key multinational customers.
The key account management teams work with the Company's regional and divisional
managers to provide a broad range of products to its major accounts and to
develop complete systems solutions. The teams build strategic relationships with
the Company's major accounts that can lead to the development of new products,
increased access to evolving technologies and enhanced knowledge of customer
requirements.
Each of the five regional sales organizations operate dedicated
distribution organizations. To support the distribution network,
STMicroelectronics operates logistic centers in Saint Genis, France;Phoenix,
Arizona; and Singapore, and has made considerable investments in warehouse
computerization and logistics support.
The Company also uses distributors and representatives to distribute its
products around the world. Typically, distributors handle a wide variety of
products, including products that compete with STMicroelectronics' products, and
fill orders for many customers. Most of the Company's sales to distributors are
made under agreements allowing for price protection and/or the right of return
on unsold merchandise. The Company recognizes revenues when it ships products to
distributors. Sales representatives generally do not offer products that compete
directly with the Company's products, but may carry complementary items
manufactured by others. Representatives do not maintain a product inventory;
instead, their customers place large quantity orders directly with
STMicroelectronics and are referred to distributors for smaller orders.
Research and Development
Management believes that research and development is critical to the
Company's success and is committed to increasing research and development
expenditures in the future. Despite significant cost reductions following the
Company's formation in 1987, and particularly in 1990 and 1991 when the Company
experienced losses, management did not reduce research and development spending.
This commitment to research and development continues unabated, with the Company
spending $690 million or 16.2% of revenue on research and development in 1998.
The table below sets forth information with respect to the Company's research
and development spending since 1994 (not including design center, process
engineering, pre-production or industrialization costs):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ------- -------- -------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C>
Expenditures.......................... $338.3 $440.3 $532.3 $610.9 $689.8
as a percentage of net revenues....... 12.8% 12.4% 12.9% 15.2% 16.2%
</TABLE>
As a result of the history of the Company, approximately 81% of the
Company's research and development expenses in 1998 were incurred in Europe,
primarily in France and Italy. See "--State Support for the Semiconductor
Industry." As of December 31, 1998, approximately 4,400 employees were employed
in research and development activities.
Central research and development units conduct research on the basic VLSI
technologies, packaging technologies and design tools that are used by all
product groups and the front-end manufacturing organization. STMicroelectronics'
central research and development activities are conducted in Crolles, France;
Agrate, Italy; Carrollton, Texas; Phoenix, Arizona; Berkeley, California; and
Noida, India. The central research and development units participate in several
strategic partnerships. The Company's manufacturing facility at Crolles, France
houses a research and development center that is operated in the legal form of a
French Groupement d'interet economique ("GIE") pursuant to a partnership
agreement in effect until the end of 1998 between the Company and CNET, the
research laboratory of France Telecom, an indirect shareholder of the Company.
This center has developed submicron process technologies
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and is currently working on the development of 0.18 micron and future generation
technologies, including copper interconnect, low k dielectric, silicon
germanium, embedded RAMs and RF options. The Company and CNET have decided to
extend the GIE to include as a member the Laboratoire d'Electronique de
Technologie d'Instrumentation ("LETI"), a research laboratory of CEA-Industrie,
one of the indirect shareholders of the Company. The Company is also cooperating
with Philips Semiconductors to jointly develop sub-micron CMOS logic processes
in Crolles, France under an agreement which has been extended through the year
2000.
In 1998, the Company also cooperated with GRESSI, the research and
development GIE formed by the CNET and LETI. The objectives of the cooperation
were to develop 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 provided for a
pluriannual plan through 1998, and the Company bore half of the program's total
cost. The cooperation with GRESSI was superseded, as of January 1, 1999, by a
tripartite cooperation arrangement between the Company, CNET 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 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 and the related contractual arrangements are in
the process of being finalized.
A technical center in Noida, India, develops design software and CAD
libraries and tools. At the Agrate, Italy site, the Company is developing
nonvolatile memory technologies and programmable logic processes using a pilot
line which is being upgraded to 8-inch with a capability of 0.25 micron and
below. See "Item 13: Interest of Management in Certain Transactions." The
Company has developed a wide network of cooperation with several universities in
the United Kingdom (Bristol and Newcastle), Italy (Bologna, Catania, Milan,
Pavia and Turin), France (Grenoble, Marseille, Toulouse and Tours), in the
United States (Carnegie Mellon, Stanford, Berkeley and UCLA) and Singapore for
basic research projects on design and process development.
In addition to central research and development, each operating division
also conducts independent research and development activities on specific
processes and products.
State Support for the Semiconductor Industry
Due to the importance of the semiconductor industry, various government
authorities in the world, including the European Commission and individual
countries in Europe, have established programs for the funding of research and
development, innovation, industrialization and training in the industry. In
addition, many countries grant various forms of tax relief, direct grants and
other incentives to semiconductor companies as well as other industries to
encourage investment. The Company has structured its operations to benefit from
such programs and incentives and expects to continue to do so in the future.
Unlike certain of its competitors, however, the Company does not receive
significant direct or indirect financing from defense development programs.
The main European programs in which the Company is involved include: (i)
the Micro-Electronics Development for European Application ("MEDEA") cooperative
research and development program, (ii) European Union research and development
projects such as ESPRIT (European Strategic Programme for Information
Technology) and RACE (Research and Development in Advanced Communications
Technologies for Europe), (iii) national programs for research and development
and industrialization in the electronics industries, and (iv) investment
incentive programs for the economic development of certain regions. The
pan-European programs are generally open to eligible companies operating and
investing in Europe and cover a period of several years. In Italy, both
electronics and economic development programs are open to eligible companies
regardless of their ownership or country of incorporation.
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<PAGE>
The MEDEA cooperative research and development program was launched in
June 1996 by the Eureka Conference and is designed to bring together many of
Europe's top researchers in a 12,000 man-year program that will cover the period
1997-2000. The MEDEA program replaced the joint European research program called
JESSI, which was a European cooperative project in microelectronics among
several countries that covered the period 1988 through 1996 and involved more
than 80 companies. In Italy, the Programma Nazionale per la Microelettronica has
18 participants, and various programs for intervention in the Mezzogiorno
(southern Italy) are open to eligible companies, including non-European
companies, operating in the region and regulated by specific laws. Italian
programs often cover several years, but funding is typically subject to annual
budget appropriation. In France, support for microelectronics is provided to
over 30 companies manufacturing or using semiconductors. The amount of support
under French programs is decided annually and subject to budget appropriation.
As a result of the history of the Company, its research and development
facilities and activities are mainly concentrated in France and Italy, and the
substantial majority of the Company's state funding has been derived from
programs in such countries. The Company has entered into funding agreements with
France and Italy which set forth the parameters of state support under certain
national programs and require, among other things, compliance with European
Commission ("EC") regulations and approval by EC authorities and annual and
project-by-project reviews and approvals.
The EC adopted guidelines in 1995 seeking to limit state aid for research
and development activities routinely performed in the normal course of the
business. There can be no assurance that the Company will be able to continue to
benefit from state aid previously committed, that such aid will not be revoked
or discontinued at any time or that aid granted by a national government for
research and development will not be reviewed or challenged by the EC.
Funding of programs in France and Italy is subject to annual
appropriation, and if such governments were unable to provide anticipated
funding on a timely basis or if existing government-funded programs were
curtailed or discontinued, such an occurrence could have a material adverse
effect on the Company's business, operating results and financial condition.
From time to time the Company has experienced delays in the receipt of funding
under these programs. As the availability and timing of such funding are
substantially outside the Company's control, there can be no assurance that the
Company will continue to benefit from such government support, that funding will
not be delayed from time to time, that sufficient alternative funding would be
available if necessary or that any such alternative funding would be provided on
terms favorable to the Company as those previously provided.
Public authority funding for research and development is reported in
"Other Income and Expenses" in the Company's consolidated statements of income.
See Note 18 to the consolidated audited financial statements for each of the
years in the three-year period ended December 31, 1998, including the Notes
thereto (collectively, the "Consolidated Financial Statements") included
elsewhere in this annual report on Form 20-F. Such funding has totalled $63.8
million, 55.3 million and $63.5 million in the years 1996, 1997 and 1998,
respectively. Public funding for industrialization costs (which include certain
costs incurred to bring prototype products to the production stage) is offset
against expenses in computing cost of sales, and has the effect of increasing
the Company's gross profit. Such funding of industrialization costs has totalled
$4.6 million, $6.2 million and $3.1 million in 1996, 1997 and 1998,
respectively. See Note 18 to the Consolidated Financial Statements. Government
support for capital expenditures funding has totalled $93.3 million, $30.2
million, and $182.4 million in the years 1996, 1997 and 1998, respectively. Such
funding has been used to support the Company's capital investment; while receipt
of these funds is not directly reflected in the Company's results of operations,
the resulting lower amounts recorded in property, plant and equipment reduce the
level of depreciation recognized by the Company.
Low interest financing has been made available (principally in Italy)
under programs such as the Italian Republic's Fund for Applied Research,
established in 1968 for the purpose of supporting Italian research projects
meeting specified program criteria. At year-end 1996, 1997 and 1998, the Company
had $95.2 million, $63.7 million
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<PAGE>
and $49.4 million, respectively, of indebtedness outstanding under
state-assisted financing programs at an average interest cost of 2.3%, 2.1% and
2.1%, respectively.
Intellectual Property
Intellectual property rights which apply to various Company products
include patents, copyrights, trade secrets, trademarks and maskwork rights.
STMicroelectronics owns more than 17,000 original invention patents or pending
patent applications, most of which have been registered in several countries
around the world. In 1998, the Company filed 671 original patent applications
around the world. Management believes that its intellectual property represents
valuable property and intends to protect the Company's investment in technology
by enforcing all of its intellectual property rights.
The Company has entered into several patent cross-licenses with several
major semiconductor companies, consisting primarily of most of the major
Japanese and Korean semiconductor companies. The Company has announced that it
has signed a broad patent cross-license agreement with IBM in June 1998 and with
Intel in January 1999.
The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products and their
design and manufacturing processes. To that end, the Company has acquired
certain patents and patent licenses and intends to continue to seek patents on
its inventions and manufacturing processes. The process of seeking patent
protection can be long and expensive, and there can be no assurance that patents
will issue from currently pending or future applications or that, if patents are
issued, they will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to the Company. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
countries. Competitors may also develop technologies that are protected by
patents and other intellectual property rights and therefore such technologies
may be unavailable to the Company or available to the Company subject to adverse
terms and conditions. Litigation, which could demand financial and management
resources, may be necessary to enforce patents or other intellectual property
rights of the Company.
Also, there can be no assurance that litigation will not be commenced in
the future against the Company regarding patents, maskworks, copyrights,
trademarks or trade secrets, or that any licenses or other rights to necessary
intellectual property could be obtained on acceptable terms. The failure to
obtain licenses or other intellectual property rights, as well as the expense or
outcome of litigation, could adversely affect the Company's results of
operations or financial condition. The Company has from time to time received,
and it may in the future receive, communications alleging possible infringement
of certain patents and other intellectual property rights of others. Regardless
of the validity or the successful assertion of such claims, the Company could
incur significant costs with respect to the defense thereof which could have a
material adverse effect on the Company's results of operations or financial
condition.
Backlog
The Company's sales are made primarily pursuant to standard purchase
orders that are generally booked from one to twelve months in advance of
delivery. Quantities actually purchased by customers, as well as prices, are
subject to variations between booking and delivery to reflect changes in
customer needs or industry conditions. During periods of industry overcapacity
and declining selling prices, customer orders are not generally made as far in
advance of the scheduled shipment date as during periods of capacity constraint.
Such reduced lead time can reduce management's ability to forecast production
levels and revenues.
The Company's backlog decreased during 1998 in difficult semiconductor
market conditions. In the first quarter of 1999, backlog increased compared to
year-end 1998.
28
<PAGE>
STMicroelectronics also sells certain products to key customers pursuant
to frame contracts. Frame contracts are annual fixed-price contracts with
customers setting forth the terms of purchase and sale of specific products that
may be ordered in the future. These contracts allow the Company to schedule
production capacity in advance and allow customers to manage their inventory
levels consistent with just-in-time principles while shortening the cycle times
required to produce ordered products. Orders under frame contracts are also
subject to risks of price reduction, order cancellation and modifications as to
quantities actually ordered.
Competition
Markets for the Company's products are intensely competitive. While only a
few companies compete with STMicroelectronics in all of the Company's product
lines, the Company faces significant competition in each of its product lines.
STMicroelectronics competes with major international semiconductor companies,
some of which have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. Smaller niche companies are also increasing
their participation in the semiconductor market, and semiconductor foundry
companies have expanded significantly, particularly in Asia. Competitors include
manufacturers of standard semiconductors, application-specific ICs and fully
customized ICs, including both chip and board-level products, as well as
customers who develop their own integrated circuit products and foundry
operations. Some of the Company's competitors are also its customers.
The Company gained market share in 1998, when the Company's net sales grew
5.7% while the TAM decreased 8.4% and the SAM decreased 5.2%, according to trade
association data. The Company gained market share in 1995 and 1996 against both
the TAM and the SAM although it lost market share against both the TAM and the
SAM in 1997. The Company does not manufacture DRAMs, which are commodity memory
products sold in high volumes that have experienced severe price cutting in
1996, 1997 and in 1998. The Company gained market share against both the TAM and
the SAM in the first quarter of 1999, when the Company's revenues grew 10.7%
compared to first quarter 1998 while the TAM grew 6.8% and the SAM grew 3.5%.
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.
According to published industry data and other industry sources,
investment in worldwide semiconductor fabrication capacity totalled
approximately $44 billion in 1996, $40 billion in 1997 and $28 billion in 1998,
or approximately 33%, 29% and 22 %, respectively, of the TAM for such years. In
addition to international semiconductor companies, companies specializing in
operating semiconductor foundries such as UMC, TSMC and Chartered
Semiconductors, have added significant capacity, particularly in Asia. These
additions to capacity have contributed to an increase of supply over demand and
to declines in average selling prices and the downturn in the industry. These
has also been a shift in existing industry capacity to production of products
that compete with the Company's products. The Company believes that fluctuations
in the rate of industry capacity additions relative to the growth rate in demand
for semiconductor products could continue to contribute to fluctuations in
average selling prices and affect the Company's results of operations.
The Company's primary competitors include Advanced Micro Devices, Hitachi,
Intel Corporation, Lucent Technologies, Mitsubishi Electric Corporation,
Motorola, National Semiconductor Corporation, Nippon Electric Company, Philips
Semiconductors, Samsung, Siemens, Texas Instruments and Toshiba. Companies
primarily operating foundries include UMC, TSMC and Charter Semiconductors.
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<PAGE>
The Company competes in different product lines to various degrees on the
basis of price, technical performance, product features, product system
compatibility, customized design, availability, quality and sales and technical
support. In particular, standard products may involve greater risk of
competitive pricing, inventory imbalances and severe market fluctuations than
differentiated products. The Company's ability to compete successfully depends
on elements both within and outside of its control, including successful and
timely development of new products and manufacturing processes, product
performance and quality, manufacturing yields and product availability, customer
service, pricing, industry trends and general economic trends.
Employees
At December 31, 1998, the Company employed approximately 29,182 people,
of whom approximately 5,938 were employed in France, 6,357 were employed in
Italy, 637 were employed in the rest of Europe, 2,655 were employed in the
United States, 5,449 were employed in Malta and Morocco and 4,686 were employed
in Singapore, Malaysia and Japan. As of December 31, 1998 approximately 4,400
employees were engaged in research and development, 1,700 in marketing and
sales, 20,200 in manufacturing, 1,600 in administration and general services and
1,300 in divisional functions.
The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate highly qualified technical, marketing,
engineering and management personnel. Unions are present in France, Italy,
Malta, Morocco and Singapore. The Company has not experienced any significant
strikes or work stoppages in recent years, other than in connection with
national strikes in Italy, and management believes that the Company's employee
relations are good.
As part of its commitment to the principles of TQM, the Company decided
in July 1994 to develop an internal education organization called "ST
University", responsible for organizing training courses to executives,
engineers, technicians and sales personnel within the Company and coordinating
all training for STMicroelectronics' employees. In 1998, ST University organized
over 100,000 hours of training for 3,500 employees.
Environmental Matters
The Company's manufacturing operations use many chemicals and gases and
the Company is subject to a variety of governmental regulations related to the
use, storage, discharge and disposal of such chemicals and gases and other
emissions and wastes. Consistent with the Company's TQM principles, the Company
has established proactive environmental policies with respect to the handling of
such chemicals and gases and emissions and waste disposals from its
manufacturing operations. The Company has engaged outside consultants to audit
its environmental activities and has created environmental management teams,
information systems, education and training programs, and environmental
assessment procedures for new processes and suppliers. All of the Company's
plants are certified for the Eco- Management and Audit Scheme ("EMAS") and have
also obtained ISO 14001 certification.
Although the Company has not suffered material environmental claims in
the past and believes that its activities conform to presently applicable
environmental regulations, in all material respects, environmental claims or the
failure to comply with present or future regulations could result in the
assessment of damages or imposition of fines against the Company, suspension of
production or a cessation of operations.
Year 2000
Reference is made to the information appearing under the caption "Year
2000" on pages 36 through 39 of the Registrant's 1998 Annual Report, which
information is incorporated herein by reference.
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<PAGE>
As of May 29, 1999, the Company's groups have fully completed Phases 1
to 3 and substantially completed Phases 4 and 5. Approximately 83% of items
involved have a status of tested and certified compliant. For the 17% not yet
tested and certified compliant, approximately 85% of the preparatory work has
been completed. Globally, the Company is near 95% completion relative to the
total work load, and is on schedule relative to the Year 2000 Project plan. At
May 29, 1999, 94% of front-end equipment and 96% of back-end equipment had been
tested or certified compliant. The Company's target is to have 100% tested
compliance by mid 1999, but there remains the possibility of some delays due to
the late delivery of solutions by certain suppliers. At May 29, 1999, 95% of
facilities equipment was tested or certified compliant. For business software
systems including financial accounting, sales order management and human
resources systems applications which are not otherwise being upgraded, specific
year 2000 compliance is being worked on internally. The Company expects to
complete most such upgrades by the end of June 1999. At May 29, 1999, 64% of
corporate materials suppliers and virtually all corporate equipment suppliers
have indicated that they are currently Year 2000 Compliant. Substantially all
other significant suppliers are on schedule to achieve Year 2000 Compliance in
due time before January 1, 2000. The Company has determined the magnitude of the
remaining tasks (completion of Phases 4 and 5) and has fixed schedules and
assigned resources accordingly. The Company has estimated the total capital
costs related to its Year 2000 activities to be in the range of approximately
$40 million.
Item 2: Description of Property
Manufacturing
STMicroelectronics currently operates 17 main manufacturing facilities
around the world. The table below sets forth certain information with respect to
STMicroelectronics' current manufacturing facilities, products and technologies.
Front-end manufacturing facilities are wafer fabrication plants and back-end
facilities are assembly, packaging and final testing plants.
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<PAGE>
<TABLE>
<CAPTION>
Location Products Technologies
- --------------------- ------------------------------------------- --------------------------------------------------
<S> <C> <C>
Front-end Facilities:
Crolles, France Semicustom devices, microcontrollers Fab- 8-inch 0.5/0.18 micron CMOS and
and dedicated products 0.7/0.25 micron BiCMOS; R&D on
VLSI submicron technologies in
conjunction with CNET and Philips
Semiconductors
Phoenix, Arizona Dedicated products Fab - 8-inch 0.7/0.35 micron CMOS,
0.5/0.35 micron BiCMOS
Agrate, Italy Nonvolatile memories, microcontrollers and Fab 1- 6-inch 0.8/0.5 micron CMOS
dedicated products Fab 2- 6-inch 2.0/0.8 micron BiCMOS and
BCD
Fab 3- 6-inch 0.35/0.18 micron CMOS pilot
line being converted to 8-inch
Rousset, France Microcontrollers, nonvolatile memories and Fab - 6-inch 0.8/0.5 micron CMOS
smartcard ICs
Catania, Italy Power transistors, smart power ICs Fab 1- 5-inch 3 micron bipolar power
and nonvolatile memories Fab 2- 6-inch 4/1 micron MOS power
Fab 3- 6-inch 4/1 micron pilot line
Fab 4- 8-inch 0.5/0.25 CMOS
Rennes, France Dedicated and power products Fab - 5-inch 2 micron BiCMOS, BCD and
bipolar
Castelletto, Italy Smart power BCD Fab - 6-inch 4.0/0.8 micron BCD pilot line
Tours, France Protection thyristors, diodes and application- Fab 1- 4/5-inch discrete
specific discretes Fab 2- 4/5-inch discrete
Ang Mo Kio, Singapore Dedicated products, microcontrollers, power Fab 1- 5-inch 1.5 micron CMOS and power
transistors and commodity products MOS
Fab 2- 5-inch 6/3 micron bipolar transistor
Fab 3- 5-inch 2.0/1.2 micron bipolar ICs
Fab 4- 5-inch 5 micron standard linear
Carrollton, Texas Memories, microcontrollers, dedicated Fab - 6-inch 0.7 micron BiCMOS, 1.0
products and semicustom devices micron BCD and 0.8/0.6 micron
CMOS
Rancho Bernardo, Dedicated products Fab - 6-inch 1.0 micron BCD
California
Back-end Facilities:
Muar, Malaysia Dedicated and standard products,
microcontrollers
Kirkop, Malta Dedicated products, microcontrollers,
semicustom devices
Toa Payoh, Singapore Nonvolatile memories and power ICs
Ain Sebaa, Morocco Discrete and standard products
Shenzhen, China Nonvolatile memories, discrete and standard
products
Bouskoura, Morocco Subsystems, RF
</TABLE>
STMicroelectronics has expanded its diversified manufacturing
infrastructure while improving the cost, quality and flexibility of its
operations. STMicroelectronics has applied recent investments in its
manufacturing facilities to bring to full capacity the 8-inch front-end
manufacturing facility in Crolles, France, to continue the ramp up of the new
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<PAGE>
8-inch front-end manufacturing facilities in Phoenix, Arizona and Catania,
Italy, and to continue to build and equip a new back-end facility in Shenzhen,
China. Capital expenditures for 1998 were devoted principally (i) to the
expansion of the 8-inch front-end wafer fabrication plant in Crolles, France,
(ii) to equip and upgrade both the new 8-inch and existing 6-inch front-end
facilities at the Catania, Italy plant, (iii) to the extension and conversion of
an existing facility in Agrate, Italy, (iv) to the expansion of the 6-inch
facility in Carrollton, Texas, (v) to the ramp-up of production at the Phoenix,
Arizona 8-inch front-end facility, (vi) to the expansion of the back-end
facilities in Muar, Malaysia, and (vii) to the expansion of the back-end
facilities in Morocco, Malta and Shenzhen, China.
The Company currently expects that capital spending for 1999 will
continue to be at levels at least as high as in each of the last three years,
and possibly higher. The most significant of the Company's 1999 capital
expenditure projects are expected to be the conversion from 6-inch to 8-inch and
expansion at one of its front-end wafer fabrications plants in Agrate, Italy,
the increase of capacity of the 8-inch facilities in Catania, Italy, the
completion of construction of its new 8-inch front-end wafer fabrications
facility in Rousset, France, the conversion of its facilities in Crolles, France
to 0.25 micron and 0.18 micron processes, the increase of capacity of the 8-inch
facilities in Phoenix, Arizona and the expansion of the back-end facilities in
Muar and Morocco. 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 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 announcements by competitors.
In 1994, the Company created a joint venture with a subsidiary of the
Shenzhen Electronics Group ("SEG") that built and equipped a back-end
manufacturing facility mentioned above in the Futian free-trade zone of Shenzhen
in southern China. STMicroelectronics owns a 60% interest in the joint venture,
with a subsidiary of SEG owning the remaining 40%. Construction of the plant and
equipment installation was completed in 1996 as scheduled and production started
at the end of 1996. The joint venture will have invested approximately $150
million in the project by the end of 1999. SEG is a diversified export-oriented
electronics company controlled by the Shenzhen Municipal Government that
manufactures communications equipment, computers and electronic products and
components and engages in import-export trading, financial investment management
and real estate.
Although each fabrication plant is dedicated to specific processes, the
Company's strategy is to develop local presences, better serve customers and
mitigate manufacturing risks by having key processes operated in different
manufacturing plants. The Company is also seeking to take advantage of current
industry overcapacity by qualifying subcontractors on a limited basis both for
wafer foundry and back-end services and thereby minimizing its capital
expenditure needs.
The Company's manufacturing processes are highly complex, require
advanced and costly equipment and are continuously being modified in an effort
to improve yields and product performance. Impurities or other difficulties in
the manufacturing process can lower yields, interrupt production or result in
losses of products in process. As system complexity has increased and sub-micron
technology has become more advanced, manufacturing tolerances have been reduced
and requirements for precision have become even more demanding. Although the
Company's increased manufacturing efficiency has been an important factor in its
improved results of operations, the Company has from time to time experienced
production difficulties that have caused delivery delays and quality control
problems, as is common in the semiconductor industry. No assurance can be given
that the Company will be able to increase manufacturing efficiency in the future
to the same extent as in the past or that the Company will not experience
production difficulties in the future.
STMicroelectronics is fostering a corporate-wide TQM culture that
defines a common set of objectives and performance measurements for employees in
all geographic regions, at every stage of product design, development,
production and consignment for all product lines. TQM in STMicroelectronics is
based on five key principles:
33
<PAGE>
management commitment, employee empowerment, continuous improvement, management
by fact and customer focus. TQM has become an integral part of the
STMicroelectronics' culture and it is designed to develop a self-directed work
force with a common set of values, objectives and problem-solving processes.
Since 1987, the Company has improved average AIQ (electrical) status levels from
5,000 ppm to 14 ppm at the end of 1998. The Company uses through-the-wall
mounted equipment for clean rooms to reduce the risk of wafer contamination from
equipment. The Company also uses robot confinement systems to reduce the risk of
wafer contamination. The Company's CIM systems provide management with real time
data on all aspects of the performance of its manufacturing systems. Most of the
Company's manufacturing facilities have been certified to conform to ISO
international quality standards. Several major customers, including
Hewlett-Packard, Nokia, Sharp, Chrysler and Sanyo, have recognized
STMicroelectronics' commitment to quality and have honored the Company with
quality awards in the recent past. In September 1997, the Company was awarded
the 1997 European Quality Award For Business Excellence in the category of large
business by the EFQM.
STMicroelectronics' manufacturing processes use many raw materials,
including silicon wafers, lead frame, mold compound, ceramic packages and
chemicals and gases. The Company obtains its raw materials and supplies from
diverse sources on a just-in-time basis. Although supplies for the raw materials
used by the Company are currently adequate, shortages could occur in various
essential materials due to interruption of supply or increased demand in the
industry.
The Company has principal executive offices located in the vicinity of
Geneva Airport at Route de Pre-Bois 20, ICC Bloc A, 1215 Geneva 15, Switzerland
and at Technoparc du Pays de Gex-BP112, 165 rue Edouard Branly, 01637 St. Genis
Pouilly, France. The latter office is maintained by the Company's French
subsidiary. The Company's corporate seat is in Amsterdam, The Netherlands. The
Company also operates nine research and development centers and 31 design
centers. The Company maintains regional sales headquarters in Geneva,
Switzerland, Boston, Massachusetts, Singapore and Tokyo, Japan, and has 62 sales
offices in 24 countries throughout Europe, North America, Japan, the Asia
Pacific region and Region Five. In general, the Company owns its manufacturing
facilities and leases most of its sales offices.
As is common in the semiconductor industry, the Company has from time to
time experienced difficulty in ramping up production at new facilities or
effecting transitions to new manufacturing processes and, consequently, has
suffered delays in product deliveries or reduced yields. There can be no
assurance that the Company will not experience manufacturing problems in
achieving acceptable yields, product delivery delays or interruptions in
production in the future as a result of, among other things, capacity
constraints, construction delays, ramping up production at new facilities,
upgrading or expanding existing facilities, changing its process technologies,
or contamination or fires, storms, earthquakes or other acts of nature, any of
which could result in a loss of future revenues. In addition, the development of
larger fabrication facilities that include 8-inch or larger capabilities and
require 0.25 micron or smaller technology has increased the potential for losses
associated with production difficulties, imperfections, or other causes of
defects. In the event of an incident leading to an interruption of production at
a fab, the Company may not be able to shift production to other facilities on a
timely basis or the customer may decide to purchase products from other
suppliers, and in either case the loss of revenues and impact on the Company's
relationship with its customers could be significant. The Company's operating
results could also be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capacity if revenues do
not increase commensurately.
Item 3: Legal Proceedings
As is the case with many companies in the semiconductor industry, the
Company has from time to time received communications alleging possible
infringement of certain intellectual property rights of others. Irrespective of
the validity or the successful assertion of such claims, the Company could incur
significant costs with respect to the defense thereof which could have a
material adverse effect on the Company's results of operations or financial
condition.
34
<PAGE>
The Company is currently involved in certain legal proceedings; however,
the Company does not believe that the ultimate resolution of pending legal
proceedings will have a material adverse effect on its financial condition.
The public prosecutor in Catania, Italy commenced a criminal
investigation into alleged unauthorized use of public funds for research and
development. Based on a report from a panel of experts appointed by the public
prosecutor, the prosecutor issued a request for indictment in June 1997 against
the 11 members of the Board of Directors of the research and development
consortium Corimme, in which the Company's Italian subsidiary
("STMicroelectronics Italy") has a two-thirds voting interest (the remaining
one-third interest is held by the University of Catania). The people indicted
included eight employees or ex-employees of STMicroelectronics Italy and three
professors of the University of Catania.
Following the request for indictment, the 11 members of Corimme's Board
of Directors filed an incidente probatorio in December 1997, requesting the
appointment of a panel of independent experts to verify the assertions made by
the public prosecutor's experts. During a hearing on March 25, 1998, the judge
for the preliminary hearing accepted the incidente probatorio and named a panel
of independent experts. The college of independent experts, in their public
report filed with the court in February 1999, concluded that not only were the
accusations formulated by the public prosecutor concerning the use of public
funds for research and development unfounded, but also that the research and
development performed by Corimme had been very wide ranging, complex, as well as
fully in line with requirements for the public funding received. The court will
now hold hearings to make a decision on the pursuit of charges against the 11
indicted persons in light of the report from the independent college of experts.
In parallel, the tax authorities in Catania had issued proceedings
against Corimme for alleged unauthorized VAT deductions and irregular invoicing
for the years 1988 to 1993, and the tax authorities in Milan had issued
proceedings against STMicroelectronics Italy for alleged VAT infringements
during the years 1990 to 1994 and income tax infringements during the years 1990
to 1992 for invoicing for allegedly noneligible production services performed by
Corimme for the account of STMicroelectronics Italy.
In a final ruling in March 1999, the Commissione Tributaria Centrale
confirmed the previous decisions favorable to Corimme entered by the Commissione
Tributaria Provinciale and the Commissione Tributaria Regionale, with respect to
the years 1988 and 1989.
The Commissione Tributaria Provinciale of Catania has ruled in favor of
Corimme with respect to the years 1990 to 1993, in first instance, and the
Commissione Tributaria Provinciale of Milan has ruled in favor of
STMicroelectronics Italy with respect to VAT claims for the years 1990 to 1994.
Presently, appeals are pending before the Commissione Tributaria Regionale.
The Commissione Tributaria Provinciale of Milan has also ruled in favor
of STMicroelectronics Italy on the various income tax proceedings for the period
1990-1992. The tax authorities have accepted these rulings by waiving their
right of appeal.
The Company's management believes that Corimme's contractual and other
requirements have been honored in all material respects in accordance with the
requirements and with applicable financial procedures provided by the Italian
government and has no grounds to suspect malfeasance. The Company has cooperated
fully with the authorities in the conduct of the inquiry. Although it remains
impossible to determine with certainty the ultimate outcome of the remaining
ongoing investigations, management believes the investigations will not have a
material effect on the financial condition or results of operations of the
Company.
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<PAGE>
Item 4: Control of Registrant
Principal Shareholders
The following table sets forth certain information with respect to the
ownership of the Company's Common Shares as of June 10, 1999.
Shareholders Common Shares Owned (1)
- ------------ -----------------------
Number(2) %
---------- ----
STMicroelectronics Holding II B.V. ("ST Holding II").....79,863,880 55.9
- --------------
(1) Prior to the offer and sale of Common Shares by the Company and ST
Holding II, completed on June 10, 1998 (the "Share Offering"), ST
Holding II held 68.9% of the outstanding Common Shares of the
Company. Simultaneously with the Share Offering, the Company offered
and sold $513,852,000 principal amount at maturity Liquid Yield
OptionTM Notes (the "Notes") convertible, subject to certain
conditions, into Common Shares at a conversion rate of 8.952 Common
Shares per $1,000 principal amount at maturity. Assuming all Notes
are converted, ST Holding II will own 54.2% of the outstanding
Common Shares. These calculations do not give effect to Common
Shares that may be issued under the Employee Stock Plan or pursuant
to options granted to members and professionals of the Supervisory
Board.
(2) On June 16, 1999, the Company effected a 2:1 stock split.
ST Holding is 50% owned by a group of French shareholders that are
indirectly controlled by the French government and 50% owned by a group of
Italian shareholders that are indirectly controlled by the Italian government.
The group of French shareholders is comprised of France Telecom, the French
state-controlled telephone company, and CEA-Industrie, a corporation controlled
by the French atomic energy commission, who hold through FT1CI. The group of
Italian shareholders is represented by MEI-Microelettronica Italiana s.r.l.
("MEI"), an Italian holding company owned by Istituto per la Ricostruzione
Industriale-IRI S.p.A. ("I.R.I."), the holding company for Italian state-owned
industrial and commercial interests, and Comitato per l'intervento nella SIR ed
in settori ad alta tecnologia ("Comitato SIR"). As of June 18, 1999, the
interest previously held by Comitato SIR was transferred to Ministero del Tesoro
del Bilancio e della Programmazione Economica-Dipartimento del Tesoro, the
Italian Ministry of Treasury. The shares of France Telecom are listed on the
ParisBourse and the New York Stock Exchange. Certificats d'investissement of
CEA-Industrie are listed on the ParisBourse.
The officers and directors of the Company as a group do not own a
material number of Common Shares.
The chart below illustrates the current shareholding structure as of
June 10, 1999:
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<PAGE>
This information was represented by an organizational chart in the
original document.
Description of Shareholding Structure: STMicroelectronics N.V. is owned
55.9% by STMicroelectronics Holding II B.V. and 44.1% by the public.
STMicroelectronics Holding II B.V. is a wholly-owned subsidiary of
STMicroelectronics Holding N.V. which is 50% owned by a group of French
shareholders and 50% owned by a group of Italian shareholders. The French
shareholder, FT1CI, is owned 51% by CEA-Industrie and 49% by France Telecom,
respectively. The Italian shareholder, MEI, is owned 50.1% and 49.9% by I.R.I.
and Comitato SIR(1), respectively.
- --------------
(1) As of June 18, 1999, the interest previously held by Comitato SIR was
transferred to Ministero del Tesoro del Bilancio e della Programmazione
Economica-Dipartimento del Tesoro, the Italian Ministry of the Treasury.
Shareholder Agreements
In connection with the formation of the Company, Thomson-CSF and STET,
as shareholders of the Company, entered into a shareholders agreement on April
30, 1987. In connection with the formation of ST Holding in 1989, which
coincided with the acquisition by Thorn EMI of its interest in the Company, the
shareholders agreement (as amended, the "Holding Shareholders Agreement") was
amended to apply to the parties' ownership in ST Holding. The rights and
obligations of Thomson-CSF and STET under the Holding Shareholders Agreement
were subsequently transferred to or assumed by, as the case may be, FT2CI for
Thomson-CSF, and Finmeccanica and MEI for STET. In connection with the transfer
by Finmeccanica of its interest in ST Holding to MEI, the rights and obligations
of Finmeccanica under the Holding Shareholders Agreement were subsequently
transferred to or assumed by, as the case may be, MEI.
The Holding Shareholders Agreement contemplates that the parties shall
agree upon common proposals and jointly exercise their powers of decision and
their full control of the strategies and actions of ST Holding and the Company.
Under the Holding Shareholders Agreement, the Supervisory Board of ST Holding,
which is composed of three representatives of the French Owner and three
representatives of the Italian Owner, must give its prior approval before ST
Holding, the Company, or any subsidiary of the Company may: (i) modify its
articles of incorporation; (ii) change its authorized share capital, issue,
acquire or dispose of its own shares, change any shareholder rights or issue any
instruments granting an interest in its capital or profits; (iii) be liquidated
or dispose of all or a substantial and material part of its assets or any shares
it holds in any of its subsidiaries; (iv) enter into any merger, acquisition or
joint venture agreement (and, if substantial and material, any agreement
relating to intellectual property) or form a new company; (v) approve such
company's draft consolidated balance sheets and financial statements or any
profit
37
<PAGE>
distribution by such company; or (vi) enter into any agreement with any of the
direct or indirect French or Italian Owners outside the normal course of
business. The Holding Shareholders Agreement also provides that long-term
business plans and annual budgets of the Company and its subsidiaries, as well
as any significant modifications thereto, shall be approved in advance by the
Supervisory Board of ST Holding. In addition, the Supervisory Board of ST
Holding shall also decide upon operations of exceptional importance contained in
the annual budget even after financing thereof shall have been approved.
Such agreement also provides that similar and adequate levels of
research, development and technological innovation shall be achieved by the
Company and its subsidiaries in France and Italy and that there shall be no
substantial discrepancy in the percentage of state financing compared to
research, development and technological innovation expenditures by the Company
and its subsidiaries in each such country. See "Item 1: Description of
Business--State Support for the Semiconductor Industry." Pursuant to the terms
of the Holding Shareholders Agreement, ST Holding is not permitted, as a matter
of principle, to operate outside the field of semiconductor products. The
parties to the Holding Shareholders Agreement also undertake to refrain directly
or indirectly from competing with the Company in the area of semiconductor
products, subject to certain exceptions, and to offer the Company opportunities
to commercialize or invest in any semiconductor product developments by them.
Any financing or capital provided by the parties to ST Holding or the Company is
intended to be provided pro rata based on the parties' respective shareholdings
in ST Holding. In the Holding Shareholders Agreement, the parties state that it
is of the utmost importance that the French and Italian governments grant
sufficient and continuous financial support for research and development, and
undertake to take suitable actions with a view to obtaining such funding. See
"Item 1: Description of Business--State Support for the Semiconductor Industry."
In the event of a disagreement that cannot be resolved between the
parties as to the conduct of the business and actions contemplated by the
Holding Shareholders Agreement, each party has the right to offer its interest
in ST Holding to the other, which then has the right to acquire, or to have a
third party acquire, such interest. If neither party agrees to acquire or have
acquired the other party's interest, then together the parties are obligated to
try to find a third party to acquire their collective interests, or such part
thereof as is suitable to change the decision to terminate the agreement. The
Holding Shareholders Agreement otherwise terminates in the event that one of the
parties thereto ceases to hold shares in ST Holding.
Pursuant to the terms of the Holding Shareholders Agreement and for the
duration of such agreement, FT2CI (the "French Owner"), on the one hand, and MEI
(the "Italian Owner"), on the other hand, have agreed to maintain equal
interests in the share capital of ST Holding and maintain, together, ownership
of the majority of ST Holding's issued voting shares. As a result of the merger
of FT1CI and FT2CI, the rights and obligations of FT2CI under the Holdings
Shareholders Agreement have been transferred to FT1CI. The admission of a third
party to the share capital of ST Holding, whether through the sale of ST
Holding's outstanding shares or through the issue by ST Holding of new shares,
or by any other means, must be unanimously agreed upon. In the event of a new
shareholder, the parties undertake to ensure that the balance between the French
and Italian shareholdings is maintained until at least December 31, 1998.
Pursuant to a Memorandum of Understanding dated February 24, 1998, the
arrangements set forth in the Holding Shareholders Agreement were extended until
at least December 31, 1998. The Company has also been informed that the
Shareholders Agreement between FT1CI and Thomson-CSF relating to the management
of their respective holdings in ST Holding and the Company terminated on October
6, 1997.
The Company has been informed that the shareholders of FT1CI have also
entered into a separate shareholder agreement that requires the consent of the
Board of Directors of each such company to certain actions taken by ST Holding,
the Company and its subsidiaries. These agreements provide for the management of
the interests of CEA-Industrie and France Telecom in ST Holding and the
Company, with the object of defining between them the positions, strategies and
decisions to be taken by the French Owner in ST Holding affecting the management
of ST Holding, and the Company and its subsidiaries. The Company is not a party
to such agreement.
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<PAGE>
The agreement between the shareholders of FT1CI (CEA-Industrie and
France Telecom) provides that the following acts with respect to ST Holding or
the Company must be approved by three-quarters of the Board of Directors of
FT1CI (which consists of five directors, three of whom are chosen by
CEA-Industrie and two of whom are chosen by France Telecom): (i) any
modification of the articles of association of ST Holding or the Company, (ii)
any change in the capital of ST Holding or the Company, or issuance, purchase or
sale by ST Holding or the Company of their shares or rights attached thereto, or
the issuance of any securities giving rights to a share in the capital or
profits of ST Holding or the Company, (iii) the liquidation or dissolution of ST
Holding or the Company or the sale of all or an important and material part of
the business or assets of ST Holding or the Company representing at least
$10,000,000 of the consolidated shareholders' equity of the Company, (iv) any
merger, acquisition, partnership in interest or the execution of any material
agreement relating to intellectual property rights, in each case in which ST
Holding or the Company participates or in which a proposal is made to
participate, or the establishment by ST Holding or the Company of new companies
or groups, (v) approval of the balance sheets and consolidated accounts of ST
Holding, the Company and its subsidiaries as well as the policies of
distributions of profits among the group, (vi) any agreement between ST Holding
and/or the Company and the shareholders of FT1CI which is out of the ordinary
course of business, (vii) the approval of, or material modifications to,
shareholders agreements with the Italian Owner with respect to ST Holding or the
Company and (viii) approval of strategic multi-year plans and annual
consolidated budgets of ST Holding and the Company. Transfers of shares in FT1CI
to third parties are subject to the approval of at least four members of the
Board of Directors, and are subject to a right of first refusal of the other
shareholders, as well as other provisions. In the event CEA-Industrie proposes
to sell its interest in FT1CI, in whole or in part, France Telecom has the right
to require the acquirer to purchase its interest as well. The FT1CI shareholders
agreement terminates upon the termination of FT1CI.
As is the case with other companies controlled by the French Government,
the French Government has appointed a Commissaire du Gouvernement and a
Controleur d'Etat for FT1CI. Pursuant to Decree No. 94-214, dated March 10,
1994, these Government representatives have the right (i) to attend any board
meeting of FT1CI, and (ii) to veto any board resolution or any decision of the
president of FT1CI within 10 days of such board meeting (or, if they have not
attended the meeting, within 10 days of the receipt of the board minutes or the
notification of such president's decision); such veto lapses if not confirmed
within one month by the Ministry of the Economy or the Ministry of Industry.
FT1CI is subject to certain points of the arrete of August 9, 1953 pursuant to
which the Ministry of the Economy and any other relevant ministries (a) have the
authority to approve decisions of FT1CI relating to budgets or forecasts of
revenues, operating expenses and capital expenditures, and (b) may set
accounting principles and rules of evaluation of fixed assets and amortization.
In connection with the Initial Public Offering, ST Holding II and the
Company entered into a registration rights agreement pursuant to which the
Company agreed that, upon request from ST Holding II, the Company will file a
registration statement under the Securities Act of 1933, as amended, to register
Common Shares held by ST Holding II, subject to a maximum number of five
requests in total as well as a maximum of one request in any twelve-month
period. Subject to certain conditions, the Company will grant ST Holding II the
right to include its Common Shares in any registration statements covering
offerings of Common Shares by the Company. ST Holding II will pay a portion of
the costs of any requested or incidental registered offering based upon its
proportion of the total number of Common Shares being registered, except that ST
Holding II will pay any underwriting commissions relating to Common Shares that
it sells in such offerings and any fees and expenses of its separate advisors,
if any. Such registration rights agreement will terminate upon the earlier of
December 15, 2004 and such time as ST Holding II and its affiliates own less
than 10% of the Company's outstanding Common Shares.
The French and Italian shareholders of ST Holding have agreed in the
Memorandum of Understanding dated February 24, 1998, which has not been
modified, to continue to manage their interest in the Company through ST Holding
until at least December 31, 1998, and accordingly, for so long as they hold
their interests in ST Holding, they have undertaken (i) to jointly hold 100% of
ST Holding's capital and voting rights, (ii) to maintain equality between the
shareholdings of the French and Italian shareholders, (iii) to ensure that ST
Holding maintains more than 50% of the Company's share
39
<PAGE>
capital and voting rights, and (iv) to jointly exercise their decision-making
powers and monitor strategies and actions as part of ST Holding's management
bodies.
On May 31, 1999, the Company's shareholders at the annual general
meeting approved the creation of 180,000,000 Preference Shares. These Preference
Shares entitle a holder to full voting rights at any meeting of shareholders and
to a preferential right to dividends. On May 31, 1998, the Company entered into
an option agreement with ST Holding II, which provides that Preference Shares
shall be issued to ST Holding II upon request subject to the adoption of a
resolution of the Supervisory Board of the Company recognizing that a hostile
takeover or similar action exists and giving its consent to the exercise of the
option and upon payment of at least 25% of the par value of the Preference
Shares to be issued. The option is contingent upon ST Holding II retaining at
least 33% of the issued share capital of the Company.
Item 5: Nature of Trading Market
Common Shares
Since 1994, the Common Shares have been traded on the New York Stock
Exchange under the symbol "STM" and on the ParisBourse and were quoted on SEAQ
International. On June 5, 1998, the Common Shares were also listed for the first
time on the Italian Stock Exchange, where they have been traded since that date.
The Common Shares have been included in the CAC 40, the principal index
published by the SBF-ParisBourse, since November 12, 1997. The CAC 40 is derived
daily by comparing the total market capitalization of 40 stocks included in the
monthly settlement market of the ParisBourse to a baseline established on
December 31, 1987. Adjustments are made to allow for expansion of the sample due
to new issues. The CAC 40 indicates the trends in the French stock market as a
whole and is one of the most widely followed stock price indices in France.
The table below indicates the range of the high and low prices in U.S.
dollars for the Common Shares on the New York Stock Exchange and the high and
low prices in euros for the Common Shares on the ParisBourse during each quarter
in 1997, 1998 and to date 1999. In December 1994, the Company completed the
Initial Public Offering of 21,000,000 Common Shares at an initial price to the
public of $22.25 per share. On June 16, 1999, the Company effected a 2:1 stock
split. The table below has been adjusted to reflect the split.
40
<PAGE>
<TABLE>
<CAPTION>
New York Stock Exchange ParisBourse
Price per Common Share Price per Common Share(1)
------------------------- ---------------------------------
Calendar Period High Low High Low
- --------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1997
First quarter..................... $ 40-7/16 $ 31-7/8 Euro 33.39 Euro 26.91
Second quarter.................... $ 44 $ 31-1/4 Euro 37.66 Euro 28.06
Third quarter..................... $ 49-17/32 $ 40-9/32 Euro 47.79 Euro 35.83
Fourth quarter.................... $ 47 $ 25-3/4 Euro 43.07 Euro 23.87
1998
First quarter..................... $ 39-3/8 $ 25-5/8 Euro 37.24 Euro 23.63
Second quarter.................... $ 45-7/8 $ 32-1/4 Euro 42.46 Euro 29.42
Third quarter..................... $ 36-1/4 $ 22 Euro 33.26 Euro 18.37
Fourth quarter.................... $ 41-7/16 $ 17-15/16 Euro 34.99 Euro 15.02
1999
First quarter..................... $ 53-13/16 $ 40-1/4 Euro 48.50 Euro 34.40
Second quarter (through June 23).. $ 72-1/2 $ 49 Euro 67.95 Euro 44.50
<FN>
- --------------
(1) For periods prior to January 1, 1999, the share prices on the ParisBourse
have been converted into euros at the official exchange rate of Euro
1.00 = FRF 6.55957.
</FN>
</TABLE>
At December 31, 1998, there were 142,478,106 Common Shares issued and
outstanding, of which 14,331,742 or 10.05% were registered in the Common Share
registry maintained on the Company's behalf in New York.
Since June 5, 1998, the Common Shares have also been listed on the
Italian Stock Exchange. The table below indicates the range of high and low
prices in euros for the Common Shares on the Italian Stock Exchange, as adjusted
for the 2:1 stock split.
Calendar Period Italian Stock Exchange
Price per Common Share(1)
---------------------------------
High Low
------------ --------------
1998
Second quarter (since June 5, 1998)..... Euro 32.79 Euro 30.38
Third quarter........................... Euro 32.53 Euro 19.92
Fourth quarter.......................... Euro 34.77 Euro 15.73
1999
First quarter........................... Euro 46.53 Euro 34.96
Second quarter (through June 23)........ Euro 67.23 Euro 45.94
- --------------
(1) For periods to January 1, 1999, the share prices on the Italian Stock
Exchange have been converted into euros at the official exchange rate of
Euro 1.00 = Lit. 1,936.27.
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<PAGE>
Dividends
On May 31, 1999, the Company's shareholders approved the payment of a
cash dividend with respect to the year ended December 31, 1998 of $0.16 per
Common Share payable as of June 15, 1999 to shareholders of record on June 1,
1999.
Liquid Yield OptionTM Notes
The Liquid Yield OptionTM Notes ("LYONs") of the Company are traded on
the New York Stock Exchange and the ParisBourse. The table below indicates the
range of the high and low prices on the New York Stock Exchange and the high and
low prices for the LYONs on the ParisBourse, in both cases as a percentage of
principal amount at maturity, during each quarter in 1998 and to date in 1999.
<TABLE>
<CAPTION>
New York Stock Exchange ParisBourse
Price per LYON Price per LYON
------------------------ ------------------------
Calendar Period High Low High Low
- --------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1998
Second quarter (since June 5, 1998)... 85-1/8% 83-1/2% 99% 85.5%
Third quarter......................... 85-1/8% 80% 88.5% 72.1%
Fourth quarter........................ 83% 80% 89% 75%
1999
First quarter.......................... 94% 84% 97.5% 90%
Second quarter (through June 23)....... 130% 94% 122.1% 101.3%
</TABLE>
ParisBourse
The securities of most large public companies are listed on the
Premier Marche with the Second Marche available for small and medium-sized
companies. Both the Premier Marche and the Second Marche are operated by the
SBF-ParisBourse (the "SBF"). Securities are also traded on the Marche Libre-OTC
which is also operated by the SBF.
The Common Shares are listed on the Premier Marche. Shares listed on
the ParisBourse are placed in one of four categories depending on the volume of
transactions. The Common Shares are listed in the category known as Continu A,
which includes the most actively traded shares (with a minimum daily trading
volume of FF250,000 or twenty trades).
Official trading of listed securities on the ParisBourse is transacted
through providers of investment services (investment companies and other
financial institutions) and takes place continuously on each business day from
10:00 a.m. to 5:00 p.m., with a pre-opening session from 8:30 a.m. to 10:00 a.m.
Any trade effected after the close of a stock exchange session will be recorded,
on the next ParisBourse trading day, at the closing price for the relevant
security at the end of the previous day's session. The SBF publishes a daily
Official Price List that includes price information on each listed security. The
ParisBourse has introduced continuous trading by computer for most listed
securities.
Trading in the listed securities of an issuer may be suspended by the
SBF if quoted prices exceed certain price limits defined by the regulations of
the SBF. In particular, if the quoted price of a Continu A security varies by
more than 10 percent from the previous day's closing price, trading may be
suspended for up to 15 minutes. Further suspensions for up to 15 minutes are
also possible if the price again varies by more than five percent. The SBF may
also
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<PAGE>
suspend trading of a listed security in certain other limited circumstances,
including, for example, the occurrence of unusual trading activity in such
security.
Trades of securities listed on the Premier Marche of the ParisBourse
are settled in either of two ways: in the cash settlement market or the monthly
settlement market. The Common Shares are settled in the marche a reglement
mensuel (monthly settlement market). In the monthly settlement market, the
purchaser may elect to settle on the third trading day following the trade
(reglement immediat or immediate settlement) or decide on the determination date
(date de liquidation), which is the fifth trading day prior to the end of the
month) either (i) to settle the trade no later than on the last trading day of
such month or (ii) upon payment of an additional fee, to extend to the
determination date of the following month the option either to settle no later
than the last trading day of such month or to postpone further the selection of
a settlement date until the next determination date (a procedure known as
report). Such purchaser may decide to renew its option on each subsequent
determination date upon payment of an additional fee. The majority of
transactions in equity securities on the ParisBourse are settled on the monthly
settlement market. In accordance with French securities regulation, any sale of
shares executed on the monthly settlement market during the month of a dividend
payment date is deemed to occur after payment of the dividend, and the
purchaser's account will be credited with an amount equal to the dividend paid
and the seller's account will be debited in the same amount.
Securities Trading in Italy
The Mercato Telematico Azionario (the "MTA"), the Italian automated
screen-based quotation system on which the Company's Common Shares are listed,
is organized and administered by Borsa Italiana S.p.A. ("Borsa Italiana")
subject to the supervision and control of CONSOB, the public authority charged,
inter alia, with regulating investment companies, securities markets and public
offerings of securities in Italy to ensure the transparency and regularity of
dealings and protect investors. Borsa Italiana was established to manage the
Italian regulated financial markets (including the MTA) as part of the
implementation in Italy of the EU Investment Services Directive pursuant to
Legislative Decree No. 415 of July 23, 1996 (the "Eurosim Decree"). Borsa
Italiana became operative in January 1998, replacing the administrative body
Consiglio di Borsa, and has issued rules governing the organization and the
administration of the Italian stock exchange, futures and options markets as
well as the admission to listing on and trading in these markets. The
shareholders of Borsa Italiana are primarily financial intermediaries.
A five-day rolling cash settlement period applies to all trades of
equity securities in Italy effected on a regulated market. Any person, through
an authorized intermediary, may purchase or sell listed securities following (i)
in the case of sales, deposit of the securities; and (ii) in the case of
purchases, deposit of 100% of such securities' value in cash, or deposit of
listed securities or government bonds of an equivalent amount. No "closing
price" is reported for the electronic trading system, but an "official price",
calculated for each security as a weighted average of all trades effected during
the trading day net of trades executed on a "cross-order" basis, and a
"reference price", calculated for each security as a weighted average of the
last 10% of the trades effected during such day, are reported daily.
If the opening price of a security (established each trading day prior
to the commencement of trading based on bids received) differs by more than 10%
(or such other amount established by Borsa Italiana) from the previous day's
reference price, trading in that security will not be permitted until Borsa
Italiana authorizes it. If in the course of a trading day the price of a
security fluctuates by more than 5% from the last reported sale price (or 10%
from the previous day's reference price), an automatic five minute suspension in
the trading of that security will be declared. In the event of such a
suspension, orders already placed may not be modified or canceled and new orders
may not be processed. Borsa Italiana has the authority to suspend trading in any
security, among other things, in response to extreme price fluctuations. In
urgent circumstances, CONSOB may, where necessary, adopt measures required to
ensure the transparency of the market, orderly trading and protection of
investors.
Italian law requires that trading of equity securities, as well as any
other investment services, may be carried out on behalf of the public only by
registered securities dealing firms and banks (with minor exceptions). Banks and
43
<PAGE>
investment services firms organized in a member nation of the EU are permitted
to operate in Italy provided that the intent of the bank or investment services
firm to operate in Italy is communicated to (i) Bank of Italy and to (ii) Bank
of Italy and CONSOB, respectively, by the competent authority of the member
state. Non-EU banks and non-EU investment services firms may operate in Italy
subject to a specific authorization granted by decree of the Italian Ministry of
Treasury and CONSOB, respectively. The settlement of stock exchange transactions
is facilitated by Monte Titoli.
The settlement of stock exchange transactions is facilitated by Monte
Titoli, a centralized securities clearing system owned by the Banca d'Italia
and certain major Italian banks and financial institutions. Almost all Italian
banks and some registered securities dealing firms have securities accounts with
Monte Titoli. Beneficial owners of shares may hold their interests through
specific deposit accounts with any depositary having an account with Monte
Titoli. Beneficial owners of shares held with Monte Titoli may transfer their
shares, collect dividends, create liens and exercise other rights with respect
to those shares through such accounts.
Participants in Euroclear and Cedelbank may hold their interests in
shares and transfer the shares, collect dividends and exercise their
shareholders' rights through Euroclear and Cedelbank. A holder may require
Euroclear and Cedelbank to transfer its shares to an account of such holder with
an Italian bank or any authorized broker having an account with Monte Titoli.
Item 6: Exchange Controls and Other Limitations
Affecting Security Holders
None.
Item 7: Taxation
The following is a summary of certain tax consequences of the
acquisition, ownership and disposition of the Common Shares based on tax laws of
The Netherlands and the United States as in effect on the date of this annual
report on Form 20-F, and is subject to changes in Netherlands or U.S. law,
including changes that could have retroactive effect. The following summary does
not take into account or discuss the tax laws of any country other than The
Netherlands or the United States, nor does it take into account the individual
circumstances of an investor. Prospective investors in the Common Shares in all
jurisdictions are advised to consult their own tax advisers as to Netherlands,
U.S. or other tax consequences of the purchase, ownership and disposition of the
Common Shares.
Netherlands Taxation
The following summary of Netherlands tax considerations is based on
present Netherlands tax laws as interpreted under officially published case law.
The description is limited to the tax implications for an owner of Common Shares
who is not, or is not deemed to be, a resident of The Netherlands for purposes
of the relevant tax codes (a "non-resident Shareholder" or "Shareholder").
Withholding Tax
Dividends distributed by the Company are subject to a withholding tax
imposed by The Netherlands at a rate of, generally, 25%. The expression
"dividends distributed by the Company" as used herein includes, but is not
limited to:
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<PAGE>
(i) distributions in cash or in kind, deemed and constructive
distributions and repayments of paid-in capital not
recognized for Netherlands dividend withholding tax purposes;
(ii) liquidation proceeds, proceeds of redemption of Common Shares
or, as a rule, consideration for the repurchase of Common
Shares by the Company in excess of the average paid-in
capital recognized for Netherlands dividend withholding tax
purposes;
(iii) the par value of Common Shares issued to a Holder of Common
Shares or an increase of the par value of Common Shares, as
the case may be, to the extent that it does not appear that a
contribution, recognized for Netherlands dividend withholding
tax purposes, has been made or will be made; and
(iv) partial repayment of paid-in capital, recognized for
Netherlands dividend withholding tax purposes, if and to the
extent that there are net profits ("zuivere winst"), unless
the general meeting of shareholders of the Company has
resolved in advance to make such repayment and provided that
the par value of the Common Shares concerned has been reduced
by an equal amount by way of an amendment of the Articles of
Association.
If a Holder of Common Shares is resident in a country other than The
Netherlands and if a double taxation convention is in effect between The
Netherlands and such country, such Holder may, depending on the terms of such
double taxation convention, be eligible for a full or partial exemption from, or
refund of, Netherlands dividend withholding tax.
U.S. Shareholders. Under the Tax Convention of December 18, 1992,
concluded between the United States and The Netherlands (the "Convention"), the
withholding tax on dividends paid by the Company to a resident of the United
States (as defined in the Convention) who is entitled to the benefits of the
Convention under Article 26 may be reduced to 15% pursuant to Article 10 of the
Convention. Dividends paid by the Company to U.S. pension funds and U.S. exempt
organizations may be eligible for an exemption from dividend withholding tax.
Relief/refund Procedure. If the 15% rate, or an exemption in case of a
qualifying U.S. pension fund, is applicable pursuant to the Convention, the
Company is allowed to pay out a dividend under deduction of 15%, or respectively
without any deduction, if, at the payment date, the relevant shareholders have
submitted the duly signed form IB 92 USA, which form includes a banker's
affidavit. Holders of Common Shares through DTC will initially receive dividends
subject to a withholding rate of 25%. An additional 10% of the dividend will be
paid to holders upon receipt by the dividend disbursing agent of notification
from the Participants in DTC that such holders are eligible for the reduced rate
under the Convention. Only where the applicant has not been able to claim full
or partial relief at source, will he be entitled to a refund of the excess tax
withheld. In that case he should mention in the Form IB 92 USA the circumstances
that prevented him from claiming relief at source.
Qualifying U.S. exempt organizations can only ask for a full refund of
the tax withheld by using the Form IB 95 USA, which form also includes a
banker's affidavit.
Income Tax and Corporate Income Tax
A non-resident individual or corporate Shareholder will not be subject
to Netherlands income tax (as opposed to the dividends withholding tax discussed
above) with respect to dividends distributed by the Company on the Common Shares
or with respect to capital gains derived from the sale or disposition of Common
Shares in the Company, provided that:
(a) the non-resident Shareholder does not have an enterprise
or an interest in an enterprise that is, in whole or in part, carried
on through a permanent establishment or a permanent representative in
The
45
<PAGE>
Netherlands and to which enterprise or part of an enterprise, as the
case may be, the Common Shares are attributable; and
(b) the non-resident Shareholder does not have a substantial
interest or a deemed substantial interest in the Company or, in the
event the Shareholder does have such an interest, it forms part of the
assets of an enterprise.
Generally, a Shareholder will not have a substantial interest if he,
his spouse, certain other relatives (including foster children) or certain
persons sharing his household, do not hold, alone or together, whether directly
or indirectly, the ownership of, or certain other rights over, shares
representing five per cent or more of the total issued and outstanding capital
(or the issued and outstanding capital of any class of shares) of the Company or
rights to acquire shares, whether or not currently issued, that represent at any
time (and from time to time) five percent or more of the total issued and
outstanding capital (or the issued and outstanding capital of any class of
shares) of the Company or the ownership of certain profit participating
certificates that relate to five percent or more of the annual profit of the
Company and/or to five percent or more of the liquidation proceeds of the
Company. A deemed substantial interest is present if (part of) a substantial
interest has been disposed of, or is deemed to have been disposed of, on a
non-recognition basis.
Net Wealth Tax
A non-resident individual Shareholder is not subject to Netherlands
net wealth tax with respect to the Shares, provided that the non-resident
Shareholder does not have an enterprise or an interest in an enterprise that is,
in whole or in part, carried on through a permanent establishment or a permanent
representative in The Netherlands and to which enterprise or part of an
enterprise, as the case may be, the Common Shares are attributable.
Corporations are not subject to Netherlands net wealth tax.
Gift and Inheritance Tax
A gift or inheritance of Common Shares from a non-resident Shareholder
will not be subject to a Netherlands gift and inheritance tax, unless:
(a) the non-resident Shareholder at the time of the gift has
or at the time of his death had an enterprise or an interest in an
enterprise that is or was, in whole or in part, carried on through a
permanent establishment or a permanent representative in The
Netherlands and to which enterprise or part of an enterprise, as the
case may be, the Common Shares are attributable; or
(b) in the case of a gift of Common Shares by an individual
Shareholder who at the time of the gift was neither resident nor
deemed to be resident in The Netherlands, the death of such individual
occurs within 180 days after the date of the gift, while such
individual is resident or deemed to be resident in The Netherlands.
United States Taxation
The following discussion is a summary of certain U.S. federal income
tax consequences of the ownership of Common Shares by U.S. Holders, as defined
below. This summary applies only to a beneficial owner of Common Shares (a) who
owns, directly or indirectly, less than 10% of the voting stock of the Company,
(b) who is (i) a citizen or resident of the United States for U.S. federal
income tax purposes, (ii) a U.S. domestic corporation or (iii) otherwise subject
to U.S. federal income taxation on a net income basis in respect of the Common
Shares, (c) who holds the Common Shares as capital assets, (d) whose functional
currency is the U.S. dollar, (e) who is a resident of the United
46
<PAGE>
States and not also a resident of The Netherlands for purposes of the
Convention, (f) who is entitled under the "limitation on benefits" provisions
contained in the Convention to the benefits of the Convention and (g) who does
not have a permanent establishment or fixed base in The Netherlands (a "U.S.
Holder"). Certain holders (including, but not limited to, United States
expatriates, tax-exempt organizations, persons subject to the alternative
minimum tax, securities broker-dealers and certain other financial institutions,
persons holding the Common Shares in a hedging transaction or as part of a
straddle or conversion transaction or holders whose functional currency is not
the U.S. dollar) may be subject to special rules not discussed below. Because
this is a general summary, prospective purchasers are advised to consult their
own tax advisors with respect to the U.S. federal, state, local and applicable
foreign tax consequences of the purchase, ownership and disposition of Common
Shares.
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), the Convention, judicial decisions, administrative pronouncements
and existing and proposed Treasury regulations as of the date hereof, all of
which are subject to change, possibly with retroactive effect.
Dividends
For U.S. federal income tax purposes, the gross amount of
distributions made by the Company with respect to the Common Shares (including
the amount of any Netherlands taxes withheld therefrom) will generally be
includable in the gross income of a U.S. Holder in the year received as foreign
source dividend income to the extent that such distributions are paid out of the
Company's current or accumulated earnings and profits as determined under U.S.
federal income tax principles. To the extent, if any, that the amount of any
such distribution exceeds the Company's current or accumulated earnings and
profits, it will be treated first as a tax-free return of the U.S. Holder's tax
basis in the Common Shares (thereby increasing the amount of any gain or
decreasing the amount of any loss realized on the subsequent sale or disposition
of such Common Shares) and thereafter as capital gain. No dividends received
deduction will be allowed with respect to dividends paid by the Company. The
amount of any distribution paid in Dutch guilders will be equal to the U.S.
dollar value of such Dutch guilders on the date of distribution, regardless of
whether the payment is in fact converted into U.S. dollars at that time. Gain or
loss, if any, realized on the sale or other disposition of such Dutch guilders
will be U.S. source ordinary income or loss. The amount of any distribution of
property other than cash will be the fair market value of such property on the
date of distribution.
Subject to certain limitations, Netherlands taxes withheld from a
distribution at the rate provided in the Convention will be eligible for credit
against a U.S. Holder's U.S. federal income tax liability. Under current Dutch
law, the Company under certain circumstances may be permitted to deduct and
retain from such withholding a portion of the amount that would otherwise be
required to be remitted to the taxing authorities in The Netherlands. This
amount generally may not exceed 3% of the total dividend distributed by the
Company. To the extent that the Company has withheld an amount from dividends
paid to shareholders which it then is not required to remit to any taxing
authority in The Netherlands, such amount in all likelihood would not qualify as
a creditable tax for U.S. tax purposes. The Company will endeavor to provide to
U.S. Holders information concerning the extent to which it has applied the
reduction described above to dividends paid to U.S. Holders. The limitation on
foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by the
Company with respect to the Common Shares will generally constitute "passive
income" or, in the case of certain U.S. Holders, "financial services income."
The rules relating to the determination of the U.S. foreign tax credit are
complex and holders should consult their tax advisors to determine whether and
to what extent a credit would be available. U.S. Holders that do not elect to
claim a foreign tax credit may instead claim a deduction for all foreign taxes
paid in the taxable year.
Sale or Other Disposition of Common Shares
Upon a sale or other disposition of Common Shares, a U.S. Holder will
recognize gain or loss for U.S. federal income tax purposes in an amount equal
to the difference between the amount realized and the U.S. Holder's tax basis
47
<PAGE>
in such Common Shares. Such gain or loss will be capital gain or loss. Any such
gain or loss, if any, will generally be U.S. source gain or loss. In the case of
a U.S. Holder who is an individual, any capital gain generally will be subject
to U.S. federal income tax at preferential rates if specified minimum holding
periods are met.
U.S. Information Reporting and Backup Withholding
Dividend payments with respect to Common Shares and proceeds from the
sale, exchange or redemption of Common Shares may be subject to information
reporting to the Internal Revenue Service ("IRS") and possible U.S. backup
withholding at a 31% rate. Backup withholding will not apply, however, to a
holder who furnishes a correct taxpayer identification number or certificate of
foreign status and makes any other required certification or who is otherwise
exempt from backup withholding. Persons required to establish their exempt
status generally must provide such certification on IRS Form W-9 (Request for
Taxpayer Identification Number and Certification) in the case of U.S. persons
and on IRS Form W-8 (Certificate of Foreign Status) in the case of non-U.S.
persons. Finalized Treasury regulations have generally expanded the
circumstances under which information reporting and backup withholding may apply
for payments made after December 31, 2000. Holders of Common Shares should
consult their tax advisors regarding the application of the information
reporting and backup withholding rules, including the finalized Treasury
regulations.
Amounts withheld as backup withholding may be credited against a
holder's U.S. federal income tax liability, and a holder may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS and furnishing any required
information.
Item 8: Selected Consolidated Financial Data
Reference is made to the information appearing under the caption
"Selected Consolidated Financial Data" on page 27 of the Registrant's 1998
Annual Report, which information is hereby incorporated by reference.
Item 9: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Reference is made to the information appearing under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 28 through 40 of the Registrant's 1998 Annual Report, which
information is hereby incorporated by reference.
Item 9A: Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are changes
in interest rates and foreign currency exchange rates. The Company's exposure to
market risk for changes in interest rates relates primarily to the Company's
investment portfolio and long-term debt obligations.
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 ensures the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. The Company primarily enters into debt obligations to support
general corporate and local purposes including capital expenditures and working
capital needs.
48
<PAGE>
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 time the contract is made until
the time it is settled.
Forward contracts outstanding as of December 31, 1998 have remaining
terms of one to 25 months, maturing mainly during first quarter 1999, and amount
to $342.5 million forward sale of U.S. dollars, $20.1 million forward purchase
of U.S. dollars, $200.4 million forward sale of other foreign currencies, and
$71.8 million forward purchase of other foreign currencies. There were no
foreign currency options outstanding as of December 31, 1998. The principal
currencies covered are the German mark, the Singapore dollar, the Japanese yen,
the French franc, the Swiss franc and the Italian lira.
The Company does not anticipate any material adverse effect on its
financial position, results of operations or cash flow resulting from the use of
these 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, 1998. The information below should be read in
conjunction with Notes 14 and 23 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:
<TABLE>
<CAPTION>
Fair value at
December 31,
1999 2000 2001 2002 2003 Thereafter Total 1998
---- ---- ---- ---- ---- ---------- ---- -------------
(in thousands of U.S. dollars, except percentages)
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents............ $1,100,752 -- -- -- -- -- $1,100,752 $1,100,752
Average interest rate....... 6.63% -- -- -- -- -- 6.63%
Long-term debt:
Fixed rate.................. $45,245 $109,936 $102,460 $77,741 $9,200 $456,527 $801,109 $802,565
Average interest rate....... 4.12% 4.84% 5.29% 5.45% 5.00% 1.91% 3.28%
</TABLE>
Long-term debt by currency:
Amount in Amount in
thousands of thousands of
original currency U.S. dollars
----------------- ------------
U.S. dollar............................. 455,885 $ 455,885
Italian lira (in million lira).......... 383,109 231,752
French franc............................ 552,347 98,628
Other currencies........................ -- 14,844
-----------
Total in U.S. dollars................... $ 801,109
===========
As of December 31, 1997, fixed-rate debt of $415.0 million was
outstanding, with a fair value of $405.4 million, at an average interest rate of
5.19%. Additionally, cash equivalents of $702.2 million were outstanding, at an
average interest rate of 5.64%.
49
<PAGE>
The following table provides information about the Company's foreign
exchange forward contracts at December 31, 1998:
<TABLE>
<CAPTION>
Fair Value
Notional Average in thousands of
Amount(1) Contract Rate U.S. dollars
------------ ------------- ---------------
<S> <C> <C> <C>
Foreign Currency Forward Exchange Contracts to buy (sell)
U.S. dollars for foreign currencies:
Deutsche mark........................................................... (14,000) 1.692 $ (14,050)
Malaysian ringgit....................................................... 4,672 3.796 4,667
French franc............................................................ (120,000) 5.610 (120,504)
Italian lira.............................................................. (115,000) 1,662.102 (115,440)
Singapore dollar........................................................ (78,000) 1.641 (77,391)
---------- ---------
Total net in U.S. dollars............................................... (322,328) $ (322,718)
========= =========
Foreign Currency Forward Exchange Contracts to buy (sell) German marks for
foreign currencies:
U.S. dollar.............................................................. (80,000) 1.702 $ (47,826)
Malaysian ringgit........................................................ 661 2.278 396
French franc............................................................. 6,910 1.016 4,213
------ ----------
Total net in German marks................................................ (72,429)
Total net in U.S. dollars................................................ (43,376) $ (43,217)
==========
Foreign Currency Forward Exchange Contracts to buy (sell) Japanese yen for
foreign currencies:
U.S. dollar............................................................. (150,000) 121.550 $ (1,313)
Italian lira............................................................ 200,000 14.407 1,775
Malaysian ringgit........................................................ 12,000 31.250 101
French franc............................................................ 650,000 21.693 5,736
Singapore dollar........................................................ (2,950,000) 71.686 (25,628)
----------- --------
Total net in Japanese yen............................................... (2,238,000)
Total net in US dollars................................................. (19,461) $ (19,329)
==========
Foreign Currency Forward Exchange Contracts to buy (sell) Swiss francs for
foreign currencies:
U.S. dollar............................................................. 55,001 1.356 $ 40,265
Italian lira............................................................ 1,500 1,218.500 1,107
French franc............................................................ 3,900 4.113 2,856
Singapore dollar........................................................ 277 1.227 199
--------- ---------
Total net in Swiss francs............................................... 60,678
Total net in U.S. dollars............................................... 44,355 $ 44,427
=========
Foreign Currency Forward Exchange Contracts to buy (sell) Italian lira for
foreign currencies (in million lira):
U.S. dollar.............................................................. (200,000) 1,738.979 $ (125,137)
Malaysian ringgit........................................................ 103 425.710 63
Singapore dollar......................................................... 934 1,002.000 559
--------- -----------
Total net in Italian lira................................................ (198,963)
Total net in U.S. dollars............................................... (120,358) $ (124,515)
===========
<FN>
(1) Amounts in thousands of original currency (Italian lira expressed in millions).
</FN>
</TABLE>
50
<PAGE>
The Company also entered into additional forward contracts as of
December 31, 1998, for a countervalue of $19.4 million denominated in various
currencies including pounds sterling, French francs, Spanish pesetas and
European Currency Units, which approximated the fair value of such contracts.
The notional amount of cross-currency contracts outstanding at
December 31, 1997 was $305.2 million, which approximated the fair value of such
contracts. These contracts expired in 1998.
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 shareholders (of whom I.R.I. has the
right to appoint two members and Ministero del Tesoro (following transfer of the
interest previously held by Comitato SIR on June 18, 1999) has the right to
appoint one member). 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.
51
<PAGE>
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 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 60
Bruno Steve Vice Chairman 1989 57
Tom de Waard Member 1998 52
Remy Dullieux Member 1993 48
Riccardo Gallo Member 1997 55
Francis Gavois Member 1998 63
Alessandro Ovi Member 1994 55
Robert M. White Member 1996 60
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
Pixtech Inc. 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 Chairman of
MEI, President of the board of statutory auditors of Alitalia S.p.a. and
Iritecna S.p.a. in liquidazione and member of statutory auditors of Alitalia
Express S.p.A., Stretto di Messina S.p.A. and Sigma S.p.A. He served as the
Chief
52
<PAGE>
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 Stibbe Simont Monahan Duhot, a leading Dutch law firm,
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.
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 is also a member of the board of directors of
Comitato Sir. From 1982 to 1991, he served as Director General at 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 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 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 is currently 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. He currently serves on the boards of Italtel (a Telecom Italia and
Siemens Company), MEI, Sirti, Carnegie Mellon University and Corporation
Development Committee of the Massachusetts Institute of Technology.
Robert M. White was appointed to the Supervisory Board in June 1996.
Mr. White is a University Professor and Department Head at Carnegie Mellon
University and serves as a member of several corporate boards, including those
of Ontrack Data Systems, Inc., and Zilog, 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 science from Massachusetts
Institute of Technology.
The Supervisory Board has established an Audit Committee comprised of
Messrs. Dullieux, Ovi and an independent director, Mr. White, and a Compensation
Committee comprised of the Chairman (Mr. Noblanc), the Vice Chairman (Mr. Steve)
and an independent director (Mr. White).
53
<PAGE>
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 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
54
<PAGE>
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. The Supervisory Board 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.
55
<PAGE>
The executive officers of the Company are:
<TABLE>
<CAPTION>
Years in
Years with Semiconductor
Name Position the Company(1) Industry Age
---- -------- -------------- -------- ---
<S> <C> <C> <C> <C>
Pasquale Pistorio President and Chief Executive Officer 19 35 63
Georges Auguste Corporate Vice President, Total Quality and 12 25 50
Environmental Management
Laurent Bosson Corporate Vice President, Front-end 16 16 56
Manufacturing
Carlo Bozotti Corporate Vice President, Memory Products 22 22 46
Group
Salvatore Castorina Corporate Vice President, Discrete and 17 33 62
Standard ICs Group
Alain Dutheil Corporate Vice President, Strategic Planning 16 29 54
and Human Resources
Pietro Fox Corporate Vice President, European Region 35 41 61
Philippe Geyres Corporate Vice President, Consumer and 15 23 47
Microcontroller Group
Maurizio Ghirga Corporate Vice President, Chief Financial 16 16 61
Officer
Jean-Claude Marquet Corporate Vice President, Asia/Pacific 13 32 57
Region
Pier Angelo Martinotti Corporate Vice President, New Ventures 18 31 58
Group
Joel Monnier Corporate Vice President, Central Research 16 25 53
and Development
Piero Mosconi Corporate Vice President, Treasurer 35 35 59
Richard Pieranunzi Corporate Vice President, Americas Region 18 33 60
Aldo Romano Corporate Vice President, Telecommunications, 33 33 58
Peripherals and Automotive Group
Giordano Seragnoli Corporate Vice President, Back-end 34 36 62
Manufacturing and Subsystems Products Group
Keizo Shibata Corporate Vice President, Japan Region 7 34 62
Enrico Villa Corporate Vice President, Region Five 31 31 58
<FN>
- --------------
(1) Including years with Thomson Semiconducteurs or SGS Microelettronica.
</FN>
</TABLE>
Pasquale Pistorio has more than 35 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
56
<PAGE>
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 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.
Pietro Fox has served as Corporate Vice President, Europe Region since
October 1998. He graduated from the Istituto Industriale A. Rosse in Vicenza in
1957 and studied Electrical Engineering at the Burrough Polytechnic in London.
His professional career started in 1958 at Standard Telephones & Cables (the
English ITT affiliate) where he worked as an Applications Engineer in the
semiconductor field. In 1962, he returned to Italy to work as Product Marketing
Engineer for semiconductors at Raytheon-Elsi SpA. His career in the Product
Marketing sector of SGS Fairchild SpA, the company that subsequently became
STMicroelectronics, began in 1964. In September 1971, he then became Marketing
Manager for North America and was appointed President of the newly created
SGS-Ates Semiconductor Corp. In March 1976, Mr. Fox moved to Germany and became
General Manager of SGS-Thomson Microelectronics GmbH in Munich. In 1997, Mr. Fox
gained increased responsibility in the European Telecom field when he became
Vice President of the Telecom Business Unit for Europe.
57
<PAGE>
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 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.
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.
58
<PAGE>
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.
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 1998 to the members of the
Supervisory Board by the Company was approximately $240,000. The amount of cash
compensation for 1998 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 $7.5 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
1998 under certain group life and medical insurance programs provided by the
Company. The aggregate additional amount set aside by the Company in 1998 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.
59
<PAGE>
Item 12: Options to Purchase Securities from Registrant or Subsidiaries
Stock Option Plans
The following description of the Company's stock options plans does
not include adjustments for the 2:1 stock split effected on June 16, 1999.
As of June 10, 1999, options to purchase up to an aggregate of 18,000
Common Shares were outstanding under the Company's first stock option plan (the
"1989 Stock Option Plan"). Such options are fully vested and are exercisable at
the original issue price, as adjusted to reflect the 40:1 stock split effected
in connection with the Initial Public Offering, of NLG 25 per share. Of such
outstanding options, 8,000 are held by executive officers of the Company as a
group. All options outstanding under the 1989 Stock Option Plan expire 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 5.5 million Common Shares (the "1995 Stock Option Plan"). The Company has
granted a total of 2,495,500 options pursuant to the 1995 Stock Option Plan as
follows:
o The Company granted options to purchase 1,200,000 Common
Shares with an exercise price per Common Share of $36.25,
half of which vested and became exercisable on March 1, 1999
and half of which will vest and become exercisable on March
1, 2000. All such options will expire on March 1, 2004. As of
June 10, 1999, 893,215 options were outstanding.
o The Company granted options to purchase 645,500 Common Shares
with an exercise price per Common Share of $85.375, which
will vest and become exercisable on September 12, 2001 and
will expire on September 12, 2005. As of June 10, 1999,
638,575 options were outstanding.
o The Company granted options to purchase 650,000 Common Shares
with an exercise price per Common Share of $72.1875, which
will vest and become exercisable on July 28, 2002 and will
expire on July 28, 2006. As of June 10, 1999, 648,265 options
were outstanding.
As of June 10, 1999, of the total options outstanding under the 1995 Stock
Option Plan, 626,050 options 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 to
purchase approximately 72,000 Common Shares of the Company over a period of
three years, beginning in 1996. The following options have been granted:
o The Company granted to members and professionals of the
Supervisory Board options to purchase 33,000 Common Shares
with an exercise price per Common Share of $54.00, which
expire on October 22, 2004. As of June 10, 1999, 23,000
options were outstanding.
o The Company granted to members and professionals of the
Supervisory Board options to purchase 15,000 Common Shares
with an exercise price per Common Share of $85.375, which
expire on September 12, 2005. As of June 10, 1999, 13,500
options were outstanding.
60
<PAGE>
o The Company granted to members and professionals of the
Supervisory Board options to purchase 15,000 Common Shares
with an exercise price per Common Share of $72.1875, which
expire on July 28, 2006. As of June 10, 1999, 15,000 options
were outstanding.
Employee Stock Plan
In 1998, the Company implemented an Employee Stock Plan under which
employees have subscribed for a total of 288,299 Common Shares at a 12% discount
from the public offering price used in the Share Offering ($72.1875 per Common
Share). These Shares were subject to a six-month holding period which expired on
December 10, 1998.
Item 13: Interest of Management in Certain Transactions
One of the Company's key customers is Thomson Multimedia. Thomson
Multimedia and Thomson-CSF were indirect shareholders of the Company until
October 1997 and are both controlled by Thomson S.A. The Company sells a broad
range of products to Thomson Multimedia, including dedicated products,
microcontrollers and semicustom devices, for use in televisions, videocassette
recorders and satellite receiver systems. The Company believes that all of the
products that it sells to Thomson Multimedia are sold on commercial terms no
less favorable to the Company than could be obtained with non-affiliated
parties. The Company has also formed a Groupement d'Interet Economique ("GIE")
with Thomson Multimedia to conduct joint research and development on advanced
television products, including digital television products. The Company and
Thomson Multimedia share equally the funding of the joint venture's designers,
engineers and managers.
The Company has formed a joint venture research and development center
with CNET in the form of a GIE. CNET 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 CNET 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
CNET 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, CNET 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 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 and the related contractual arrangements are in the process of being
finalized.
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--State Support for the Semiconductor Industry."
The shareholders of ST Holding, the corporate parent of the Company's majority
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 totalled $5.6
million in 1998.
61
<PAGE>
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 May 31, 1999, the Company's shareholders approved a 2:1 stock split
and simultaneous redenomination of the par value of each Common Share to
Euro 3.12. The changes became effective June 16, 1999. Shareholders
authorized the creation of 180,000,000 Preference Shares which would entitle a
holder to full voting rights at any meeting of shareholders and to a
preferential right to dividends and designated the Supervisory Board as the
corporate body authorized to issue the Preference Shares. See "Item 4: Control
of Registrant -- Shareholder Agreements." After these changes in the Company's
authorized share capital, its share capital was Euro 1,809,600,000, consisting
of 400,000,000 Common Shares and 180,000,000 Preference Shares of Euro 3.12
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.
Item 19: Financial Statements and Exhibits
With the exception of the items incorporated by reference elsewhere in
this annual report, the 1998 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 NV dated January 25, 1999, appearing on pages
41-56 and 58 of the 1998 Annual Report are incorporated herein by
reference.
62
<PAGE>
<TABLE>
<CAPTION>
Reference Page
------------------------
1998 Annual
Report to
Form 20-F Shareholders
--------- ------------
<S> <C> <C>
Financial Statements:
Report of Independent Accountants for Years Ended
December 31, 1998, 1997 and 1996............................. 58
Consolidated Statement of Income for the Years Ended
December 31, 1998, 1997 and 1996............................. -- 41
Consolidated Balance Sheet as of December 31, 1998 and 1997.. -- 42
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996............................. -- 43
Consolidated Statement of Shareholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996....................... -- 44
Notes to Consolidated Financial Statements................... 45
Financial Statement Schedules:
For each of the three years in the period ended December 31, 1998
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 --
</TABLE>
(b) Exhibits
3.(i) Articles of Association, as amended as of June 16, 1999, of the
Company
10 Option Agreement, signed May 31, 1999 between the Company and
STMicroelectronics Holding II B.V.
21 Subsidiaries of the Company (see Note 3 to the Consolidated Financial
Statements)
23 Consent of PricewaterhouseCoopers NV
Pages 27 to 56 and 58 of the 1998 Annual Report, submitted as a Report
on Form 6-K by STMicroelectronics N.V. on June 30, 1999.
63
<PAGE>
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
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
Kbit......................kilobit
Mbit......................megabit
MCUs......................microcontrollers 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
64
<PAGE>
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 30, 1999
By: /S/ PASQUALE PISTORIO
---------------------------------
Name: Pasquale Pistorio
Title: President and Chief Executive Officer
65
<PAGE>
STMICROELECTRONICS N.V.
VALUATION AND QUALIFYING ACCOUNTS
(Currency - Thousands of U.S. dollars)
<TABLE>
<CAPTION>
Valuation and qualifying accounts deducted Balance as Charged to Balance at
from the related asset accounts beginning Translation costs and end of
of period adjustment expenses Deductions period
---------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
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
1996
Inventories.................................. 36,500 - 45,176 (36,500) 45,176
Accounts Receivable.......................... 17,881 (514) 1,114 (329) 18,152
</TABLE>
S-1
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Supervisory Board of STMicroelectronics NV
Our audits of the consolidated financial statements referred to in our
report dated January 25, 1999 appearing on page 58 of the 1998 Annual
Report to Shareholders of STMicroelectronics NV (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 NV
Amsterdam, The Netherlands
January 25, 1999
S-2
<PAGE>
INDEX TO EXHIBITS
Name Page
---------- ------
3.(i) Articles of Association, as amended as of June 16, 1999,
of the Company
10 Option Agreement, signed May 31, 1999 between the Company and
STMicroelectronics Holding II B.V............................
23 Consent of PricewaterhouseCoopers NV.........................
ARTICLES OF ASSOCIATION:
of:
STMicroelectronics N.V.
established in Amsterdam
dated June 16, 1999
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
<PAGE>
2
thousand euro (EUR 1,809,600,000.--), consisting of four hundred
million (400,000,000) ordinary shares and one hundred eighty million
(180,000,000) preference shares of three euro and twelve eurocents
(EUR 3.12) 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
<PAGE>
3
employees of the company or of a group company. In the
event of an issue of preference shares none of 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.
<PAGE>
4
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 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.
<PAGE>
5
Article 5.
5.1. The company may acquire, for valuable consideration, shares in its own
share capital if and in so far as:
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. Shares thus acquired may again be disposed of. The managing board
shall not acquire shares in the company's own share capital as referred
to above - if an authorization as referred to above is in force - or
dispose of such shares without the prior approval of the supervisory
board. If depositary receipts for shares in the company have been
issued, such depositary receipts shall for the application of the
provisions of this paragraph and the preceding paragraph be treated as
shares.
5.3. 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
<PAGE>
6
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.
5.4. 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.
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
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7
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.
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
<PAGE>
8
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 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
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9
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 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.
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10
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 certificates registered in
his name to the same nominal amount.
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11
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 to vote,
shall not be entitled to the rights which
<PAGE>
12
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
<PAGE>
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.
<PAGE>
14
REPRESENTATION.
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;
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15
2. the formation of all companies, acquisition or sale of any
participation, and conclusion 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
<PAGE>
16
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 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
<PAGE>
17
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 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.
<PAGE>
18
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 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
<PAGE>
19
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 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
<PAGE>
20
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 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,
<PAGE>
21
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 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
<PAGE>
22
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 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
<PAGE>
23
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 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
<PAGE>
24
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 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
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25
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;
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
<PAGE>
26
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 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-
<PAGE>
27
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 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.
<PAGE>
28
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 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
<PAGE>
29
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 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.
<PAGE>
30
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 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
<PAGE>
31
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 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.
<PAGE>
32
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 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
<PAGE>
33
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 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
<PAGE>
34
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 - weigthed 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 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
<PAGE>
35
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 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
<PAGE>
36
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 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
<PAGE>
37
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 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 -
<PAGE>
38
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 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.
<PAGE>
39
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.
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.
OPTION AGREEMENT REGARDING THE ISSUANCE AND
SUBSCRIPTION OF PREFERENCE SHARES IN THE SHARE CAPITAL
OF ST MICROELECTRONICS N.V.
THE UNDERSIGNED:
1. ST Microelectronics N.V., a limited liability company organised under
the laws of the Netherlands, established in Amsterdam, the Netherlands,
hereinafter: "STM";
and
2. ST Microelectronics Holding II B.V., a private company organised under
the laws of the Netherlands, established in Amsterdam, the Netherlands,
hereinafter "HSBV".
WHEREAS:
a. STM and H2BV have held discussions in respect of protecting STM from a
hostile take over or similar actions in order to protect the interest
of STM and of all the shareholders of STM;
b. STM and H2BV hereby wish to enter into an agreement whereby -- subject
to the provisions of this agreement -- an option is granted to H2BV to
acquire shares in the share capital of STM;
c. on May 31, 1999 the supervisory board of STM has been designated by the
general meeting of shareholders of STM as the corporate body authorised
to resolve upon issuance of any number of ordinary shares and/or
preference shares as well as upon granting of rights to subscribe for
any number of ordinary shares and/or preference shares;
d. the supervisory board of STM, upon consultation and in agreement with
the managing board of STM, has resolved on May 31, 1999 to grant to
H2BV the right to subscribe for up to 180,000,000 preference shares in
the share capital of STM (which preference shares were created in the
authorised share capital of STM following the resolutions of the
general meeting of shareholders of STM which were adopted on May 31,
1999), copy of which resolution of the supervisory board of STM on May
31, 1999 is attached to this agreement;
e. the managing board of H2BV has resolved on May 31, 1999, after having
obtained the approval of the supervisory board of ST Microelectronics
Holding N.V. and the approval of the general meeting of shareholders of
H2BV, to enter into this agreement;
<PAGE>
2
HEREBY AGREE AS FOLLOWS:
1. STM hereby grants H2BV the right to acquire such a number of preference
shares in the share capital of STM as H2BV shall desire, with the
understanding that such number shall not exceed 180,000,000, being the
number of preference shares that is presently comprised in the
authorised share capital of STM.
2. H2BV's right to acquire preference shares shall be subject to the prior
approval of the supervisory board of STM as further set out in article
6 of this agreement.
3. Without the prior written consent of H2BV STM shall neither issue
preference shares not grant rights to subscribe for preference shares
to any other party than H2BV.
4. Without the prior written consent of STM H2BV shall not sell or
otherwise dispose of any preference shares and/or the voting rights
attached thereon.
5. If H2BV wishes to make use of its right to acquire preference shares in
any share capital of STM it shall notify the President of the
supervisory board of STM thereof in writing. Such notice, of which a
copy must be sent by H2BV to the managing board of STM, shall specify
the number of preference shares H2BV wishes to acquire and the date as
per which H2BV wishes to acquire those preference shares, such date not
being a date which is earlier than twenty days after the date of the
notice. Upon receipt of the notice the President of the supervisory
board of STM shall procure that three days prior to the date referred
to in the notice of H2BV a resolution shall be adopted by the
supervisory board of STM. If the supervisory board of STM resolves not
to give its consent to the exercise of the option, no preference shares
shall be issued to H2BV and STM shall immediately notify H2BV thereof.
If the supervisory board of STM resolves to give its consent to the
exercise of the option, STM, by the mere fact of such consent, hereby
issues to H2BV the number of preference shares H2BV wishes to acquire
on the date referred to in the notice of H2BV, provided that STM has
received as per such date the amount to be paid upon the issue of the
preference shares.
6. An issue of preference shares pursuant to this agreement shall take
place at a rate of 100% against payment of an amount equal to 25% of
the aggregate par value of the preference shares to be issued. Such
payment will be made in cash.
7. The exercise by H2BV of its right to acquire a certain number of
preference shares which is less than 180,000,000 shall not prevent H2BV
from exercising its right to acquire further preference shares in the
share capital of STM.
<PAGE>
3
8. The exercise by H2BV of its right to acquire preference shares shall
not, after that the consequences thereof have been totally or partially
remedied, prevent H2BV from again exercising such right.
9. If and as soon as H2BV notifies STM in writing of its request thereto,
STM shall take all possible action -- including but not limited to the
convening of a general meeting of shareholders in accordance with the
procedures laid down by its articles of association -- in order to
repurchase or to cancel with repayment the preference shares held by
H2BV, in such a way that such a repurchase or cancellation is effected
as soon as possible but in any event within 6 months after the date of
the request. In the event of a repurchase, the purchase price shall be
equal to the total amount that has been paid on the shares since their
issue.
10. This agreement shall terminate as soon as H2BV shall no longer own at
least 33% of the issued capital of STM. It may also be terminated by
STM and H2BV through the execution of an agreement to that effect by
both parties.
11. This agreement shall be governed by and construed in accordance with
the laws of the Netherlands.
12. Any and all disputes arising in connection with this agreement shall be
finally settled by arbitration in accordance with the rules of the
Netherlands Arbitration Institute (Nederlands Arbitrage Instituut). The
arbitration proceedings shall take place in the English language and
the place of arbitration shall be Amsterdam. The arbitration tribunal
shall consist of three arbitrators and shall decide in accordance with
the rules of law.
Signed in twofold in [ ] on [ ], 1999.
__________________________________ ______________________________________
ST Microelectronics N.V. ST Microelectronics Holding II B.V.
By: P. Pistorio by: ST Microelectronics Holding N.V.
which company is hereby represented by
its managing directors B. Loubert and
L. Acciari
EXHIBIT 23
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 NV of our report dated January 25, 1999
relating to the financial statements, which appears on page 58 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, 1999 relating to the financial statement schedule, which appears in
this Form 20-F.
PRICEWATERHOUSECOOPERS NV
Amsterdam, The Netherlands
June 25, 1999
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, 1998. 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, 1998, 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.
<TABLE>
<CAPTION>
Year ended December 31,
(in millions except per share and ratio data) 1994(1) 1995(1) 1996 1997 1998(1)
Consolidated Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 2,602.2 $ 3,520.7 $ 4,078.3 $ 3,969.8 $ 4,210.6
Other revenues 42.7 33.7 44.1 49.4 37.2
Net revenues 2,644.9 3,554.4 4,122.4 4,019.2 4,247.8
Cost of sales (2) (1,528.7) (2,096.0) (2,414.7) (2,457.4) (2,623.0)
Gross profit (2) 1,116.2 1,458.4 1,707.7 1,561.8 1,624.8
Operating expenses:
Selling, general & administrative (339.9) (413.2) (421.1) (454.3) (488.1)
Research and development (3) (338.3) (440.3) (532.3) (610.9) (689.8)
Restructuring costs (37.0) (13.0) -- -- --
Other income and expenses (3) 32.0 59.1 45.1 23.2 76.5
Total operating expenses (683.2) (807.4) (908.3) (1,042.0) (1,101.4)
Operating income 433.0 651.0 799.4 519.8 523.4
Net interest income (expense) (21.0) (16.8) (11.2) (2.6) 8.7
Gain on disposal of investment -- -- 7.3 -- --
Income before income taxes and
minority interests 412.0 634.2 795.5 517.2 532.1
Income tax expense (49.5) (108.3) (171.6) (113.0) (120.4)
Income before minority interests 362.5 525.9 623.9 404.2 411.7
Minority interests (4) -- 0.6 1.6 2.4 (0.6)
Net income $ 362.5 $ 526.5 $ 625.5 $ 406.6 $ 411.1
Earnings per share (basic) (5) $ 3.04 $ 4.03 $ 4.50 $ 2.92 $ 2.92
Earnings per share (diluted) (5) $ 3.03 $ 4.01 $ 4.49 $ 2.91 $ 2.89
Number of shares used in calculating
earnings per share (basic) 119.4 130.6 138.7 139.1 140.9
Number of shares used in calculating
earnings per share (diluted) 119.7 131.3 139.2 139.9 144.0
Ratio of earnings to fixed charges (6) 10.9 13.2 18.6 13.4 12.7
Consolidated Balance Sheet Data
(end of period):
Cash, cash equivalents and
marketable securities $ 461.5 $ 758.4 $ 556.4 $ 702.2 $ 1,100.7
Working capital (7) 291.1 417.4 611.8 443.5 695.4
Total assets 3,224.7 4,486.0 5,005.5 5,445.7 6,434.0
Short-term debt (including current portion
of long-term debt) 322.5 492.8 428.2 424.6 191.2
Long-term debt (excluding current portion) (1) 277.2 200.7 194.9 356.4 755.8
Shareholders' equity (1) 1,680.0 2,661.7 3,260.0 3,307.4 4,083.3
Consolidated Operating Data:
Capital expenditures (8) $ 779.7 $ 1,001.9 $ 1,125.2 $ 1,035.4 $ 947.3
Net cash provided by operating activities 728.1 825.1 980.7 983.8 1,012.5
Depreciation and amortization (8) 288.0 392.4 535.9 608.1 704.0
<FN>
(1) On June 10, 1998, the Company completed an equity offering of 3,000,000
shares of capital stock at $72.1875 per share (the "Share Offering"). The
net proceeds to the Company in connection with the 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 Option TM Notes due 2008 (the
"LYONs"), with yield to maturity of 1.75% per annum (the "LYONs
Offering"). The net proceeds to the Company in connection with the LYONs
Offering was $421.8 million. In October 1995, the Company completed a
second public offering, with net proceeds to the Company of approximately
$371.6 million. In December 1994, the Company completed the Initial Public
Offering, with net proceeds to the Company of approximately $198.7
million.
(2) Cost of sales is net of certain funds received through government
subsidies for industrialization costs (which include certain costs
incurred to bring prototype products to the production stage) included
therein. See Note 18 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 subsidies 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. The Company's reported research and development expenses do not
include design center, process engineering, pre-production or
industrialization costs.
(4) In 1994, the Company created a joint venture with a subsidiary of the
Shenzhen Electronics Group ("SEG"). The Company owns a 60% interest in the
joint venture, with a subsidiary of SEG owning the remaining 40%. Minority
interests also include other minor investments made by the Company.
(5) 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 2.14 and Note 12 to the Consolidated Financial Statements.
(6) 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.
(7) 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).
(8) Capital expenditures are net of certain funds received through government
subsidies, the effect of which is to decrease depreciation.
</FN>
</TABLE>
- 27 -
<PAGE>
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 June 5, 1998. The Company assumes
no obligation to update the forward-looking statements or such factors.
Overview
The semiconductor industry experienced a severe slowdown in 1998, after a
similar decrease in 1996 and a marginal recovery in 1997. During this period the
Company experienced increased competition and pricing pressure in its core
product markets. According to trade association data, worldwide sales of
semiconductor products (the total available market or "TAM") decreased 8.4% in
1998 over 1997, ending the year below the 1995 level. According to trade
association data, the estimated market for products produced by the Company (the
serviceable available market or "SAM") (which prior to 1995 consisted of the TAM
without DRAMs, microprocessors and opto-electronic products and commencing in
1995 and for all subsequent periods presented includes microprocessors as a
result of the Company's production of x86 products) decreased approximately 5.2%
in 1998 over 1997.
While the semiconductor market in 1998 registered a significant
decrease, the Company's net revenues for 1998 increased 5.7% compared to net
revenues for 1997, benefiting from increased volumes in virtually all product
families and an improved product mix, including sales of new products.
Despite difficult market conditions in recent years, from 1994 to 1998
the Company's net revenues increased from $2,644.9 million to $4,247.8 million,
representing a compound annual growth rate of 12.6%. Such revenue gains were
achieved despite the Company's absence from the market for DRAMs (a commodity
memory product) and, until the second half of 1994, from the market for personal
computer microprocessors (such as the x86 family of products). According to
trade association data, the TAM increased from $101.9 billion in 1994 to $125.6
billion in 1998, representing a compound annual growth rate of 5.4%, while the
SAM increased from $75.2 billion in 1994 to $107.0 billion in 1998, representing
a compound annual growth rate of 9.2%. During the same period, the Company's
share of the TAM increased from 2.6% to 3.4%, while the Company's share of the
SAM increased from 3.5% to 4.0%. The Company's revenue growth from 1994 through
1998 was particularly significant for differentiated ICs (which the Company
defines as being its dedicated products, semicustom devices and
microcontrollers).
As a result of this performance, the Company not only gained market
share against both the TAM and SAM, but, according to leading market analysts,
became the ninth largest semiconductor company in the world during 1998 moving
up from tenth position in 1997. The Company's absence from the DRAM market
partially contributed to the Company's outperformance of the semiconductor
industry during the period presented. 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 62% of the Company's net revenues
in 1998, compared to approximately 57% in 1997. 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 1998, compared to approximately 49% in 1997, while discrete devices
accounted for approximately 13% of the Company's net revenues in 1998 and
approximately 14% in 1997. 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 semi-conductor industry. However,
the difficult competitive environment in the semiconductor market in more recent
years has led to price pressures also in these families.
With the aim of reinforcing 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) and Vision Group
(in the imaging market).
The Company's gross profit margin decreased from 42.2% in 1994 to 38.3%
in 1998. Benefiting from a favorable environment in 1994, 1995 and 1996, the
Company had a stable gross profit margin of above 40%. 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 a solid level of 12%.
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.
- 28 -
<PAGE>
Results of Operations
The tables below set forth information on the Company's net revenues by product
group and by geographic region:
<TABLE>
<CAPTION>
Year ended December 31,
(in millions except percentages) 1994 1995 1996 1997 1998
Net Revenues by Product Group:
<S> <C> <C> <C> <C> <C>
Dedicated Products (1) (2) $ 997.1 $ 1,344.4 $ 1,788.7 $ 1,696.3 $ 1,865.6
Discrete and Standard ICs 636.3 838.0 784.1 846.8 828.7
Memory Products (2) 560.7 653.3 736.8 708.6 659.6
Programmable Products (1) 372.0 550.6 689.5 642.1 783.4
New Ventures Group and Others (3) 78.8 168.1 123.3 125.4 110.5
Total $ 2,644.9 $ 3,554.4 $ 4,122.4 $ 4,019.2 $ 4,247.8
Net Revenues by Geographic Region: (4)
Europe $ 1,187.5 $ 1,593.8 $ 1,788.5 $ 1,753.3 $1,768.9
North America (5) 643.9 812.5 903.0 899.1 937.3
Asia/Pacific 617.6 916.7 1,125.7 1,065.8 1,247.9
Japan 134.7 155.4 228.2 214.5 180.7
Region Five (4) 61.2 76.0 77.0 86.5 113.0
Total $ 2,644.9 $ 3,554.4 $ 4,122.4 $ 4,019.2 $ 4,247.8
As a percentage of net revenues
Net Revenues by Product Group
Dedicated Products (1) (2) 37.7% 37.8% 43.4% 42.2% 43.9%
Discrete and Standard ICs 24.1 23.6 19.0 21.1 19.5
Memory Products (2) 21.2 18.4 17.9 17.6 15.5
Programmable Products (1) 14.0 15.5 16.7 16.0 18.4
New Ventures Group and Others (3) 3.0 4.7 3.0 3.1 2.7
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Net Revenues by Geographic Region: (4)
Europe 44.9% 44.8% 43.4% 43.6% 41.6%
North America (5) 24.3 22.9 21.9 22.4 22.1
Asia/Pacific 23.4 25.8 27.3 26.5 29.4
Japan 5.1 4.4 5.5 5.3 4.3
Region Five (4) 2.3 2.1 1.9 2.2 2.6
Total 100.0% 100.0% 100.0% 100.0% 100.0%
<FN>
(1) In January 1997, analog array products were moved from the Programmable
Products Group to the Dedicated Products Group and image processing
products from the Dedicated Products Group to the Programmable Products
Group. 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 focal point
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.
(5) Substantially all of the revenues derived from North America are derived
from the United States.
</FN>
</TABLE>
- 29 -
<PAGE>
The following table sets forth certain financial data from the Company's
consolidated statements of income since 1994, expressed in each case as a
percentage of net revenues:
<TABLE>
<CAPTION>
Year ended December 31, 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Net sales 98.4% 99.1% 98.9% 98.8% 99.1%
Other revenues 1.6 0.9 1.1 1.2 0.9
Net revenues 100.0 100.0 100.0 100.0 100.0
Cost of sales (57.8) (59.0) (58.6) (61.1) (61.7)
Gross profit 42.2 41.0 41.4 38.9 38.3
Operating expenses:
Selling, general and administrative (12.9) (11.6) (10.2) (11.3) (11.5)
Research and development (12.8) (12.4) (12.9) (15.2) (16.2)
Restructuring costs (1.4) (0.4) -- -- --
Other income and expenses 1.3 1.7 1.1 0.5 1.7
Total operating expenses (25.8) (22.7) (22.0) (26.0) (26.0)
Operating income 16.4 18.3 19.4 12.9 12.3
Net interest income (expense) (0.8) (0.5) (0.3) -- 0.2
Gain on disposal of investment -- -- 0.2 -- --
Income before income taxes & minority interests 15.6 17.8 19.3 12.9 12.5
Income tax expense (1.9) (3.0) (4.2) (2.9) (2.8)
Income before minority interests 13.7 14.8 15.1 10.0 9.7
Minority interests -- -- 0.1 0.1 --
Net income 13.7% 14.8% 15.2% 10.1% 9.7%
</TABLE>
1998 vs. 1997
The Company distinguished itself during 1998 by the solid performance achieved
during an unprecedented downturn in the semi-conductor 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 Dedicated Products Group's net revenues increased 10.0% 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 2.1%, 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 Programmable Products
Group's net revenues increased 22.0% as a result of significantly higher volumes
in digital image processing and graphics products.
- 30 -
<PAGE>
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.
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 subsidies 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 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
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 Share Offering and
the 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. As such benefits may not be available after 1998, the Company
expects an increase in the effective tax rate in the coming years.
1997 vs. 1996
The difficult market environment during 1997 resulted in a decrease in the
Company's net revenues, gross profit, operating income and net income in 1997
compared to 1996. While unit volumes increased substantially in the 1997 period,
average selling prices in 1997 declined compared to 1996.
Net revenues: Net sales decreased 2.7%, from $4,078.3 million in 1996 to
$3,969.8 million in 1997. This decrease originated from difficult market
conditions for certain product families for which supply exceeded demand and
produced strong negative pressures on the Company's selling prices, while in
other product families demand itself declined because of high inventories
accumulated by the Company's customers in previous periods. In general, as is
normal in a situation of excess capacity, memory and commodity products
experienced price declines. In particular, hard disk drives were affected by
decreasing prices due to increased competition both at the system and
semiconductor levels and set-top boxes experienced a slowdown in sales due to
inventory corrections and lower demand. The Company's unit volumes increased
substantially in 1997 compared to 1996, with commodity products (which are
typically more price sensitive than other products in the Company's product
portfolio) constituting a higher proportion of the overall product mix. The
impact of these market conditions was particularly apparent in the Asia Pacific
region and Japan. In addition, since a significant part of the Company's net
revenues was billed in European and Japanese currencies, the strong appreciation
of the U.S. dollar during 1997 resulted in a negative impact on total net
revenues when translated from local currencies into U.S. dollars. Other revenues
increased from $44.1 million in 1996 to $49.4 million in 1997 due primarily to
an increase in licensing revenues. Net revenues decreased 2.5%, from $4,122.4
million in 1996 to $4,019.2 million in 1997.
- 32 -
<PAGE>
The Dedicated Products Group's net revenues fell 5.2% primarily as a
result of price pressure and a less favorable product mix in certain major
products including telecommunication, video and automotive products. Price and
volume declines in computer (hard disk drives) products also contributed to the
revenues decline. In January 1997, analog array products were moved from the
Programmable Products Group to the Dedicated Products Group and image processing
products from the Dedicated Products Group to the Programmable Products Group.
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.
The Discrete and Standard ICs Group's net revenues increased by 8.0%, as
significant volume increases were partly offset by price declines in
substantially all major products including standard commodities and discrete and
power devices. Net revenues of the Memory Products Group declined by 3.8%, as
the sales increases in smartcard ICs (used primarily in European telephone and
bank cards) were more than offset by price declines in the major memory product
families (such as EPROMs, flash memories and EEPROMs) and volume declines in
EPROMs. The Programmable Products Group's net revenues decreased 6.9% as an
improved product mix in digital semicustom devices and higher volumes in
microcontroller products were more than offset by declines in sales of image
processing products and price declines in certain major products.
Gross profit: The Company's gross profit decreased 8.5%, from $1,707.7 million
in 1996 to $1,561.8 million in 1997. As a percentage of net revenues, gross
profit decreased from 41.4% in 1996 to 38.9% in 1997, primarily as a result of
the reduction in average selling prices and a less favorable product mix.
Cost of sales increased slightly from $2,414.7 million in 1996 to
$2,457.4 million in 1997, primarily due to an increase in production volume
related to higher sales volume and higher depreciation charges linked to the
higher level of capital investment.
The exchange rate impact on gross profit in 1997 compared to 1996 was
marginal, as the negative impact of the appreciation of the U.S. dollar on net
revenues was only slightly higher than the positive impact on cost of sales. See
"--Impact of Changes in Exchange Rates." Cost of sales in 1997 and 1996 was net
of $6.2 million and $4.6 million, respectively, of funds received through
government subsidies 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 7.9%, from $421.1 million in 1996 to $454.3
million in 1997, reflecting higher expenditure in the marketing organization and
for information technology. As a percentage of net revenues, selling, general
and administrative expenses increased from 10.2% in 1996 to 11.3% in 1997, due
primarily to the increase in selling, general and administrative expenses and
the decrease in net revenues.
Research and development expenses: Research and development expenses increased
14.8%, from $532.3 million in 1996 to $610.9 million in 1997. The Company
continued to invest heavily in research and development and plans to continue
increasing its research and development staff. The Company is allocating
significant financial resources to expand its market leadership in key
applications, reflecting the commitment to service and continuous innovation. As
a percentage of net revenues, research and development expenses increased from
12.9% in 1996 to 15.2% in 1997. The Company's reported research and development
expenses do not include design center, process engineering, pre-production or
industrialization costs.
Other income and expenses: Other income and expenses decreased from income of
$45.1 million in 1996 to income of $23.2 million in 1997. 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 decrease in other income and expenses resulted primarily from
higher start-up costs of new production facilities and from a decrease in funds
received from government agencies in connection with the Company's research and
development programs.
Operating income: The Company's operating income decreased 35.0%, from $799.4
million in 1996 to $519.8 million in 1997, primarily as a result of the decrease
in net revenues and the increase in research and development expenses, which
more than offset the favorable exchange rate impact.
Net interest income (expense): Net interest expense decreased from $11.2 million
in 1996 to $2.6 million in 1997 reflecting primarily improved cash flow during
1997 and a slight reduction in interest rates.
Income tax expense: Provision for income tax was $113.0 million in 1997 compared
to $171.6 million in 1996, primarily as a result of the substantial decrease in
income before income taxes and minority interests. The accrued effective tax
rate increased slightly from 21.6% in 1996 to 21.8% in 1997. The still favorable
1997 rate was mainly due to the application of favorable tax regimes in certain
countries.
- 32 -
<PAGE>
Quarterly Results of Operations
The following table sets forth certain financial information for the years 1997
and 1998. 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.
<TABLE>
<CAPTION>
Quarter ended (unaudited)
(in millions, except percentages and per share data)
Mar 29, June 28, Sept 27 Dec 31, Apr 4, Jul 4, Oct 3, Dec 31,
1997 1997 1997 1997 1998 1998 1998 1998
Consolidated Statement of Income Data
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 944.9 $ 969.7 $1,000.1 $1,104.4 $1,005.4 $1,070.3 $1,039.4 $1,132.7
Cost of sales (583.8) (595.9) (608.2) (669.5) (620.4) (660.3) (643.7) (698.6)
Gross profit 361.1 373.8 391.9 434.9 385.0 410.0 395.7 434.1
Operating expenses:
Selling, general & administrative (103.0) (113.3) (111.2) (126.7) (119.9) (126.2) (120.1) (121.9)
Research and development (142.2) (151.5) (151.5) (165.7) (166.4) (176.2) (168.0) (179.2)
Other income and expenses (2.4) 6.9 (5.5) 24.3 16.2 17.2 21.4 21.8
Total operating expenses (247.6) (257.9) (268.2) (268.1) (270.1) (285.2) (266.7) (279.3)
Operating income 113.5 115.9 123.7 166.8 114.9 124.8 129.0 154.8
Net interest income (expense) (0.7) (0.7) (0.5) (0.8) (1.1) -- 5.2 4.6
Income before income taxes &
minority interests 112.8 115.2 123.2 166.0 113.8 124.8 134.2 159.4
Income tax expense (23.5) (23.4) (26.5) (39.7) (23.6) (26.7) (32.5) (37.6)
Income before minority interests 89.3 91.8 96.7 126.3 90.2 98.1 101.7 121.8
Minority interests 1.2 0.3 0.9 -- -- (0.6) (0.1) --
Net income $ 90.5 $ 92.1 $ 97.6 $ 126.3 $ 90.2 $ 97.5 $ 101.6 $ 121.8
Earnings per share (basic) $ 0.65 $ 0.66 $ 0.70 $ 0.91 $ 0.65 $ 0.70 $ 0.71 $ 0.86
Earnings per share (diluted) $ 0.65 $ 0.66 $ 0.70 $ 0.90 $ 0.65 $ 0.69 $ 0.70 $ 0.84
Number of shares used in calculating
earnings per share (basic) 139.0 139.1 139.1 139.1 139.1 139.9 142.2 142.2
Number of shares used in calculating
earnings per share (diluted) 139.8 139.8 140.0 139.8 139.8 141.9 147.3 147.4
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 (61.8) (61.5) (60.8) (60.6) (61.7) (61.7) (61.9) (61.7)
Gross profit 38.2 38.5 39.2 39.4 38.3 38.3 38.1 38.3
Operating expenses:
Selling, general & administrative (10.9) (11.7) (11.1) (11.5) (11.9) (11.8) (11.6) (10.8)
Research and development (15.0) (15.6) (15.1) (15.0) (16.6) (16.5) (16.2) (15.8)
Other income and expenses (0.3) 0.8 (0.6) 2.2 1.6 1.7 2.1 2.0
Total operating expenses (26.2) (26.5) (26.8) (24.3) (26.9) (26.6) (25.7) (24.6)
Operating income 12.0 12.0 12.4 15.1 11.4 11.7 12.4 13.7
Net interest income (expense) (0.1) (0.1) (0.1) (0.1) (0.1) -- 0.5 0.4
Income before income taxes &
minority interests 11.9 11.9 12.3 15.0 11.3 11.7 12.9 14.1
Income tax expense (2.4) (2.4) (2.6) (3.6) (2.3) (2.5) (3.1) (3.3)
Income before minority interests 9.5 9.5 9.7 11.4 9.0 9.2 9.8 10.8
Minority interests 0.1 -- 0.1 -- -- (0.1) -- --
Net income 9.6% 9.5% 9.8% 11.4% 9.0% 9.1% 9.8% 10.8%
</TABLE>
- 33 -
<PAGE>
In 1998, approximately 42% of the Company's net revenues originated in
Europe, compared to approximately 44% in 1997. 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. However, during the third quarter of 1997, the negative impact of third
quarter seasonality in Europe was offset by increased sales in other regions.
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.
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.
First quarter 1998 net revenues declined 9.0% compared to the fourth
quarter of 1997 due to difficult market conditions, lower demand for certain
product families and an adverse currency effect, and were 6.4% above first
quarter 1997 net revenues. Second quarter 1998 net revenues increased 6.5%
compared to the first quarter, and were 10.4% above second quarter 1997 net
revenues. Third quarter 1998 revenues showed a 2.9% sequential decline over the
second quarter of 1998 due to seasonal factors that generally reduce sales
during the summer months and were 3.9% above 1997 third quarter net revenues.
Fourth quarter 1998 net revenues recorded a 9.0% sequential improvement over the
third quarter of 1998 and a 2.6% increase over the fourth quarter of 1997. The
Company experienced strong sequential sales gains across all product groups in
the fourth quarter of 1998. The Dedicated Products Group recorded an increase in
net revenues of nearly 12%, reflecting the strength in sales of ICs for hard
disk drives, digital cellular phones and automotive applications. The Memory
Products Group also experienced double-digit growth, with net revenues
increasing 11%, attributable to a strong rebound in flash memories. The
Programmable Products Group had a solid quarter with an increase of 5.8% in net
revenues. The Discrete and Standards ICs Products Group also experienced
improvements with net revenues increasing just under 2%.
Gross profit as a percentage of net revenues in the fourth quarter of
1998 remained virtually unchanged compared to the previous quarters in 1998. The
fourth quarter 1998 gross profit margin declined slightly compared to the fourth
quarter of 1997, which, net of licensing revenues, would have been 38.7%.
Looking ahead the Company is entering 1999 in a strong competitive
position with a product portfolio that is both balanced and focused. The market
for standard products remains very competitive and visibility is still quite
limited. The differentiated products, however, have been enhanced by significant
research and development spending and should benefit from the recent
acquisitions of Peripherals Technology Solutions and Vision Group. Additionally,
the Company has already made investments in buildings and facilities that will
enable it to have the capacity to respond to a market recovery. Within this
context, the Company expects to have the capacity to continue to outperform the
served market in 1999.
Impact of Inflation
The Company believes that inflation has not had a material effect on the results
of its operations during the periods presented.
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 invoicing and 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 1998 compared to 1997 against the
principal European and Asian currencies that have a material impact on the
Company resulted in a favorable impact on results of operations for the period
because the negative impact on net revenues was more than offset by the positive
impact on cost of sales and operating expenses, resulting in a net favorable
impact on operating income. Net revenues in 1997 were materially adversely
affected by the depreciation of European currencies and the Japanese yen against
the U.S. dollar due to the significance of the Company's sales in these
currencies and the impact of translating such
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local currency revenues into U.S. dollars. However, the net impact on operating
income was favorable as the negative impact on net revenues was more than offset
by the positive impact on cost of sales and operating expenses. In 1996, the
U.S. dollar on average appreciated slightly against the principal European
(except Italian) and Asian currencies which have a material impact on the
Company. The exchange rate impact on results of operations in 1996 was not
significant.
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 2.4 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, 1998, the Company's outstanding indebtedness was
denominated principally in U.S. dollars, Italian lire, and French francs. See
Note 14 to the Consolidated Financial Statements.
Liquidity and Capital Resources
The Company's net cash generated from operations totaled $1,012.5
million in 1998 compared to $983.8 million in 1997 and $980.7 million in 1996.
Significant amounts of net cash generated from operations in 1996, 1997 and 1998
coupled with capital increases undertaken by the Company in June 1998, which
resulted in net proceeds to the Company of $208.8 million and in October 1995,
which resulted in net proceeds to the Company of $371.6 million, 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 $153.7 million
at December 31, 1998 compared to a negative net financial position of $78.8
million at December 31, 1997. At December 31, 1998 cash and cash equivalents was
$1,100.7 million, compared to $702.2 million at December 31, 1997 and $551.9
million at December 31, 1996. At December 31, 1998, the aggregate amount of the
Company's long-term credit facilities was approximately $801 million, all of
which was outstanding, and additionally the aggregate amount of the Company's
short-term facilities was approximately $971 million, under which approximately
$146 million of indebtedness was outstanding. At December 31, 1998, the Company
had approximately $45 million of long-term indebtedness that will become due
within one year and expects to fund such debt repayments from available cash.
In 1998, the Company's capital expenditure payments totaled $947.3
million, compared to $1,035.4 million in 1997 and $1,125.2 million in 1996.
Capital expenditures for 1998 were devoted principally (i) to the expansion of
the 8-inch front-end wafer fabrication plant in Crolles, France, (ii) to equip
and upgrade both the new 8-inch and existing 6-inch front-end facilities at the
Catania, Italy plant, (iii) to the extension and conversion of an existing
facility in Agrate, Italy, (iv) to the expansion of the 6-inch facility in
Carrollton, Texas, (v) to the ramp-up of production at the Phoenix, Arizona
8-inch front-end facility, (vi) to the expansion of the back-end facilities in
Muar, Malaysia and (vii) to the expansion of the back-end facilities in Morocco,
Malta and Shenzhen, China. Capital expenditures for 1997 were devoted
principally (i) to equip and upgrade both the new 8-inch and existing 6-inch
front-end facilities at the Catania, Italy plant, (ii) to the expansion of the
8-inch front-end wafer fabrication plant in Crolles, France, (iii) to the
extension and conversion of an existing facility in Agrate, Italy, (iv) to the
upgrading of the front-end facility and the construction of a new 8-inch wafer
fabrication plant in Rousset, France, (v) to the ramp-up of production at the
Phoenix, Arizona 8-inch front-end manufacturing facility, (vi) to the expansion
of the back-end facility in Muar, Malaysia, (vii) to the expansion of the 6-
inch facility in Carrollton, Texas, (viii) to the expansion of the back-end
facilities in Singapore, Shenzhen (China), Malta and Morocco and (ix) to the
upgrade of the wafer fabrication facility in Rancho Bernardo.
The Company currently expects that capital spending for 1999 will
continue to be at levels at least as high as in 1997 and 1998, and possibly
higher. The most significant of the Company's 1999 capital expenditure projects
are expected to be the conversion from 6-inch to 8- inch and expansion at one of
its front-end wafer fabrication plants in Agrate, Italy, the increase of
capacity of the 8-inch facilities in Catania, Italy, the completion of
construction of its new 8-inch front-end wafer fabrication facility in Rousset,
France, the conversion of its facilities in Crolles, France to 0.25 micron and
0.18 micron processes, the increase of capacity of the 8-inch facilities in
Phoenix, Arizona and the expansion of the back-end facilities in Muar and
Morocco. 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
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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. The
Company has also announced plans for a new center for advanced research and
development and industrialization in the field of nonvolatile memories in Agrate
(Italy) to target 0.13 micron CMOS technology generation by 2003. 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.
In 1998, the Company's receivables from government agencies totaled
$261.2 million compared to $154.9 million in 1997 and $217.3 million in 1996.
The increase in 1998 was due primarily to the recognition of certain government
contracts for which cash will be received in future periods. See Note 7 to the
Consolidated Financial Statements. In 1998, the Company's advances from
government agencies totaled $14.1 million compared to $10.1 million in 1997 and
$10.7 million in 1996. See Note 15 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, principally from the French and Italian
governments) 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 1999.
Year 2000
STMicroelectronics has had a top priority program (the "Year 2000 Project")
underway since the second quarter of 1997 for dealing with the year 2000 issue,
and is currently evaluating its information technology infrastructure for year
2000 compliance and working with key customers and suppliers to ensure that
their systems are year 2000 compliant. As part of the Year 2000 Project, a
Company-wide task force has been assembled to identify, test, and correct or
replace the Company's systems to ensure that they do not malfunction as a result
of the year 2000. This task force reports directly to a corporate vice-president
who produces a monthly report which is circulated to senior management and to
the President and Chief Executive Officer. The main objectives of the Year 2000
Project are to minimize the negative impact of Year 2000-related date problems
on the Company's operations and financial results as well as to instill in
business partners and other stakeholders confidence in the Company's products
and systems.
Year 2000 risks relate to the issues associated with the limitations of
the programming code in many existing computer systems, whereby computer systems
may not properly recognize date sensitive information at or after the turn of
the year to 2000. Computer systems include, but are not limited to, computer
systems embedded in production equipment, products containing computer systems,
business data processing systems, production management and planning systems and
personal computers. Systems that do not properly recognize such information on
or after January 1, 2000 could generate erroneous data or fail. Associated
problems include the use of certain codes such as "99" for certain functions.
The Company has established its Year 2000 compliance definition to mean that the
functions, calculations, and other computing processes of each of the products
and systems (collectively, "Processes") perform in a consistent manner
regardless of the date and time the Processes are actually performed, whether
before, on, or after January 1, 2000 and regardless of whether the dates are
affected by leap years, and further that each product will function without
interruptions caused by the date and time on which the Processes are actually
performed, whether before, on or after January 1, 2000 ("Year 2000 Compliance").
The Five-Phase Year 2000 Project
The Company's Year 2000 Project has five overlapping phases: (i) preparation
(identification of the issues, creation of general awareness and the assignment
of responsibility), (ii) sizing (completion of an inventory, determination of
the costs and resources needed and assessment of risks), (iii) planning
(allocation of work, preparation of budgets, and planning for contingencies),
(iv) remediation and testing (ensuring that all products, items and systems are
Year 2000 ready and testing that remediation is adequate), and (v) tuning
(end-to-end testing and implementation of contingency plans).
The Company's Year 2000 Project focuses on addressing seven major areas
of concern: (1) the Company's products, (2) manufacturing equipment, software
and tools including embedded controllers, (3) facilities equipment with embedded
controllers and software, (4) business application equipment and software, (5)
suppliers, including materials, logistics, financial services and utilities
suppliers, (6) design equipment and software, and (7) electronic data
interchange (EDI) links with customers and distributors.
Readiness
As of December 31, 1998, all of the Company's groups had fully completed Phase 1
and substantially completed Phase 2. Phases 3 and 4 are well under way and Phase
5 is planned to be substantially completed during the second quarter of 1999.
Inventories have been completed in all areas of the Company, status is known for
approximately 98% of the items involved, and approximately 42% of items have a
status of tested and certified compliant. For
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the 58% not yet tested and certified compliant, approximately 60% of the
preparatory work has been completed. Globally, the Company is near 75%
completion relative to the total work load, and is on schedule relative to the
Year 2000 Project plan. The Company has determined the magnitude of the
remaining tasks (completion of Phases 3, 4, and 5), and has fixed schedules and
assigned resources accordingly. As at the end of 1998, compliant systems for all
business functions with a one year time horizon, i.e. order processing and
certain planning functions had been put in place. The Company anticipates being
fully compliant in all essential manufacturing and business systems by the end
of June 1999. The Company believes that the remaining tasks will be limited, and
contingency plans will be developed for matters not resolved that may have a
material adverse impact on the Company. The Company intends to define any such
contingency plans by the end of June 1999 with a view towards implementing them
prior to the end of 1999. In view of the possibility of less than 100%
compliance, the Company anticipates that the year 2000 task force will remain
active at least until the end of the first quarter of 2000.
Products: All of the Company's products have been determined to be Year 2000
Compliant (as such compliance is defined above). For the majority of the
Company's products, compliance is due to the fact that these products do not
contain any date or date functions, and do not accept any time or date inputs.
The exception is the "Timekeeper" product series, which is a battery- backed RAM
product that records time and date information. All "Timekeeper" products are
Year 2000 Compliant. However, the system software used in "Timekeeper" products,
which is not written by the Company but by its customers, must take into account
that certain of these products store only the last two digits of the year, and
such software code needs to be checked by the customer. However, when the
Company's products are used in systems with software loaded by users or others,
the software programs could have potential year 2000 problems. The Company has
advised customers to check such systems, and has also begun a communication
campaign to educate customers about potential year 2000 issues and the Company's
products in particular. New product developments, if date-sensitive, will be
designed with four digit years. Certain products are by their nature likely to
be used in third-party products which process dates. It is possible for these
third-party products to have non-compliant software. The Company is in the
process of contacting all known customers of these products to invite them to
review their designs.
The results of the Company's evaluation of its portfolio of existing
products which has not identified any past or current semi-conductor products
which mis-process dates is being made available to the public through the
Company's web site at www.st.com. Also, the Company, to date, has not been
notified by third parties of any problems.
Manufacturing equipment with embedded controllers and software: Some of the
tools and equipment (hardware and software) used to develop and manufacture the
Company's products are date-sensitive. The Company has compiled an inventory of
all manufacturing and facilities equipment, and has identified all non-Year 2000
Compliant items. As part of its Year 2000 Project, the Company has implemented a
plan of remediation, in cooperation with its principal suppliers. At the end of
December 1998, 36% of front-end equipment and 76% of back-end equipment had been
tested or certified compliant. The Company's target is to have 100% tested
compliance by the end of June 1999, but there remains the possibility of some
delays due to the late delivery of solutions by certain suppliers. Testing is
being coordinated with equipment manufacturers and Sematech (a forum for
cooperation set up by the major semiconductor manufacturers) to minimize
production disruption.
Facilities equipment with embedded controllers and software: Embedded systems
used to control lifts, lighting, heating, air-conditioning, fire protection,
safety systems and entry control (among others) have been identified in each
site (with help from the corporate manufacturing organization) and are being
tested with the help of suppliers. Several sites use the same facility
management system, which the Company expects will speed progress. At the end of
1998, 62% of facilities equipment was tested or certified compliant.
Computing and telecommunications infrastructure: The Company has received
assurances from its telecom network service provider, that its private corporate
wide-area network infrastructure is already Year 2000 Compliant for data and
network administration services and will be compliant for voice in the first
half of 1999. All Company equipment used to connect to that network is being
made compliant. The Company has made available compliant firmware for all
standard components of the local-area networks (routers, hubs, etc.) and
upgrades and testing will be completed by June 1999. The links between Company
sites and the service provider network are provided by national carriers from
whom we have received no statement of compliance, so the Company has asked the
service provider to test each of these links for compliance. The Company is also
working with its information technology providers to obtain Year 2000 Compliant
versions of all operating systems and basic software for computing data
processing platforms and these should be implemented throughout the Company in
the second quarter of 1999. As part of its normal operations, the Company is
continuously upgrading its business software systems including its financial
accounting, sales order management and human resources systems, and as part of
those upgrades is securing year 2000 compliance. For applications which are not
otherwise being upgraded, specific year 2000 compliance is being worked on
internally. The Company expects to complete most such upgrades between the end
of 1998 and mid-1999.
Suppliers: The Company has contacted its significant corporate suppliers of
equipment and materials, and is in the process of contacting its significant
local suppliers. As at December 31, 1998, 26 out of 73 corporate materials
suppliers and 50 out of 77 corporate equipment suppliers have indicated that
they are currently Year 2000 Compliant. Substantially all other significant
suppliers are on schedule to achieve Year 2000 Compliance in due time before
January 1, 2000. The Company has identified a small number of critical suppliers
which require further investigation. The Company intends to continue to work
closely with all of its suppliers with a
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view of ensuring full Year 2000 Compliance, or, in the event compliance cannot
be achieved and such failure would result in a business interruption for the
Company, to allow it to develop and implement the necessary contingency plans.
The Company has contacted its distributors and key customers to ensure
that each such business partner is dealing with the year 2000 issue, and in
order to identify and test interfaces for orders, delivery and payment. The
Company's existing logistical applications have been made compliant. Each site
has contacted its local/national utilities suppliers (electricity, gas, water
supply, sewage and telephone network) to ensure they are aware of the year 2000
problem and to establish their year 2000 readiness. The suppliers of major
concern are utilities suppliers, primarily electricity suppliers.
Design equipment and software: Remediation and testing have been completed.
EDI: EDI transactions are inherently date sensitive. All EDI partners worldwide
have been contacted to invite them to change to compliant standard message
formats (ANSI 4010 or EDIFACT 92.1) or to implement windowing and all have
confirmed that they will do so. Any partner who is not ready in time will be
dropped from EDI and will revert temporarily to manual processing.
Costs
The Company has estimated the total capital costs related to its year 2000
activities to be in the range of approximately $50 million, of which the
majority remains to be spent. The Company expects to finance all of the year
2000 costs from available cash resources. These costs do not include costs for
potential litigation, write-offs of equipment, external support, and
miscellaneous expenses. Substantially all of the year 2000 remediation work is
carried out by the Company's current employees. Furthermore, the Company
estimates that in total more than 400 man years will be spent on dealing with
the internal year 2000 issues, mainly during 1998 and the first half of 1999.
While the Company has not hired additional workers to deal with the year 2000
issues, it has had to postpone other work because of the time spent on year 2000
matters. In addition to the above-mentioned costs, the need to shut down tools
and equipment for remediation and testing is expected to cause the Company to
suffer some loss of manufacturing capacity. The Company believes, however, that
due to its current levels of utilization of capacity, the maximum impact on
potential billings resulting from any such manufacturing loss will be less than
4%, which amount is less than normal planning and forecasting error.
The Company does not believe that the incremental costs of addressing
year 2000 issues will have a material adverse effect on its consolidated results
of operations, liquidity or capital resources. The Company regularly reviews and
updates data for costs incurred and forecasted. Business groups within the
Company do not specifically account for internal costs (salaries, travel, etc.)
in becoming Year 2000 Compliant. As the Company continues to assess the last
phases of the Year 2000 Project, estimated costs may change. While the cost of
the project and the expected date for completion are based on the best
information available to management, such estimates have been made based on a
number of variable factors and hypotheses about future events, including the
continuing availability of certain resources, modifications of third-party
systems and other factors. No assurance can be given that such estimates or
costs will not differ significantly from those described above. The factors
which could adversely affect management's estimations include the availability
and cost of qualified personnel, the availability and/or cost of compliant
upgrades from suppliers, the ability to find and correct all programming codes
implicated by the year 2000 and similar uncertainties.
Major Risks of Year 2000 Issues
While the Company believes that its Year 2000 Project will enable it to
identify and remedy major issues relating to the year 2000, there can be no
assurance that the Company's operations and financial results will not be
adversely materially affected by the known and unknown threats posed by the year
2000 issues. Due to its nature and the presence of computer technology in
virtually all levels of the commercial chain, year 2000 failures can occur at
several stages, either internally or externally. It is therefore practically
impossible for the Company to ensure that its operations will be immune to any
such failure, wherever it may occur along the line. Were any of the measures
taken by the Company to fail to provide the expected safeguards, or were any of
the critical suppliers of the Company to encounter major difficulties due to a
year 2000 related problem, such occurrences could have a material adverse effect
on the Company's results of operations.
The Company has identified potential failures in the supply of raw
materials and in the logistical transportation chain which can cause material
interruptions to the Company's normal operations. Suppliers of major concern are
the utilities companies, primarily electricity suppliers, who to date have been
unwilling to provide assurances that they will be year 2000 ready. Tests
conducted to date in century rollover simulations involving such suppliers have
resulted in failures. While the Company has started dialogues with such
suppliers at the highest levels, a failure in the supply of electricity could
shut down one or more of the Company's manufacturing sites. Shifting production
in the short time involved is not feasible and such interruptions would cause
loss of production as well as significant unrecoverable loss of valuable
work-in-process. Failures in the transportation chain, due to such developments
as air transportation delays, could have an adverse impact on the Company's
purchase and sales flow. Given that the Company purchases raw materials such as
silicon wafers, lead frames, mold compound, ceramic packages and chemicals and
gases from a number of suppliers on a just-in-time basis, any significant
disruption in international/national commercial flows could materially impact
the Company's operations.
Contingency Plan
The Company's Year 2000 Project includes a review and prioritization of
the possible problems and a series of possible responses to each of the major
risks. Of such risks and contingency plans, the following are the most important
ones: (1) in the case of a supplier
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<PAGE>
with serious year 2000 compliance problems, the Company's contingency plan
requires it to identify alternative sources of supply. Alternative sources have
already been qualified for all corporate materials; (2) in the case of delivery
delays, the Company's contingency plan requires it to review stock levels of
critical supplies to avoid interruptions in production; (3) in the case of
applications which cannot be rolled out to all sites before January 1, 2000, the
Company's contingency plan requires it to change business processes to shorten
the time horizon or supplement the computer application with human intervention;
(4) in the case of loss of key personnel during the Year 2000 Project, the
Company's contingency plan requires it to promote teamwork and cross-training to
ensure that adequate backup personnel are available; (5) in the case of
incorrect results due to date errors, before or after January 1, 2000, the
Company's contingency plans require it to train users to be alert for unexpected
results and to develop a support team to deal quickly and effectively with such
developments; and (6) in the event previously undetected date processing errors
halts production on January 1, 2000, the Company's contingency plan requires key
maintenance personnel to be on standby in all of the Company's sites as well as
at the critical suppliers. The Company also intends to schedule a light
processing load over the New Year in the year 2000.
As the Company continues to review and complete the last phases of the
Year 2000 Project it expects to establish additional contingency measures as
appropriate. There can be no guarantee, however, that the Company will be able
to successfully prevent major disruptions by means of such contingency measures.
This disclosure is a Year 2000 Readiness Disclosure within the meaning
of the US Year 2000 Information and Readiness Disclosure Act of 1998 to the
extent that the disclosure relates to Year 2000 processing of the Company or
products or services offered by the Company.
It should be noted that certain statements herein which are not
historical facts, including, without limitation those regarding 1) the projected
extent and timing of Year 2000 Compliance for the Company's products, systems,
and facilities as well as those of third parties; 2) the estimated costs of Year
2000 Compliance activities, including actions currently contemplated and
actions, including contingency plans, decided upon in the future; 3) the
estimated impact on the Company's business, results and financial condition of
failures by it or third parties to adequately address year 2000 issues; and 4)
certain statements preceded by "believes", "expects", "aims", "intends",
"estimates", "anticipates", or similar expressions, are forward looking
statements. Because such statements involve risks and uncertainties, actual
events may differ materially from those currently expected by the Company.
Factors that could cause such differences include, but are not limited to 1)
additional information the Company may discover concerning the status of Year
2000 Compliance of the products, systems and facilities or those of third
parties as part of the Company's Year 2000 Project; 2) failures of others,
including public utilities, financial institutions, communications companies,
transportation providers, customers, computer manufacturers and software
providers, as well as other providers of resources on which the Company relies,
to identify, disclose and address year 2000 issues accurately and on a timely
basis; 3) the inability of year 2000 consultants, experts and advisers to
adequately identify and address year 2000 issues as planned; 4) changes in
technologies or methodologies used in identifying and addressing year 2000
issues in products, systems and facilities; 5) the effectiveness and costs of
contingency plans the Company may develop as it learns more about the status of
its own and others' Year 2000 Compliance and readiness; and 6) factors that
could affect the Company's business, results and financial condition generally,
including the risk factors specified in the Company's Prospectus dated June 5,
1998.
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<PAGE>
Compensation
The aggregate cash compensation payable for 1998 to the members of the
Supervisory Board by the Company was approximately $240,000. The amount of cash
compensation for 1998 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 $7.5 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
1998 under certain group life and medical insurance programs provided by the
Company. The aggregate additional amount set aside by the Company in 1998 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. The Stock Option Plans are described in Note 11 to
the Consolidated Financial Statements.
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.
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Consolidated Statement of Income
<TABLE>
<CAPTION>
Year ended December 31,
(in thousands of US dollars except per share amounts) 1996 1997 1998
<S> <C> <C> <C>
Net sales 4,078,246 3,969,773 4,210,618
Other revenues 44,114 49,372 37,134
Net revenues 4,122,360 4,019,145 4,247,752
Cost of sales (2,414,706) (2,457,386) (2,622,943)
Gross profit 1,707,654 1,561,759 1,624,809
Selling, general and administrative (421,012) (454,311) (488,072)
Research and development (532,294) (610,847) (689,785)
Other income and expenses 45,074 23,218 76,458
Operating income 799,422 519,819 523,410
Net interest income (expense) (11,169) (2,646) 8,691
Gain on disposal of investment 7,263 0 0
Income before income taxes & minority interests 795,516 517,173 532,101
Income tax expense (171,638) (113,017) (120,351)
Income before minority interests 623,878 404,156 411,750
Minority interests 1,666 2,398 (629)
Net income 625,544 406,554 411,121
Earnings per share (Basic) 4.50 2.92 2.92
Earnings per share (Diluted) 4.49 2.91 2.89
</TABLE>
The accompanying notes are an integral part of these financial statements
- 41 -
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
As at December 31,
(in thousands of US dollars) 1997 1998
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents 702,157 1,100,752
Trade accounts and notes receivable 644,017 779,489
Inventories 593,520 644,279
Other receivables and assets 413,914 509,129
Total current assets 2,353,608 3,033,649
Intangible assets, net 26,423 33,571
Property, plant and equipment, net 3,046,813 3,333,005
Investments and other non-current assets 18,895 33,804
3,092,131 3,400,380
Total assets 5,445,739 6,434,029
Liabilities and shareholders' equity
Current liabilities
Bank overdrafts 365,944 146,040
Short-term debt and current portion of long-term debt 58,614 45,245
Trade accounts and notes payable 592,315 564,457
Other payables and accrued liabilities 320,427 327,681
Accrued and deferred income tax 295,207 345,253
Total current liabilities 1,632,507 1,428,676
Long- term debt 356,407 755,864
Reserves for pension and termination indemnities 94,938 111,803
Other non-current liabilities 38,636 32,364
489,981 900,031
Total liabilities 2,122,488 2,328,707
Minority interests 15,805 22,012
Capital stock 1,073,990 1,096,743
Capital surplus 930,945 1,135,526
Accumulated result 1,616,292 2,027,413
Accumulated other comprehensive income (loss) (313,781) (176,372)
Shareholders' equity 3,307,446 4,083,310
Total liabilities and shareholders' equity 5,445,739 6,434,029
</TABLE>
Other commitments and contingencies: Note 24
The accompanying notes are an integral part of these financial statements
- 42 -
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
As at December 31,
(in thousands of US dollars) 1996 1997 1998
Cash flows from operating activities:
<S> <C> <C> <C>
Net income 625,544 406,554 411,121
Add (deduct) non-cash items:
Depreciation and amortization 535,908 608,123 704,004
Gain on disposal of investment (7,263) 0 0
Other non-cash items 7,298 19,015 13,016
Minority interest in net income of subsidiaries (1,666) (2,398) 629
Deferred income tax 58,515 (3,157) 34,333
Changes in assets and liabilities:
Trade receivables (71,774) (74,721) (115,879)
Inventories (80,517) (149,642) (18,807)
Trade payables (38,019) 73,790 45,982
Other assets and liabilities, net (47,359) 106,227 (61,852)
Net cash from operating activities 980,667 983,791 1,012,547
Cash flows from investing activities:
Payment for purchases of tangible assets (1,125,205) (1,035,434) (947,253)
Proceeds from sale of investment 8,420 0 0
Other investing activities (5,493) (11,576) (18,997)
Net cash used in investing activities (1,122,278) (1,047,010) (966,250)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 84,623 250,759 424,955
Repayment of long-term debt (54,085) (80,238) (72,396)
Increase (decrease) in short-term facilities (106,239) 68,869 (233,261)
Capital increase 16,671 9,669 233,334
Net cash from (used in) financing activities (59,030) 249,059 352,632
Effect of changes in exchange rates (1,509) (35,579) (334)
Net cash increase (decrease) (202,150) 150,261 398,595
Cash and cash equivalents at beginning of the year 754,046 551,896 702,157
Cash and cash equivalents at end of the year 551,896 702,157 1,100,752
</TABLE>
The accompanying notes are an integral part of these financial statements
- 43 -
<PAGE>
Consolidated Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Capital Capital Accumulated Comprehensive Shareholders'
(in thousands of US dollars) Stock Surplus Result Income (loss) Equity
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 1,066,528 922,065 584,039 89,083 2,661,715
Capital increase 6,405 8,847 15,252
Deferred compensation (582) 155 (427)
Comprehensive income
Net Income 625,544 625,544
Other comprehensive income, net of tax (42,064) (42,064)
Comprehensive income 583,480
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
</TABLE>
The accompanying notes are an integral part of these financial statements
- 44 -
<PAGE>
Notes to Consolidated Financial Statements
(Currency--Thousands of U.S. dollars)
One -- 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 is registered in The Netherlands with its statutory domicile in
Amsterdam.
As of December 31, 1998, the Company was 56.05% (December 31, 1997: 68.90%)
owned by STMicroelectronics II B.V., and 43.95% by the public (December 31,
1997: 31.10%)
At December 31, 1997 and at December 31, 1998, STMicroelectronics II B.V. was
100% owned by STMicroelectronics Holding N.V.
At December 31, 1997, and 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%).
Two -- 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 (US GAAP).
The Company's consolidated financial statements include the assets, liabilities
and results of operations of its majority-owned subsidiaries. The ownership of
the other interest holders is reflected as minority interests. All intercompany
accounts and transactions have been eliminated in consolidation.
The initial combination of the SGS Microelettronica and Thomson Semiconducteurs
civilian semiconductor businesses was accounted for as the creation of a joint
venture. Accordingly, the assets and liabilities of the combined entities were
recorded in the books of the joint venture at their carrying amounts at the date
of combination.
2.2 Use of estimates
The preparation of the Company's financial statements in accordance with US 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. Management believes that the estimates are reasonable.
2.3 Income recognition
Sales: Revenues on sales of semiconductor products are 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 from the cost of the
related fixed assets.
2.4 Foreign currency
The United States 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 US dollars
exceed revenues in any other currency.
The functional currency used by 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 of local functional currency 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 covers certain portions of its foreign currency exposure primarily
through the use of forward contracts and option contracts. Generally, gains and
losses associated with currency rate changes on 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 currency options
to protect the Company from the effect of currency fluctuations on its probable
anticipated transactions.
- 45 -
<PAGE>
2.5 Intangible assets
Intangible assets include the cost of technologies and licenses purchased from
third parties, amortized over a period ranging from five to eighteen years, and
goodwill acquired in business combinations amortized over its estimated useful
life, generally five to fifteen 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.
2.6 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.
2.7 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. Marketable debt and equity securities and other equity investments are
classified as "available for sale" securities and stated at fair value.
2.8 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.
2.9 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 two French research and development interest groups.
For some of its research and development programs, the Company receives grants
from Governmental agencies; these grants are recognized in the income statement
in "other income and expenses".
2.10 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.
2.11 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 such benefits as are provided by pension plan
arrangements; these plans conform with local regulations and practices of the
countries in which the Company operates.
2.12 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 basis 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. Tax rate changes are
reflected in income in the period such changes are enacted.
2.13 Advertising costs
Advertising costs are expensed as incurred. Advertising expenses for 1996, 1997
and 1998 were $12,686, $14,523 and $16,012 respectively.
2.14 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.
2.15 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.
- 46 -
<PAGE>
2.16 Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2.17 Recently issued accounting standards
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" effective for financial statements beginning after December 15,
1998. This statement provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The Company will adopt the
standards required by this statement in 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", (FAS 133) effective for fiscal years beginning after
June 15, 1999. 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
the first quarter of fiscal year 2000.
Management has not fully evaluated the impact, if any, that these new standards
may have on future financial statement disclosure.
Three -- Consolidated entities
The consolidated financial statements include the accounts of STMicroelectronics
N.V. and the following entities as of December 31, 1998:
<TABLE>
<CAPTION>
Percentage
Common Ownership
Stock (Direct or
Legal Seat Name (Thousands) Indirect)
<S> <C> <C> <C> <C>
United Kingdom London STMicroelectronics LTD 1,000 GBP 100
London Thomson Components LTD 1,150 GBP 100
Bristol STMicroelectronics E.E.I.G. 0 GBP 100
Sweden Stockholm STMicroelectronics A.B. 16,000 SEK 100
Germany Munich STMicroelectronics GmbH 12,901 DEM 100
Switzerland Geneva STMicroelectronics S.A. 500 CHF 100
Malta Malta STMicroelectronics LTD 21,590 MTP 100
Spain Madrid STMicroelectronics S.A. 55,000 ESP 100
France Paris STMicroelectronics S.A. 3,463,319 FRF 100
Paris STMicroelectronics S.A.S. 250 FRF 100
Italy Milano STMicroelectronics S.R.L. 852,000,000 ITL 100
Catania CORIMME 3,000,000 ITL 100
Singapore Singapore STMicroelectronics PTE LTD 179,997 SGD 100
Singapore STMicroelectronics ASIA PACIFIC PTE LTD 13,982 SGD 100
Malaysia Muar STMicroelectronics SDN BHD 196,805 MYR 100
Muar STMicroelectronics (Malaysia) SDN BHD 0.002 MYR 100
Japan Tokyo STMicroelectronics KK 68,000 JPY 100
Hong Kong Hong Kong STMicroelectronics LTD 780 HKD 100
Australia Sydney STMicroelectronics PTY LTD 185 AUD 100
United States Dallas STMicroelectronics Inc. 22,000 USD 100
Rancho
Bernardo STMicroelectronics (RB), Inc. 1 USD 100
Dallas STMicroelectronics Leasing Co Inc. 1 USD 100
La Jolla Metaflow Technologies Inc. 87 USD 85
Brazil Sao Paulo STMicroelectronics Ltda 0 R$ 100
Morocco Casablanca STMicroelectronics S.A. 66,000 MAD 100
Casablanca Electronic Holding S.A. 3,110 MAD 100
China Shenzhen Shenzhen STS Microelectronics Co LTD 65,000 USD 60
Shenzhen STMicroelectronics (Shenzhen) Co LTD 250 USD 100
India New Delhi STMicroelectronics PTE LTD 62,000 INR 100
Finland Helsinki STMicroelectronics OY 2,000 FIM 100
</TABLE>
- 47 -
<PAGE>
Four -- Cash and cash equivalents
Cash and cash equivalents consist of the following:
December 31, 1997 1998
Cash 653,898 1,078,098
Marketable securities
(with maturity under 3 months) 48,259 22,654
Total 702,157 1,100,752
Marketable securities (all of which mature within three months) consist mainly
of short term cash investments. There was no significant difference between the
book value of traded marketable securities and their fair market value as of
December 31, 1997 and 1998.
Five -- Trade accounts and notes receivable
Trade accounts and notes receivable consist of the following:
December 31, 1997 1998
Trade accounts and notes receivable 659,245 789,983
Less valuation allowance (15,228) (10,494)
Total 644,017 779,489
During 1996, 1997 and 1998 no customer individually represented over ten percent
of consolidated net revenues.
Six -- Inventories
Inventories consist of the following:
December 31, 1997 1998
Raw materials 114,712 107,546
Work-in-process 341,537 392,666
Finished products 137,271 144,067
Total 593,520 644,279
Seven -- Other receivables and assets
December 31, 1997 1998
Receivables from government
agencies* 154,916 261,194
Taxes and other government
receivables 60,474 64,573
Down payment to suppliers 814 6,274
Loans to employees 3,197 3,580
Prepaid expenses 14,062 18,222
Sundry debtors 55,475 23,989
Deferred tax 96,139 92,795
Other 28,837 38,502
Total 413,914 509,129
*Related to research and development contracts, industrialization contracts and
capital expenditures.
Eight -- Intangible assets
Intangible assets consist of the following:
December 31, 1997 1998
Technologies and licenses, gross 72,189 86,368
Less accumulated amortization (45,766) (52,797)
Total 26,423 33,571
Nine -- Property, plant and equipment
Property, plant and equipment consist of the following:
December 31, 1997 Gross Depreciation Net
Land and buildings 490,707 (102,409) 388,298
Machinery and
equipment 4,391,066 (2,138,115) 2,252,951
Other tangible
fixed assets 307,844 (209,088) 98,756
Construction in
progress 306,808 -- 306,808
Total 5,496,425 (2,449,612) 3,046,813
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
- 48 -
<PAGE>
Included in the above categories are assets recorded under capitalized leases
with original costs totaling $7,805 in 1997 and $8,355 in 1998.
Ten -- Investments and other non-current assets
Investments and other non-current assets consist of the following:
December 31, 1997 1998
Investments carried at fair value 10,334 11,403
Long-term deposits and receivables 8,561 13,053
Discount on LYONs 0 9,348
Total 18,895 33,804
Long-term deposits and receivables consist primarily of indemnities receivable
from third parties on the sale of businesses, which bear interest or are
discounted to reflect their present value.
Eleven -- Shareholders' equity
Public offerings of shares: In December 1994, the Company increased its capital
stock through an initial public offering of 9,606,240 new shares of capital
stock, which resulted in an increase in capital stock and capital surplus of
$75,049 and $123,772, respectively. In connection with a secondary offering of
capital stock in October 1995, the Company issued 8,960,000 new shares of
capital stock, which resulted in an increase in capital stock and capital
surplus of $79,356 and $292,075, respectively. In connection with a secondary
offering of capital stock in June 1998, the Company issued 3,000,000 new shares
of capital stock, which resulted in an increase in capital stock and capital
surplus of $20,378 and $188,320, respectively.
Outstanding shares: The authorized share capital of the Company is NLG
2,750,000,000, consisting of 200,000,000 shares, each with a nominal value of
NLG 13.75. As of December 31, 1996, 1997 and 1998, the number of shares of
capital stock outstanding at a par value of NLG 13.75 were 138,985,580 shares,
139,132,397 shares and 142,478,106 shares, respectively.
Stock option plans: In 1989, the Shareholders voted to adopt the 1989 Stock
Option Plan (the "1989 Plan") and approved the issuance of 1,634,400 options to
136 employees to purchase capital stock. Under the 1989 Plan, the options vested
over four years and are exercisable for ten years at an exercise price of NLG
17.50.
In 1995, the Shareholders voted to adopt the 1995 Stock Option Plan (the
"1995 Plan") whereby options for up to 5,500,000 shares may be granted in
installments over a five year period. Under the 1995 Plan, the options may be
granted to purchase shares of capital 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
1,200,000 options to employees at an exercise price of $36.25 per share. In
September 1997, the Company granted 645,500 options to employees at an exercise
price of $85.375 per share. In July 1998, the Company granted 650,000 options to
employees at an exercise price of $72.1875 per share.
In 1996, the Shareholders voted to adopt the Supervisory Board Option
Plan whereby members of the Supervisory Board may receive, during the three year
period 1996-1998, 3,000 options for 1996 and 1,500 options for both 1997 and
1998, 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 1,500 options for 1996 and 750 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 33,000 shares were granted at an exercise price of
$54.00 per share. In September 1997, options to purchase 15,000 shares were
granted at an exercise price of $85.375 per share. In July 1998, options to
purchase 15,000 shares were granted at an exercise price of $72.1875 per share.
A summary of stock option transactions for the plans follows:
Number of Price Per Share
Shares Range Average
December 31, 1995 810,200 17.5-25 NLG 0.0 NLG
Options granted
1995 Plan 1,200,000 $36.25 $36.25
Supervisory Board Plan 33,000 $54.00 $54.00
Options cancelled (16,500) $36.25 $36.25
Options exercised (531,790) 17.5-25 NLG 20.1 NLG
December 31, 1996 1,494,910 17.5-25 NLG 20.1 NLG
$36.25-$54.00 $36.73
Options granted
1995 Plan 645,500 $85.38 $85.38
Supervisory Board Plan 15,000 $85.38 $85.38
Options cancelled (18,000) $36.25-$85.375 $44.98
Options exercised (137,380) $8.67-$36.25 $10.36
December 31, 1997 2,000,030 17.5-25 NLG 20.8 NLG
$36.25-$85.375 $53.19
Options granted
1995 Plan 650,000 $72.19 $72.19
Supervisory Board Plan 15,000 $72.19 $72.19
Options cancelled (9,565) $36.25-$85.375 $47.98
Options exercised (57,410) $8.67-$54.00 $12.82
December 31, 1998 2,598,055 17.5-25 NLG 23.5 NLG
$36.25-$85.375 $58.83
Employee offering plan: In December 1995, the Company offered to certain of its
employees world-wide the right to acquire up to 1,000 shares of capital stock
per employee, at a price of $33.725 per share, representing a discount of five
percent from the market price. A total of 243,710 shares were sold to
participating employees world-wide as a result of the offering. Participating
employees who purchased shares in the offering and who held such
- 49 -
<PAGE>
shares for at least one year were entitled to purchase, for a price of 13.75
NLG, one share for each ten shares purchased in the offering.
In June 1998, the Company offered to certain of its employees world-wide
the right to acquire up to 400 shares of capital stock per employee, at a price
of $63.525 (377.15 French francs, 110,800 Italian lira) per share, representing
a discount of twelve percent from the market price. A total of 288,299 shares
were issued to participating employees world-wide as a result of the offering.
Fair value of stock-based compensation: 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.
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 of the Company's stock based awards to employees was
estimated using a Black-Scholes option pricing model. The fair value was
estimated assuming no expected dividends and the following weighted-average
assumptions:
1996 1997 1998
Expected life (years) 5 5 5
Expected stock price
volatility 55% 40% 38%
Risk-free interest rate 5% 6% 5%
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period. The Company's
pro forma information is as follows:
Year ended December 31, 1996 1997 1998
Net income
As reported 625,544 406,554 411,121
Pro forma 621,449 399,509 393,949
Earnings per share
As reported 4.50 2.92 2.92
Pro forma 4.48 2.87 2.80
These pro forma amounts include amortized fair values attributable to options
granted after December 31, 1995 only, and are therefore not representative of
future pro forma amounts.
Retained earnings: At December 31, 1998, the amount of retained earnings
available to pay dividends under Dutch law was approximately $2,987,000 (1997:
2,233,000). 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, 1998.
Twelve -- Earnings per share
For the years ended December 31, 1996, 1997 and 1998 earnings per share (EPS)
was calculated as follows:
Year ended December 31, 1996 1997 1998
Basic EPS
Net income 625,544 406,554 411,121
Weighted average
shares outstanding 138,695,540 139,092,900 140,852,008
EPS 4.50 2.92 2.92
Diluted EPS
Net income 625,544 406,554 411,121
LYONs interest,
net of tax 0 0 4,566
Net income adjusted 625,544 406,554 415,687
Weighted average
shares outstanding 138,695,540 139,092,900 140,852,008
Dilutive effect of
stock options 505,586 757,696 632,563
Dilutive effect
of LYONs 0 0 2,570,959
Number of shares used
in calculating EPS 139,201,126 139,850,596 144,055,530
EPS 4.49 2.91 2.89
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<PAGE>
Thirteen -- 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.
December 31, 1997 1998
Change in benefit obligation:
Benefit obligation at beginning of year 167,515 169,455
Service cost 17,501 17,045
Interest cost 8,155 7,551
Benefits paid (8,594) (8,293)
Actuarial losses 190 4,034
Foreign currency
translation adjustments (14,561) 7,258
Other (751) (1,935)
Benefit obligation at end of year 169,455 195,115
Change in plan assets:
Plan assets at fair value at beginning
of year 66,908 77,455
Actual return on plan assets 8,017 8,228
Employer contributions 5,575 5,223
Benefits paid (8,594) (8,293)
Foreign currency translation adjustments (1,868) 1,062
Other 7,417 (437)
Plan assets at fair value at end of year 77,455 83,238
Funded status (92,000) (111,877)
Unrecognized prior service cost 7,381 7,848
Unrecognized transition obligation (3,649) (3,281)
Unrecognized net actuarial gain 2,517 820
Accrued benefit cost (85,751) (106,490)
Net amount recognized in the balance
sheet consists of the following:
Prepaid benefit cost 9,187 5,313
Accrued benefit liability (94,938) (111,803)
Net amount recognized (85,751) (106,490)
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, 1996 1997 1998
Service cost 19,922 17,501 17,045
Interest cost 6,879 8,155 7,551
Expected return on
plan assets (4,147) (4,478) (6,147)
Amortization of
unrecognized
transition obligation (1,612) (282) (366)
Recognized gains
and losses 17 56 56
Recognition of prior
service cost 490 553 762
Net periodic benefit cost 21,549 21,505 18,901
The weighted average assumptions used in the determination of the net pension
cost for the pension plans were as follows:
Assumptions 1996 1997 1998
Discount rate 5.56% 5.98% 5.97%
Salary increase rate 4.21% 4.21% 4.18%
Expected rate of return
on funds 8.33% 8.53% 8.43%
Fourteen -- Long-term debt
Long-term debt consists of the following:
December 31, 1997 1998
Unsecured 369,915 801,109
Secured (mainly mortgages on
land, buildings and liens on equipment) 45,106 0
Total 415,021 801,109
Repayment schedule
December 31, 1998
1999 45,245
2000 109,936
2001 102,460
2002 77,741
2003 9,200
Thereafter 456,527
Total 801,109
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<PAGE>
Interest rates
December 31, 1997 1998
Non interest bearing 4,092 3,308
From 1 to 3% 63,719 485,290
From 3 to 6% 275,163 287,339
From 6 to 10% 68,721 21,521
From 10 to 17% 3,326 3,651
Total 415,021 801,109
Currencies
December 31, 1997 1998
U.S. dollar 20,000 455,885
Italian lira 242,754 231,752
French franc 94,403 98,628
Other 57,864 14,844
Total 415,021 801,109
Long-term debt includes:
1997 1998
STMicroelectronics SA (France)
- - 4.97% Bank Loan due 2002 33,361 35,712
- - 4.95% Bank Loan due 2002 33,361 35,712
- - 4.36% Other Bank Loans 27,681 27,204
STMicroelectronics LTD (Malta)
- - 6.19% Bank Loan due 1998 20,033 0
- - 3.00% Other Bank Loans 25,075 1,322
STMicroelectronics s.r.l. (Italy)
- - 5.68% Bank Loan due 2002 56,844 60,492
- - 2.15% Government Loan
due 2000 53,219 40,276
- - 5.50% Other Bank Loans 132,691 130,984
STMicroelectronics N.V.
- - 1.75% Liquid Yield Option Notes (LYONs) 0 435,885
STMicroelectronics (other countries)
- - 6.99% Other Bank Loans 32,756 33,522
Total long-term debt 415,021 801,109
Total long-term debt, current portion 58,614 45,245
Total long-term debt, less current portion 356,407 755,864
In June 1998, the Company issued $513,852 face value of zero-coupon subordinated
convertible notes, due 2008, for net proceeds of $421,837. The notes are
convertible at any time by the holders at the rate of 8.952 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.
Fifteen -- Other payables and accrued liabilities
December 31, 1997 1998
Taxes other than income taxes 38,910 29,825
Salaries and wages 85,809 78,493
Social charges 52,893 74,064
Advances received on fundings 10,124 14,050
Commercial rebates 31,585 37,577
Royalties payable 20,769 12,778
Other 80,337 80,894
Total 320,427 327,681
Sixteen -- Other revenues
Other revenues consist of the following:
December 31, 1996 1997 1998
Royalties and
indemnities received 582 956 0
Licensing revenues 16,693 27,598 1,765
Miscellaneous sales 18,675 17,250 27,833
Other 8,164 3,568 7,536
Total 44,114 49,372 37,134
Seventeen -- Personnel
Labor costs consist of the following:
December 31, 1996 1997 1998
Salaries and wages 745,329 753,275 825,961
Social security contribution 210,611 214,023 219,942
Other 53,838 57,929 60,871
Total 1,009,778 1,025,227 1,106,774
Labor costs are allocated to cost of sales, selling, general and administrative
expenses and research and development costs. At December 31, 1998 the Company
employed 29,182 persons (1997: 28,728).
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<PAGE>
Eighteen -- Other income and expenses
Other income and expenses consist of the following:
December 31, 1996 1997 1998
Research and development funding* 63,792 55,269 63,531
Patents income (expense), net (2,639) (660) (2,396)
Exchange gain (loss), net 11,822 15,158 19,019
Start-up costs (38,987) (47,867) (12,609)
Other 11,086 1,318 8,913
Total 45,074 23,218 76,458
*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 ($4,613 for 1996, $6,192 for 1997 and $3,081 for 1998).
Nineteen -- Net interest income (expense)
Net interest income (expense) consist of the following:
December 31, 1996 1997 1998
Income 34,139 39,009 54,294
Expenses (45,308) (41,655) (45,603)
Total (11,169) (2,646) 8,691
Cash paid for interest was $40,064 for 1996, $43,305 for 1997 and $48,569 for
1998.
Twenty -- Income tax
Income before income tax expense is comprised of the following components:
December 31, 1996 1997 1998
Income from domestic operations 31,284 (8,437) (18,730)
Income from foreign operations 765,898 528,008 550,202
Income before income tax expense 797,182 519,571 531,472
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.
December 31, 1996 1997 1998
Domestic--current (4,857) (8,377) (3,886)
Foreign--current (108,266) (107,797) (82,132)
Current taxes (113,123) (116,174) (86,018)
Deferred taxes (58,515) 3,157 (34,333)
Income tax expense (171,638) (113,017) (120,351)
The principal items accounting for the differences in income taxes computed at
The Netherlands statutory rate (35%) and the effective income tax rate comprise
the following:
Income tax expense computed
at statutory rate (279,013) (181,850) (186,015)
Benefit (deductions) for financial
reporting for which no current tax
benefit is available 14,894 (1,217) 7,644
Variation in valuation allowance 23,935 (294) 397
Other tax and credits 7,855 (627) 2,995
Effect of tax rate differences 60,691 70,971 54,628
Income tax expense (171,638) (113,017) (120,351)
Permanent differences reflect mainly the effects of the capital allowances
programs existing in certain Southeast Asian and Mediterranean countries, of the
special post-pioneer regimes existing in Asia Pacific regions and of
non-deductible items.
Deferred tax assets and liabilities consist of the following:
1997 1998
Tax loss carryforwards and capital allowances 71,967 41,375
Other assets 142,362 142,212
Total assets, gross 214,329 183,587
Valuation allowance (4,450) (4,053)
Deferred tax assets, net 209,879 179,534
Fixed assets depreciation 213,399 240,116
Other liabilities 50,857 34,472
Deferred tax liabilities 264,256 274,588
As a result of offsetting deferred tax assets against deferred tax liabilities
in each tax jurisdiction, the Company recorded a net deferred tax asset of
$96,139 in 1997 and $92,795 in 1998, and a net deferred tax liability of
$150,516 in 1997 and $187,849 in 1998. The Company increased its valuation
allowance by $294 and decreased it by $397 in 1997 and 1998, respectively.
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<PAGE>
As of December 31, 1998, the Company and its subsidiaries had net operating loss
carryforwards and capital allowances expiring in the following years:
Year
1999 23,927
2000 11,297
2001 11,984
2002 7,424
2003 and thereafter 146,982
Total 201,614
The Company paid $109,277 cash for income taxes in 1996, $37,207 cash for income
taxes in 1997 and $75,886 cash for income taxes in 1998.
Twenty-One -- Credit facilities
As of December 31, 1998, the aggregate amount of the Company's long-term credit
facilities was $801,109 (note 14) under which $801,109 of indebtedness was
outstanding, and additionally the aggregate amount of the Company's short-term
facilities was approximately $971,000 under which $146,000 indebtedness was
outstanding.
Twenty-Two -- Lease commitments
The Company leases land, building, plant and equipment under non-cancellable
lease agreements. As of December 31, 1998 the future minimum lease payments to
which the Company was committed under operating leases were as follows:
Year
1999 14,971
2000 11,484
2001 9,414
2002 7,893
2003 7,269
Thereafter 23,985
Total 75,016
Twenty-Three -- Financial instruments and risk management
Financial instruments and derivatives are used exclusively for purposes other
than trading.
Forward exchange contracts and currency options: The Company enters into forward
contracts and foreign currency options to protect against potentially adverse
changes 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, 1998 have remaining terms of one
to 25 months, maturing mainly during first quarter 1999, and amount to $342,470
forward sale of US$, $20,142 forward purchase of US$, $200,424 forward sale of
other foreign currencies, and $71,833 forward purchase of other foreign
currencies. There were no foreign currency options outstanding as of December
31, 1997 or 1998. The principal currencies covered are the German mark, the
British pound, the Japanese yen, the French franc, the Swiss franc and the
Italian lira.
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 cash and cash
equivalents, financial instruments with off-balance sheet risks (primarily
forward contracts), and trade receivables. The Company places its cash and cash
equivalents with high credit quality financial institutions. 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. In the event of a failure to honor one
of the forward contracts by one of the banks with which the Company has
contracted, management believes any loss would be limited to the exchange rate
differential from the time the contract was made.
Concentrations of credit risk with respect to trade receivables are
limited because the Company conducts its operations with customers located
throughout the world. Management believes that receivables are well diversified,
thereby reducing potential credit risk to the Company.
The Company does not anticipate non-performance by counterparties which
could have a significant impact on its financial position or results of
operations.
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<PAGE>
Interest rate and foreign currency agreements:
December 31, 1997 1998
Forward exchange contracts:
- --sales 213,468 542,894
- --purchases (91,751) (91,975)
Fair value of financial instruments: The estimates of fair value were obtained
using prevailing financial market information resulting from various valuation
techniques as of December 31, 1998. The estimated fair values may not be
representative of actual values of the financial instruments that could have
been realized as of year end or that will be realized in the future. The
methodologies used to estimate fair value are as follow:
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 these financial instruments 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.
Forward exchange contracts: The fair value of these instruments is the estimated
amount that the Company would receive or pay to settle the related agreements as
of December 31, 1997 and 1998 based upon quoted market prices for the same or
similar instruments and the creditworthiness of the counterparties.
<TABLE>
<CAPTION>
1997 1998
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Balance sheet
- -- Marketable securities (included in
cash equivalents) 48,259 48,259 22,654 22,654
- -- Bank loans (including current
portion) 415,021 405,445 365,224 355,514
- -- Liquid Yield Option Notes (LYONs) -- -- 435,885 447,051
Off-balance sheet
- -- Forward exchange contracts (13,833) (121,717) (7,900) (455,098)
</TABLE>
Twenty-Four -- Other commitments and 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 effect on the business, financial
condition or results of operations of the Company. However, the Company believes
that provisions carried as at December 31, 1998 are adequate.
Twenty-Five -- Related party transactions
Transactions with significant shareholders and their affiliates were as follows:
December 31, 1996 1997 1998
Sales 232,057 148,172 5,608
Research and development expenses (13,262) (12,794) (16,215)
Other purchases and expenses (48,155) (29,757) (12,406)
Accounts receivable 31,580 17,244 1,872
Accounts payable 10,519 9,745 10,509
As at December 31, 1996 and 1997, the transactions with the shareholders
included transactions with Thomson SA and Thomson CSF, who were shareholders
during those years.
Twenty-Six -- 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.
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<PAGE>
The following is a summary of operations by entities located within the
indicated geographic areas for 1996, 1997 and 1998. Long-lived assets consist of
net property and equipment and other intangible assets.
Net revenues
December 31, 1996 1997 1998
France 486,551 455,663 474,580
Italy 196,816 189,222 171,143
Germany 505,759 427,211 444,362
Other European countries 631,592 728,128 737,112
USA 934,224 935,010 978,662
Singapore 809,930 1,031,020 1,261,165
Other countries 557,488 252,891 180,728
Total 4,122,360 4,019,145 4,247,752
Long-lived assets
December 31, 1996 1997 1998
France 895,979 980,250 1,169,273
Italy 777,698 837,307 899,689
Germany 921 869 1,134
Other European countries 7,384 7,402 19,922
USA 497,348 605,666 587,734
Singapore 245,731 227,888 216,817
Other countries 432,221 413,854 472,007
Total 2,857,282 3,073,236 3,366,576
Twenty-Seven -- Subsequent events (unaudited)
In April 1999, the Supervisory Board approved the submission of several
resolutions to shareholder approval. The resolutions include payment of a cash
dividend of $0.16 per share on June 15, 1999 to shareholders of record on June
1, 1999, a two for one stock split, which would become effective on June 16,
1999 immediately after the payment of the cash dividend, and the authorisation
for the Company to issue up to 180 million Preference Shares to its main
Shareholder STMicroelectronics Holding II B.V. After the stock split and the
authorisation to create Preference Shares, the authorised share capital of the
Company would be 400 million ordinary shares and 180 million Preference Shares.
The Preference Shares which are intended to protect the Company from a hostile
takeover would be issued in accordance with the terms of an option contract to
be agreed between the Company and STMicroelectronics Holding II B.V., at 25% of
their par value, and would entitle STMicroelectronics II B.V. to full voting
rights. The issuance of Preference Shares is contingent upon STMicroelectronics
Holding II B.V. retaining at least 33% of the issued share capital of the
Company.
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<PAGE>
Report of Independent Accountants
To the Supervisory Board and Shareholders of
STMicroelectronics NV
In our opinion, the accompanying consolidated balance sheets 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 NV and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, 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 generally accepted
auditing standards 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.
/s/ PricewaterhouseCoopers NV.
PricewaterhouseCoopers NV
Amsterdam, January 25, 1999
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