As filed with the Securities and Exchange Commission on June 27, 2000May 15, 2001
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X]|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 19992000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-13546
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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)
Route de Pre-Bois
ICC Bloc A1215
Geneva 15
Switzerland
(Address 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 EUR 3.12Euro 1.04 per share*share New York Stock Exchange
Liquid Yield OptionTM Notes due June 10, 2008 New York Stock Exchange
Liquid Yield OptionTM Notes due September 22, 2009 New York Stock Exchange
* (not adjusted to reflect the 3:1 split effected on May 5, 2000)
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
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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:
289,808,140889,881,287 Common Shares*
* (not adjusted to reflect the 3:1 split effected on May 5, 2000)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]|X| No [ ]
Indicate by check mark which financial statement item the registrant
has elected to follow:
Item 17 [ ] Item 18 [X]|X|
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TABLE OF CONTENTS
PART I
Page No.
Cautionary Statement Regarding Forward-Looking Statements.............. 3
Presentation
PART I............................................................................................................4
ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS..........................................4
ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE........................................................4
ITEM 3: KEY INFORMATION................................................................................4
ITEM 4. INFORMATION ON THE COMPANY....................................................................15
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..................................................42
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES....................................................54
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............................................65
ITEM 8. FINANCIAL INFORMATION.........................................................................68
ITEM 9. THE OFFER AND LISTING.........................................................................69
ITEM 10. ADDITIONAL INFORMATION........................................................................74
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................84
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........................................87
PART II..........................................................................................................88
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...............................................88
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS..........................................................................88
ITEM 15. [RESERVED]....................................................................................88
ITEM 16. [RESERVED]....................................................................................88
PART III.........................................................................................................89
ITEM 17. FINANCIAL STATEMENTS..........................................................................89
ITEM 18. FINANCIAL STATEMENTS..........................................................................89
ITEM 19. EXHIBITS......................................................................................89
2
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
In this annual report, references to "we" and "us" are to
STMicroelectronics NV together with its consolidated subsidiaries, references to
"EU" are to the European Union, references to the "Euro" and the "euro" are to
the euro currency of Financial Information.................................. 3
Item 1. Descriptionthe EU, references to the "United States" and "U.S." are to
the United States of Business....................................... 4
Item 2. Description of Property....................................... 26
Item 3. Legal Proceedings............................................. 29
Item 4. Control of Registrant......................................... 29
Item 5. Nature of Trading Market...................................... 33
Item 6. Exchange ControlsAmerica and Other Limitations Affecting
Security Holders............................................. 37
Item 7. Taxation...................................................... 37
Item 8. Selected Consolidated Financial Data.......................... 41
Item 9. Management's Discussionreferences to "$" or to "U.S. dollars" are to
United States dollars.
References in this annual report to published industry data are
references to data published by Pathfinder Research, Inc. ("Pathfinder ") or
Dataquest-Gartner Group and Analysis of Financial
Condition and Results of Operations.......................... 41
Item 9A. Quantitative and Qualitative Disclosures About
Market Risk.................................................. 41
Item 10. Directors and Officers of Registrant.......................... 45
Item 11. Compensation of Directors and Officers........................ 52
Item 12. Optionsreferences to Purchase Securities from Registrant or
Subsidiaries................................................. 52
Item 13. Interest of Managementtrade association data are references
to World Semiconductor Trade Statistics ("WSTS"). Except as otherwise disclosed
herein, all references to our market positions in this annual report are based
on 2000 revenues according to published industry data. Certain Transactions................ 53
PART II
Item 14. Description of Securities to be Registered *.................. 54
PART III
Item 15. Defaults Upon Senior Securities *............................. 54
Item 16. Changesterms used in
Securities and Changesthis annual report are defined in Security for
Registered Securities *...................................... 54
PART IV
Item 17. Financial Statements *........................................ 54
Item 18. Financial Statements.......................................... 54
Item 19. Financial Statements and Exhibits............................. 55
Certain Terms ......................................................... 56
*Omitted because item is not applicable.
"Certain Terms."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
CertainSome 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"4: Information on the Company" and "Item 9:
Management's Discussion5:
Operating and Analysis of Financial ConditionReview and Results of
Operations,Prospects," 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) inability to meet customer demand,
(ii) capital requirements, (iii) new product developmentso General business and technological
change, (iv) manufacturing risks, (v) inability to achieve timely ramp-up of
production, (vi)economic conditions in the loss of key personnelcountries, the markets
and the inabilitybusiness segments in which we and our customers operate;
o Market demand for our products and changes in customer order patterns
and requirements including, but not limited to, order cancellation or
rescheduling;
o Competitive factors including the pricing of products in an
increasingly competitive environment;
o The development, qualification and availability of innovative products
in a rapidly changing technological environment;
o Our ability to implement cost reductions in a timely manner and the
success of those actions;
o Manufacturing risks;
o Insufficient, excess or obsolete inventory;
o Our ability to recruit additional personnel, (vii)and retain skilled personnel; and
o Currency fluctuations and other risks.
Certain such forward-looking statements can be identified by the highly cyclical natureuse of
forward-looking terminology such as "believes", "expects", "may", "are expected
to", "will", "will continue", "should", "would be", "seeks" or "anticipates" or
similar expressions or the semiconductornegative thereof or other variations thereof or
comparable terminology, or by discussions of strategy, plans or intentions. Some
of these risk factors are set forth are discussed in more detail, including
under "Item 3: Key Information - Risk Factors," "Item 4: Information on the
Company" and "Item 5: Operating and Financial Review and Prospects." Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this annual report as anticipated, believed or expected. We do not
intend, and do not assume any obligation, to update any industry (viii) competition, (ix) inability of the foundry suppliers to meet
order requirements, (x) variations in industry capacity, (xi) variability of
operating results, (xii) economic downturn in any of our major markets, (xiii)
possible acquisitions, (xiv) control of the Company and potential conflicts of
interest, (xv) loss of key customers and strategic relationships, (xvi)
intellectual property issues, (xvii) international operations and the related
regulatory environment, including changes in laws related to investment and
taxation, (xviii) currency fluctuations, (xix) dependence on certain sources of
supply and (xx) environmental regulations. See also "Risk Factors" included in
the Company's Prospectuses dated September 16, 1999.
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Referencesinformation or
forward-looking statements set forth 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 1999 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 "EUR" 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 "$"reflect subsequent
events or to "U.S. dollars" are to United States dollars.circumstances.
3
PART I
Item 1: DescriptionIdentity of BusinessDirectors, Senior Management and Advisers
Not applicable.
Item 2: Offer Statistics and Expected Timetable
Not applicable.
Item 3: Key Information
Selected Financial Data
The table below sets forth our selected consolidated financial data for
each of the years in the five-year period ended December 31, 2000. Such data
have been derived from our consolidated financial statements. Consolidated
audited financial statements for each of the years in the three-year period
ended December 31, 2000, 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 "Item 5:
Operating and Financial Review and Prospects" and the Consolidated Financial
Statements and the related notes thereto included elsewhere in this annual
report.
Year ended December 31,
1996 1997 1998(1) 1999(1) 2000(1)
---------- ---------- ------------ ----------- ----------
(in millions except per share and ratio data)
Consolidated Statement of Income Data:
Net sales ....................................... $ 4,078.3 $3,969.8 $4,210.6 $5,023.1 $ 7,764.4
Other revenues................................... 44.1 49.4 37.2 33.2 48.8
---- ---- ---- ---- ----
Net revenues..................................... 4,122.4 4,019.2 4,247.8 5,056.3 7,813.2
Cost of sales.................................... (2,414.7) (2,457.4) (2,623.0) (3,054.5) (4,216.9)
--------- --------- --------- --------- ---------
Gross profit..................................... 1,707.7 1,561.8 1,624.8 2,001.8 3,596.3
Operating expenses:
Selling, general and administrative............ (421.1) (454.3) (488.1) (534.2) (703.7)
Research and development(2) ................... (532.3) (610.9) (689.8) (836.0) (1,026.3)
Other income and expenses(2) .................. 45.1 23.2 76.5 39.9 (83.6)
---- ---- ---- ---- ------
Total operating expenses..................... (908.3) (1,042.0) (1,101.4) (1,330.3) (1,813.6)
------ -------- -------- -------- --------
Operating income................................. 799.4 519.8 523.4 671.5 1,782.7
Net interest income (expense).................... (11.2) (2.6) 8.7 35.6 46.7
Gain on disposal of investments.................. 7.3 - - - -
--- --- --- --- ---
Income before income taxes and minority interests 795.5 517.2 532.1 707.1 1,829.4
Income tax expense............................... (171.6) (113.0) (120.4) (157.2) (375.1)
------ ------ ------ ------ ------
Income before minority interests................. 623.9 404.2 411.7 549.9 1,454.3
Minority interests............................... 1.6 2.4 (0.6) (2.6) (2.2)
--- --- ---- ---- ----
Net income....................................... $ 625.5 $ 406.6 $ 411.1 $ 547.3 1,452.1
========= ======== ======== ======== =======
Earnings per share (basic)(3) ................... $ 0.75 $ 0.49 $ 0.49 $ 0.64 $ 1.64
Earnings per share (diluted)(3) ................. $ 0.75 $ 0.48 $ 0.48 $ 0.62 $ 1.58
Number of shares used in calculating
earnings per share (basic)..................... 832.2 834.6 845.1 859.1 885.7
Number of shares used in calculating
earnings per share (diluted)................... 835.2 839.1 864.3 901.2 936.1
Ratio of earnings to fixed charges(4) 18.6 13.4 12.7 16.3 29.3
Dividends per share(3) .......................... $ - $ - $ - $ 0.027 $ 0.03
4
Consolidated Balance Sheet Data (end of period):
Cash, cash equivalents and marketable
securities(1) $ 556.4 $ 702.2 $1,100.7 $1,823.1 $ 2,330.9
Working capital(5)............................... 611.8 443.5 855.1 398.5 372.5
Total assets..................................... 5,005.5 5,445.7 6,434.0 7,930.3 11,880.5
Short-term debt (including current portion)...... 428.2 424.6 191.2 123.2 141.6
Long-term debt (excluding current portion)(1) ... 194.9 356.4 755.8 1,348.5 2,700.5
Shareholders' equity(1) ......................... 3,260.0 3,307.4 4,083.3 4,563.9 6,124.6
Capital stock(6) ................................ 2,003.3 2,004.9 2,232.3 2,508.0 2,823.6
Consolidated Operating Data:
Capital expenditures(7) ........................ $ 1,125.2 $1,035.4 $ 947.3 $1,347.5 $ 3,317.6
Net cash provided by operating activities........ 980.7 983.8 1,012.5 1,469.3 2,431.8
Depreciation and amortization(7) ................ 535.9 608.1 704.0 806.8 1,108.2
- ---------
(1) On November 16, 2000, we issued $1,480.0 million initial aggregate
principal amount of zero-coupon unsubordinated convertible notes, due
2010, for net proceeds of $1,457.8 million. On September 22, 1999, we
completed an equity offering of 8,970,000 shares of capital stock at
$24.88 (adjusted for the 3-for-1 stock split) for net proceeds of $216.8
million. On September 22, 1999, we also completed a debt offering of
$720.9 million initial aggregate principal amount of zero-coupon
convertible Liquid Yield Option(TM) Notes, due 2009, for net proceeds of
$708.3 million. On June 10, 1998, we completed an equity offering of
18,000,000 shares of capital stock at $12.03 (adjusted for the 2-for-1
and 3-for-1 stock splits) for net proceeds of $208.8 million. On June 10,
1998, we also completed a debt offering of $431.7 million initial
aggregate principal amount of zero-coupon convertible Liquid Yield
Option(TM) Notes, due 2008, for net proceeds of $421.8 million. We have
issued a redemption notice for these LYONs and intend to redeem them at a
redemption price of $885.22 per $1,000 principal amount on June 11, 2001.
According to the information available to us, on May 11, 2001,
approximately $45.6 million in total indebtedness was outstanding under
the 1998 LYONs. Based on the amount outstanding on May 11, 2001, if all
remaining holders of the 1998 LYONs chose to convert them into Common
Shares before the redemption date, 2,772,291 Common Shares would be
issued.
(2) Other income and expenses include, among other things, funds received
through government agencies for research and development expenses, and
the cost of new plant start-ups, as well as foreign currency gains and
losses, the costs of certain activities relating to intellectual property
and goodwill amortization. Our reported research and development expenses
do not include design center, process engineering, pre-production or
industrialization costs.
(3) All share information has been adjusted to reflect the 2-for-1 stock
split effected in June 1999 and the 3-for-1 stock split effected in May
2000. See Note 2.19 to the Consolidated Financial Statements. Earnings
per share have been restated to reflect the adoption in 1997 of Statement
of Financial Accounting Standard No. 128 "Earnings per Share." See Note
2.10 and Note 12 to the Consolidated Financial Statements.
(4) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and minority interests,
plus fixed charges. Fixed charges consist of interest expenses.
(5) Working capital is calculated as current assets (excluding cash, cash
equivalents and marketable securities) less current liabilities
(excluding bank overdrafts, short-term debt and current portion of
long-term debt.)
(6) Capital stock consists of common stock and capital surplus.
(7) Capital expenditures are net of certain funds received through government
agencies, the effect of which is to decrease depreciation.
Risk Factors
Risks related to the semiconductor industry
The semiconductor industry is highly cyclical, which causes our results
to vary significantly
The semiconductor industry is highly cyclical and has been subject to
significant economic downturns at various times. These downturns are typically
characterized by production overcapacity, accelerated erosion of average selling
prices and reduced revenues. When these downturns have occurred, such as in 1991
and 1996 through 1998, our results of operations have been adversely affected.
In addition, the markets for semiconductors and electronic systems that use
semiconductor products are characterized by rapid technological change, leading
to more complex and powerful products, evolving industry standards, intense
competition, and fluctuations in end-user demand. According to published
industry data, since the fourth quarter 2000, the market has been experiencing a
downturn which has led to a reduction in the production volume of semiconductor
products being shipped since the third quarter of 2000, primarily due to excess
inventory held by end-customers, particularly computer, telecom and other
manufacturers.
Overall, the semiconductor market expanded significantly from 1983
through 2000. According to trade association data, annual worldwide sales of all
semiconductor products, referred to as the total available market or TAM, has
grown from 1983 through 2000 at an average compound annual growth rate of
approximately 15.4%. During the upward industry cycle in the first half of the
1990s, the semiconductor industry experienced significantly increased demand and
production capacity constraints, with the total available market growth rate
reaching over 40% in 1995. During this period, semiconductor manufacturers
increased capacity significantly. However, in 1996
5
the market experienced a significant downturn characterized by production
overcapacity and severe reductions in average selling prices that resulted in an
8.6% decrease in the total available market compared to 1995.
According to trade association data, the total available market
decreased by 8.4% in 1998 compared to 1997. However, the total available market
for worldwide sales of semiconductor products increased by approximately 36.8%
in 2000 compared to 1999. In addition, the serviceable available market, or SAM,
(which consists of the TAM but excluding the market for DRAM and opto-electronic
products), increased by approximately 34.8% in 2000 compared to 1999. Capital
expenditures of many semiconductor manufacturers increased in 2000 and have
remained at high levels in 2001. In the event of weakening demand, the addition
of new capacity may give rise to over capacity and competitive pricing which
will affect margins. Since the third quarter 2000, the industry has experienced
a downturn. We cannot guarantee that the current downturn or any future downturn
will not be severe or that it would not have a material adverse effect on our
results of operations.
Changes in industry capacity could lead to overcapacity and exacerbate
future industry downturns
In the 1990s, many companies invested in building or improving
semiconductor-manufacturing capacity. According to published industry data and
other industry sources, investment in worldwide semiconductor fabrication
capacity totaled approximately $43 billion in 1996, $38 billion in 1997, $28
billion in 1998, $33 billion in 1999 and $59 billion in 2000 or approximately
32%, 28%, 22%, 22% and 29%, respectively, of the total available market for such
years. In addition to international semiconductor companies, companies
specializing in operating semiconductor foundries (companies providing
outsourcing capacity on a third party basis) such as UMC, TSMC and Chartered,
have added significant capacity, particularly in Asia. These capacity additions
contributed to an increase of supply over demand during 1997 and 1998 and to
declines in average selling prices and the downturn in the industry during this
period. Recent investments in 2000 could further increase overcapacity in 2001.
There has also been a shift in existing industry capacity to production of
products that compete with our products. We believe that future fluctuations in
the rate of industry capacity additions relative to the growth rate in demand
for semiconductor products or the transformation of manufacturing facilities to
produce products that compete with our products could contribute to fluctuations
in average selling prices and affect our results of operations.
During industry downturns, our high fixed costs may adversely impact
our results
In less favorable industry environments, we are driven to reduce prices
in response to competitive pressures. Since the semiconductor industry is
characterized by high fixed costs, we cannot guarantee our ability to reduce our
total costs in line with revenue declines during industry downturns. Reduced
average selling prices for our products therefore adversely affect our results
of operations. Our gross profit margin declined from 41.4% in 1996 to 38.9% in
1997 and 38.3% in 1998 during difficult market conditions. Our gross profit
margin was 39.6% in 1999 and 46.0% in 2000. In the difficult market conditions
encountered during the first quarter of 2001, our gross margin decreased by 2.9
percentage points compared to the fourth quarter 2000 and we expect that it will
further decrease by between 2.5 percentage points and 4.5 percentage points in
the second quarter of 2001 compared to the first quarter 2001. We cannot
guarantee that increased competition in our core product markets will not lead
to further price erosion, lower revenue growth rates and lower margins for us in
the future.
Competitive factors in our industry make our competitive environment
intense
We compete on the basis of a variety of factors, and our success
depends on our ability to compete successfully in all of the relevant areas. We
compete in different product lines to various degrees on the following bases:
o price
o technical performance
o product features
o product system compatibility
o product design
o availability
6
o quality
o sales and technical support
Our ability to compete successfully also depends on factors partially
outside of our control, including:
o successful and timely development of new products and
manufacturing processes
o manufacturing yields
o product availability
o industry and general economic trends
Our results may be adversely impacted by worldwide economic downturns
Our results are increasingly linked to worldwide economic trends,
especially in the United States, the European Union and Japan. The economic
situation in Asia in 1998 had a negative effect on the worldwide semiconductor
market and made semiconductor and end-use market requirements more difficult to
predict. The current economic slow-down in the United States, linked to a
declining GDP growth rate and to inventory build-ups by certain customers for
semiconductor products, is also negatively impacting the semiconductor market
which, following a growth of 36.8% in 2000, has declined by over 4% in the first
quarter of 2001, compared to the first quarter of 2000, and by over 19% over the
fourth quarter of 2000, according to industry sources. We believe that these
market developments are creating additional pressures on unit demand and on
semiconductor prices in general. To the extent economic uncertainties cause our
customers to experience reduced demand for their products that include our
products, our results of operations could be adversely affected.
Because we operate in an industry where technology changes rapidly, our
products may become obsolete and we may not be able to develop new ones in a
timely manner
The market for our products is characterized by rapidly changing
technology. Therefore, our success is highly dependent upon our ability to
develop and manufacture increasingly complex new products on a cost-effective
basis, to introduce them in the marketplace on a timely basis, and to have them
selected for design into future products of leading systems manufacturers. We
have committed and intend to continue to commit substantial resources to the
development of new products. Because new product development commitments must be
made well in advance of sales, however, our new product decisions must
anticipate both future demand and the technology that will be available to
supply such demand. Delays in developing new products with anticipated
technological advances, failure to win new design projects for customers or in
commencing volume shipments of new products, may have an adverse effect on our
business. In addition, there can be no assurance that new products, if
introduced, will gain market acceptance or will not be adversely affected by new
technological changes or new product announcements by others.
Our future success depends in part upon our ability to develop and
implement new design and process technologies
Semiconductor design and process technologies are subject to rapid
technological change and require large expenditures for capital investment and
research and development. We are developing advanced and standardized design
tools for our processes as well as libraries of macrofunctions and megafunctions
for many of our products. We are also focusing on improving our concurrent
engineering practices to better coordinate design activities and reduce overall
time-to-market. If we experience substantial delays in developing new design or
process technologies or inefficiently implement production increases or
transitions, our results of operations could be adversely affected.
Loss of our key employees could hurt our competitive position
As is common in the semiconductor industry, our success depends to a
significant extent upon the continued service of our key senior executives and
research and development, engineering, marketing, sales, manufacturing, support
and other personnel. Our success also depends upon our 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
7
material adverse effect on us. Mr. Pasquale Pistorio, age 65, has been our
president and chief executive officer since our formation in 1987 and he was
reappointed at our 1999 annual shareholders' meeting for a three-year term
expiring at our annual general meeting to be held in 2002. We do not maintain
insurance with respect to the loss of any of our key personnel.
Some of our production processes and materials are environmentally
sensitive, which could lead to increased costs due to environmental regulations
or to damage to the environment
We are subject to a variety of governmental regulations relating to the
use, storage, discharge and disposal of chemicals, gases and other hazardous
substances used in our manufacturing processes. We have established proactive
environmental policies with respect to the handling of chemicals, gases,
emissions and waste disposals from our manufacturing operations, and we have not
suffered material environmental claims in the past. We believe that our
activities comply with presently applicable environmental regulations in all
material respects. All of our facilities have been approved as being in
compliance with the EU Eco-Management and Audit Scheme regulations, and have
also obtained ISO 14001 certification. We are participating in various working
groups set up by the European Commission to propose new legislation regarding
the collection, recovery and disposal of electronic equipment, as well as
banning the use of lead and some flame retardants in manufacturing electronic
components. We intend to proactively implement such new legislation, when
enacted, in line with our commitment towards environmental protection.
We cannot assure you, however, that the implementation of any such
legislation could not adversely affect our manufacturing costs or product sales
by requiring us to acquire costly equipment or materials, or to incur other
significant expenses in adapting our manufacturing processes or waste and
emission disposal processes. Furthermore, environmental claims or our failure to
comply with present or future regulations could result in the assessment of
damages or imposition of fines against us, suspension of production or a
cessation of operations and, as with other companies engaged in similar
activities, any failure by us to control the use of, or adequately restrict the
discharge of hazardous substances could subject us to future liabilities.
Because we depend on a limited number of suppliers for raw materials,
we may experience supply disruptions or pricing pressure
Our manufacturing operations depend upon obtaining adequate supplies of
quality raw materials on a timely basis. Thus, our results of operations would
be adversely affected if we were unable to obtain adequate supplies of raw
materials in a timely manner or if there were significant increases in the costs
of raw materials or problems with the quality of these raw materials. A number
of materials are available from a limited number of suppliers, or from a limited
number of suppliers in a particular region. In addition, we purchase raw
materials such as silicon wafers, lead frames, mold compounds, ceramic packages
and chemicals and gases from a number of suppliers on a just-in-time basis.
Although supplies for the raw materials used by us are currently adequate,
shortages could occur in various essential materials due to interruption of
supply or increased demand in the industry. In addition, suppliers may extend
lead times, limit supply to us or increase prices due to capacity constraints or
other factors. Any such supply limitations or price increases could adversely
affect our quarterly or annual results of operations.
Risk factors related to our operations
Our operating results may vary significantly from quarter to quarter
and annually
Our operating results are affected by a wide variety of factors that
could materially and adversely affect revenues and profitability or lead to
significant variability of operating results. These factors include, among
others, the cyclicality of the semiconductor and electronic systems industries,
capital requirements and the availability of funding, competition, new product
development and technological change, and manufacturing problems. In addition, a
number of other factors could lead to fluctuations in quarterly and annual
operating results, including:
o order cancellations or reschedulings by customers
o reduced bookings or product returns by key customers
o changes in distribution arrangements
8
o intellectual property developments
o failure to win new design projects
o problems with product quality
o litigation
o possible acquisitions
o problems in obtaining adequate raw materials on a timely basis
o the loss of key personnel
Unfavorable changes in the above or other factors have in the past and
may in the future adversely affect our operating results. In addition, 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 constraints and we have experienced an increasing
reliance on orders placed and shipped within the same month. During, industry
downturns, we experience lower levels of backlog, which in turn reduces our
management's ability to forecast production levels, revenues and margins.
We face intense competition in our core product lines as well as in
emerging applications from both large integrated manufacturers and smaller niche
companies
The semiconductor industry is intensely competitive and we face
significant competition in each of our product lines. Some of our competitors
are large integrated manufacturing groups that compete with us in most of our
product lines. A few of these large companies have substantially greater
financial and other resources than we do. As a result, these companies may be
able to invest more than we can afford in research and development, in the
construction of large-scale, advanced, cost effective manufacturing plants and
in the marketing of products, and this may adversely affect our ability to take
advantage of potentially profitable business opportunities. Such large
competitors include:
o Advanced Micro Devices
o Agere Systems
o Analog Devices
o Atmel
o Broadcom
o Fujitsu
o Hitachi
o Infineon Technologies
o Intel
o LSI Logic
o Matsushita
o Mitsubishi Electric Corporation
o Motorola
o National Semiconductor
o Nippon Electric Company
9
o ON Semiconductor
o Philips Semiconductors
o Samsung
o Texas Instruments
o Toshiba
In addition, we are facing increased competition from smaller niche
companies that specialize in certain product lines and who may decide to invest
more than we do in research and development, manufacturing and marketing of such
selected products. These competitors include design houses, many of which use
semiconductor foundry companies that produce high volume products and may offer
competitive pricing. These foundry companies have expanded significantly in
recent years, particularly in Asia. Other smaller niche competitors include
manufacturers of standard semiconductors, integrated circuits for specific
applications and fully customized integrated circuits, including both chip and
board-level products. In addition, some of our customers have developed their
own integrated circuit products and foundry operations.
Certain of our competitors have increased their focus on products that
compete with our products
In recent years, some of our competitors have redirected their
marketing focus and manufacturing capacity toward products that compete with our
products. We believe increased focus by our competitors in our core product
markets is generating greater pricing pressure, increased competition for market
share in the serviceable available market, and a generally more challenging
market environment for us. In addition, as new products are developed we will
face significant competition in each of these markets. We cannot guarantee that
we will be able to maintain or establish a strong market position in all of our
product markets.
Because we have our own manufacturing facilities, our capital needs are
high compared to competitors who do not produce their own products, and they
remain high during industry downturns
As a result of our strategic choice to maintain control of our advanced
proprietary manufacturing technologies to serve our customer base and develop
our strategic alliances, we require significant amounts of capital to build,
expand, modernize and maintain our facilities. Some of our competitors, however,
do not manufacture their own products, and therefore do not require significant
capital expenditures for their facilities. Our capital expenditures totaled $0.9
billion in 1998, $1.3 billion in 1999 and $3.3 billion in 2000. Due to the
current market situation, we have reduced our capital expenditure forecast for
2001 from approximately $2.5 billion to approximately $1.9 billion. However, we
expect to continue to invest significantly in the coming years as the
requirements of new technologies increase the cost of production equipment,
although we intend to modulate such investments in line with market
requirements. We will continue to monitor our level of capital spending, taking
into consideration factors such as trends in the semiconductor market and
capacity utilization.
The semiconductor industry also requires heavy commitments of funds for
research and development necessary to keep up with the rapid pace of
technological change and to consistently develop innovative, performing and
cost-effective products. We intend to continue to increase research and
development expenditures in the future, although not necessarily as a percentage
of net revenues.
We could need additional funding in the coming years
At December 31, 2000, we had a negative net financial position (total
debt, net of cash, cash equivalents and marketable securities) of $511.2
million. As the cost of new manufacturing facilities is increasing, due to the
complexity of advanced sub-micron technology and required manufacturing
equipment, we may expand or upgrade capacity based on market conditions. In that
event, or if we proceed with acquisitions, we may incur additional indebtedness,
which could increase our interest costs and adversely affect our results. In
such circumstances, we may need to issue additional debt or equity, or both.
Our manufacturing processes are highly complex, costly and potentially
vulnerable to impurities and disruptions that can significantly increase our
costs and delay product shipments to our customers
10
Our manufacturing processes are highly complex, require advanced and
increasingly 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 in the
past few years we have significantly enhanced our manufacturing capability in
terms of efficiency, precision and capacity, we have from time to time
experienced production difficulties that have caused delivery delays and quality
control problems, as is common in the semiconductor industry. We cannot
guarantee that we will be able to increase the capacity, efficiency or precision
of our manufacturing capabilities in the future to the same extent as in the
past. We might also experience production difficulties in the future. In
addition, during past periods of high revenue growth for us, our manufacturing
facilities have operated at high capacity, which has led to production
constraints.
As is common in the semiconductor industry, we have from time to time
experienced difficulty in ramping up production at new facilities or effecting
transitions to new manufacturing processes. As a result, we have suffered delays
in product deliveries or reduced yields. In the future, we might face:
o construction delays
o delays in ramping up production at new facilities or on new
lines, in upgrading or expanding existing facilities, or in
changing our process technologies
o interruptions in production
o delivery delays
o manufacturing problems in achieving acceptable yields
o capacity constraints
o contamination or fires, storms, earthquakes or other acts of
nature
the impact of which is exacerbated during a period of industry constraint.
In addition, our development of fabrication facilities that include
200mm or 300mm capabilities, or which require advanced technologies has
increased the potential for losses associated with production difficulties,
imperfections, or other causes of defects. If production is interrupted at a
manufacturing facility, we may not be able to shift production to other
facilities on a timely basis or customers may decide to purchase products from
another supplier. In either case the loss of revenues and impact on our
relationships with our customers could be significant. Our 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.
We may not be able to increase capacity to meet additional demand,
which could adversely affect our ability to take advantage of profitable
business opportunities
Our ability to increase capacity in response to increasing customer
demand will be an important factor in our future profitability. To increase
capacity, we may need to expand or modernize our manufacturing facilities, which
may require significant amounts of capital and time to accomplish. In addition,
we are dependent upon suppliers of semiconductor manufacturing equipment to
provide us with the necessary equipment. During periods of increased demand,
these suppliers may not be able to provide such equipment on a timely basis. As
a result, we may lose opportunities to provide new products or greater volumes
of products to customers and the associated revenues.
In a period of market downturn, we may face overcapacity in some of our
older fabrication facilities
In a period of market downturn, we may have overcapacity, particularly
in our older fabrication facilities that use mature process technology. We, like
other semiconductor manufacturers, could have mature fabrication facility
capacity being only partially used. This may affect our cost of operations if we
are unable to simultaneously and proportionately cut our manufacturing costs or
make other necessary savings in due time.
11
If our outside wafer suppliers fail to perform, this could adversely
affect our ability to exploit growth opportunities
In 2000, to meet anticipated requirements for HCMOS wafers, we used
outside suppliers, or foundries, for the supply of up to 15% of our requirements
for these wafers. We do not intend to increase our reliance on front-end
manufacturing through external foundries beyond this level. In fact, in a period
of market downturn, our reliance on such suppliers may decrease. For example, in
the first quarter 2001, they represented only 9% of our wafer requirements,
compared to an average of 11% in the year 2000. However, when our markets grow,
we may face capacity constraints and we expect to continue to rely on
third-party wafer suppliers without having the same degree of management control
and supervision over their operations as we do over our own. If these suppliers
experience manufacturing difficulties, delays, or reduced yields, our results of
operations and ability to satisfy customer demand could suffer. In addition,
purchasing rather than manufacturing these products may adversely affect our
gross profit margin if the purchase costs of these products are higher than our
own manufacturing costs.
Our common share price and operating results may be negatively affected
by potential acquisitions
Our growth to date had primarily been organic. In 1999, however, we
made three acquisitions: the Peripheral Technology Solutions group from Adaptec
for a purchase price of approximately $72 million, Vision Group plc for a
purchase price of approximately $41 million and Arithmos for a purchase price of
approximately $42 million. In 2000 we acquired from Nortel Networks its
semiconductor business including a 150mm manufacturing facility located in
Ottawa, Canada, under the terms of a transaction which could involve a payment
of up to $100 million. In September 2000, we acquired the assets and business of
Waferscale Integration, Inc. for approximately $78 million. In December 2000, we
announced the acquisition of Portland Group Inc. (PGI), a vendor of compilers
and software developments tools to the high-performance parallel computing
market, for approximately $18 million. In January 2001, we announced the
acquisition of Ravisent's consumer electronics business for approximately $56
million, which transaction closed in March 2001. We may, from time to time,
consider making selected additional acquisitions that we believe would
complement or expand our existing business. We may pay for these acquisitions
with cash, our common shares or both. These acquisitions, if they occur, may
have a dilutive effect for existing shareholders and, whether they are paid for
in cash or common shares, may negatively affect our common share price. In
addition, acquisitions involve a number of risks and if not successful they
could adversely affect our operating results. Announcements concerning potential
acquisitions could be made at any time.
Our business can be adversely affected by changes in the value of the
U.S. dollar
A material variation in the value of the U.S. dollar against the
principal European and Asian currencies which have a material impact on us could
result in a favorable impact on our net income in the case of an appreciation of
the U.S. dollar, or a negative impact on our net income if the U.S. dollar
depreciates relative to these currencies. For example, the appreciation
registered by the U.S. dollar in 2000 against the principal European and Asian
currencies (excluding the Japanese yen, which appreciated compared to the U.S.
dollar) resulted in a favorable impact on results of operations for 2000,
because of the favorable impact on cost of sales and operating expenses. In
addition, the balance sheet impact of translation adjustments has been, and may
be expected to continue to be, material from period to period. Our policy is to
monitor and cover a portion of our exchange rate exposure, and we manage our
operations to mitigate, but not eliminate, the positive or negative impact of
exchange rate fluctuations.
Our controlling shareholders' interests may conflict with your
interests
STMicroelectronics Holding II B.V. ("ST Holding II"), a wholly owned
subsidiary of ST Holding N.V. ("ST Holding"), owns in excess of 40% of our
outstanding common shares and is effectively in a position to control actions
that require shareholder approval, including corporate actions and the election
of the Supervisory Board and the Managing Board. As permitted by our articles of
association, the Supervisory Board has specified further selected actions by our
Managing Board that require the approval of the Supervisory Board.
ST Holding is 50% owned by a French shareholder that is indirectly
controlled by the French government and 50% owned by an Italian shareholder in
whom the Italian government holds approximately 37% of the share capital and
retains special powers to approve or determine certain corporate actions. These
French and Italian shareholder groups of ST Holding have entered into a
shareholders agreement which enables each of them to designate three members of
our Supervisory Board and includes provisions requiring the approval of the
supervisory
12
board of ST Holding for actions by ST Holding, us and our subsidiaries. Such
shareholders agreement also contemplates that equilibrium will be maintained in
the levels of research and development and related expenditures between France
and Italy.
The shareholders of FT1CI (the holding company for the two indirect
French shareholders of ST Holding) also have entered into a separate
shareholders agreement that in effect requires the approval of the board of
directors of each such company before members of our Supervisory Board appointed
by the group of French shareholders may approve specified actions to be taken by
ST Holding, ST Holding II, us or our subsidiaries. In addition, as is the case
with other companies controlled by the French government, certain Ministries of
The Republic of France may veto any decision taken by the board of directors of
FT1CI. These requirements for the prior approval of various actions to be taken
by us and our subsidiaries may give rise to a conflict of interest between our
interests and your interests, on the one hand, and the interests of the
individual shareholders approving such actions, on the other, and may result in
a delay in the ability of our Managing 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 supervising our
management.
In addition, our indirect shareholders, their affiliates and we may
have contractual and other business relationships and may engage in significant
transactions from time to time. Although it is anticipated that any such
transactions and agreements will be on terms no less favorable to us than we
could obtain in comparable contracts with unaffiliated third parties, conflicts
of interest may arise between us and our indirect shareholders and their
affiliates in a number of circumstances.
Our shareholder structure and our preference shares may deter a change
of control
On May 31, 1999, our shareholders at the annual general meeting
approved the creation of up to 180,000,000 preference shares. Pursuant to the
3-for-1 stock split effected in May 2000, the number of such preference shares
has increased to 540,000,000. 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, 1999, we agreed, in order to protect ourselves from a
hostile takeover or other similar action, to enter into an option agreement with
ST Holding II, which provides that up to 540,000,000 preference shares shall be
issued to ST Holding II upon its request and subject to the adoption of a
resolution of our Supervisory Board 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 our issued share capital. The preference shares, if issued, would
have priority with respect to dividends and distributions upon liquidation over
the common shares. The effect of the preference shares may be to deter potential
acquirors from effecting an unsolicited acquisition resulting in a change of
control. In addition, any issuance of additional capital within the limits of
our authorized share capital, as approved by our shareholders, is subject to the
approval of our Supervisory Board and of the Supervisory Board of ST Holding
(the entity which controls the entire share capital of ST Holding II).
Substantial sales of our common shares into the market could cause the
market price of our common shares to drop significantly
As of December 31, 2000, 889,881,287 of our common shares were
outstanding, not including (i) common shares issuable under our various employee
stock option plans or employee share purchase plans, or (ii) common shares
issuable upon conversion of our outstanding convertible debt securities.
Substantial sales of existing shares of our common shares by existing
shareholders, or newly issued shares or convertible debt securities by us, could
cause the market price of our common shares to drop significantly. The timing
and size of any future primary or secondary offerings will depend upon a variety
of factors, including, in particular, market conditions.
The shareholders of ST Holding entered into an agreement on August 31,
1999 pursuant to which they agreed to maintain their interest at least 40% of
our share capital and voting rights until at least December 31, 2000. ST Holding
has informed us that its shareholders have not extended such agreement.
Therefore, we cannot exclude the possibility that the percentage of our common
stock and of our voting rights held by ST Holding may change at any time. Any
such transaction, or publicity concerning such a potential transaction, could
affect the market price of our common shares and cause the market price of our
common shares to drop significantly. See "Item 7: Major Shareholders and Related
Party Transactions - Major Shareholders."
13
Disruptions in our relationships with any one of our key customers
could adversely affect our results of operations
We have several large customers, some of whom have entered into
strategic alliances with us. In 2000, our largest customer was Nokia and it
accounted for approximately 13% of net revenues, and our top ten customers
accounted for approximately 47% of net revenues. We cannot guarantee that our
largest customers will continue to book the same level of sales with us that
they have in the past. Many of our key customers operate in cyclical businesses
that are also highly competitive, and their own demands and market positions may
vary considerably. Our customers have in the past, and may in the future, vary
order levels significantly from period to period. In addition, approximately 18%
of our net revenues were made through distributors in each of 1998, 1999 and
2000. We cannot guarantee that such customers or distributors, or any other
customers, will continue to place orders with us in the future at the same
levels as in prior periods. If we were to lose one or more of our customers or
distributors, or if any key customer or distributor were to reduce its bookings,
increase its product returns or fail to meet its payment obligations, our
operating results could be adversely affected. If orders are canceled, we may
not be able to resell products previously made or require the customers who have
ordered these products to pay for them.
We depend on patents to protect our rights to our technology
We depend in part on patents and other intellectual property rights
covering our products and their design and manufacturing processes. We intend to
continue to seek patents on our inventions and manufacturing processes. The
process of seeking patent protection can be long and expensive, however, and we
cannot guarantee that we will receive patents from currently pending or future
applications. Even if patents are issued, they may not be of sufficient scope or
strength to provide meaningful protection or any commercial advantage. In
addition, effective patent, copyright and trade secret protection may be
unavailable or limited in some countries. Competitors may also develop
technologies that are protected by patents and other intellectual property and
therefore either be unavailable to us or be made available to us subject to
adverse terms and conditions. We may not be able to obtain licenses or other
rights to necessary intellectual property on acceptable terms.
Because patent and other intellectual property litigation is costly and
unpredictable, our attempts to protect our rights or to defend ourselves against
claims made by others could impose high costs and risks on our business
Litigation that could demand financial and management resources may be
necessary to enforce our patents or other intellectual property rights. Also, we
may become involved in costly litigation brought against us regarding patents,
mask works, copyrights, trademarks or trade secrets. If we cannot obtain
licenses or other intellectual property rights, or if we have litigation
expenses or judgments that are contrary to us, our results of operations or
financial condition could be hurt. We have from time to time received, and may
in the future receive, communications alleging possible infringement of patents
and other intellectual property rights of others. Regardless of the validity or
the successful assertion of such claims, we could incur significant costs with
respect to the defense thereof which could have a material adverse effect on our
results of operations or financial condition.
We have benefitted from state funding in France and Italy which might
become unavailable, and as a result our costs could increase
Like many other semiconductor manufacturers operating in Europe, we
have had the benefit of governmental funding for research and development
expenses, industrialization costs (which include some of the costs incurred to
bring prototype products to the production stage) and capital investment as well
as low-interest financing. As a result of our history, our research and
development facilities and manufacturing activities are concentrated mainly in
France and Italy, and the substantial majority of our state funding has been
derived from national and European Union programs in these countries. We have
entered into funding agreements with France and Italy, which set forth the
parameters for state support to us under selected national programs. These
funding agreements require compliance with European Union ("EU") regulations and
approval by EU authorities and annual and project-by-project reviews and
approvals. Recently, the EU confirmed our right to receive Euro143 million
under programs funded by the Italian government in accordance with the Italian
law for the development of the south of Italy.
14
The EU adopted guidelines in 1995 seeking to limit state aid for
research and development activities routinely performed in the normal course of
business. We cannot guarantee that we will continue to benefit from state aid
for research and development, that such aid will not be revoked or discontinued,
or that material aid granted by a government for research and development will
not be reviewed or challenged by the EU.
We rely on receiving funds allocated by state governments on a timely
basis. However, funding of programs in France and Italy is subject to annual
appropriation. If these governments were unable to provide anticipated funding
on a timely basis or if existing government-funded programs were curtailed or
discontinued, this could have a material adverse effect on our business,
operating results and financial condition. From time to time we have experienced
delays in the receipt of funding under these programs. As the availability and
timing of such funding are substantially outside our control, we cannot
guarantee that we 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 as favorable to us as those previously provided. In
addition, there can be no assurance that the funding granted to us may not be
revoked or challenged or discontinued in whole or in part by any competent state
or European authority, or competent administrative or judicial body, until the
legal time period for challenging or revoking such funding has elapsed.
Because we are a Dutch company subject to the corporate law of The
Netherlands, you might have difficulty protecting your interests in a court of
law or otherwise
The corporate affairs of STMicrolectronics NV are governed by our
articles of association and by the laws governing corporations incorporated in
The Netherlands. The corporate affairs of each of the consolidated subsidiaries
of STMicroelectronics NV are governed by the articles of association and by the
laws governing corporations incorporated in the jurisdiction in which such
consolidated subsidiary is incorporated. Your rights and the responsibilities of
members of our Supervisory Board under Dutch law are not as clearly established
as under the rules of some U.S. jurisdictions. Therefore, you may have more
difficulty in protecting your interests in the face of actions by our
management, members of our Supervisory Board or our controlling shareholders
than you would have if we were incorporated in the United States. Under our
articles of association, when our annual accounts are adopted by the general
meeting of shareholders, the members of our Managing Board and Supervisory Board
are discharged from liability for their actions during the financial year
concerned, unless a reservation is made by the general meeting of shareholders.
This is without prejudice to the provisions of Dutch law, including provisions
relating to liability of members of supervisory boards and managing boards upon
bankruptcy of a company pursuant to articles 2:138 and 2:149 of the Dutch Civil
Code.
Our executive offices and a substantial portion of our assets are
located outside the United States. In addition, ST Holding II and most members
of our Managaging and Supervisory Boards are residents of France, Italy,
Switzerland and jurisdictions other than the United States and Canada. As a
result, it may be difficult for you to effect service within the United States
or Canada upon us, ST Holding II, members of our Managing or our Supervisory
Boards. It may also be difficult for you to enforce outside the United States or
Canada judgments obtained against such persons in U.S. or Canadian courts, or to
enforce in U.S. or Canadian courts judgments obtained against such persons in
courts in jurisdictions outside the United States or Canada. This could be true
in any legal action, including actions predicated upon the civil liability
provisions of the U.S. securities laws. In addition, it may be difficult for you
to enforce, in original actions brought in courts in jurisdictions located
outside the United States, liabilities predicated upon the U.S. securities laws.
Removal of our common shares from the CAC 40 could adversely affect the
price of our common shares
Our common shares have been included in the CAC 40 index on Euronext
Paris since November 12, 1997. However, our common shares could be removed from
the CAC 40, which could adversely affect the market price of our common shares.
Item 4. Information on the Company
History and Development of the Company
STMicroelectronics N.V (formerly known as SGS-Thomson Microelectronics
N.V.). 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 the former Thomson-CSF, now Thales, a French corporation) whereby
each company contributed their
15
respective semiconductor businesses in exchange for a 50% interest in
STMicroelectronics. We were incorporated in 1987, and our length of life is
indefinite. We have our corporate legal seat and are domiciled in Amsterdam, and
are organized under the laws of The Netherlands. We have our headquarters and
executive offices located in the vicinity of Geneva Airport at Route de Pre-Bois
20, ICC Bloc A, 1215 Geneva 15, Switzerland. Our main telephone number is
(41-22) 929-2929. We also maintain an administrative center at Technoparc du
Pays de Gex - B.P. 112, 165, rue Edouard Branly, 01637 Saint-Genis Pouilly,
France; telephone number (33-4) 5040-2640. STMicroelectronics N.V. (the "Company") is our parent
company and we also conduct our operations through our consolidated
subsidiaries.
For information on our principal capital expenditures and divestitures,
see "Item 5: Operating and Financial Review and Prospects."
Business Overview
We are 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. The Company believes it was eighth amongAccording to Dataquest-Gartner Group, we were
the sixth largest semiconductor company worldwide suppliers of semiconductor devices in 1999,2000 based on various
independent market research institutes and published company reports. On this
basis,sales.
According to the latest industry sources released in 2001, STMicroelectronics in
2000 was the world's leading supplier of differentiated
analogtelecom ICs and mixed-signal ICs (ASICs and ASSPs), digital decoder ICs (MPEG), disk
drive ICs, special automotive ICs, EPROM memories, and protection devices, and the
second leading supplier of total analog and mixed-signalmixed signal ICs, ADSL Kits, EEPROM memories,
thyristorsNVRAM memories, power diodes and triacs,thyristors. According to published industry
data, we are the leader for differentiated and smartcard MCUs. The Companymixed signal ASSP ICs, digital
decoder ICs, disk drive ICs, special automotive ICs and the second leading
producer for ADSL kits. We currently offersoffer more than 3,000 main types of
products to approximately 800 direct customers. Major customers include Alcatel,
Bosch, DaimlerChrysler, Delco, Echostar, Ericsson, Gemplus, Hewlett-Packard,
IBM, Marelli, Matsushita, Maxtor, Motorola, Nokia, Nortel Networks, Pace, Philips, Pioneer, Samsung,
Schlumberger, Scientific Atlanta, Seagate Technology, Siemens, Sony, Thomson
Multimedia and Western Digital. The
CompanyWe also sells itssell our products through distributors.
The Company offersWe offer a diversified product portfolio and developsdevelop products for a
wide range of market applications to reduce itsour dependence on any single
product, industry or application market. Within itsour diversified portfolio, the Company haswe
have focused on developing products that exploit itsour technological strengths in
creating customized, system-level solutions with substantial analog and
mixed-signal content. Products include differentiated ICs (which the Company defineswe define as
being itsour 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 haswe have
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 63% of the Company'sour net
revenues in 1999 compared to
approximately 62% in 1998. The Companyeach of 2000 and 1999. We also targetstarget applications that require
substantial analog and mixed-signal content and can exploit the Company'sour system level
expertise. AnalogAll analog ICs accounted for approximately 51%49% of the Company's
1999our 2000 net
revenues compared to approximately 50%51% in 1998,1999, while discrete devices accounted
for approximately 12%10% of the Company'sour net revenues in 19992000 compared to approximately 13%12%
in 1998. In general, differentiated ICs, in particular
analog ICs, experience less volatility in sales growth rates and average selling
prices than the overall semiconductor industry.
STMicroelectronics'1999.
Our products are manufactured and designed using a broad range of
manufacturing processes and proprietary design methods. STMicroelectronics usesWe use all of the
prevalent function-oriented process technologies, including CMOS, bipolar and
nonvolatile memory technologies. In addition, by combining basic processes, the Company haswe
have developed advanced systems-oriented technologies that enable itus 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'sour strategy for
many years, enables the Companyus to meet the increasing demand for "system-on-a-chip"
solutions. To complement this depth and diversity of process and design
technology, the Companywe also possessespossess a broad intellectual property portfolio that it useswe use
to enter into cross-licensing agreements with many major semiconductor
manufacturers.
Our products are organized into the following principal groups:
o Telecommunications, Peripherals and Automotive
16
o Consumer and Microcontroller
o Memory Products
o Discrete and Standard ICs
As part of our activities outside the above principal product groups,
we also have a New Ventures Group, which identifies and develops new business
opportunities to complement our existing businesses, and a Subsystems Product
Group, which produces subsystems for industrial and other applications.
The tables below set forth information on our net revenues by product
group and by geographic region:
Year ended December 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(in millions except percentages)
Net Revenues by Product Group:(1)
Telecommunications, Peripherals and Automotive(1) $1,614.0 $1,606.9 $1,855.2 $2,305.5 $3,481.7
Discrete and Standard ICs(1)..................... 778.1 839.5 816.7 927.9 1,213.1
Memory Products.................................. 736.8 708.6 659.6 835.9 1,552.9
Consumer and Microcontrollers(1)................. 870.2 738.8 805.8 881.7 1,438.9
New Ventures Group and Others(2)................. 123.3 125.4 110.5 105.3 126.6
-------- -------- -------- -------- --------
Total........................................ $4,122.4 $4,019.2 $4,247.8 $5,056.3 $7,813.2
======== ======== ======== ======== ========
Net Revenues by Geographic Region: (3)
Europe........................................... $1,788.5 $1,753.3 $1,768.9 $1,833.6 $2,629.2
North America.................................... 903.0 899.1 937.3 1,156.1 1,843.0
Asia Pacific..................................... 1,125.7 1,065.8 1,247.9 1,658.2 2,614.7
Japan............................................ 228.2 214.5 180.7 239.7 402.4
Emerging Markets(3).............................. 77.0 86.5 113.0 168.7 323.9
-------- -------- -------- -------- --------
Total........................................ $4,122.4 $4,019.2 $4,247.8 $5,056.3 $7,813.2
======== ======== ======== ======== ========
(as a percentage of net revenues)
Net Revenues by Product Group:(1)
Telecommunications, Peripherals and Automotive(1) 39.1% 40.0% 43.6% 45.6% 44.6%
Discrete and Standard ICs(1)..................... 18.9 20.9 19.2 18.4 15.5
Memory Products.................................. 17.9 17.6 15.5 16.5 19.9
Consumer and Microcontrollers(1)................. 21.1 18.4 19.0 17.4 18.4
New Ventures Group and Others(2)................. 3.0 3.1 2.7 2.1 1.6
--- --- --- --- ---
Total........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
Net Revenues by Geographic Region: (3)
Europe........................................... 43.4% 43.6% 41.6% 36.3% 33.6%
North America.................................... 21.9 22.4 22.1 22.9 23.6
Asia Pacific..................................... 27.3 26.5 29.4 32.8 33.5
Japan............................................ 5.5 5.3 4.3 4.7 5.2
Emerging Markets(3).............................. 1.9 2.2 2.6 3.3 4.1
--- --- --- --- ---
Total........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
- ----------
(1) In January 1999, we implemented organizational changes to better orient
our product groups to end-use applications. As a result, net revenues
have been restated for prior periods to reflect these changes. In
addition, the former Dedicated Products Group has become the
Telecommunications, Peripherals and Automotive Groups, while the former
Programmable Products Group has become the Consumer and Microcontrollers
Groups.
(2) Includes revenues from sales of subsystems and other products and from
the New Ventures Group, which was created in May 1994 to act as a center
for our new business opportunities.
(3) 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. In the fourth
quarter of 2000, Region Five changed its name to become the Emerging
Markets region.
17
We have received many awards. We were the only semiconductor company to
receive a AAA rating in eco-efficiency from Innovest Strategic Value Advisors
and were recipients of both the EPA Climate Protection Award in 1999 and the
Akira Inoue Award for Outstanding Achievement in Environmental, Health and
Safety in the Semiconductor Industry in December 2000. In recent years, our
regional subsidiaries have also received several prestigious awards were accorded to the Company's
regional subsidiaries, underscoring its long-standing commitment to business
excellence:awards: the
prestigious Malcolm Baldrige National Quality Award in the U.S., the Singapore
Quality Award, the Moroccan National Quality Award, and the EPA Climate Protection
Award (US). These, together with the Company's previous
honors -(U.S.), the Malaysian Prime Minister Quality Award and the Malta Quality
Award andAward. In 1997, we received the European Quality Award for Business Excellence
in the category of large businesses awarded in 1997 by the European Foundation for
Quality Management -Management. These awards illustrate the success of the Company'sour unified Total
Quality and Environmental Management philosophy on four continents. Total
Quality and Environmental Management or "TQEM" defines a common set of
objectives and performance measurements for 4
employees in all geographic regions,
at every stage of product design, development and production for all product
lines. See "Strategy" below"--Strategy" and "Item
2: Description"--Description of Property--Manufacturing."
Strategy
The Company introducedkey elements of our strategy are set forth below.
Broad Product Portfolio. We offer a diversified product portfolio and
develop products for a wide range of market applications to reduce our
dependence on any single product, industry or application market. Within our
diversified portfolio, we have focused on developing products that exploit our
technological strengths in creating customized, system-level solutions with
substantial analog and mixed-signal content. Products include differentiated ICs
(which we define as being our 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,
we have 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 63% of our net revenues in each of 2000 and 1999 and 62% in 1998.
We also target applications that require substantial analog and mixed-signal
content and can exploit our system level expertise. Analog ICs accounted for
approximately 49% of our 2000 net revenues compared to approximately 51% in 1999
several newand 50% in 1998, while discrete devices accounted for approximately 10% of our
net revenues in 2000 compared to approximately 12% in 1999 and 13% in 1998. In
general, 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, we can also benefit from selling
standard products. Consistent with this view, we have 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.
Total standard products (including all nonvolatile memories, discrete
devices, Smartcard ICs and all standard logical and linear ICs) represented
approximately 37% of our sales in 2000 and, in management's view, increased
sales of these products represent an opportunity to improve cash flow because
the manufacture of standard products requires moderate capital investment and to
saturate existing mature fabrication facilities.
Broad Range of Process and Design Technologies. We intend to continue
to exploit our expertise and experience with a wide range of process and design
technologies to develop our capabilities. We are 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 our
logic products and planssemicustom devices. We continually work with key suppliers to
further develop advanced and produce superintegrated, system-level silicon solutionsstandardized design methodologies for our CMOS, mixed
signals and nonvolatile memories processes as well as libraries of
macrofunctions and megafunctions for many of our products, and are focusing on
improving our concurrent engineering practices to better coordinate design
activities and reduce overall time-to-market. We are also working closely with
many of our 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.
18
Leading Global Customer Base with Focus on Strategic Alliances. We work
with our key customers to identify evolving needs and new applications and to
develop innovative products and product features. We also seek to use our access
to key customers as a setsupplier of application-specific products to establish
ourselves as a supplier across a broad range of products. Alliances with
customers allow us and our customers to share some of the risks of product
development and the customers to gain access to our process technologies and
manufacturing infrastructure. We have targeted alliances with customers in each
of our key application markets of telecommunications, automotive, consumer and
computer. We have established alliances with Alcatel, Bosch, Hewlett-Packard,
Marelli, Nokia, Nortel Networks, Pioneer, Seagate Technology, Thomson Multimedia
and Western Digital, among others. In establishing these alliances, we have also
aimed to cover our key geographical markets.
Integrated Presence in Key Regional Markets. We have 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 we are well positioned to
anticipate and meet our customers' business requirements in local markets.
Therefore, we have established front-end manufacturing facilities in the United
States (in Phoenix, Arizona; Carrollton, Texas; and Rancho Bernardo,
California), in Europe (Agrate, Castelletto and Catania, Italy; and Crolles,
Rennes, Rousset and Tours, France) and in Asia (Singapore); the more
labor-intensive back-end facilities have been located in Malaysia, Malta,
Morocco, Singapore and China, enabling us 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, we believe we can maintain strong relationships with our customers. We
intend to continue to build our integrated local presence in each region where
we compete in our efforts to better serve our customers and to develop an early
presence in potential high growth markets such as China, where we have both a
back-end facility and a design center, and India, where we have a design center.
Balanced Sales by Application and Region in High Growth Market
Segments. We have developed a strong product portfolio across major application
markets including computer peripherals, wireless communications, digital
consumer electronics, Smartcards, automotive and power management. While we are
consolidating our position in our established high volume businesses, including
switching, engine management, car safety, traditional analog TV, VCR, computer
peripherals, power and industrial and consumer appliances, we have also been
investing research and development and design resources to develop the next
generation of high growth applications, such as computer peripherals (including hard disk
drives, optical storage devices, inkjet printers, monitors, LCD displays and
webcams),smartcards, portable computing,
digital consumer devices (including(DVD, new generations of set-top boxes, DVDs, digital television,TV, digital
cameras and MP3 digital music players), wireless telecommunications products (including digitalcommunications (digital
cellular handsets)phones), digital
networks (including xDSL, ATM,data transport (fiber optic ICs and voice over IP, known as
VoIP), Internet protocol ("VoIP") and optical
network ICs) as well as(xDSL), new automotive electronics (including injection control,
safety, car radio and carproducts (car multimedia) and smartcards (including
telecommunications, banking, pay TVnew
generations of mass storage devices. We also maintain a geographically diverse
customer base across a broad range of market applications.
Pervasive TQEM Culture. We are fostering a corporate-wide TQEM culture
that defines a common set of objectives and personal identification)performance measurements for
employees in all geographic regions, at every stage of product design,
development, production and consignment for all product lines. TQEM in our
company is based on five key principles: management commitment, employee
empowerment, continuous improvement, management by fact and customer focus. TQEM
has become an integral part of our 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, we have continually improved average AIQ
(electrical) status levels. Most of our manufacturing facilities have been
certified to conform to ISO international quality standards and Eco Management
and Audit Scheme ("EAMS"). Several major customers, including Hewlett-Packard,
Nokia, Sharp, DaimlerChrysler and Sanyo have recognized our commitment to
quality and have honored us with quality awards in the recent past. Also in
recent years, several prestigious awards have been accorded to our regional
subsidiaries, underscoring our long-standing commitment to business excellence:
the prestigious Malcolm Baldrige National Quality Award in the U.S., the
Singapore Quality Award, the Moroccan National Quality Award, the EPA Climate
Protection Award (U.S.), the Malaysian Prime Minister Quality Award, and the
Malta Quality Award. In 1997 the European Quality Award for Business Excellence
in the category of large businesses was awarded to us by the European Foundation
for Quality Management. These awards illustrate the success of our unified Total
Quality and Environmental Management philosophy on four continents.
19
Pioneer in System-on-chip. Since our inception, we have leveraged our
know-how of a broad range of industries to integrate different system functions
on a single chip, pioneering the trend towards system evolutions on silicon and
superintegration. A modular approach is being utilized to develop options to the
main manufacturing processes and blocks of intellectual property; strategic
partnerships are the main lever for acquisitions of the system know-how to be
embedded on the chip. We currently supply highly integrated products in all our
main applications, and particularly in high volume domains such as hard disk
drives (disk controllers), set-top boxes and Digital video drives.
To date, our growth has been attributable primarily to internal growth.
However, we have recently proceeded with the acquisition of specific assets and
intellectual property, enhancing our expertise in specific business or markets.
In 1999, we acquired Peripheral Technology Solutions Group, a company
specialized in the design of products for the hard disk drive market, of Vision
Group, a leading designer and supplier of CMOS sensors and Arithmos, a company
which designs controller ICs for flat panel displays and LCD monitors. In 2000,
we acquired WSI, a manufacturer of programmable system memory devices, (in
September) and PGI, a vendor of computers and software development tools to the
high performance parallel computer market (in December). In additionJune 2000, we also
acquired from Nortel Networks its semiconductor business, including its design
and manufacturing activity in Ottawa. Furthermore, in March 2001, we completed
the acquisition of Ravisent's consumer electronics business. We may, from time
to time, consider making selected acquisitions of or targeted equity investments
in companies that we believe would complement or expand our existing business.
Announcements concerning potential acquisitions could be made at any time.
Acquisitions involve a number of risks that could adversely affect our
operating results, including: (i) the many dedicateddiversion 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 our
standards; (v) the risk that the businesses acquired will not maintain the
quality of products and services that we have historically provided; (vi) the
inability to attract and retain qualified management for the acquired business;
and (vii) our inability to retain customers of the acquired entity. There can be
no assurance that (a) we 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 us, if at all, or (c) any operations
acquired will be successfully integrated or that such operations will ultimately
have a positive impact on our business. See "Item 5: Operating and Financial
Review and Prospects -- Liquidity and Capital Resources."
Products and Technology
We design, develop, manufacture and market 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. Our products include
standard commodity components, full custom devices, semicustom ICs developed using
powerdevices and ASSPs
for analog, digital and mixed-signal applications. Historically, we have not
produced DRAMs or x86 microprocessors.
In 2000, we had four principal products groups, Telecommunications
Peripherals and Automative, Consumer and Microcontroller, Memory Products and
Discrete and Standard ICs. As part of our activities outside the principal
product groups, we also have a New Ventures Group, which identifies and develops
new business opportunities to complement our existing businesses, and a
Subsystem Product Group, which produces subsystems for industrial and other
applications. For a breakdown of net revenues by product group and geographic
region each of the five years ended December 31, 2000, see " - Business
Overview."
Telecommunications, Peripherals and Automotive Groups
The Telecommunications Group has two application divisions, and the
Automotive and Peripherals Group has four divisions. 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 Automotive 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
20
of the CompanyGroups' products are ASSPs, full-custom or semicustom devices that may
also include DSP and micro-controller cores.
The Telecommunications, Peripherals and Automotive Groups work closely
with customers to develop application-specific products using our technologies
and manufacturing capabilities. The breadth of our customer and application base
provides us with a source of stability in the cyclical semiconductor market. 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.
The Telecommunications Group has focused itstwo divisions:
(i) Wireline Telecommunications Products. Our wireline
telecommunications products are used in telephone sets,
modems, subscriber line interface cards (SLICs) for digital
central office switching equipment and high-speed electronic
and optical communications networks. In the field of broadband
networking, the success of our established strategic
partnership with Nortel Networks was reinforced by the new
agreements that included a commitment for $2 billion in sales
to Nortel over three years, and a development agreement
covering processes, packages and fundamental IP for high speed
optical interfaces, essential components for high-speed
optical-fiber network equipment. We also announced our entry
into the emerging market for optical switches, by signing a
letter of intent with Agilent Technologies for the development
and manufacture of innovative optical switch chips.
In the area of broadband access, we shipped more than four
million ADSL chipsets in 2000. Along with our strategic
partner Alcatel, we announced the joint development and
promotion of the DMT (Discrete Multi-Tone) modulation
technique as a worldwide standard for VDSL at the
international regulatory level. We also signed an agreement
with Telia AB for the transfer to us of all patent rights in
the Zipper-DMT VDSL technology jointly developed by us with
Telia.
In addition, we announced plans to develop an Enhanced G.Lite
ADSL (Asymmetrical Digital Subscriber Line) chipset for the
mass market through a joint project with Nortel Networks.
(ii) Wireless Telecommunications Products. In wireless
telecommunications, we focus our product offerings on cellular
phones, pagers and wireless local loop applications, serving
the major OEMs in each of these areas with differentiated ICs.
Regarding the cellular phone segment, new design wins for
radio frequency were achieved in Silicon-Germanium (SiGe)
technologies for next generation cellular phones (2.5G and
3G). Two leading manufacturers of mobile phones awarded us
with development contracts. One was for a multimedia processor
chip for next-generation mobile phones, while another leading
cellphone maker chose us to supply a radio frequency solution
for dual-mode terminals, using 0.35-micron SiGe technology. In
addition, we announced an agreement with TTPCom for the
development of GSM and GPRS (2.5G) baseband platform chips for
the next generation of mobile handsets and mobile Internet
devices based on our ST100 DSP core.
In addition, in the telecommunications area, Alcatel
Microelectronics has agreed to use our innovative ST100 as the
preferred DSP core for a variety of system-on-chip solutions
for GSM, xDSL, Voice-over-Internet Protocol (VoIP) and other
leading-edge technologies.
The Peripherals and Automotive Group has four divisions:
(i) Data Storage. We produce ICs for several data storage
applications, specializing in disk drives with advanced
solutions for read and write digital channels, controllers,
host interfaces, digital power processing and micromachinery.
We are working actively on super-integrating these
macro-functions into system-on-chip solutions. In September
2000, we announced two important additions to our Hard Disk
Drive IC portfolio. Aimed at 'dual servo' disk drives where
micropositioning will be used to increase drive density, the
L6670 Rotational Accelerometer System is a device containing
both a micromachined Micro-Electro-Mechanical System (MEMS)
sensor plus an interface chip, while the L6660 is a
Piezoelectric actuator driver built in 90V BCD technology. We
have also been awarded a design win from Seagate for the most
advanced
21
system-on-chip solution for high-volume, low-cost hard disk
drives. The chip will be the first to integrate the hard disk
controller, the new Super10 micro/DSP core and the read/write
channel. In addition to delivering first samples of a hard
disk controller with embedded DRAM built in 0.18-micron
technology and gaining important new design wins for hard disk
drive preamplifiers and dedicated power devices for high-end
and mobile disk drives, we were chosen by Quantum Technologies
to supply a SoC solution for a new hard disk drive. Based on
our new Super10 DSP enhanced microcontroller core, the new
device will also incorporate a hard disk controller, 4Mbit of
embedded dynamic RAM memory and interface functions. We will
supply the complete system solution, including firmware. In
February 2001, we introduced the world's first single-chip
solution for 16x DVD- and 48x CD- ROM drives. Called "Verdi"
(STA1000), the new solution integrates an ST10 16-bit
microprocessor core, a proprietary digital signal processor
core, memories, interfaces and application-specific digital
and mixed analog/digital functions.
(ii) Printers. We are focusing on inkjet printer components and are
an important supplier of pen chips, motor drivers, head
drivers, high performance photo quality applications and
digital color copiers. We are an important partner of
Hewlett-Packard for technology development and manufacturing
and are currently developing printer system on chip platforms.
Other notable successes in the printer field included
contracts with two other leading printer manufacturers to
develop system-on-chip solutions with embedded DRAM memory for
the 'digital printer engines' used in inkjet printers. With
these new contracts, we are now the chosen supplier at three
out of the four leading manufacturers. In the first quarter of
2001, we won further design wins for both inkjet and laser
printer engines and also ramped up production of 0.18-micron
printer engines for a very high volume order.
(iii) Audio and Automotive Products. Our audio products include
audio power amplifiers, audio processors and graphic equalizer
ICs. Our 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,
instrumentation systems and car multimedia. We believe we are
the leader in the manufacturing of car radio components, on
the basis of sales. We are currently developing solutions for
global positioning systems (GPS) and multimedia in the car. In
1999, we signed a strategic alliance for car entertainment
systems with Pioneer Electronics of Japan. Due to our
super-integration know-how, we have successfully expanded our
presence beyond Europe to the United States and Japan, further
accessing key customers such as Mitsubishi and Denso.
In 2000, we announced the world's first automotive grade
microcontroller with embedded Flash memory. Optimized for
automotive applications, the ST10F168 integrates the ST10
16-bit MCU core, 256kbytes of internal Flash memory plus
peripherals and RAM. We were awarded a contract to develop a
complex system-on-chip with both a powerful DSP - the ST120,
based on the ST100 core - and a 32-bit micro core for a new
traffic information system being developed by Cue Corporation
in the United States. In addition, we began a joint
development program with Marelli and Cadence for smart valves
for motor control in model year 2005. This program is based on
the ST120 DSP/MCU core. We signed an important agreement with
Italy's Autostrade for the development of a chipset that will
support the European standard for new generation tolling.
In 2001, our leading position in the automotive arena was
reinforced by the introduction of a new 16-bit
automotive-grade microcontroller chip with embedded Flash
memory whose performance is guaranteed over the entire
automotive temperature range, making it ideal for fast-growing
applications such as engine control. In addition, our
microcontroller built using 0.18 -micron embedded Flash
technology was selected by Siemens for a next generation
airbag system.
In the audio field, we achieved a major technical milestone
with XM Satellite Radio, the satellite radio broadcaster.
Following the successful fabrication and testing of XM's
custom chips, the devices are now being delivered to XM radio
partners for integration into XM satellite-capable radios. In
the first quarter 2001, we received an order for one million
kits for the WorldSpace satellite radio receivers, following
the successful launch of the second satellite.
22
(iv) Industrial and Power Supplies. We design and manufacture
products for industrial automation systems, lighting
applications (lamp ballast), battery chargers and switch mode
power supplies (SMPS). Our 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. We are currently developing superintegrated
solutions using our broad range of technologies (CMOS, BiCMOS, BCD) and our
expertise in microcontrollers/DSP cores, dedicated IC megacells and embedded
memory capability.
Other important technology deals concluded during the year included the
acquisition of Portland Group Inc. (PGI). PGI is a developer of compilers and
software development tools for the high-performance parallel computing market
and the acquisition of full ownership of PGI's operations substantially
reinforces our strength in embedded DSP system-on-chip solutions for
applications including wireless, wireline, data storage, multimedia and
automotive.
Consumer and Microcontroller Groups
The Consumer and Microcontroller Groups (CMG) are responsible for the
design, development and manufacture of microcontrollers, graphic accelerators
and Application Specific Standard Products (ASSP) targeted at high growth
digital consumer applications, including digital set-top boxes, Digital
Versatile Disk (DVD) players, digital cameras and digital TV.
Through year-end 2000, CMG was organized by system partitionings, with
front-end ICs (reception and demodulation of the video signal), back-end ICs
(decompression and control of the video signal) and micro cores. In the first
quarter 2001, CMG was reorganized by application and regrouped the front-end,
the back-end and the micro cores activities of each application. Two new
divisions have been created: the set-top-box division and the DVD division. The
TV, the Imaging and Display, the Graphics Products and the Microcontroller
divisions are unchanged.
The Consumer and Microcontroller Groups are divided into the Consumer
Group and the Microcontrollers Group. The Consumer Group is further divided into
five divisions: set-top boxes, DVD, TV, Imaging and Display division and the
Graphics Products division.
Consumer Group. We consolidated our leadership in digital consumer
applications on the basis of shipments in 2000, particularly for set-top boxes,
DVDs and digital TV, and we shipped more than 30 million MPEG2 decoder ICs
embedding our ST20 32-bit RISC core in 2000.
(i) Set-top box. We have expanded our product and customer base
introducing solutions for set-top boxes with web-browsing and
video recording and time-shifting functionality. We were the
only semiconductor company at the USA National Association of
Broadcasters show (NAB2000) in Las Vegas to demonstrate
advanced Personal Video Recording (PVR) and Hard Disk Drive
capability, on our STi5512 product family, in conjunction with
NDS Group. We reinforced the market leadership of our STi5500
(OMEGA) family of set-top box back-end decoders with the
introduction of the STi5518, which retains all of the features
of the STi5500 but adds support for Dolby Digital and MP3
audio decoding as well as additional logic to ease the
connection of hard disk drives, making the device ideal for
emerging 'convergence' products that offer features such as
pausing and time-shifting of live TV. In addition, we shipped
production quantities of our STi5508 OMEGA set-top box chip to
customers such as Echostar and major design wins were achieved
in the U.S. and Europe for the STV0399, the world's first
device to integrate a Zero IF tuner, a multi-standard
demodulator (QPSK and 8-PSK) and a Forward Error Correction
(FEC) block in a single CMOS chip.
We entered into new agreements for expanding our leadership
position in digital consumer applications on the basis of
sales. Following the 1999 agreement with Scientific Atlanta
(SA) on DOCSIS (Data Over Cable System Interface
Specification), we strengthened our cooperation with SA to
supply key components for the Explorer 2000 and 6000 digital
cable set-top boxes. In May
23
2000, we announced a license agreement with France Telecom
that gives us worldwide rights to exploit France Telecom's
patented Turbo Code Forward Error Correction technology. This
allows the information carrying capacity of a communications
system to be substantially increased and could dramatically
affect the Digital Satellite TV market by significantly
increasing the number of TV channels broadcast by existing
satellites. In September 2000, we disclosed details of plans
with Norwegian company Nera to develop chipsets and related
software for providing turnkey interactive broadband solutions
for set-top boxes.
(ii) DVD. In the field of DVD players, after RCA and Philips, we
won designs for DVD and Combo boxes (set-top box plus DVD) in
the U.S. and China. Further strengthening our positioning, we
introduced in the second quarter 2000 a new DVD decoder/host
processor chip, the STi5508, that offers all the functions of
the popular STi5505 along with enhanced audio and video
features, including a powerful Karaoke processor and MP3
decoder. The STi5508 has been designed into DVD drives of
major Asian manufacturers. In 2001, following several years of
successful cooperation combining Ravisent's DVD software and
ST's OMEGA family of DVD decoder processors, we expanded our
ability to provide complete DVD system solutions by acquiring
the Consumer Electronics business of Ravisent Technologies.
(iii) TV. This division addresses both the analog and digital
television markets with a wide range of highly integrated
ASSPs and application-specific microcontrollers.
(iv) Imaging and Display Division. Our Imaging and Display Division
focuses on video camera recorders, monitors and flat panel
displays and image capturing and transmission. In 1999, we
finalized the acquisition of Vision Group plc, a U.K. company
based in Edinburgh, Scotland, which developed a technology for
production of CMOS sensors. CMOS sensors significantly reduce
the cost of digital cameras; 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.
We are actively pursuing opportunities in webcam, digital
still camera and cellular phone applications. In 2000, we
unveiled a highly integrated digital color camera module
optimized for use in the next generation of cellular phones,
personal digital assistants and other portable communications
devices. The Digital Camera Module meets two key requirements
for portable applications - small size and low power
consumption.
(v) Graphics Products. In early 1999, we entered into a
partnership agreement with Imagination Technologies, (formerly
Videologic) of the United Kingdom for developing the next
generation 3D accelerator aimed at the PC and digital consumer
market. In June 2000, we introduced our KYRO 3D graphics and
video accelerator, which was the first full-featured PC
graphics and video accelerator based on Imagination
Technologies' PowerVR Series 3 technology. We gained several
design wins from PC-based graphics card manufacturers in
Taiwan and China. In March 2001, we announced our
second-generation 3D Graphics and Video Accelerator derived
from our partnership with Imagination Technologies. At the
same time, we announced a commercial partnership and technical
cooperation with Hercules to develop further leading-edge PC
Graphics add-in card solutions exploiting KYRO II's clear
performance leadership for PC games and similar applications
requiring high performance, cost-effective graphics.
Microcontroller Division. This division provides competitive,
high-volume 8- and 16- bit microcontrollers for all major application segments.
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.
Expanding on our cooperation with Hitachi on advanced SuperH RISC
cores, we have announced the formation of a jointly controlled independent
company, SuperH, Inc. In addition to licensing SuperH cores on the open market,
SuperH will complete the final development of the 64-bit SH-5 core and take over
development of the SH-6 and SH-7 cores. SuperH is expected to commence
operations in the third quarter of 2001 subject to receipt of all required
regulatory clearances.
24
Memory Products Group
The Memory Products Group designs, develops and manufactures a broad
range of semiconductor memory products but does not produce DRAMs.
Our Memory Products Group is organized into the following divisions:
(i) Flash memories; (ii) smartcard products; (iii) EPROMs; (iv) EEPROMs; and (v)
other memories and application-specific memories. This last division was set up
following the acquisition of WSI.
(i) Flash Memories. In 2000, the market for Flash memories more
than doubled, according to published industry data, driven by
cellular phones and digital consumer applications growth. Our
Flash sales have more than tripled in the same period due to
advanced process technologies, new products development and
state-of-the-art manufacturing facilities. Flash memories must
have many capabilities because they are used in a wide variety
of applications, and thus are more comparable to dedicated
products than pure standard products. We offer a broad variety
of Flash memories, which we sell to customers in different
fields, such as wireless telephony, digital consumer,
automotive and computer products. For example, we currently
supply single voltage (down to 1.8 volt) NOR cell structure
Flash memory products up to 32 Mbit to the mobile phone
market, and we are now successfully processing wafers for the
first 64Mbit Flash memories using multi-bit/cell technology.
In addition, in the 2001 first quarter, we began ramping up
production of our dedicated Flash memories for Firmware Hub
BIOS applications, which are now qualified at most PC desktop
and notebook manufacturers. Targeted at high-performance PCs
employing Intel's Accelerated Hub Architecture, the device is
a 4Mbit Flash memory that performs the Firmware Hub function
and is built using our advanced 0.18-micron Flash technology.
(ii) 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 and bank cards (primarily in Europe), as
well as pay television systems (primarily in the United
States, United Kingdom and France). Other applications include
medical record applications, card-access security systems,
toll-payment secure transactions over the Internet and ID
cards applications. In 2000, our innovative SmartJ 32-bit RISC
and Java processing platform was awarded the prestigious 'Best
New Chip' award at the Smartcard 2000 show held in London. At
the same event, we demonstrated the world's fastest RF-powered
contactless microcontroller-based smartcard chip. Our
achievement in obtaining the world's first security
certification to the new international ISO 15408 standard for
our ST19 platform was followed by a similar certification
jointly achieved with Gemplus for a Smartcard solution that
combines Gemplus' embedded software and our ST19 hardware
platform. The ST19 platform and embedded Gemplus secure
software will be used in Smartcards for telecommunications
and banking applications. In 2001, we introduced a chipset
that simplifies the design of contactless Smartcard readers,
stimulating growth of new contactless Smartcard applications
such as access control, ticketing systems, E-purse and ID
cards. Finally, we are currently developing biometric
solutions based on fingerprint recognition.
(iii) EPROMs. We produce a broad range of EPROMs, from 16 Kbit to 32
Mbit. The EPROM market is relatively mature. We have succeeded
in maintaining our market leadership because of our EPROM
technology, which has allowed us 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 us an advantageous cost position. Efficient
manufacturing in our Singapore assembly plant, together with
our sales and distribution channels, has contributed to the
exploitation of our technological advantage.
(iv) EEPROMs. We offer serial EEPROMs up to 512 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. We intend to work closely with
our key customers and strategic allies to identify and develop
added-value application-specific memories.
25
(v) Other memories and application-specific memories. We focus on
producing nonvolatile RAMs (battery back-up) used in computers
and telecommunications equipment. Our strategy of developing
innovative differentiated and value-added products was
reflected by the acquisition of Waferscale Integration (WSI).
The acquisition of WSI allows us to offer configurable memory
systems, integrating multiple memory types and control logic,
which represent the ultimate step in term of value-added
memories.
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
radio frequency products.
This Group's discrete and standard products are manufactured using
mature technological processes. Although such products are less capital
intensive than our other principal products, we are 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.
(i) Discrete Power Devices. We manufacture and sell a variety of
discrete power devices, including rectifiers, protection
devices and thyristors (SCRs and triacs). Our devices are used
in various applications, including 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. We offer a highly successful range of standard
products built with our 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. We have recently started development of
electronic devices integrating both passive and active
components on the same chip (IPAD: Integrated Passive and
Active Devices).
(ii) Power Transistors. We design, manufacture and sell power
transistors, which (like our discrete power devices) operate
at high current and voltage levels in a variety of switching
and pulse mode systems. We have three power transistor
divisions: bipolar transistors, power MOSFETs
(metal-oxide-silicon field effect transistors) and new power
transistors such as IGBTs.
Our 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.
We also offer 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.
(iii) Standard Logic and Linear ICs. We produce 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. We also
offer standard linear ICs covering a variety of applications,
including amplifiers, comparators, decoders, detectors,
filters, modulators, multipliers and voltage regulators.
(iv) Radio Frequency Products. We supply components for RF
transmission systems used in television broadcasting
equipment, radar systems, telecommunications systems and
avionic equipment. We are targeting new applications for our
RF products, including two-way wireless communications
26
systems (in particular, cellular telephone systems) and
commercial radio communication networks for business and
government applications.
Strategic Alliances
We believe that strategic alliances are critical to success in the
semiconductor industry, and we have entered into strategic alliances with
customers, other semiconductor manufacturers and major suppliers of design
software. We have entered into several strategic customer alliances, including
alliances with Alcatel, Bosch, Hewlett-Packard, Marelli, Nokia, Nortel Networks,
Pioneer, Seagate Technology, Thomson Multimedia and Western Digital, among
others. In June 2000, in conjunction with our acquisition of the 150mm facility
in Ottawa, Canada, we entered into an agreement with Nortel Networks for the
development of processes, packages and fundamental IP for high-speed optical
interfaces. Customer alliances provide us with valuable systems and application
know-how and access to markets for key products, while allowing our customers to
share some of the risks of product development with us and gain access to our
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, as well as the building and
operations of a 300mm wafer pilot line fab in Crolles, France, the agreement
with Mitsubishi for CMOS Flash memory processes using 0.20 through 0.18-micron
lithography 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.
We have established joint development programs with leading suppliers
such as Air Liquide, Applied Materials, ASM Lithography, Canon, Hewlett-Packard,
KLA-Tencor, LAM Research, MEMC, Schlumberger, Teradyne and Wacker and with CAD
tool producers including Cadence, Co Ware and Synopsys. We are a participant in
Sematech I 300I for the development of 300 millimeter wafer manufacturing
processes. We are active in joint European research efforts such as the MEDEA
program, and also cooperate with major research institutions and universities.
In 2000, we pursued development of 0.15-micron drawn (0.13-micron
effective gate length) CMOS process technology, at Crolles, France. At the same
time we started production of our 0.15-micron effective gate length (0.18-micron
drawn) CMOS technology, known as HCMOS-8. This process is aimed at producing
"system-on-chip" products incorporating up to tens of millions of transistors
combined with embedded memory for telecom, digital consumer and computer
applications. In 2000, we started work on new generation 0.13 microFlash
technology in our R2 technology center in Agrate, Italy.
Customers and Applications
We design, develop, manufacture and market over 3,000 main types of
products that we sell to approximately 800 direct customers. We also sell our
products through distributors. Major customers include Alcatel, Bosch,
DaimlerChrysler, Ericsson, Gemplus, Hewlett-Packard, Marelli, IBM, Matsushita,
Maxtor, Motorola, Nokia, Nortel Networks, Philips, Pioneer, Samsung,
Schlumberger, Scientific Atlanta, Seagate Technology, Siemens, Sony, Thomson
Multimedia and Western Digital. To many of our key customers we provide a wide
range of products, including dedicated products, discrete devices, memory
products and programmable products. Our position as a strategic supplier of
application-specific products to certain customers fosters close relationships
that provide us 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 our significant customers and
certain applications for our products:
27
- --------------------------------------------------------------------------------------------------------------------
Telecommunications
Customers: Alcatel Lucent Technologies Motorola Philips
Ericsson Marconi Nokia Sagem
Italtel Matsushita Nortel Networks Siemens
Applications: Central office switching systems Telephone terminals (wireline and wireless)
Digital cellular telephones Internet access (xDSL)
Wireless networking (Bluetooth) Data transport (routing, switching for electronic
and optical networks)
- --------------------------------------------------------------------------------------------------------------------
Computer Systems
Customers: ACER Delta Logitech Seagate
Agilent Hewlett-Packard Maxtor Sun Microsystems
Creative Technology IBM Samsung Western Digital
Applications: Data storage Webcams
Monitors and displays Printers
Graphics Imaging
Power management
- --------------------------------------------------------------------------------------------------------------------
Automotive
Customers: Bosch Denso Motorola Valeo
DaimlerChrysler Lear Pioneer VDO
Delphi Marelli Siemens Visteon
Applications: Airbags Engine management systems (ignition and
Injection)
Antiskid braking systems Multiplex wiring kits
Car radio Global positioning systems
Body and chassis electronics Car multimedia
- --------------------------------------------------------------------------------------------------------------------
Consumer Products
Customers: Agilent Technologies Hughes Philips Scientific Atlanta
Bose Corporation Kenwood Pioneer Sony
Echostar Matsushita Samsung Thomson Multimedia
Grundig Pace
Applications: Audio processing (CD, DVD, Hi-Fi) DVDs
Digital cameras Set-top boxes
Digital music players Analog TVs
Digitial TVs VCRs
- --------------------------------------------------------------------------------------------------------------------
Industrial and Other Applications
Customers: Astec Gemplus Nagra Schlumberger
Autostrade Giesecke & Devrient Oberthur Siemens
Bull IPM Orga
Delta Litton Philips
Applications: Battery chargers Lighting systems (lamp ballasts)
Smartcards ICs Motor controllers
Industrial automation and control systems Power supplies
Intelligent power switches Switch mode power supplies
- --------------------------------------------------------------------------------------------------------------------
In 2000, our largest customer, Nokia, represented approximately 13% of
our net revenues. No other single customer accounted for more than 10% of our
net revenues. Sales to our top ten customers accounted for approximately 47% of
our net revenues in 2000 (45% in 1999). We have several large customers, certain
of whom have entered into strategic alliances with us. Many of our 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 our net revenues in 2000 were made through distributors. There can be no
assurance that such customers or distributors, or any other customers, will
continue to place orders with us in the future at the same levels as in prior
periods. The loss of one or more of our customers or distributors, reduced
bookings or product returns by our key
28
customers or distributors, could adversely affect our operating results. In
addition, in a declining market like the present, we have been in the past and
may in the future be driven to lower prices in response to competitive pressures
and may expect a higher number of order cancellations, particularly by
distributors and for commodity products.
Sales, Marketing and Distribution
We operate regional sales organizations in Europe, North America, the
Asia Pacific region, Japan and, since January 1, 1998, in Emerging Markets which
includes South America, Africa, Eastern Europe, the Middle East and India. For a
breakdown of net revenues by product group and geographic region for each of the
five years ended December 31, 2000, for " - Business Overview." In 2000, our
largest customer, Nokia, represented approximately 13% of our net revenues. No
other single customer accounted for more than 10% of our net revenues. Sales to
our top ten customers were approximately 47% and 45% of our net revenues in 2000
and 1999, respectively, which was an increase from 43% in 1998.
The European region is divided into five businesses units: automotive,
commodities, consumer and computers, industrial and smartcards, six
geographically configured units to cover mid-sized OEM customers (France and the
Benelux, Central Europe, Northern Europe, Southern Europe, Scandinavia and
Finland), and six regions (United Kingdom, France, Central Europe, Southern
Europe, Scandinavia and Finland) addressed through distributors.
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 us 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 our 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 our regional sales headquarters in Singapore. We have 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 our sales are made through
distributors, as is typical for foreign suppliers to the Japanese market.
However, our sales and marketing engineers in Japan work directly with customers
as well as with the distributors to meet customers' needs. We provide marketing
and technical support services to customers through sales offices in Tokyo and
Osaka. In addition, we have 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 our products
in specific applications.
The Emerging Markets region (designated as "Region Five" until January
1, 2001) was created as of January 1, 1998 and includes 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. Emerging Markets also includes the design and software
development center in India, which employs approximately 700 people in a wide
range of activities. We intend to increase our focus on this region to enhance
our presence in these new markets.
The sales and marketing activities carried out by our regional sales
organizations are supported by the product marketing that is carried out by each
product division, which also include product development functions. This matrix
system reinforces our sales and marketing activities and our broader strategic
objectives.
29
We are pursuing 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.
Each of the five regional sales organizations operates dedicated
distribution organizations. To support the distribution network, we operate
logistic centers in Saint Genis, France; Phoenix, Arizona; and Singapore, and
have made considerable investments in warehouse computerization and logistics
support.
We also use distributors and representatives to distribute our products
around the world. Typically, distributors handle a wide variety of products,
including products that compete with our products, and fill orders for many
customers. Most of our sales to distributors are made under agreements allowing
for price protection and/or the right of return on unsold merchandise. We
recognize revenues upon transfer of ownership of the goods at shipment. Sales
representatives generally do not offer products that compete directly with our
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 us and are referred to distributors
for smaller orders.
Research and Development
We believe that research and development is critical to our success and
we are committed to increasing research and development expenditures in the
future. In periods of industry downturn, such as in 1997 and 1998,
simultaneously as we made significant cost reductions in our overall expenses,
we continued increasing our research and development expenses, year-over-year.
In 2000, we spent $1,026 million on research and development, increased from
$836 million in 1999. The table below sets forth information with respect to our
research and development spending since 1996 (not including design center,
process engineering, pre-production or industrialization costs):
Year ended December 31,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ----------
(in millions, except percentages)
Expenditures....................... $532.3 $610.9 $689.8 $836.0 $1,026.3
As a percentage of net revenues.... 12.9% 15.2% 16.2% 16.5% 13.1%
- -------------------------------------------------------------------------------------------------------------------
As a result of our history, approximately 81% of our research and
development expenses in 2000 were incurred in Europe, primarily in France and
Italy. See "--Public Funding." As of December 31, 2000, approximately 6,800
employees were employed in research and development activities.
Our policy in the field of research and development is market driven,
focused on leading edge products and technologies and carried out by over 6,800
employees worldwide in close collaboration with strategic alliance partners,
leading universities and research institutes, key customers and blue chip
equipment manufacturers working at the cutting edge of their own markets. We
invest in a variety of research and development projects ranging from long term
advanced research for the acceleration, in line with industry requirements and
roadmaps, of our broad range of process technologies including BICMOS, BCD, High
Performance Logic, stand alone and embedded Flash and other nonvolatile
memories, to the continued expansion of our system level design expertise and IP
creation for advanced architecture for system-on-chip integration, as well as
new products for many key applications in the field of digital consumer wireless
communications and networking, computer peripherals, Smartcards and car
multimedia amongst others.
Our research and development activities focus on the VLSI technology
platform, new system architectures, new product developments and emerging
technologies in microsystems and photonics. The development of the technology
platform (VLSI technologies and design tools) is conducted by Central Research
and Development (CRD) while new systems architectures are studied in the
Advanced System Technology (AST) units. New product research and development is
conducted within each product group in conjunction with customers. The highest
concentration of our CRD activities is located in the two main VLSI facilities
of Crolles, France and Agrate, Italy. Other CRD activities are located in
Catania, Italy, Rousset, France, Carrollton, Texas, Berkeley, California,
Ottawa, Canada and Noida, India.
30
The central research and development units participate in several
strategic partnerships. Our 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") named "Centre Commun de
Microelectronique de Crolles", whose members are us, France Telecom R&D and
Laboratoire d'Electronique de Technologie d'Instrumentation ("LETI"), a research
laboratory of CEA-Industrie. The tripartite cooperation is intended to last
until the end of 2002. We also cooperate with Philips Semiconductors to jointly
develop sub-micron CMOS logic processes in Crolles, France and have extended
this cooperation to cover the building of an advanced 300mm wafer pilot line in
Crolles, France, which will be funded and operated jointly with Philips
Semiconductors. Since April 2001, the piles have been completed and the shell
building has commenced.
The CRD activities performed in the new 200mm facility of Agrate,
Italy, are focused on the development of new generation sub 0.18 micron Flash
memories from which other nonvolatile memory products are derived, such as
embedded memories, EEPROM and OTP. Current Flash developments, which are one of
our technology drivers, are targeting 0.13 micron very high density multilevel
memories and the introduction of innovative materials for nonvolatile
applications.
A technical center in Noida, India, develops design software and CAD
libraries and tools. At the Agrate, Italy site, we are developing nonvolatile
memory technologies and programmable logic processes using a pilot line, which
is being upgraded to 200mm with a capability of 0.25 -micron and below. See
"--Property, Plants and Equipment." We have 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.
We are a member of International Sematech, a non profit technology
development consortium of 13 semiconductor manufacturers, funded by dues from
the member companies. International Sematech works with members, equipment and
materials suppliers, international labs and institutes, academia, and other
consortia to accelerate the development of advanced precompetitive semiconductor
manufacturing processes, materials and equipment for their member companies.
In addition to central research and development, each operating
division also conducts independent research and development activities on
specific processes and products focusing on developing an advanced range of the
key technological building blocks required by targeted applications. These
building blocks include (i) MPEG2 decoder ICs, (ii) a family of 16 bit (ST10,
super 10), 32 bit (ST20) and 64 bit (ST50) microcontrollers, (iii) a family of
general purpose DSP cores for embedded applications based on the current D950
solution and the ST100 (currently being sampled to customers) as well as several
dedicated DSP cores (MMDSP, SAFIRE, EMIRALDA) for specific applications, and
(iv) embedded volatile (DRAM and SRAM) and nonvolatile (EPROM, EEPROM and Flash)
memories. Applying itsour broad range of technologies and itsour expertise in diverse
application domains, the Company iswe are currently embedding dedicated, semicustom circuits
and these advanced building blocks on the same chip. Superintegratedchip, in addition to the many
dedicated and semicustom ICs developed using power analog, digital and mixed
signal technologies.
Intellectual Property
Intellectual property rights that apply to our various products developedinclude
patents, copyrights, trade secrets, trademarks and maskwork rights. We own more
than 19,000 patents or pending patent applications corresponding to datemore than
11,000 original inventions, most of which have been registered in several
countries around the world. In 2000, we filed 685 new patent applications around
the world. Management believes that our intellectual property represents
valuable property and intends to protect our investment in technology by
enforcing all of our intellectual property rights. We have entered into several
patent cross-licenses with several major semiconductor companies.
Our success depends in part on our ability to obtain patents, licenses
and other intellectual property rights covering our products and their design
and manufacturing processes. To that end, we have acquired certain patents and
patent licenses and intend to continue to seek patents on our 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 us. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain countries. Competitors may
also develop technologies that
31
are protected by patents and other intellectual property rights and therefore
such technologies may be unavailable to us or available to us subject to adverse
terms and conditions. Litigation, which could demand financial and management
resources, may be necessary to enforce our patents or other intellectual
property rights.
Also, there can be no assurance that litigation will not be commenced
in the future against us 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 our results of operations or financial
condition. We have from time to time received, and we 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, we could incur significant costs with
respect to the defense thereof, which could have a material adverse effect on
our results of operations or financial condition.
Backlog
Our 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 economic slowdown and/or industry
overcapacity and/or declining selling prices, customer orders are not generally
made far in advance of the scheduled shipment date. Such reduced lead time can
reduce management's ability to forecast production levels and revenues. During
periods of industry undercapacity, the backlog can exceed our manufacturing
capacity.
Our backlog increased steadily in the first half of 2000 while
registering a decline in the latter part of the year reflecting the industry
downturn. Backlog decline increased during the first quarter of 2001. In
industry downturns, customers tend to order products for immediate delivery,
which leads us to build up inventory of key products and lowers our backlog.
We also sell certain products to key customers pursuant to frame
contracts. Frame contracts are annual contracts with customers setting forth
quantities and prices on specific products that may be ordered in the future.
These contracts allow us 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 our products are intensely competitive. While only a few
companies compete with us in all of our product lines, we face significant
competition in each of our product lines. We compete with major international
semiconductor companies, some of which have substantially greater financial and
other resources than us 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 our competitors are also our customers.
According to published industry data in March 2001, we grew 55.4%
annually making us the STi55XX Omega platform (a platformsixth leading semiconductor manufacturer worldwide. The
primary international semiconductor companies, which compete with us include
Advanced Micro Devices, Agere Systems, Broadcom, Hitachi, Intel Corporation,
Mitsubishi Electric Corporation, Motorola, National Semiconductor Corporation,
Nippon Electric Company, Philips Semiconductors, Samsung, Infineon Technology,
Texas Instruments and Toshiba.
According to published industry data and other industry sources,
investment in worldwide semiconductor fabrication capacity totaled approximately
$28 billion in 1998, $33 billion in 1999 and $59 billion in 2000, or
approximately 22 %, 22% and 29%, respectively, of the TAM for digital consumer applicationssuch years. Such
capacity investment is made not only by international semiconductor companies,
but also companies specializing in operating semiconductor foundries,
particularly in Asia such as set-top boxesUMC, TSMC and DVDs)Chartered Semiconductors.
32
We compete 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. Our ability to compete successfully depends on elements both within
and outside of our 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.
Organizational Structure
We are a multinational group of companies that 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. We are 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. STMicrolectronics
N.V., owns directly or indirectly, 100% of all of our significant operating
subsidiaries which has
achieved significant design winshave their own corporate organization and production volumesmanagement bodies,
and are operated independently in 1999.
Atcompliance with the beginninglaws of 1999,their country of
incorporation. For a list of our subsidiaries, see note 3 to our consolidated
financial statements.
Property, Plants and Equipment
We currently operate 19 main manufacturing sites around the Company implemented organizational
changesworld. In
June 2000, we acquired a 150mm microconductor manufacturing facility owned by
Nortel Networks in Ottawa, Canada. The table below sets forth certain
information with respect to better orient its product groupsour current manufacturing facilities, products and
technologies. Front-end manufacturing facilities are wafer fabrication plants
(known as "fabs") and back-end facilities are assembly, packaging and final
testing plants.
Gross floor area
size (including
clean room,
facilities and
Location Products Technologies production offices)
--------- -------- ------------ -------------------
(in square meters)
Front-end facilities
Crolles, Semicustom devices, Fab: 200mm 0.35/0.18 -micron CMOS and 0.7/0.25 51,600
France microcontrollers and -micron BiCMOS; R&D on VLSI sub-micron
dedicated products technologies in conjunction with France Telecom
R&D and Philips Semiconductors
Phoenix, Dedicated products Fab: 200mm 0.5/0.35 -micron CMOS, 0.5/0.35 -micron 46,400
Arizona BiCMOS
Agrate, Italy Nonvolatile memories, Fab 1: 150mm 2.0/0.5 -micron BCD, nonvolatile 47,500
microcontrollers and memories
dedicated products
Fab 2: 200mm 0.35/0.18 -micron Flash, embedded 32,800
Flash, R&D on nonvolatile memories
Rousset, Microcontrollers, Fab 1: 150mm 0.8/0.5 -micron CMOS, Smartcard 32,000
France nonvolatile memories and
smartcard ICs and Fab 2: 200mm 0.35/0.18 -micron CMOS, Flash, 66,500
dedicated products Smartcard
33
Gross floor area
size (including
clean room,
facilities and
Location Products Technologies production offices)
--------- -------- ------------ -------------------
(in square meters)
Catania, Italy Power transistors, smart Fab 1: 150mm 4/1 -micron MOS power, BCD 22,500
power ICs and nonvolatile
memories Fab 2: 150mm 4/1 -micron pilot line RF 10,000
Fab 3: 200mm 0.35/0.18-micron, Flash, Smartcard 43,000
Rennes, France Dedicated and power products Fab: 150mm 2 -micron BiCMOS, BCD and bipolar 17,500
Castelletto, Smart power BCD Fab: 150mm 4.0/0.8 -micron BCD pilot line 12,500
Italy
Tours, France Protection thyristors, Fab: 100mm and 150mm discrete 36,500
diodes and
application-specific
discretes-power
transistors
Ang Mo Kio, Dedicated products, Fab 1: 100mm 1.5-micron, power MOS, bipolar 75,000
Singapore microcontrollers, power transistor, bipolar ICs, standard linear
transistors, commodity CMOS
products; nonvolatile
memories and dedicated Fab 2: 150mm 1-2-micron bipolar, power MOS and BCD 15,000
products
Fab 3: 200mm 0.50/0.18-micron BICMOS, Flash (should 58,500
enter volume production in 2001)
Carrollton, Memories, microcontrollers, Fab: 150mm 1.5/0.7-micron BiCMOS, BCD and CMOS 47,000
Texas dedicated products; and
semicustom devices
Rancho Dedicated products Fab: 150mm 2.0-micron BCD 18,500
Bernardo,
California
Ottawa, Dedicated products Fab: 150mm, 0.8-micron bipolar 11,000
Canada
Back-end
Facilities:
Muar, Malaysia Dedicated and standard 63,050
products, microcontrollers
Kirkop, Malta Dedicated products, 27,200
microcontrollers,
semicustom devices
Tuas, Dedicated products and 12,400
Singapore nonvolatile memories
Toa Payoh, Nonvolatile memories and 17,150
Singapore power ICs
34
Gross floor area
size (including
clean room,
facilities and
Location Products Technologies production offices)
--------- -------- ------------ -------------------
(in square meters)
Ain Sebaa, Discrete and standard 30,000
Morocco products
Bouskoura, Nonvolatile memories, 60,000
Morocco discrete and standard
products, micromodules,
RF and subsystems
Shenzhen, Nonvolatile memories, 40,000
China(1) discrete and standard
products
- -------------
(1) Jointly operated with Shenzhen Electronics Group.
In the last quarter of 2000, our front-end facilities had total
capacity of approximately 140,000 150mm equivalent wafer starts per week. The
number of wafer starts per week varies from facility to end use applications. Asfacility and from period
to period 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 principalchanges in 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 Company hasmix. We have five 8-inch200mm wafer
production facilities of which two atcurrently in operation. Of these, three (at Crolles,
France, and Catania, Italy areand Phoenix, Arizona) were operating at full capacity at
December 31, 2000 and currently
being expanded, one in Phoenix, Arizona, is almost saturated, andthe other two in(in Rousset, France and Agrate, Italy,Italy) are
currentlynow in start up mode with volume production expected at the end of the second quarter of 2000.and continue to be expanded. Construction of a new
8-inch submicron200mm sub-micron facility is underway in Singapore. An additional 8-inch
submicronWe have started construction
our 200mm sub-micron fabrication plant in Catania, Italy which will be
upgradeable to 300mm capacity and is planned to becomebe operational by the year 2002.
In 1999, to face the sudden increase in demand, the Company boughtWe acquired a new facility in Singapore preparing forthat entered volume production
of 6-inch wafer by the end of150mm wafers in 2000, performed expansion of itsand we expanded our production of 6-inch150mm wafers in
Carrollton, Texas and Rancho Bernardo, California, and completed three conversionsCalifornia. In June 2000, we acquired
from 5 to
6-inchNortel Networks a 150mm manufacturing facility in Rennes and Tours, France, and Catania, Italy.
5
Ottawa, Canada. In line
with itsour expansion of front-end facilities the Company is also
expandingin 2000, we expanded all itsour back-end
plants at itsour existing facilities in Morocco, Malta, Malaysia, Singapore, and
China and started in early 2000 to equipChina. We also equipped a newly acquired back-end plant in Tuas Singapore.
The Company has historically subcontracted part(Singapore) and
built a new back-end plant in Bouskoura (Morocco) in which the first assembly
lines were operational by the end of its back-end
operations (in2000.
We have also started the rangeconstruction of 15% of total volumes) to external suppliers. In
1999, to cope with a sudden surge in demand, the Company has decided to
significantly increase the qualification of external foundriesshell building for front-end
manufacturing, with the aim of having the possibility to satisfy in the range of
15% of its total wafer demand through sub-contracts.
The Company has also announced its decision to build an
advanced 12-inch300mm wafer pilot-line fabfabrication facility in Crolles France which(France) that
will be funded and operated jointly with Philips Semiconductors. This new agreement expands the
existing technological cooperation agreement that has been in place with Philips
Semiconductors since 1992. The pilot line will
initially be designed to produce up to 1000 wafer1,000 wafers per week, with potential to
ramp up to 20002,000 wafers per week as needed. Site preparation has commenced, with theThe first 12-inch300mm wafers are expected
to be processed around two years time. Furthermore,in 2002.
We have historically subcontracted approximately 15% of total volumes
for back-end operations to external suppliers. Since 1999, to cope with a sudden
surge in demand, and in particular, to meet anticipated requirements for HCMOS
wafers, we decided to significantly increase our use of external foundries for
front-end manufacturing as well, and they supplied up to approximately 15% of
our total wafers. We intend to maintain the Company willpercentage of front-end
manufacturing through external foundries at approximately this level in a period
of high demand, reducing it as required to meet market conditions. In the first
quarter 2001, the total wafer demand supplied by foundries represented
approximately 9%, compared to an average of 11% in year 2000.
We have expanded our diversified manufacturing infrastructure while
improving the cost, quality and flexibility of our operations. In 2000, we
invested in our manufacturing facilities to bring to full capacity and expand
the 200mm front-end manufacturing facility in Crolles, France and Catania,
Italy, to continue its very productive cooperation program with France Telecom R&D (formerly CNET)
and with Leti (research labthe ramp up of the French Commissariat a l'Energie Atomique -
CEA) as part of its contribution to the new joint pilot line in Crolles.
STMicroelectronics is international in scope. The Company operatesan 200mm front-end and/or back-end manufacturing facilities in
Europe,Phoenix, Arizona and Catania, Italy, and to build and equip the United States,new 200mm
front-end facilities in Rousset, France and Agrate, Italy, which are today in
production, to expand 150mm front-end facilities in Carrollton, Texas and Rancho
Bernardo, California, to purchase and equip a new 150mm facility in Singapore,
to convert from 5-to 150mm the Mediterraneanfront-end facilities in Tours and Asia Pacific regions,Rennes, France
and conducts researchCatania, Italy and developmentto expand our back-end facilities in Morocco, Malta,
Malaysia, Singapore and China.
According to present visibility, as of the end of March 2001, we
currently expect that capital spending for 2001 will be in the range of $1.9
billion, significantly below the 2000 level and the initially announced $2.5
billion. This investment will primarily be used for the expansion of the 200mm
front-end facilities in France and Italy, and design, marketing and sales
activities in eachthe
35
start-up of the electronics industry's major economic regions: Europe,200mm facility in Singapore, the United States, the Asia Pacific region and Japan. In 1999, approximately
36.3%expansion of the Company's net revenues originatednew back-end
facilities in Europe (comparedMorocco and the conversion of the facilities in Crolles (France)
from 0.18 micron to 41.6% in
1998),0.15 micron processes. As of December 31, 2000, we had
commitments of approximately 22.9% in North America (compared$1.7 billion for equipment purchases. We will
continue to 22.1% in 1998),
approximately 32.8%monitor our level of capital spending, taking into consideration
factors such as trends in the Asia Pacific region (comparedsemiconductors market, capacity utilization and
announced additions.
Although each fabrication plant is dedicated to 29.4%specific processes, our
strategy is to develop local presences, better serve customers and mitigate
manufacturing risks by having key processes operated in 1998),
approximately 4.7%different manufacturing
plants. In certain countries, we have been granted tax incentives by local
authorities in Japan (comparedline with local regulations, being recognized as an important
contributor to 4.3%the economies where our plants are located. In 2000 we sought to
take advantage of industry capacity limitations by purchasing from
subcontractors both wafer foundry and back-end services and thereby minimizing
our capital expenditure needs.
Our manufacturing processes are highly complex, require advanced and
costly equipment and are continuously being modified in 1998)an effort to improve
yields and approximately 3.3%product performance. Impurities or other difficulties in Region Five (including emerging markets suchthe
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 our
increased manufacturing efficiency has been an important factor in our improved
results of operations, we have from time to time experienced production
difficulties that have caused delivery delays and quality control problems, as
South America, Africa, Eastern
Europe, Indiais common in the semiconductor industry. No assurance can be given that we will
be able to increase manufacturing efficiency in the future to the same extent as
in the past or that we will not experience production difficulties in the
future.
We are fostering a corporate-wide TQEM 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. TQEM in our company is based on five key
principles: management commitment, employee empowerment, continuous improvement,
management by fact and customer focus. TQEM has become an integral part of our
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, we have
improved average AIQ (electrical) status levels. Most of our manufacturing
facilities have been certified to conform to ISO international quality standards
and EMAS. Several major customers, including Hewlett-Packard, Nokia, Sharp,
DaimlerChrysler and Sanyo, have recognized our commitment to quality and have
honored us with quality awards in the Middle East) (comparedrecent past. We have also adopted an
environmental charter in order to 2.6% in 1998). See "--Sales,
Marketing and Distribution". In 1999, approximately 38% of the 6-inch equivalent
wafers manufactured by the Company were manufactured outside Europe and
approximately 45% of the Company's employees were located outside Europe.
STMicroelectronics believes that strategic alliances are criticalreinforce our commitment to successenvironmental
protections.
As is common in the semiconductor industry, we have from time to time
experienced difficulty in ramping up production at new facilities or effecting
transitions to new manufacturing processes and, has entered into strategic alliances
with customers,consequently, have suffered
delays in product deliveries or reduced yields. There can be no assurance that
we 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 semiconductor manufacturers and major suppliers of design
software. The Company has entered into several strategic customer alliances,
including alliances with Alcatel, Bosch, Hewlett-Packard, Marelli, Nortel
Networks, Pioneer, Seagate, Thomson Multimedia and Western Digital, among
others. Customer alliances provide the Company with valuable systems and
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'sthings, capacity constraints, construction delays, ramping up
production at new facilities, upgrading or expanding existing facilities,
changing our process technologies, and manufacturing
infrastructure. Alliances withor contamination or fires, storms,
earthquakes or other semiconductor manufacturers, such as the
cooperation with Philips Semiconductorsacts of nature, any of which could result in Crolles, France, fora loss of
future revenues. In addition, the development of advanced CMOS logic manufacturing processes, as well aslarger fabrication facilities
that require state-of-the-art sub-micron technology has increased the buildingpotential
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, we 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 operationsin either case the loss of a 12-inch wafer pilot line fabrevenues and impact on our
relationship with our customers could be significant. Our operating results
could also be adversely affected by the increase in Crolles, France,fixed costs and operating
expenses related to increases in production capacity if revenues do not increase
commensurately. Finally, in periods of high demand, we increase our reliance on
external contractors for foundry and back-end service. Any failure to perform by
such subcontractors could impact our relationship with our customers and could
materially affect our results of operations.
Public Funding
We participate in certain programs established by the agreement
with MitsubishiEuropean
Commission and individual countries in Europe (France and Italy), which provide
public funding for CMOS flash memory processes using 0.20 through 0.18 micron
lithography and the agreement with Hitachi on SuperH microprocessors, permit
costly research and development and manufacturing resourcescapital investment in compliance
with local laws. The pan-European programs are generally open to be shared to
mutual advantage for joint technology development. The Company has established
jointeligible
companies operating and
36
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.
The main European programs for research and development in which we are
involved include: (i) the Micro-Electronics Development for European Application
("MEDEA+") cooperative research and development program, (ii) European Union
research and development projects with leading suppliers such as Air Liquide, Applied
Materials, ASM Lithography, Canon, Hewlett-Packard, KLA-Tencor, LAM Research,
MEMC, Schlumberger, TeradyneFWP5 for Information Technology; and
Wacker(iii) national programs for research and with CAD tool producers including
Cadencedevelopment and Synopsys. It is a participantindustrialization in
Sematech I 300Ithe electronics industries. We also participate in investment incentive programs
for the economic development of 300 millimeter wafer manufacturing processes. STMicroelectronicscertain regions.
The MEDEA+ cooperative research and development program was launched in
June 2000 by the Eureka Conference and is activedesigned to bring together many of
Europe's top researchers in a 12,000 man-year program that will cover the period
2000-2008. The MEDEA+ program replaced the joint European research effortsprogram
called MEDEA, which was a European cooperative project in microelectronics among
several countries that covered the period 1996 through 2000 and involved more
than 80 companies. In Italy, the Programma Nazionale per la Bioelettronica has
more than 10 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.
We have also 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 EU authorities and annual and project-by-project
reviews and approvals.
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 our business, operating results and financial condition. From time to
time, we have experienced delays in the receipt of funding under these programs.
As the availability and timing of such funding are substantially outside our
control, there can be no assurance that we 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 us as those
previously provided.
Public authority funding for research and development is reported in
"Other Income and Expenses" in our consolidated statements of income. See Note
17 to the Consolidated Financial Statements. Such funding has totaled $63.5
million, $60.4 million and $42.1 million in the years 1998, 1999 and 2000,
respectively. Government support for capital expenditures funding has totaled
$182.4 million, $53.4 million and $95.2 million in the years 1998, 1999 and
2000, respectively. Such funding has been used to support our capital
investment; while receipt of these funds is not directly reflected in our
results of operations, the resulting lower amounts recorded in property, plant
and equipment reduce the level of depreciation recognized by us.
Low interest financing has been made available (principally in Italy)
under programs such as the MEDEAItalian Republic's Fund for Applied Research,
established in 1968 for the purpose of supporting Italian research projects
meeting specified program criteria. At year-end 1998, 1999 and also cooperates
with major research institutions2000, we had
$49.4 million, $48.8 million and universities.
In 1999, STMicroelectronics started development$31.3 million, respectively, of 0.15 micron drawn
(0.13 micron effective gate length) CMOSindebtedness
outstanding under state-assisted financing programs at an average interest cost
of 2.1%, 1.6% and 1.4%, respectively.
Due to changes in legislation and/or review by the competent
administrative or judicial bodies, there can be no assurance that government
funding granted to us may not be revoked or challenged or discontinued in whole
or in part, by any competent state or European authority, until the legal time
period for challenging or revoking such funding has fully lapsed.
Suppliers
The quality and technology of equipment used in the IC manufacturing
process defines the limits of our technology. Demand for increasingly smaller
chip structures means that semiconductor producers must quickly incorporate the
latest advances in process technology to remain competitive. Advances in process
technology
37
cannot be brought about without commensurate advances in equipment technology,
and equipment costs tend to increase as the equipment becomes more
sophisticated.
In the front-end process we use steppers, scanners, track equipment,
strippers, chemo-mechanical polishing equipment, cleaners, inspection equipment,
etchers, physical and chemical vapor deposition equipment, implanters, furnaces,
testers, probers and other specialized equipment. The manufacturing tools that
we use in the back-end process include bonders, burn-in ovens, testers and other
specialized equipment.
Our manufacturing processes use many raw materials, including silicon
wafers, lead frame, mold compound, ceramic packages and chemicals and gases. The
prices of many of these raw materials are volatile. We obtain our raw materials
and supplies from diverse sources on a just-in-time basis. Although supplies for
the raw materials used by us are currently adequate, shortages could occur in
various essential materials due to interruption of supply or increased demand in
the industry.
Environmental Matters
Our manufacturing operations use many chemicals, gases and other
hazardous substances, and we are subject to a variety of governmental
regulations related to the use, storage, discharge and disposal of such
chemicals and gases and other hazardous substances, emissions and wastes.
Consistent with our TQEM principles, we have established proactive environmental
policies with respect to the handling of such chemicals and gases and emissions
and waste disposals from our manufacturing operations. We have engaged outside
consultants to audit our environmental activities and have created environmental
management teams, information systems, education and training programs, and
environmental assessment procedures for new processes and suppliers. All of our
plants are validated for the Eco-Management and Audit Scheme ("EMAS") and have
also obtained ISO 14001 certification. We are also participating in various
working groups set up by the European Commission to propose new legislation
regarding the collection, recovery and disposal of electronic equipment, as well
as banning the use of lead and some flame retardants in manufacturing electronic
components. We intend to proactively implement such new legislation when enacted
in line with our commitment towards environmental protection.
Although we have not suffered material environmental claims in the past
and believe that our 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 us, suspension of production or a
cessation of operations, and as with other companies engaged in similar
activities, any failure by us to control the use of or adequately restrict the
discharge of hazardous substances, emissions or wastes could subject us to
future liabilities.
Because we have manufacturing facilities located in California and
southern Italy (Sicily), we face the risk that an earthquake could damage these
facilities, which would cause a reduction in our revenue and profitability. Any
disruption in our product development capability or our manufacturing capability
arising from earthquakes could cause significant delays in the production or
shipment of our products until we are able to shift development or production to
different facilities or arrange for third parties to manufacture our products.
We may not be able to obtain alternate capacity on favorable terms or at Crolles, France.
Atall.
The risk of earthquakes to our manufacturing facilities in Catania (Italy) and
in California is significant due to the same time, STMicroelectronics has recently started productionproximity of its 0.15
micron effective gate length (0.18 micron drawn) CMOS technology, known as
HCMOS-8. This processmajor earthquake fault
lines to these manufacturing facilities. In addition, some of our suppliers are
located in regions where there is aimed at producing "system-on-chip" products
incorporating up to tensa risk of millions of transistors combined with embedded
memory for telecom, digital consumer and computer applications.
6
earthquake.
Industry Background
The Semiconductor Market
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, consumer goods, automotive products 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
38
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 18%21% in 1999.2000. 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 $149.4$204.4
billion in 19992000 (growing at a compound annual rate of approximately 14%15.4%). 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, increased from approximately $15.0 billion in 1983 to $122.9$165.7
billion in 19992000 (growing at a compound annual rate of approximately 14%approximately15.2%). In
1999,2000, the TAM increased by 18.9%36.8%. Based on preliminary trade association data for the first
quarter of 2000,2001, the TAM increaseddecreased in the first quarter of 20002001 by 33.8%4.5% compared
to the first quarter of 1999.2000. In addition, in the first quarter of 2001, the TAM
decreased by 19.6% compared to the fourth quarter of 2000. The SAM increased
14.9%34.8% in 19992000 compared to 1998;1999; however, based on preliminary trade association
data for the first quarter of 2000,2001, the SAM increaseddecreased by 33.2%1.6% compared to the
first quarter of 1999.2000. In 1999,2000, approximately 31.8%31.3% of all semiconductors were
shipped to the Americas, 21.9%22.9% to Japan, 21.3%20.7% to Europe, and 25%25.1% to the Asia
Pacific region.
The following table sets forth information with respect to worldwide
semiconductor sales by type of semiconductor and geographic region:
Worldwide Semiconductor Sales (1) Compound Annual Growth Rates (2)
------------------------------------------------------------------------------------
1983 1993 1998 1999 2000 83-93 93-97 98-99 99-00
----- ----- ------ ------ ------ ----- ----- ----- -----
(in billions of $) (expressed as percentages)
Integrated Circuits.... $13.3 $66.0 $109.1 $130.3 $176.9 17.4% 16.0% 19.3% 35.8%
Analog (linear and
Mixed-signal)....... 2.8 10.7 19.1 22.1 30.5 14.3 16.5 15.7 38.0
Digital Logic.......... 6.7 34.1 67.0 75.9 97.2 17.7 19.9 13.3 28.1
Memory:
DRAM.............. 1.7 13.1 14.0 20.7 28.9 22.7 10.7 47.8 39.6
Others............ 2.0 8.1 9.0 11.6 20.3 15.0 4.4 28.9 75.0
----- ----- ------ ------ ------ ----- ---- ---- ----
Total Memory........ 3.7 21.2 23.0 32.3 49.2 19.1 8.4 40.3 52.3
Total digital.......... 10.4 55.3 90.0 108.2 146.4 18.2 15.8 20.0 35.3
Discrete............... 3.7 8.6 11.9 13.4 17.7 8.8 11.1 12.6 32.0
Opto-electronics....... 0.7 2.6 4.6 5.7 9.8 14.0 14.7 23.9 71.9
----- ----- ------ ------ ------ ----- ---- ---- ----
TAM................. $17.8 $77.3 $125.6 $149.4 $204.4 15.8% 15.4% 18.9% 36.8%
===== ===== ====== ====== ====== ===== ==== ==== ====
Europe................. 3.3 14.6 29.4 31.9 42.3 16.0 18.8 8.5 32.6
Americas............... 7.8 24.7 41.4 47.5 64.1 12.2 16.8 14.7 34.9
Asia Pacific........... 1.2 14.2 28.9 37.2 51.3 28.0 20.7 28.7 37.9
Japan.................. 5.5 23.8 25.9 32.8 46.7 15.8 7.8 26.6 42.4
----- ----- ------ ------ ------ ----- ---- ---- ----
TAM................. $17.8 $77.3 $125.6 $149.4 $204.4 15.8% 15.4% 18.9% 36.8%
===== ===== ====== ====== ====== ===== ==== ==== ====
- ----------------------
(1) Source: WSTS
(2) Calculated using end points of the periods specified.
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
39
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
7
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.
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.
40
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
13.8%58.7% of semiconductor memory sales in 1999,2000, 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
8
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 that represent an intermediate solution for system designers
between EPROMs and EEPROMs based on their cost and functionality.
Flash memories are typically less expensive per bit of stored
information than EEPROMs, and can also be erased and rewritten. The entire
content of a flashFlash memory or large blocks of data (not individual bytes) can be
erased with a "flash""Flash" of current. Because flashFlash memories can be erased and
reprogrammed electrically and in-system, they are more flexible than EPROMs and,
therefore, are progressively replacereplacing EPROMs in many of their current
applications. Flash memories are typically used in high volume in digital mobile
phones and digital consumer applications (set-top boxes, DVDs, digital cameras,
MP3 digital music players) and are also suitable for solid state mass storage of
data and emerging high volume application.
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
(including alarm systems, household appliance controls and video products),
automotive systems (including engine control and dashboard instrumentation),
computer peripheral equipment (including disk drives, facsimile machines,
printers and optical scanners), industrial applications (including motor drives
and process controllers), and telecommunications systems (including 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 utilizedfor utilization 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 is 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.
41
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 9
contributed to the development
of new applications, including multimedia, video conferencing, automotive, mass
storage and personal communications.
The Semiconductor MarketITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following table sets forth informationdiscussion should be read in conjunction with respect to worldwide
semiconductor sales by typeour
Consolidated Financial Statements and Notes thereto included elsewhere in this
annual report. The following discussion contains forward-looking statements
within the meaning of semiconductor and geographic region:
Worldwide Semiconductor Sales(1) Compound Annual Growth Rates(2)
1983 1993 1997 1998 1999 83-93 93-97 97-98 98-99
---- ---- ---- ---- ---- ----- ----- ----- -----
(in billions of $) (expressed as percentages)
------------------ --------------------------
Integrated Circuits.. $13.3 $66.0 $119.5 $109.1 $130.3 17.4% 16.0% (8.8)% 19.3%
Analog (linear and
Mixed-signal)..... 2.8 10.7 19.7 19.1 22.1 14.3 16.5 (3.4) 15.7
Digital Logic........ 6.7 34.1 70.4 67.0 75.9 17.7 19.9 (4.9) 13.3
Memory:
DRAM............ 1.7 13.1 19.7 14.0 20.7 22.7 10.7 (29.2) 47.8
Others.......... 2.0 8.1 9.6 9.0 11.6 15.0 4.4 (5.8) 28.9
----- ----- ------ ------ ------ ----- ----- ------ ------
Total Memory...... 3.7 21.2 29.3 23.0 32.3 19.1 8.4 (21.6) 40.3
Total digital........ 10.4 55.3 99.6 90.0 108.2 18.2 15.8 (9.8) 20.0
Discrete............. 3.7 8.6 13.1 11.9 13.4 8.8 11.1 2.5 12.6
Opto-electronics..... 0.7 2.6 4.5 4.6 5.7 14.0 14.7 2.5 23.9
----- ----- ------ ------ ------ ----- ----- ------ -----
TAM............. $17.8 $77.3 $137.2 $125.6 $149.4 15.8% 15.4% (8.4)% 18.9%
===== ===== ====== ====== ====== ===== ====== ====== =====
Europe............... 3.3 14.6 29.1 29.4 31.9 16.0 18.8 1.1 8.5
Americas............. 7.8 24.7 45.9 41.4 47.5 12.2 16.8 (9.6) 14.7
Asia Pacific......... 1.2 14.2 30.1 28.9 37.2 28.0 20.7 (4.4) 28.7
Japan................ 5.5 23.8 32.1 25.9 32.8 15.8 7.8 (19.2) 26.6
----- ----- ------ ------ ------ ----- ----- ------ -----
TAM............. $17.8 $77.3 $137.2 $125.6 $149.4 15.8% 15.4% (8.4)% 18.9%
===== ===== ====== ====== ====== ===== ====== ====== =====
- --------------
(1) Source: WSTS.
(2) Calculated using end pointsSection 27A of the periods specified.
During the 1960s and 1970s, the developmentSecurities Act of semiconductor process
technologies was critical to the success of participants1933, as amended. Our
actual results may differ significantly from those projected in the
industry. As
process technologies matured, manufacturing sciences became important;forward-looking statements. Factors that might cause future actual results to
differ materially from our recent results or those projected in the
1980s,forward-looking statements include, but are not limited to, those discussed in
"Cautionary Statement Regarding Forward-Looking Statements" and under the
emphasis shiftedcaption "Item 3: Key Information - Risk Factors". We assume no obligation to
increasing production volumesupdate the forward-looking statements or such factors.
Overview
Business conditions in 1999 and yields2000 improved from the difficult
conditions experienced in the semiconductor industry in 1997 and lowering production costs. The large capital expenditures and other resources
required during this period1998. According
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 complexitytrade association data, worldwide sales of semiconductor products (the total
available market or "TAM") increased 36.8% in 2000 over 1999. Based on trade
association data, the demandsestimated market for products produced by us (the
serviceable available market or "SAM") (which consists of technological change,the TAM without DRAMs,
and opto-electronic products) increased approximately 34.8% in 2000 over 1999.
However, the costs associatedhigher rates of increase were recorded in the first three quarters
of 2000, while during the fourth quarter 2000 the semiconductor industry showed
some signs of decreased growth rates with keeping pace with industry developments have
contributedthe total market declining
approximately 3% in that quarter compared to the growth of cooperationthird quarter 2000. The reverse
in product design and development and
manufacturing alliances with customers as well as among semiconductor suppliers.
Alliances with customers provide the manufacturer with valuable system 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 research and development and
manufacturing resources to be shared to mutual advantage for joint technology
development.
The Company believes that as part of the new "e-society", major new
growth segmentstrend in the semiconductor industry which began in the fourth quarter of
2000 led to negative growth expectations for 2001. Industry analysts at the end
of 2000 were forecasting a downturn in the 2001 semiconductor market.
Our net revenues for 2000 increased 54.5% compared to 1999, a stronger
increase than both the TAM and the SAM. We benefited from increased volumes in
virtually all product families and an improved product mix, including sales of
new products.
In the last five years, despite the difficult market are developing,conditions in particular for
digital multimedia, networking1997
and wireless communications
10
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 many1998, our net revenues increased from $4,122.4 million in 1996 to $7,813.2
million in 2000, representing a compound annual growth rate of these new products will require17.3%. According
to trade association data, the TAM increased from $132.0 billion in 1996 to
$204.4 billion in 2000, representing a high levelcompound annual growth rate of semiconductor
integration, combining various technologies such as bipolar, CMOS, DMOS and
memory, on11.6%,
while the SAM increased from $102.7 billion in 1996 to $165.7 billion in 2000,
representing a single chip.
To compete as a leading player for system-on-chip applications,
management believes that it is necessary to combine (i) a broad and diverse
customer base; (ii) system knowhow; (iii) strategic alliances; (iv) broad rangecompound annual growth rate of product technologies; (v) world-class volume manufacturing; (vi) software
expertise; (vii) design methodology; (viii) broad IP portfolio; and (ix)
powerful engines DSP and microcontroller cores and that12.7%. During the Company possesses
all the aforementioned ingredients. 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
The key elementssame period, our
share of the Company's strategy are set forth below.
Broad Product Portfolio. The Company offers a diversified product
portfolio and develops productsTAM increased from 3.1% to 3.8%, while our share of the SAM
increased from 4.0% to 4.7%. Our revenue growth from 1996 through 2000 was
particularly significant 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 defineswe define as being itsour
dedicated products, semicustom devices and microcontrollers).
As a result of our performance during the period 1996 to 2000, we not
only gained market share against both the TAM and SAM, but, according to ranking
by leading market analysts, became the sixth largest semiconductor company in
the world during 2000, up from ninth in 1999. However, we believe that the
general market conditions have led certain of our competitors to redirect their
marketing focus and manufacturing capacity toward products that compete with our
products. We believe increased competition in our core product markets is
42
generating greater pricing pressure, increased competition for market share in
the SAM and a generally more challenging market environment for us.
There can be no assurance that we will experience revenue growth at or
above the growth rate for the TAM or the SAM, or that increased competition in
our core product markets will not lead to further price erosion, lower revenue
growth rates and lower margins for us.
In 2000, we continued to focus on differentiated ICs and analog ICs.
Differentiated ICs (including mixed-signal
ICs), the majorityaccounted for approximately 63% of which are also differentiated ICs. As a leading provider
of differentiated ICs, the Company has developedour net revenues in both
2000 and 1999. Such products foster close relationships with customers,
resulting in early knowledge of their evolving requirements and opportunities to
access their markets for other products. Differentiated ICs,
whichproducts, and are less vulnerable to competitive
pressures than standard commodity products, accounted for approximately 63%products. Analog ICs (including mixed signal
ICs), the majority of the Company's net revenues in 1999
compared to approximately 62% in 1998. The Companywhich are also targets applications
that require substantial analog and mixed-signal content and can exploit the
Company's system level expertise. Analogdifferentiated ICs, accounted for
approximately 51%49% of the Company's 1999our net revenues in 2000 compared to approximately 50%51% in 1998,1999, while
discrete devices accounted for approximately 12%10% of the Company'sour net revenues in 19992000
compared to approximately 13%12% in 1998.1999. In general, differentiated ICs,recent years, these families of
products, in particular analog ICs, have experienced less volatility in sales
growth rates and average selling prices than the overall semiconductor industry.
However, the difficult competitive environment in the semiconductor market in
more recent years has led to price pressures in these product families as well.
In order to reinforce our presence in certain strategic business
segments, we completed the acquisition from Nortel Networks of a 150mm facility
in Ottawa, Canada, in June 2000 with a commitment for $2 billion in sales to
Nortel Networks over the following three years (in conjunction with the
acquisition, we entered into an agreement with Nortel Networks for the
development of processes, packages and fundamental IP for high-speed optical
interfaces). We also acquired Waferscale Integration (a leading manufacturer of
programmable system memory devices) and Portland Group (a vendor of compilers
and software development tools for the high-performance parallel computing
market).
Our gross profit margin increased from 41.4% in 1996 to 46.0% in 2000.
Benefiting from a favorable industry environment in 1996, we had a gross profit
margin of approximately 41% and an operating income margin of approximately 19%.
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 broad range supplier,percentage of net revenues which, however, remained above
12%. Benefiting from 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.
Total standard products (including all nonvolatile memories, discrete
devices, and all standard logical and linear ICs) represented approximately 37%
of the Company's salesmarket recovery in 1999 and 2000, gross profit margin
increased in management's view, increased sales2000 to 46.0% while operating income as a percentage of these products represent an opportunitynet
revenues rose significantly to improve cash flow because22.8%.
Preliminary projections for 2001 assumed a worsening of the manufacturemarket
correction. According to industry data, the market for the first quarter of standard products requires moderate capital investment.
Broad Range2001
declined 19.6% compared to the fourth quarter of Process2000 and Design Technologies.4.5% compared to the
first quarter of 2000. The Company intendslatest forecasts by industry analysts at the end of
March 2001 estimate a 12% decline in the TAM and a 10% decline in the SAM in
2001 compared to 2000. We estimate that the market correction which began
abruptly with a sharp inventory adjustment in the fourth quarter of 2000 is
likely to continue through much of 2001. Its duration is closely tied 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. 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
11
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.
Leading Global 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, Hewlett-Packard,
Marelli, Nortel Networks, Pioneer, Seagate, 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
facilitiesmacroeconomic conditions, particularly in the United States (in Phoenix, Carrollton and Rancho Bernardo),Japan, as well
as to industry-specific issues such as overcapacity and excess inventory levels.
While we are expecting a difficult business environment, we are
confident in Europe (Agrate, Castelletto, 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 intendsour ability to continue to build its integrated local presence in each region where it competes in its
effortsoutperform the industry by a meaningful
margin. Within this challenging near term environment, our strategy continues to
better serve its customers and to develop an early presence in
potential high growth markets such as China, wherebe based upon profitable market share gains through the Company has both a
back-end facilitydevelopment of
world-leading products, strong customer alliances, efficient global
manufacturing 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 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, digital cameras and MP3 digital music players),
wireless communications (digital cellular phones), data transport (fiber optic
ICs and voice over IP), Internet (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.
Pervasive TQEM Culture. STMicroelectronics is fostering a
corporate-wide TQEM 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. TQEM in STMicroelectronics is based on five key principles: 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 continually improved average AIQ (electrical) status levels. Most of the
Company's manufacturing facilities have been certified to conform to ISO
international quality standards and Eco Management and Audit Scheme ("EAMS").
Several major customers, including Hewlett-Packard, Nokia, Sharp,
DaimlerChrysler and Sanyo have recognized STMicroelectronics' commitment to
quality and have honored the Company with quality awards in the recent past. In
1999, several prestigious awards were accorded to the Company's regional
subsidiaries, underscoring its long-standing commitment to business excellence:
the prestigious Malcolm Baldrige National Quality Award in the U.S., the
Singapore Quality Award, the Moroccan National Quality Award, and the EPA
Climate Protection Award (US). These, together with the Company's previous
honors
12
- - the Malaysian Prime Minister Quality Award, the Malta Quality Award and the
European Quality Award for Business Excellence in the category of large
businesses awarded in 1997 by the European Foundation for Quality Management -
illustrate the success of the Company's unified Total Quality and Environmental
Management philosophy on four continents.
Pioneer in System-on-chip. Since its inception, the Company has
leveraged its know-how of a broad range of industries to integrate different
system functions on a single chip, pionneering the trend towards system
evolutions on silicon and superintegration. A modular approach is being utilized
to develop options to the main manufacturing processes and blocks of
intellectual property; strategic partnerships are the main lever for
acquisitions of the system know-how to be embedded on the chip. The Company
currently supplies highly integrated products in all its main applications, and
particularly in high volume domains such as hard disk drives (disk controllers),
set-top boxes and Digital video drives.
To date, the Company's growth has been attributable primarily to
internal growth. However, in 1999, the Company completed 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. In 1999, the
Company also acquired Arithmos, a company which designs controller ICs for flat
panel displays and LCD monitors. In June 2000, the Company also acquired from
Nortel Networks its semiconductor business and in particular its manufacturing
activity in Ottawa. 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 andcapital expenditure.
43
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.Operations
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 setstables below set forth certain of the Company's significant
customers and certain applications for its products:
13
- ------------------------------------------------------------------------------------------------------
Telecommunications
Customers: Alcatel Italtel Nokia Sagem
Bosch Lucent Technologies Nortel Networks Samsung
Ericsson Motorola Philips Siemens
Applications: Central office switching systems Telephone terminals (corded and cordless)
Digital cellular telephones Internet access (xDSL)
Wireless networking (Bluetooth) Data transport (routing, switching
for electronic and optical networks)
- ------------------------------------------------------------------------------------------------------
Computer Systems
Customers: ACER Creative Technology Maxtor Seagate
Bull Hewlett-Packard Olivetti 3D Labs
Compaq IBM Quantum Western Digital
Logitech Samsung
Applications: Data storage Webcams
Monitors and displays Printers
Graphics Imaging
Power management
- ------------------------------------------------------------------------------------------------------
Automotive
Customers: Bosch Denso Motorola Valeo
DaimlerChrysler Kenwood Pioneer VDO
Delphi Marelli Siemens Visteon
Applications: Airbags Engine management systems (ignition and
injection)
Antiskid braking systems Multiplex wiring kits
Car radio Global positioning systems
Body and chassis electronics Car multimedia
- ------------------------------------------------------------------------------------------------------
Consumer Products
Customers: Bose Corporation Lucky Goldstar Pace Scientific Atlanta
Grundig Matsushita Philips Sony
Huges Nokia Pioneer Thomson Multimedia
Kenwood Samsung
Applications: Audio processing (CD, DVD, Hi-Fi) DVDs
Digital cameras Set-top boxes
Digital music players Analog TVs
Digitial TVs VCRs
- ------------------------------------------------------------------------------------------------------
Industrial and Other Applications
Customers: Astec Gemplus Oberthur Schneider
Autostrade Giescke & Devrient Orga SCI
Bull Liton Philips Siemens
Delta Nagra Schlumberger Toshiba
Applications: Battery chargers Motor controllers
Smartcards ICs Power supplies
Industrial automation and control systems Switch mode power supplies
Intelligent power
switches
Lighting systems (lamp ballasts)
- ------------------------------------------------------------------------------------------------------
In 1999, the Company's largest customer, Nokia, represented
approximately 11% of the Company's net revenues. No other single customer
accounted for more than 10% of the Company's net revenues. Sales to the
Company's top ten customers accounted for approximately 45% of the Company's net
sales in 1999 (43% in 1998). 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, as in 1998, approximately 18% of the Company's net revenues in 1999
were made through distributors. There can be no assurance that such customers or
distributors,
14
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
and may expect a higher number of order cancellations, 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 1999, the Company had four principal products groups,
Telecommunications Peripherals and Automative, Consumer and Microcontroller,
Memory Products and Discrete and Standard ICs. Certain information with respect
to revenues for these product groups for 1999 is shown in the table below. For a
breakdown of the Company'son our net revenues by Groupproduct
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.by geographic region:
Year ended December 31,
-----------------------------------------------------------
1996 1997 1998 1999 Group Revenues by Region2000
-----------------------------------------------------------
(percentage of Group net revenues)
Total
(% of total
Total net North Asia Region
(in millions) revenues) Europe America Pacific(1) Five Japan
------------- ---------- ------ ------- ----------- ------ -----
Net Revenues by Product Group: (1)
Telecommunications, Peripherals and
Automotive............... $ 2,305.5 45.6% 31.0% 23.3% 38.7% 2.6% 4.4%
Consumer and Microcontroller
Products......................... 881.7 17.4 32.4 29.6 29.7 5.0 3.3
Memory Products.................. 835.9 16.5 46.6 18.8 20.9 2.5 11.2Automotive(1)............................. $1,614.0 $1,606.9 $1,855.2 $2,305.5 $3,481.7
Discrete and Standard ICs........ICs(1) ............. 778.1 839.5 816.7 927.9 1,213.1
Memory Products........................... 736.8 708.6 659.6 835.9 1,552.9
Consumer and Microcontrollers(1) ......... 870.2 738.8 805.8 881.7 1,438.9
New Ventures Group and Others(2) ......... 123.3 125.4 110.5 105.3 126.6
----- ----- ----- ----- -----
Total............................... $4,122.4 $4,019.2 $4,247.8 $5,056.3 $7,813.2
======== ======== ======== ======== ========
Net Revenues by Geographic Region:(3)
Europe.................................... $1,788.5 $1,753.3 $1,768.9 $1,833.6 $2,629.2
North America............................. 903.0 899.1 937.3 1,156.1 1,843.0
Asia Pacific.............................. 1,125.7 1,065.8 1,247.9 1,658.2 2,614.7
Japan..................................... 228.2 214.5 180.7 239.7 402.4
Emerging Markets(3) ...................... 77.0 86.5 113.0 168.7 323.9
---- ---- ----- ----- -----
Total............................... $4,122.4 $4019.2 $4,247.8 $5,056.3 $7,813.2
======== ======== ======== ======== ========
(As a percentage of net revenues)
Net Revenues by Product Group:(1)
Telecommunications, Peripherals and
Automotive(1)............................. 39.1% 40.0% 43.6% 45.6% 44.6%
Discrete and Standard ICs(1) ............. 18.9 20.9 19.2 18.4 38.5 20.7 34.6 4.615.5
Memory Products........................... 17.9 17.6 15.5 16.5 19.9
Consumer and Microcontrollers(1) ......... 21.1 18.4 19.0 17.4 18.4
New Ventures Group and Others(2) ......... 3.0 3.1 2.7 2.1 1.6
--- --- --- --- ---
Total............................... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Net Revenues by Geographic Region:(3)
Europe.................................... 43.4% 43.6% 41.6% 36.3% 33.6%
North America............................. 21.9 22.4 22.1 22.9 23.6
Asia Pacific.............................. 27.3 26.5 29.4 32.8 33.5
Japan..................................... 5.5 5.3 4.3 4.7 5.2
Emerging Markets(3)....................... 1.9 2.2 2.6 3.3 4.1
--- --- --- --- ---
Total............................... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
- -----------------------------
(1) Many of the products sold in the Asia Pacific region are sold to
U.S.-based original equipment manufacturers located in the region.
At the beginning ofIn January 1999, the Companywe implemented organizational changes to better
orient its productsour product groups to end useend-use applications. Its
products are now organized intoAs a result, net
revenues have been restated for prior periods to reflect these changes.
In addition, the following principal product groups:
Telecommunications, Peripherals and Automotive (formerlyformer Dedicated Products),
Consumer and Microcontroller (formerly Programmable Products), Memory Products and Discrete and Standard ICs. As part of its activities outsideGroup has become 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 ofwhile the former
DedicatedProgrammable Products Group are today encompassed
withinhas become the Consumer and
MicrocontrollerMicrocontrollers 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.
15
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.
The Telecommunications Group has two divisions:
(i) Wireline Telecommunications Products. The Company's
telecommunications products are used in telephone sets,
modems, subscriber line interface cards (SLICs) for digital
central office switching equipment and high speed electronic
and optical communications networks. During 1999, significant
developments included the introduction of a modem chip set for
Asymmetric Digital Subscriber Loop (ADSL) and the delivery of
approximately 1,000,000 full-rate ADSL chip sets to leading
equipment manufacturers. The Company also announced a joint
development program with Virata for a complete ethernet/USB
reference design for ADSL. The Company also demonstrated a
chip set jointly developed with Telia Research AB for a Very
high bit-rate Digital Subscriber Loop (VDSL), a system
supporting broadband communications facilities for interactive
multimedia Internet access, video-on-demand, and other
advanced services, and which will be compatible with DMT-ADSL
currently on the market. In early 2000, the Company acquired
an equity interest of approximately 16% in Netergy Networks,
(formerly 8x8) to reinforce its position in VoIP.
(ii) Wireless 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 (91 million phones equipped in
1999), audio CODEC (44 million phones equipped in 1999), and
RF/IF ICs (83 million phones equipped in 1999). 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 1999 the Company shipped
approximately 7 million units and pursued the development of
its new ST100 DSP core which it has licensed to Alcatel
Microelectronics for various applications including VoIP.
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 into system chip solutions. In 1999, the
Company completed its acquisition from Adaptec of Peripheral
Technology Solutions Group which is specialized in the design
of products for the hard disk drive market. 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. The Company has
developed a one-chip solution for the optical storage market
(DVD ROM) that will be launched in 2000.
(ii) Printers. STMicroelectronics is focusing on inkjet printer
components and is an important supplier of pen chips, motor
drivers, head drivers, high performance photo quality
applications
16
and digital color copiers. The Company is an important partner
of Hewlett-Packard for technology development and
manufacturing and is currently developing printer system on
chip platforms.
(iii) Audio and Automotive Products. STMicroelectronics' audio
products include audio power amplifiers, audio processors and
graphic equalizer ICs. In the second half of 1999, the Company
launched a digital music player platform for MP3, with more
than one million units shipped in the first three months of
2000. 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, instrumentation systems and car multimedia. The
Company believes it is the leader in the manufacturing of car
radio components. The Company is currently developing
solutions for global positioning systems (GPS) and multi-media
in the car. In 1999, 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 1999, the Company achieved volume production and gained
design wins for 8.16 and 32 bit automotive graded embedded
Flash microcontrollers in 0.5, 0.35 and 0.18 micron
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 are responsible for the design, development and
manufacture of 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 1999, the digital consumer market grew mainly
due to the strong growth of digital TV satellite broadcasting
in the United States and Western Europe. This division
delivers large volumes of MPEG decoder ICs suitable for
several applications, including set-top boxes (cable,
satellite and terrestrial), DVDs and digital TVs. The majority
of these products implement the MPEG2 standard. In 1999,
STMicroelectronics reached volume production of the STi55
Omega chip, a family of highly integrated devices that combine
an MPEG2 audio/video decoder with a 32-bit microprocessor and
other functions to create a complete set-top box or DVD
back-end
17
section on a single chip. In the set-top box business, the
Company is preparing solutions for interactive and high-end
boxes based on the ST40 advanced microcontroller and the
STG4003 3D graphic ships, a product being co-developed with
Imagination Technologies, a U.K. company. In the DVD business,
the Company has started developing a one chip dip DVD and an
MPEG2 encoder that will provide recording capability.
(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. The division provides Front-end solutions
for satellite and cable set-top boxes in relation to which it
has entered into partnership agreements with Netergy Networks
of the U.S. in the field of VoIP and Scientific Atlanta of the
U.S. in the field of digital cable modem.
(iii) TV, Monitor and Camera Division. This division targets analog
and digital television, video camera recorders, monitors and
flat panel displays and image capturing and transmission. In
1999, the Company finalized the acquisition of Vision Group
plc, a U.K. company based in Edinburgh, Scotland, which has
developed a technology for production of CMOS sensors. CMOS
sensors significantly reduce the cost of digital cameras; 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. The company is actively pursuing
applications in webcam and digital still camera business and
has started a research and development program for mobile
phone cameras. The Company is today supplying manufacturers of
High Definition Television (HDTV) and plans to pursue other
business opportunities for the next generation of products.
(iv) Graphics Products. In early 1999, the Company entered into a
partnership agreement with Imagination Technologies, (formerly
Videologic) of the United Kingdom for developing the next
generation 3D accelerator aimed at the PC and digital consumer
market. The first prototypes are expected in the middle of
2000.
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
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 1999 revenues, STMicroelectronics was
the leading producer of EPROMs, with a 48.0% market share, and the second
leading supplier of EEPROMs.
According to published industry data, the total market for memory
devices in 1999 was approximately $32.3 billion including DRAMs (64.1%), SRAMs
(14.9%) and nonvolatile memories (21%).
18
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) NVRAMs.
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 1999, with
revenues of $206 million or approximately 48% 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
1999 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
1.8 volt) NOR cell structure flash memory products up to 32 Mbit, and is
introducing into production a family of multi-level flash memories operating at
3.0 volt and manufactured using 0.18 micron technology. The market for flash
memories is growing fast, according to published industry data, driven by
cellular phones and digital consumer applications growth. The Company aims to
increase market share in flash memories by continuing investments in advanced
process technologies, new products development and state-of-the-art
manufacturing facilities in order to address a market which, according to
published industry data, is growing fast, driven by a broad range of high volume
applications such as cellular phones, networking and set top boxes. The Company
is also leveraging its strong network of customer alliances to enter several
long-term agreements to supply flash memories.
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 and bank cards (primarily in Europe), as well as pay
television systems (primarily in the United States, United Kingdom and France).
Other applications include medical record applications, card-access security
systems, toll-payment secure transactions over the Internet and ID cards
applications. According to market estimates from independent analysts, the
Company's market share for microcontroller-based smartcard ICs in units was 46%
in 1999. On this basis, the Company believes to have maintained its leading
position in this market segment. In 1999, the Company achieved ISO 15408
certification for its ST 19 platform of microcontroller-based smartcard,
continuing its leadership in terms of independent security certification. The
Company also recently announced a 32 bit RISC microcontroller for
multi-application cards optimized for fast and secure execution of JavaCard(TM)
applets. The Company is currently developing biometric solutions based on
fingerprint recognition.
EEPROMs and Application-Specific Memories. The Company offers serial
EEPROMs up to 512 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. The Company
intends to work closely with its key customers and strategic allies to identify
and develop added-value application-specific memories. In 1999, the sales of
this division represented, according to trade association data, approximately
23.2% of the world market for EEPROM and other nonvolatile memory compared to
approximately 16.9% in 1998.
NVRAMS. The Company focuses on producing nonvolatile SRAMs (battery
back-up) used in computers and telecommunications equipment. According to
independent market analysts, the Company was the world's second largest supplier
of NVRAMs in 1999, with an estimated market share of 26.0%.
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 1999 revenues,
STMicroelectronics is the second supplier of thyristors and triacs and among the
leading suppliers of
19
power transistors, rectifiers, voltage regulators and amplifiers. Based on trade
association data, the Company believes it is the leader in protection diodes.
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. The Company has recently started development of
electronic devices integrating both passive and active components on the same
chip (IPAD: Integrated Passive and Active Devices).
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.
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 1999 revenues, STMicroelectronics is
among the leading suppliers of bipolar transistors, including RF power
transistors.
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.
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 1999, the Company derived approximately 82% of its(2) Includes revenues from sales directlyof subsystems and other products and from
the New Ventures Group, which was created in May 1994 to customers through its regional sales organizations (comparedact as a
center for our new business opportunities.
(3) Revenues are classified by location of customer invoiced. For example,
products ordered by U.S.-based companies to approximately 82% in 1998) and 18% of its net revenues from sales through
distributors (comparedbe invoiced to approximately 18% in 1998). The Company operates
regional sales organizations
20
in Europe, North America, the Asia Pacific
affiliates are classified as Asia Pacific revenues. Net revenues by
geographic region Japan and, sincehave been reclassified to reflect the creation of
Region Five in January 1,
1998 in "Region Five" 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. In 1999, approximately 36.3%the
fourth quarter of the Company's revenues originated in Europe (compared to approximately 41.6%
in 1998), while 22.9% originated in the Americas (compared to approximately
22.1% in 1998), 32.8% originated in the Asia Pacific region (compared to
approximately 29.4% in 1998), 4.7% originated in Japan (compared to
approximately 4.3% in 1998) and 3.3% originated in2000, Region Five (comparedchanged its name to approximately 2.6%become the
Emerging Markets region.
44
The following table sets forth certain financial data from our
consolidated statements of income since 1996, expressed in 1998).each case as a
percentage of net revenues:
Year ended December 31,
------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
Net sales......................................... 98.9% 98.8% 99.1% 99.3% 99.4%
Other revenues.................................... 1.1 1.2 0.9 0.7 0.6
--- --- --- --- ---
Net revenues...................................... 100.0 100.0 100.0 100.0 100.0
Cost of sales..................................... (58.6) (61.1) (61.7) (60.4) (54.0)
----- ----- ----- ----- -----
Gross profit...................................... 41.4 38.9 38.3 39.6 46.0
Operating Expenses:
Selling, general and administrative............... (10.2) (11.3) (11.5) (10.6) (9.0)
Research and development.......................... (12.9) (15.2) (16.2) (16.5) (13.1)
Other income and expenses......................... 1.1 0.5 1.7 0.8 (1.1)
--- --- --- --- ----
Total operating expenses.......................... (22.0) (26.0) (26.0) (26.3) (23.2)
----- ----- ----- ----- -----
Operating income.................................. 19.4 12.9 12.3 13.3 22.8
Net interest income (expense)..................... (0.3) -- 0.2 0.7 0.6
Gain on disposal of investment.................... 0.2 -- -- -- --
--- --- --- --- ---
Income before income taxes and minority interests. 19.3 12.9 12.5 14.0 23.4
Income tax expense................................ (4.2) (2.9) (2.8) (3.1) (4.8)
---- ---- ---- ---- ----
Income before minority interests ................. 15.1 10.0 9.7 10.9 18.6
Minority interests................................ 0.1 0.1 -- (0.1) --
--- --- --- ---- ---
Net income........................................ 15.2% 10.1% 9.7% 10.8% 18.6%
==== ==== === ==== ====
2000 vs. 1999
In 2000, we benefited from the industry recovery and our strong market
position, and increased significantly our net revenues, operating income, net
income and diluted earnings per share in each successive quarter. We continued
to invest significant amounts in research and development and completed several
strategic acquisitions which enhanced our intellectual property portfolio. We
accelerated our capital spending during the year in order to build up capacity
to meet demand.
Net revenues. Net sales increased 54.6%, from $5,023.1 million in 1999
to $7,764.4 million in 2000. The increase in net sales was primarily the Company's largest customer, Nokia,
represented approximately 11%result
of the Company's net revenues. No other single
customer accounted for more than 10%higher volume and an improved product mix, including sales of the Company's net revenues. Sales to the
Company's top ten customers accounted for approximately 45% of the Company'snew products.
The exchange rate impact on net sales in 2000 was estimated to be negative.
Other revenues increased from $33.2 million in 1999 (43%to $48.8 million in 1998).2000 due
primarily to an increase in licensing revenues. Net revenues increased 54.5%,
from $5,056.3 million in 1999 to $7,813.2 million in 2000.
The European region is divided into five businesses units:Telecommunications, Peripherals and Automotive Groups' net revenues
increased 51.0% primarily as a result of volume increases in wireless and
wireline telecommunications, data storage devices and automotive communities, consumerproducts and computers, industriala
more favorable product mix in wireline products. The Discrete and smartcards, six
geographically configured units to cover mid-sized OEM customers (FranceStandard ICs
Group's net revenues increased 30.7%, as the volume increases in basically all
major product families and the Benelux, Central Europe, Northern Europe, Southern Europe, Scandinaviamore favorable product mix in standard
commodities and Finland)discrete devices more than offset the price declines in
basically all major product families. Net revenues of the Memory Products Group
increased by 85.8% as a result of volume increases in basically all product
families (such as Flash memories, smartcard ICs and EEPROMs) and improved mix in
Flash memories and EPROMs. The Consumer and Microcontrollers Groups' net
revenues increased 63.2% as a result of significantly higher volumes in digital
video, digital consumer applications and imaging products, partially offset by a
general decrease in prices in most major product families.
Gross profit. Our gross profit increased 79.7%, from $2,001.8 million
in 1999 to $3,596.3 million in 2000 primarily as a result of higher net
revenues. As a percentage of net revenues, gross profit increased from 39.6% in
45
1999 to 46.0% in 2000, benefiting from higher production volumes, improved
product mix and six regions (United Kingdom, France, Central Europe, Southern
Europe, Scandinaviaa more cost-effective utilization of manufacturing facilities.
Cost of sales increased from $3,054.5 million in 1999 to $4,216.9
million in 2000, primarily due to a significant increase in production volume,
the increase in purchases of wafers from external foundries and Finland) addressed through distributors.
In North America, the increased
depreciation associated with new capital investments.
The exchange rate impact on gross profit in 2000 compared to 1999 was
estimated to be favorable. The appreciation of the U.S. dollar versus the euro
had a favorable impact on cost of sales that was higher than the unfavorable
impact on net revenues. See "--Impact of Changes in Exchange Rates."
Selling, general 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)administrative expenses. Selling, general and
administrative expenses increased 31.7%, 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 specializesfrom $534.2 million in 1999 to $703.7
million in 2000, reflecting increased efforts 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 servicesadministrative functions and the information technology area. As a percentage of
net revenues, selling, general and administrative expenses decreased from 10.6%
in 1999 to customers through
sales offices9.0% 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 is pursuing 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. In 1999, the Company launched the "Mare Nostrum"
program for Europe which involves (i) focusing on customers and applications,
(ii) using the Company's standard product portfolio
21
through technical support, (iii) product marketing and sales to develop an
application kit approach, (iv) encouraging a one stop shopping approach, as well
as (v) improving market coverage through a customer interface team.
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.2000.
Research and Development
Management believes thatdevelopment expenses. Research and development expenses
increased 22.8%, from $836.0 million in 1999 to $1,026.3 million in 2000. We
continued to invest heavily in research and development is criticaland plan to the
Company's success and is committed tocontinue
increasing our research and development expendituresstaff. We continue to allocate
significant financial resources to expand our market leadership in the future. Despite significant cost reductions following the
Company's formation in 1987, 1990key
applications, reflecting our commitment to service and 1991 when the Company experienced losses,
and during the recent industry downturn in 1997 and 1998, management did not
reducecontinuous innovation.
Our reported research and development spending. This commitment to research and
development continues unabated, with the Company spending $836 million or 16.5%
of net revenues on research and development in 1999. The table below sets forth
information with respect to the Company's research and development spending
since 1994 (not includingexpenses do not include marketing design
center, process engineering, pre-production or industrialization costs):costs. As a
percentage of net revenues, research and development expenses decreased from
16.5% in 1999 to 13.1% in 2000.
Other income and expenses. Other income and expenses decreased from
income of $39.9 million in 1999 to expenses of $83.6 million in 2000. Other
income and expenses include primarily funds received from government agencies in
connection with our research and development programs, the cost of new plant
start-ups, the amortization of goodwill and related acquisition costs, 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. In addition, lower funds received from government
agencies in connection with our research and development programs, higher patent
expenses and higher goodwill amortization contributed to the increase in
expenses.
Operating income. Our operating income increased by 165.5%, from $671.5
million in 1999 to $1,782.7 million in 2000. The exchange rate impact on
operating income in 2000 was estimated to be favorable since the appreciation of
the U.S. dollar against the euro had a favorable impact on gross profit and
operating expenses.
Net interest income (expense). Net interest income increased from
income of $35.6 million in 1999 to income of $46.7 million in 2000 primarily as
a result of the increase in cash and cash equivalents following the share
offering and the Liquid Yield Option (TM) Notes ("LYONs") offering completed on
September 22, 1999 and to the convertible debt offering completed on November
16, 2000.
Income tax expense. Provision for income tax was $375.1 million in 2000
compared to $157.2 million in 1999, primarily as a result of the increase in
income before income taxes and minority interests. The accrued effective tax
rate decreased from 22.2% in 1999 to 20.5% in 2000 mainly due to the application
of new benefits in certain countries. As such benefits may not be available
after 2000, an increase in the effective tax rate could result in the coming
years.
Net income. Our net income increased 165.3%, from $547.3 million to
$1,452.1 million. As a percentage of net revenues, 2000 net income was 18.6%, up
from 10.8% of 1999 net income. Diluted earnings per share reached $1.58, an
increase of 154.8% compared to diluted earnings per share of $0.62 in 1999. All
per share numbers have been adjusted to reflect the 2-for-1 stock split effected
in June 1999 and for the 3-for-1 stock split effected in May 2000.
1999 vs. 1998
In 1999, we benefited from the industry recovery and our strong market
position, and increased our net revenues, operating income, net income and
diluted earnings per share in each successive quarter. We continued to
46
invest significant amounts in research and development and completed several
strategic acquisitions which enhanced our intellectual property portfolio. We
accelerated our capital spending in the second half of the year.
Net revenues. Net sales increased 19.3%, from $4,210.6 million in 1998
to $5,023.1 million in 1999. The increase in net sales was primarily the result
of higher volume and an improved product mix, including sales of new products,
partly offset by declining average selling prices. The exchange rate impact on
net sales in 1999 was estimated to be negligible. Other revenues decreased from
$37.2 million in 1998 to $33.2 million in 1999 due primarily to a reduction in
licensing revenues. Net revenues increased 19.0%, from $4,247.8 million in 1998
to $5,056.3 million in 1999.
The Telecommunications, Peripherals and Automotive Groups' net revenues
increased 24.3% primarily as a result of volume increases in wireless
telecommunications, data storage and automotive products and a more favorable
product mix. The Discrete and Standard ICs Group's net revenues increased 13.6%,
as the volume increases in basically all major product families and the more
favorable product mix in standard commodities more than offset the price
declines in all product families. Net revenues to the Memory Products Group
increased by 26.7% as the volume increases in all product families more than
offset the price declines in nearly all product families (such as EPROMs,
EEPROMs, smartcard ICs and flash memories). The Consumer and Microcontrollers
Groups' net revenues increased 9.4% as a result of significantly higher volumes
in digital video and microcontrollers products, partially offset by decreased
volumes in graphics products and lower prices in all product families.
Gross profit. Our gross profit increased 23.2%, from $1,624.8 million
in 1998 to $2,001.8 million in 1999 primarily as a result of higher net
revenues. As a percentage of net revenues, gross profit increased from 38.3% in
1998 to 39.6% in 1999, due to higher sales volumes and improved manufacturing
efficiency.
Costs of sales increased from $2,623.0 million in 1998 to $3,054.5
million in 1999, primarily due to a significant increase in production volume
and the increased depreciation associated with new capital investments.
The exchange rate impact on gross profit in 1999 compared to 1998 was
estimated to be favorable, as the negligible impact of the variation of the U.S.
dollar on net revenues was more than offset by the positive impact on cost of
sales of the appreciation of the U.S. dollar versus the euro. See "--Impact of
Changes in Exchange Rates".
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 9.4%, from $488.1 million in 1998 to $534.2
million in 1999, reflecting higher expenditure for information technology,
marketing and administrative functions, including the expenses for year 2000
compliance. As a percentage of net revenues, selling, general and administrative
expenses decreased slightly from 11.5% in 1998 to 10.6% in 1999.
Research and development expenses. Research and development expenses
increased 21.2%, from $689.8 million in 1998 to $836.0 million in 1999. We
continued to invest heavily in research and development and plan to continue
increasing our research and development staff. We continue to allocate
significant financial resources to expand our market leadership in key
applications, reflecting our commitment to service and continuous innovation.
Our reported research and development expenses do not include marketing design
center, process engineering, pre-production or industrialization costs. As a
percentage of net revenues, research and development expenses increased from
16.2% in 1998 to 16.5% in 1999.
Other income and expenses. Other income and expenses decreased from
income of $76.5 million in 1998 to income of $39.9 million in 1999. Other income
and expenses include primarily funds received from government agencies in
connection with our 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, from the inclusion of the
goodwill amortization of Vision Group, of Peripherals Technology Solutions and,
to a lesser extent, of Arithmos, and from a slight decrease in funds received
from government agencies in connection with our research and development
programs.
Operating income. Our operating income increased by 28.3%, from $523.4
million in 1998 to $671.5 million in 1999. The exchange rate impact on operating
income in 1999 was favorable since the appreciation of the U.S. dollar against
the euro had a favorable impact on gross profit and operating expenses.
47
Net interest income (expense). Net interest income increased from
income of $8.7 million in 1998 to income of $35.6 million in 1999 primarily as a
result of the increase in cash and cash equivalents following the 1999 Share
Offering and the 1999 LYONs Offering completed on September 22, 1999.
Income tax expense. Provision for income tax was $157.2 million in 1999
compared to $120.4 million in 1998, primarily as a result of the increase in
income before income taxes and minority interests. The accrued effective tax
rate decreased from 22.6% in 1998 to 22.2% in 1999 mainly due to the application
of benefits in certain countries. As such benefits may not be available after
1999, an increase in the effective tax rate could result in the coming years.
Net income. Our net income increased 33.1%, from $411.1 million to
$547.3 million. As a percentage of sales, 1999 net income was 10.8%, up from
9.7% of 1998 net income. The increase was mainly due to higher net sales.
Diluted earnings per share reached $0.62 compared to diluted earnings per share
of $0.48 in 1998. All per share numbers have been adjusted to reflect the
2-for-1 stock split effected in June 1999 and the 3-for-1 stock split effected
in May 2000.
Quarterly Results of Operations
The following table sets forth certain financial information for the
years 1999 and 2000. 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 us in recent years, the increasingly
competitive nature of the markets in which we operate, the changes in product
mix and the currency effects of changes in the composition of sales and
production among different geographic regions, we believe that period-to-period
comparisons of our operating results should not be relied upon as an indication
of future performance.
Our 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 our expenses varies with our
revenues, there can be no assurance that we 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 our
operating results.
48
YearQuarter ended December(Unaudited)
----------------------------------------------------------------------------------------
April 3, July 3, Oct. 2, Dec. 31, -------------------------------------------------------------------
1995 1996 1997 1998April 1, July 1, Sept. 30, Dec. 31,
1999 -------- ------- ------- ------ -------1999 1999 1999 2000 2000 2000 2000
---------- --------- --------- ---------- ----------- --------- ----------- ------------
(in millions, except percentages)percentages and per share data)(1)
Expenditures................................ $440.3 $532.3 $610.9 $689.8 $836.0
as
Consolidated Statement of
Income Data
Net revenues.............. $1,113.3 $1,190.6 $1,274.2 $1,478.2 $1,702.2 $ 1,877.3 $ 2,042.0 $ 2,191.7
Cost of sales............. (685.4) (719.9) (766.8) (882.4) (985.1) (1,001.6) (1,077.1) (1,153.1)
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Gross profit.............. 427.9 470.7 507.4 595.8 717.1 875.7 964.9 1,038.6
Operating expenses:
Selling, general and
administrative.......... (119.1) (130.3) (136.8) (148.0) (159.5) (177.1) (174.0) (193.1)
Research and development.. (193.5) (202.8) (205.5) (234.1) (235.1) (245.1) (259.8) (286.4)
Other income and expenses. 16.1 14.9 5.0 3.8 (30.5) (37.7) (19.3) 4.1
Total operating expenses.. (296.5) (318.2) (337.3) (378.3) (425.1) (459.9) (453.1) (475.4)
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Operating income.......... 131.4 152.5 170.1 217.5 292.0 415.8 511.8 563.2
Net interest income....... 3.7 6.0 8.2 17.7 16.4 14.0 7.3 9.0
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Income before income taxes
and minority interests.. 135.1 158.5 178.3 235.2 308.4 429.8 519.1 572.2
Income tax expense....... (29.9) (35.4) (41.6) (50.3) (69.4) (92.7) (103.6) (109.5)
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Income before minority
interests............... 105.2 123.1 136.7 184.9 239.0 337.1 415.5 462.7
Minority interests........ (0.1) (0.6) (1.4) (0.6) (0.6) (0.6) (0.2) (0.8)
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Net income................ $ 105.1 $ 122.5 $ 135.3 $ 184.3 $ 238.4 $ 336.5 $ 415.3 $ 461.9
========== ========= ========= ========== =========== ========= =========== ============
Earnings per share (basic) $0.12 $ 0.14 $ 0.16 $ 0.21 $ 0.27 $ 0.38 $ 0.47 $ 0.52
Earnings per share (diluted) $0.12 $ 0.14 $ 0.15 $ 0.21 $ 0.26 $ 0.37 $ 0.45 $ 0.50
Number of shares used in
calculating earnings per
share (basic)........... 855.1 856.5 858.2 866.8 878.2 887.0 888.5 889.3
Number of shares used in
calculating earnings per
share (diluted)......... 888.3 890.6 896.2 930.6 933.5 934.5 934.0 942.4
As a percentage of net revenues............. 12.4% 12.9% 15.2% 16.2% 16.5%revenues
Net revenues.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............. (61.6) (60.5) (60.2) (59.7) (57.9) (53.4) (52.7) (52.6)
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Gross profit.............. 38.4 39.5 39.8 40.3 42.1 46.6 47.3 47.4
Operating expenses:
Selling, general and
administrative.......... (10.7) (10.9) (10.7) (10.0) (9.4) (9.4) (8.5) (8.8)
Research and development.. (17.4) (17.0) (16.1) (15.8) (13.8) (13.1) (12.7) (13.1)
Other income and expenses. 1.5 1.2 0.3 0.2 (1.8) (2.0) (0.9) 0.2
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Total operating expenses.. (26.6) (26.7) (26.5) (25.6) (25.0) (24.5) (22.2) (21.7)
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Operating income.......... 11.8 12.8 13.3 14.7 17.2 22.1 25.1 25.7
Net interest income....... 0.3 0.5 0.7 1.2 1.0 0.8 0.3 0.4
Income before income taxes
and minority interests.. 12.1 13.3 14.0 15.9 18.1 22.9 25.4 26.1
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Income tax expense........ (2.7) (3.0) (3.3) (3.4) (4.1) (4.9) (5.1) (5.0)
Income before minority
interests............... 9.4 10.3 10.7 12.5 14.0 18.0 20.3 21.1
---------- --------- --------- ---------- ----------- --------- ----------- ------------
Minority interests........ - - (0.1) - - (0.1) - -
Net income................ 9.4% 10.3% 10.6% 12.5% 14.0% 17.9% 20.3% 21.1%
========== ========= ========= ========== =========== ========= =========== ============
As- -------------
(1) All share information has been adjusted to reflect the 2-for-1 stock
split effected in June 1999 and the 3-for-1 stock split effected in May
2000.
Net revenues. Fourth quarter 2000 net revenues recorded a 7.3%
sequential improvement over the third quarter of 2000, with gains mainly from
the Memory Products Group and the Telecommunications, Peripherals and Automotive
Groups. We recorded an increase in net revenues of 48.3% versus the fourth
quarter of 1999, experiencing strong sales gains across all product groups.
Third quarter 2000 net revenues showed an 8.8% sequential increase over the
second quarter of 2000 in spite of seasonal factors that generally reduce sales
during the
49
summer months and were 60.3% above 1999 third quarter net revenues. Second
quarter 2000 net revenues increased 10.3% compared to the first quarter of 2000,
and were 57.7% above second quarter 1999 net revenues. First quarter 2000 net
revenues increased 15.2% compared to the fourth quarter of 1999, and were 52.9%
above first quarter 1999 net revenues.
With respect to the product groups, the Memory Products Group had the
highest year-over-year and quarter-over-quarter results; its revenues in the
2000 fourth quarter rose 84.1% in comparison to the 1999 fourth quarter and
increased 13.7% in comparison to the 2000 third quarter, reflecting our
significant progress in penetrating the market with new generation flash
products. In the 2000 fourth quarter, net revenues from the Telecommunications,
Peripherals and Automotive Groups increased 49.2% over the year ago quarter and
12.0% sequentially, reflecting the strength in sales of ICs for
telecommunications, mainly wireless, hard disk drives, digital cellular phones
and automotive applications. Net revenues for the Consumer and Microcontrollers
Groups increased 39.4% compared to the 1999 fourth quarter and net revenues for
the Discrete and Standards ICs Products Group increased 15.5%. Overall, our
48.3% revenue growth of the 2000 fourth quarter over the 1999 fourth quarter
resulted from the rapidly increasing demand for our products as well as our
ability to effectively deploy our resources.
In 2000, approximately 34% of our net revenues originated in Europe,
compared to approximately 36% in 1999. Our third quarter revenues in Europe have
generally been slightly less than average revenues during other quarters due to
production slowdowns by our European customers in July and August. Quarterly
results have also been and may be expected to continue to be substantially
affected by the cyclical nature of the semiconductor and electronic systems
industries, the timing and success of new product introductions and the levels
of provisions and other unusual charges incurred.
Gross profit. In the fourth quarter of 2000, gross profit was $1,038.6
million, 74.3% above the year-ago period. Gross profit margin in the 2000 fourth
quarter was 47.4%, representing a significant improvement compared to 40.3 % in
the fourth quarter of 1999, as a result of higher production volumes, improved
product mix, and more cost-effective utilization of manufacturing facilities.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $193.1 million in the fourth quarter of 2000, or
8.8% of net revenues, compared to $148.0 million, or 10.0% of net revenues in
the fourth quarter of 1999. The percentage decrease results principally from the
increase in net revenues.
Research and development expenses. In the fourth quarter of 2000,
research and development costs of $286.4 million increased 22.3% compared to the
fourth quarter of 1999. Research and development represented 13.1% of net
revenues in the fourth quarter of 2000 compared to 15.8% of net revenues in the
fourth quarter of 1999, as a result of the historyincrease in net revenues.
Other income and expenses. Other income and expenses remained basically
unchanged from income of $3.8 million in the 1999 fourth quarter to income of
$4.1 million in 2000 fourth quarter as the gain from the sale of certain
marketable securities was offset by lower research and development funding
received from government agencies in connection with our research and
development programs and slightly higher start-up costs of new production
facilities.
Operating income. Operating income reached $563.2 million in the fourth
quarter of 2000 which represented an increase of 158.9% compared to the level of
the Company, approximately 81%fourth quarter of 1999. Operating income margin for the 2000 fourth quarter
was 25.7% compared to 14.7% in the 1999 fourth quarter.
Net income. Net income for the 2000 fourth quarter rose sharply,
increasing 150.6% to $461.9 million compared to $184.3 million in the 1999
fourth quarter and 11.2% compared to $415.3 million in the third quarter 2000.
Diluted earnings per share increased 138.1% to $0.50 from $0.21 in the fourth
quarter 1999 and 11.1% from $0.45 in the third quarter 2000. All per share
figures have been adjusted to reflect the 2-for-1 stock split effected in June
1999 and the 3-for-1 stock split effect May 2000.
During the first quarter of 2001, the semiconductor industry
experienced a decline in revenues in excess of earlier forecasts, estimated at a
4% decrease versus the first quarter of 2000 and 19% sequentially. Based on
this, the latest forecasts by industry analysts estimate a 12% decline in the
TAM and a 10% decline in the SAM in 2001 compared to 2000. Our revenues have
been affected by the strong negative market correction that is currently taking
place. On a comparative basis with the first quarter of 2000, our first quarter
2001 revenues recorded a 12.9% increase, in excess of the Company'sindustry average, but
12.3% below the revenue level reached in the fourth quarter of 2000.
50
We have taken steps to significantly reduce costs during this period of
uncertain market conditions. Specifically, capital expenditure plans for 2001
have been reduced from $2.5 billion to $1.9 billion and stringent cost control
programs have taken effect throughout our company, including a hiring freeze.
These forward-looking statements are subject to certain risks and
uncertainties, in particular the rapid pace of change in the semiconductor
industry, and may differ materially from actual events.
Impact of Changes in Exchange Rate
Our results of operations and financial condition can be significantly
affected by changes in exchange rates between the U.S. dollar and other
currencies, particularly the euro (with respect to prior periods, the Italian
lira, the French franc, the German mark), the Japanese yen and other Asian
currencies.
Revenues for certain products (primarily dedicated products sold in
Europe and Japan) that are quoted in currencies other than the U.S. dollar are
directly affected by fluctuations in the value of the U.S. dollar. Revenues for
all other products, which are quoted in U.S. dollars and translated into local
currencies for payment, tend not to be affected significantly by fluctuations in
exchange rates except to the extent that there is a lag between changes in
currency rates and adjustments in the local currency equivalent price paid for
such products.
Certain significant costs incurred by us, 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 our operations are located. Fluctuations in the value of
these currencies, particularly the euro, compared to the U.S. dollar can affect
our costs and therefore our profitability.
The appreciation in the U.S. dollar in 2000 compared to 1999 against
the principal European and Asian currencies (excluding the Japanese yen, which
appreciated compared to the U.S. dollar) that have a material impact on us
resulted in a favorable impact on results of operations because of the favorable
impact on cost of sales and operating expenses.
Our 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, we purchase or sell currencies forward to cover currency risk
in obligations or receivables. We have not experienced significant gains or
losses as a result of exchange coverage activities. Our 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
our results, thus making our exposure to exchange rate fluctuations more
concentrated.
Assets and liabilities of subsidiaries are, for consolidation purposes,
translated into U.S. dollars at the period-end exchange rate. See Note 2.3 to
the Consolidated Financial Statements. Income and expenses are translated at the
average exchange rate for the period. Adjustments resulting from the translation
are recorded directly in shareholders' equity, and are shown as "accumulated
other comprehensive income (loss)" in the consolidated statements of changes in
shareholders' equity. The balance sheet impact of such translation adjustments
has been, and may be expected to be, significant from period to period.
At December 31, 2000, our outstanding indebtedness was denominated
principally in U.S. dollars, French francs and Italian lire. See Note 14 to the
Consolidated Financial Statements.
Liquidity and Capital Resources
Treasury activities are regulated by our procedures which define
policies, objectives and controls. The policies focus on the management of our
financial risk in terms of exposure to exchange rates and interest rates. Our
objectives are to neutralize our exposure to changes in exchange rates, to
optimize the use of credit facilities and funds available, and to obtain the
best possible market conditions for our financial and treasury operations. Our
treasury controls include systematic reporting to senior management and are
subject to internal and external audits. Most of our treasury activities are
centralized, with any local treasury activities subject to oversight from our
head
51
treasury office. Basically all of our cash and cash equivalents are held in U.S.
dollars and are placed with financial institutions rated "A+" or higher.
Marginal amounts are held in other currencies. Foreign currency operations and
hedging transactions are performed only to cover commercial positions. For
further information on our funding and treasury policies, see "Item 11:
Quantitative and Qualitative Disclosures About Market Risk."
On November 16, 2000, we issued $1,480.0 million initial aggregate
principal amount of zero-coupon unsubordinated convertible notes, due 2010, with
yield to maturity of 3.75% per annum. Our net proceeds in connection with the
2000 notes offering were $1,457.8 million. On September 22, 1999, we completed
an equity offering of 8,970,000 shares of capital stock at $24.88 per share
(adjusted for the three-for-one stock split). Our net proceeds in connection
with the 1999 equity offering were $216.8 million. On September 22, 1999, we
also issued $720.9 million initial aggregate principal amount of zero-coupon
convertible Liquid Yield Option(TM) Notes, due 2009, with yield to maturity of
2.4375% per annum. Our net proceeds in connection with the 1999 LYONs offering
was $708.3 million. Our net cash generated from operations totaled $2.4 billion
in 2000 compared to $1.5 billion in 1999 were incurredand $1.0 billion in Europe,
primarily1998. Significant
amounts of net cash generated from operations in France1998, 1999 and Italy. See "--Public Funding." As2000 coupled
with the debt offering undertaken by us in November 2000, and the equity and
debt offerings in September 1999, enabled us to finance capital expenditures and
strengthen our balance sheet over the last five years.
We had a negative net financial position (cash, cash equivalents and
marketable securities net of total debt) of $511.2 million at December 31, 2000
compared to a positive net financial position of $351.4 million at December 31,
1999. At December 31, 2000, cash and cash equivalents totaled $2,295.7 million,
compared to $1,823.1 million at December 31, 1999. At December 31, 2000, the
aggregate amount of our long-term debt was approximately $2,806 million, all of
which was outstanding, and additionally the aggregate amount of our short-term
credit facilities was approximately $884 million, under which approximately $36
million of indebtedness was outstanding. At December 31, 2000, we had
approximately $106 million of long-term indebtedness that will become due within
one year and expect to fund such debt repayments from available cash. During
2000, certain holders of our 1998 and 1999 LYONs requested conversion of the
LYONs into our shares for approximately 5,350 employees were employed$334 million principal amount at
maturity. We have issued a redemption notice for these LYONs and intend to
redeem them at a redemption price of $885.22 per $1,000 principal amount on June
11, 2001. According to the information available to us, on May 11, 2001,
approximately $45.6 million in research and development
activities.
Central research and development units conduct researchtotal indebtedness was outstanding under the 1998
LYONs. Based on the basic
VLSI technologies, packaging technologiesamount outstanding on May 11, 2001, if all remaining holders
of the 1998 LYONs chose to convert them into Common Shares before the redemption
date, 2,772,291 Common Shares would be issued.
In 2000, our capital expenditure payments totaled $3.3 billion,
compared to $1.3 billion in 1999. Capital expenditures for 2000 were devoted
principally to (i) the conversion from 150mm to 200mm and design tools that are used by all
product groupsexpansion at one of
our front-end wafer fabrication plants in Agrate (Italy), (ii) the increase of
capacity of the 200mm facilities and upgrading of the 150mm fabrication plant in
Catania (Italy), (iii) the completion of construction of our new 200mm front-end
wafer fabrication facility in Rousset (France), (iv) the conversion of our
facilities in Crolles (France), to 0.25 micron and 0.18 micron processes, (v)
the construction of a new 200mm facility and the equipment of a new 150mm
facility in Singapore, (vi) the increase of capacity of our 200mm facilities in
Phoenix (Arizona), and of the 150mm facility in Carrollton (Texas), and (vii)
the expansion of the back-end facilities in Muar (Malaysia), Morocco and
Singapore. Capital expenditures for 1999 were used principally to (i) expand a
150mm facility and the construction of a new 200mm front-end manufacturing organization. STMicroelectronics'
central researchfacility in Agrate
(Italy), (ii) equip and development activities are conductedupgrade both the new 200mm and existing 150mm front-end
facilities at the Catania (Italy) plant, (iii) expand the 200mm front-end wafer
fabrication plant in Crolles France;
Agrate, Italy;(France), (iv) expand the 150mm facility in
Carrollton Texas;(Texas), (v) upgrade the 150mm facility in Rousset (France), (vi)
ramp-up of production at the Phoenix Arizona; Berkeley, California;(Arizona) 200mm front-end facility, (vii)
construct the new 200mm front-end plant in Rousset (France) and Noida, India. The central research(viii) expand
the back-end facilities in Muar (Malaysia), Morocco, Malta 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 formShenzhen (China).
According to present visibility, as of a
French Groupement d'interet economique ("GIE") pursuant to a partnership
agreement in effect until the end of 1998 betweenMarch 2001, we
currently expect that capital spending for 2001 will be in the Company and France Telecom
R&D,range of $1.9
billion, with the research laboratoryability to adjust that amount up or down in response to the
changes in market conditions. The most significant of France Telecom, an indirect shareholderour 2001 capital
expenditure projects are expected to be (i) the expansion of the Company. This center has developed submicron process technologies 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 France Telecom R&D have
decided to extend the GIE named Centre Commun de Microelectronique de Crolles 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 objectives of the cooperation are 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 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 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
22
the year 2000. In April 2000, the Company announced its decision to build an
advanced 12 inch wafer pilot line in Crolles, France, which will be funded and
operated jointly with Philips Semiconductors.
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.
Public Funding
The Company participates in certain programs established by the
European Commission and individual countries in Europe (France and Italy).
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.
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.
The Company has also 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 EU authorities and annual and
project-by-project reviews and approvals.
Funding of programs200mm front-end
facilities in France and Italy, is subject(ii) the start-up of the 200mm facility in
Singapore, (iii) the expansion of the new back-end facilities in Morocco and
(iv) the conversion of the facilities in Crolles (France), from 0.18 micron to
annual
appropriation,0.15 micron processes. We have also decided to build a new 300mm wafer research
fabrication and ifpilot 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 us in Crolles. We will continue to monitor
our level of capital spending, however, taking into consideration factors such
governments were unableas trends in the semiconductor market, capacity utilization and announced
additions.
52
At December 31, 2000, our receivables from government agencies totaled
$139.4 million compared 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$152.2 million in 1999. See Note 7 to the
Company's business, operating results and financial condition.
FromConsolidated Financial Statements. In 2000, our advances from government
agencies totaled $10.6 million compared to $38.7 million in 1999. See Note 15 to
the Consolidated Financial Statements. The timing of receipt of funds under
government contracts has been delayed from time to time the Company has experienced delays in the receiptpast, and while
generally we have received the amounts recorded in such receivables, there have
been instances in which such funds ultimately have not been paid.
We expect to have significant capital requirements in the coming years
and intend to continue to devote a substantial portion of fundingour net revenues to
research and development. We plan to fund our capital requirements from cash
from operations, available funds, available support from third parties
(including state support) and may make recourse to borrowings under these programs. Asavailable
credit lines and, to the availability and timingextent necessary or attractive based on market
conditions prevailing at the time, the sale of such funding are
substantially outside the Company's control, theredebt or additional equity
securities. There can be no assurance that the
Companyadditional financing 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 ifas necessary to fund our working capital requirements, research and
development, industrialization costs or expansion plans, or that any such
alternative funding wouldfinancing, if available, will be provided on terms favorableacceptable to the Company as those previously provided.
Public authority fundingus.
We believe that our available funds, available support from third
parties, and additional borrowings will be sufficient to meet our anticipated
needs for liquidity through at least 2001. For further information on our
research and development, including amounts spent, see "Item 4: Information on
the Company -- Research and Development."
Impact of Recently Issued U.S. Accounting Standards
In June 1998, the U.S. Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement No. 133"), which is reportedrequired to be adopted in "Other Income and Expenses"fiscal years beginning
after June 15, 2000. Statement No. 133 requires us to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not used for hedging
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the Company's consolidated statementsfair value of income.
See Note 17 toderivatives
will either be offset against the consolidated audited financial statements for
23
eachchange in fair value of the yearshedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. We have adopted the standards required by this statement
in the three-year period endedfirst quarter of 2001. We believe that adoption of Statement No. 133 has
not had a material effect on our financial position or results of operations.
In December 31, 1999, including
the Notes thereto (collectively,U.S. Securities and Exchange Commission released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"), providing the "Consolidated Financial Statements")
included elsewhere in this annual reportstaff's views on Form 20-F. Such funding has totaled
$55.3 million, $63.5 millionapplying generally accepted
accounting principles to selected revenue recognition issues. For companies with
fiscal years that begin between December 16, 1999 and $60.4 millionMarch 15, 2000, portions
of SAB 101 became effective in the years 1997, 1998 and 1999,
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 costfourth quarter of sales, and has the effect of increasing
the Company's gross profit. Such funding of industrialization costs has totaled
$6.2 million, $3.1 million and $2.4 million in 1997, 1998 and 1999,
respectively. See Note 17 to the Consolidated Financial Statements. Government
support for capital expenditures funding has totaled $30.2 million, $182.4
million and $53.4 million in the years 1997, 1998 and 1999, respectively. Such
funding has been used to support the Company's capital investment; while receipt2000. We believe that
adoption of these funds isportions of SAB 101 has not directly reflectedhad a material effect on our
financial position or overall trends in the Company's results of operations,operations.
Euro Conversion
On January 1, 1999, eleven of the resulting lower amounts recorded in property, plantfifteen member countries of the
European Union established fixed conversion rates between their existing
national currencies and equipment reduce the leveleuro. The participating countries 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 during the subsequent six months. We do not expect
that the introduction and use 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 purposeeuro will materially affect our foreign
exchange activities, or our use of supporting Italian research projects
meeting specified program criteria. At year-end 1997, 1998 and 1999, the Company
had $63.7 million, $49.4 million and $48.8 million respectively of indebtedness
outstanding under state-assisted financing programs at an average interest cost
of 2.1%, 2.1% and 1.6%, respectively.
Due to change in legislation and/or review by the competent
administrative or judicial bodies, there can be no assurance that government
funding granted to the Company may not be revoked or challenged or discontinued
in whole or in part, by any competent state or European authority, until the
legal time period for challenging or revoking such funding has fully lapsed.
Intellectual Property
Intellectual property rights which apply to various Company products
include patents, copyrights, trade secrets, trademarks and maskwork rights.
STMicroelectronics owns more than 19,000 patents or pending patent applications
corresponding to more than 11,000 original inventions, most of which have been
registered in several countries around the world. In 1999, the Company filed 751
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.
The Company's success depends in part on its ability to obtain patents,
licensesderivatives 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 intendsfinancial instruments,
or will result in any material increase in costs to us. We will 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 toassess 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
rightsimpact of the Company.
Also, there can be no assurance that litigation will not be commenced
inintroduction of the future againsteuro currency over 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,transition
period 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 respectperiod subsequent to the defense thereof which could have a
material adverse effect on the Company's results of operations or financial
condition.
24
transition, as applicable.
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. During periods of industry undercapacity, which is the case
today, the backlog can exceed the Company's manufacturing capacity.
Our backlog has increased steadily in 1999since the end of 1998 and we
continued to aexperience record backlog for the
first quarter of 2000, with the highest level of incoming order rates in the
Company's history.and backlog levels during
2000. In order to meet this backlog, the Company is aggressivelywe are ramping up production at the new
8-inch200mm facility at Rousset, France, and Agrate, Italy, facilities and iswe are also
increasing itsour use of front-end external foundry services. STMicroelectronicsOrders under frame
contracts also sells certain products to key customers
pursuant to frame contracts.increased during 2000. Frame contracts are annual
53
fixed-price contracts with customers setting forth the terms offorecasted quantities and
schedule for 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 frameFrame contracts are also
subjectintended to risks of price reduction, order cancellation and modifications as to
quantities actually ordered.
Competition
Marketssecure capacity availability for the
Company's products are intensely competitive. While
only a few companies competecustomer and improved visibility with STMicroelectronics in allrespect to customer requirements. Due to
the deterioration 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.
In 1999, the Company gained market share in 1999 versus the SAM, while
its market position remained unchanged versus the TAM. The Company's net sales
grew 19.0% while the TAM increased 18.9% and the SAM increased 14.9%, 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 inindustry recorded during the first
quarter of 2000, when2001, our backlog at the Company's
revenues grew 52.9% comparedend of March 2001 declined in comparison to
first quarter 1999 while the TAM grew 33.8%end of December 2000.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
Supervisory Board
Our management is entrusted to the Managing Board under the
supervision of the Supervisory Board. The Supervisory Board advises the
Managing Board and is responsible for supervising the policies pursued by the
Managing Board and the SAM grew 33.2%general course of our affairs and business. In
fulfilling their duties under Dutch law, the members of the Supervisory Board
must serve our interests and 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 our
Supervisory Board must include three members designated by the French
shareholders from the Board of Directors of FT1CI (following the merger of FT2CI
and FT1CI, a corporation owned by CEA-Industrie and France Telecom), and three
members designated by the Italian shareholder. See "Item 7: Major Shareholders
and Related Party Transactions - Major Shareholders - Shareholder Agreements."
Our Supervisory Board currently includes three 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 Managing 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 Managing 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, our 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 our 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 our operations who, with assistants, will
also review operation reports and the implementation of Supervisory Board
decisions; and (iii) the establishment by the Supervisory Board of advisory
committees. In addition, the Supervisory Board has established procedures for
the preparation of Supervisory Board resolutions and the setting of the Board's
calendar.
Members of the Supervisory Board must retire no later than at the
ordinary general meeting of shareholders held after a period of three years
following their appointment, but may be re-elected. A member of the Supervisory
Board must retire at the ordinary general meeting of shareholders held in the
year in which he reaches the age prescribed by Dutch law for retirement of a
supervisory director (currently at age 72). AccordingMembers of the Supervisory Board may
be suspended or dismissed by the general meeting of shareholders. The
Supervisory Board may make a proposal to publishedthe 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 Italian shareholder, as shareholders of ST Holding, also includes certain
provisions requiring the approval of the Supervisory Board of ST
54
Holding for certain actions by ST Holding, STMicroelectronics and our
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 STMicroelectronics
N.V. or our 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 us
and our subsidiaries may give rise to a conflict of interest between our
interests and the individual shareholders approving such actions, and may result
in a delay in the ability of the Managing 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 our
management.
The members of the Supervisory Board are:
Name Position Year Appointed Term Expires Age
- ---------- -------------- -------------------- ------------ ------
Jean-Pierre Noblanc................... Chairman 1994 2002 62
Bruno Steve........................... Vice Chairman 1989 2002 59
Tom de Waard.......................... Member 1998 2002 54
Remy Dullieux......................... Member 1993 2002 50
Douglas Dunn.......................... Member 2001 2002 57
Riccardo Gallo........................ Member 1997 2002 57
Francis Gavois........................ Member 1998 2002 65
Alessandro Ovi........................ Member 1994 2002 57
Robert M. White....................... Member 1996 2002 62
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 a
Member of the French Academy of Technology and serves on the Board of Directors
of CEA Industrie, FT1CI and Picogiga S.A. He is also the Chairman of the Board
of MEDEA+, an industry dataresearch and development program on microelectronics
belonging to the EUREKA organization.
Bruno Steve has been a member of our 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 industry sources,
investmentaffiliates of I.R.I. in worldwide semiconductor fabrication capacity totaled approximately
$40 billion in 1997, $28 billion in 1998 and $32 billion in 1999, or
approximately 29%, 22 % and 21.5%, respectively,various senior
positions for over 17 years. Mr. Steve is currently President of the TAMboard of
statutory auditors of Alitalia S.p.a., Italia Express S.p.a. and Sigma S.p.A.,
Chairman of the Board of EEMS S.p.A., and member of statutory auditors of
Stretto di Messina S.p.A. Until December 1999, he served as Chairman of MEI. He
served as the Chief Operating Officer of Finmeccanica from 1988 to July 1997 and
Chief Executive Officer from May 1995 to July 1997. He was Senior Vice President
of Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior to 1984, Mr.
Steve served in several key executive positions at Telecom Italia, I.R.I.'s
holding company for such years. Such
capacity investmentthe telecommunications sector.
Tom de Waard was appointed to the Supervisory Board in 1998. Mr. de
Waard has been a partner of Clifford Chance, a leading English law firm, since
March 2000. Prior to that, he was a partner at Stibbe, Simont, Monahan, & Duhot,
where he held several positions since 1979 and gained extensive experience
working with major international companies, particularly with respect to
corporate finance. He is made not only by international semiconductor companies,
buta member of the Amsterdam bar and received his law
degree from Leiden University in 1979.
Remy Dullieux has been a member of the Supervisory Board since 1993. He
is a graduate of the Ecole Polytechnique. Since June 1996, Mr. Dullieux has
served as a France Telecom Executive Manager for the Northern and Eastern areas
of France. From 1991 to June 1996, Mr. Dullieux served as Group Executive Vice
President for Strategic Procurement and Development of France Telecom. From 1985
to 1988, Mr. Dullieux served as Regional Manager of Creteil. Mr Dullieux also
companies specializing in operating semiconductor foundries,
particularly in Asia such as UMC, TSMC and Chartered Semiconductors.
The primary international semiconductor companies which compete with
the Company include Advanced Micro Devices, Hitachi, Intel Corporation, Lucent
Technologies, Mitsubishi Electric Corporation, Motorola, National Semiconductor
Corporation, Nippon Electric Company, Philips Semiconductors, Samsung, Infineon
Technology, Texas Instruments and Toshiba.
The Company competes in different product lines to various degreesserves on the basisBoard of price, technical performance, product features, product system
compatibility, customized design, availability, qualityDirectors of FT1CI.
55
Douglas Dunn was appointed to the Supervisory Board in 2001. He is
President and salesChief Executive Officer of ASM Lithography Holding N.V. He was a
member of the Managing Board of Royal Philips Electronics in 1998. From 1996 to
1998 he was Chairman and 25
technical support.Chief Executive Officer of Philips Consumer
Electronics. From 1993 to 1996 Chairman and Chief Executive Officer of Philips
Semiconductors. From 1980 to 1993 he held various positions at Plessey
Semiconductors. Prior to 1980, Mr. Dunn served in executive positions at
Motorola Semiconductors.
Riccardo Gallo was appointed to the Supervisory Board in 1997. He is
Associate Professor of Industrial Economics at the Engineering Faculty of "La
Sapienza" University in Rome. He has also been a member of the board of
directors of Comitato Sir from 1981 until the present. From 1982 to 1991, he
served as Director General at the Italian Ministry of the National Budget. In
particular, standard products may involve greater riskthe early 1990s, he served as Vice Chairman of competitive pricing, inventory imbalancesI.R.I. In 1994, he was appointed
by the Italian Minister of Industry as Extraordinary Commissioner of Fidia, a
research-oriented pharmaceutical company.
Francis Gavois was appointed to the Supervisory Board in 1998. Mr.
Gavois is the Chairman of the Supervisory Board of ODDO et Cie. He is also a
member of the Board of Directors of Plastic Omnium, FT1CI and severe market fluctuations than
differentiated products. The Company's abilitythe Supervisory
Board of the Consortium de Realisation (CDR). From 1984 to compete successfully depends
on elements both within1997, Mr. Gavois held
several positions, including Chairman of the Board of Directors and outsideChief
Executive Officer 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, 1999, the Company employed approximately 34,500 people,
of whom approximately 7,200 were employed in France, 7,650 were employed in
Italy, 850 were employedBanque Francaise du Commerce Exterieur (BFCE). Prior to
that time Mr. Gavois held positions in the restFrench government. He is Inspecteur
des Finances and a graduate of Europe, 3,250 were employedthe Institut d'Etudes Politiques de Paris and the
Ecole Nationale d'Administration.
Alessandro Ovi has been a member of the Supervisory Board since 1994.
He received a doctoral degree in Nuclear Engineering from the Politecnico in
Milan and a masters degree in operations research from Massachusetts Institute
of Technology. He currently is a Special Advisor to the President of the
European Community and also serves on the boards of Carnegie Mellon University
and Corporation Development Committee of the Massachusetts Institute of
Technology. Until April 2000, Mr. Ovi was the Chief Executive Officer of
Tecnitel S.p.a., a subsidiary of Telecom Italia Group. Prior to joining Tecnitel
S.p.A., Mr. Ovi was the Senior Vice President of International Affairs and
Communications at I.R.I.
Robert M. White was appointed to the Supervisory Board in June 1996.
Mr. White is a University Professor and Director of the Data Storage Systems
Center at Carnegie Mellon University and serves as a member of several corporate
boards, including those of Ontrack Data Systems, Inc., and Read-Rite, Inc. He is
a member of the U.S. National Academy of Engineering. From 1990 to 1993, Mr.
White served as Under Secretary of Commerce for Technology in the United States
6,000 were employedGovernment. Prior to 1990, Mr. White served in Maltaseveral key executive positions
at Xerox Corporation, Control Data Corporation and MoroccoMCC. He received a doctoral
degree in physics from Stanford University and 9,550 were employedgraduated with a degree in
Singapore, Malaysia, Japanphysics from Massachusetts Institute of Technology.
Supervisory Board Committees
Audit Committee. The Audit Committee was established in 1996 to assist
the Supervisory Board in fulfilling its oversight responsibilities relating to
corporate accounting, reporting practices, and the restquality and integrity of Asia. Asour
financial reports. Its primary duties and responsibilities according to its
charter are to oversee that:
o Our management has maintained the reliability and integrity of
December 31, 1999
approximately 5,350 employees were engagedthe accounting policies and financial reporting and disclosure
practices;
o Our management has established and maintained processes to
assure compliance with all applicable laws, regulations and
corporate policy concerning financial accounting; and
o The independence and performance of our external auditors.
Our Audit Committee is composed of four directors, and meets at least
five times annually, and more frequently as circumstances dictate. It is
currently chaired by Mr. de Waard and also comprised of Messrs. Gavois, Ovi and
White.
Compensation Committee. Our Compensation Committee approves the
compensation for the sole member of our Managing Board. It also approves any
increase in the incentive compensation component of our executive officers.
Finally, the Compensation Committee is informed of the compensation plans for
our executive officers. It is currently comprised of the Chairman (Mr. Noblanc),
the Vice-Chairman (Mr. Steve) and Mr. White.
56
Strategic Committee. Our Strategic Committee was instituted to monitor
key developments within the semiconductor industry and our overall strategy, and
is particularly involved in supervising the execution of significant
transactions. Our Strategic Committee does not have a charter or regular
meetings, but meets as often as is required by our ongoing business or any new
significant opportunities. It is currently comprised of Messrs. Noblanc and
Steve.
Managing Board
Our management is entrusted to the Managing Board under the supervision
of the Supervisory Board. Mr. Pasquale Pistorio, our President and Chief
Executive Officer, is currently the sole member of the Managing Board. His term
expires in 2002. There is no mandatory retirement age for members of our
Managing Board.
Under the Articles of Association, the Managing 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 of our multi-year plans and
the budget for the coming year, covering investment policy, policy regarding
research and development, 1,900as 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 Managing
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 our assets or
concerns; and (ii) all mergers, acquisitions or joint ventures which we wish 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 Managing Board that
require its prior approval. Following the adoption of such a resolution, the
actions by the Managing Board requiring such prior approval include the
following: (i) modification of our Articles of Association; (ii) change in our
authorized share capital, issue, acquisition or disposal of our own shares,
change in any shareholder rights or issue of any instruments granting an
interest in our capital or profits; (iii) liquidation or disposal of all or a
substantial and material part of our assets or any shares we hold in any of our
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 Managing Board obtain prior approval from the Supervisory
Board for (i) the appointment of the members of the statutory management,
administration and control bodies of our French and Italian subsidiaries; and
(ii) the nomination of our statutory management, administration and control
bodies and each of our 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 Managing
Board that require shareholder approval. Our Articles of Association provide
that the Managing Board must obtain shareholder approval prior to (i) the sale
of all or an important part of our assets and concerns; and (ii) all mergers,
acquisitions or joint ventures which we wish to enter into and which the
Supervisory Board considers to be of material significance. However, during a
meeting held on September 23, 2000, the Supervisory Board authorized the
Managing Board to proceed with acquisitions without prior consent of the
Supervisory Board subject to a maximum amount of $25 million per transaction,
provided the Managing Board keeps the Supervisory Board informed of progress
regarding transactions and gives a full report once the transaction is
completed. See "Item 4: Information on the Company" and "Item 7: Major
Shareholders and Related Party Transactions - Related Party Transactions."
The Managing 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 Managing 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 Managing Board to be chairman of the Managing
Board require the approval of a majority of its members.
57
Board for a three year term (upon approval of at least three-quarters of the
members of the Supervisory Board). Resolution
The general meeting of shareholders may suspend or dismiss one or more
members of the Managing Board at a meeting at which at least one-half of the
outstanding share capital is present or represented. No quorum is required if a
suspension or dismissal is proposed by the Supervisory Board. The Supervisory
Board may suspend members of the Managing 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 Managing Board, be temporarily responsible for our
management. Upon delegation from the Supervisory Board, the Compensation
Committee determines the compensation and other terms and conditions of
employment of the members of the Managing Board.
Executive Officers
Our executive officers support the Managing Board in its management of
us, without prejudice to the Managing Board's ultimate responsibility. We are
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 23,800organizations. Our executive officers are:
Years in
Years with Semiconduct
Name Position Company(1) or Industry Age
- ---------- ------------- -------------- ------------ ---
Pasquale Pistorio President and Chief Executive
Officer 21 37 65
Georges Auguste Corporate Vice President, Total
Quality and Environmental
Management 14 27 52
Laurent Bosson Corporate Vice President, Front-end
Manufacturing 18 18 58
Carlo Bozotti Corporate Vice President, Memory
Products Group 24 24 48
Salvatore Castorina Corporate Vice President, Discrete
and Standard ICs Group 19 35 64
Alain Dutheil Corporate Vice President, Strategic
Planning and Human Resources 18 31 56
Philippe Geyres Corporate Vice President, Consumer
and Microcontroller Group 17 25 49
Maurizio Ghirga Corporate Vice President, Chief
Financial Officer 18 18 63
Jean-Claude Marquet Corporate Vice President,
Asia/Pacific Region 15 34 59
Pier Angelo Martinotti Corporate Vice President, New
Ventures Group 20 33 60
Joel Monnier Corporate Vice President, Central
Research and Development 18 27 55
Piero Mosconi Corporate Vice President, Treasurer 37 37 61
Carmelo Papa Corporate Vice President, Emerging
Markets 17 17 52
Richard Pieranunzi Corporate Vice President, Americas
Region 20 35 62
Aldo Romano Corporate Vice President,
Telecommunications, Peripherals
and Automotive Group 36 36 60
Giordano Seragnoli Corporate Vice President, Back-end
Manufacturing and Subsystems
Products Group 36 38 64
Keizo Shibata Corporate Vice President, Japan
Region 9 36 64
Enrico Villa Corporate Vice President, European
Region 33 33 60
- ----------------------
(1) Including years with Thomson Semiconducteurs or SGS Microelettronica.
58
Pasquale Pistorio has more than 37 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 our President and Chief Executive
Officer upon our formation in 1987.
Georges Auguste has served as Corporate Vice President, Total Quality
and Environmental Management since 1999. Mr. Auguste received a degree in
engineering from the Ecole Superieure d'Electricite (SUPELEC) in 1974 and a
diploma in business administration from the Caen University in 1976. Prior to
joining us, Mr. Auguste worked with Philips Components from 1974 to 1986, in
various positions in the field of manufacturing. From 1990 to 1997 he headed our
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 our
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
1,800facility.
Carlo Bozotti has served as Corporate Vice President, Memory Products
since August 1998. Mr. Bozotti joined SGS Microelettronica in administration1977 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 us
as General Manager of Transistors in Catania and became the General Manager of
our 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 our 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 our
Discrete Products Division. From 1989 to 1994, Mr. Dutheil served as Director
for Worldwide Back-end Manufacturing, in addition to serving as Corporate Vice
President for Human Resources from 1992 until the present.
Philippe Geyres has served as Corporate Vice President, General Manager
Consumer and Microcontroller Group (formerly Programmable Products Group) since
1990. Mr. Geyres graduated from the Ecole Polytechnique in 1973 and began his
career with IBM in France before joining Schlumberger Group in 1980 as Data
Processing Director. He was subsequently appointed Deputy Director of the IC
Division at Fairchild Semiconductors. Mr. Geyres joined Thomson Semiconducteurs
in 1983 as Director of the Bipolar Integrated Circuits Division. He was
appointed Strategic Programs Director in 1987 and, later the same year, became
our Corporate Vice President, Strategic Planning.
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
59
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 us 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 Organization 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 with us
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, our former subsidiary.
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.
Carmelo Papa has served as Corporate Vice President, Emerging Markets
since January 2000. Mr. Papa received his degree in nuclear physics at Catania
University. Mr. Papa joined us in 1983 and since 1986 has been Director of
Product Marketing and Customer Service for Transistors and Standard ICs. During
this time, he has overseen a substantial growth both in the product portfolio
and the sales volume. He has also played a key role both in the expansion of our
facility in Catania, Italy, from its origin as a low-cost assembly plant to its
present position as one of our most important and dynamic centres, hosting
advanced R&D in areas ranging from process technology to fuzzy logic and other
"soft computing" disciplines, leading-edge wafer manufacturing and Sales and
Marketing HQ for our Discrete and Standard Circuits division.
Richard Pieranunzi has served as Corporate Vice President, Americas
Region since August 1996. Mr. Pieranunzi received his BSEE from the University
of Rhode Island, and started his career in process engineering. Later, he joined
Motorola's international marketing organization, including in Europe where he
held management positions in sales and strategic marketing and applications. Mr.
Pieranunzi joined SGS Semiconducteurs in 1981 as Marketing and Sales Manager
and, upon our formation in 1987, he became Vice President Marketing and Sales
for the U.S. organization. For three years, Mr. Pieranunzi headed our Corporate
Strategic Marketing and Corporate Key Account programs.
Aldo Romano has served as Corporate Vice President, General Manager
Telecommunications, Peripherals and Automotive Group (formerly Dedicated
Products Group) since 1987. Mr. Romano is also Managing Director of our 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.
60
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 our management,
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
our Japanese subsidiary since 1992. Mr. Shibata obtained bachelors and masters
degrees in Engineering from Osaka University and has 32 years of experience in
the semiconductor industry. Prior to joining us, 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, Europe since
January 1, 2000. Mr. Villa has served in various capacities within our
management 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, our 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 our 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 us. We do not maintain insurance with
respect to the loss of any of our key personnel.
Compensation
The aggregate compensation paid in 2000 to the members of our
Supervisory Board by us was approximately $500,000. The amount of compensation
paid in 2000 to our executive officers and members of our Managing Board as a
group by us was approximately $8.7 million.
In 1989, we established a Corporate Executive Incentive Program (the
"EIP") that entitles selected executives and members of the Managing 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
or member's salary and is adjusted to reflect our overall performance. The
participants in the EIP must satisfy certain personal objectives that are
focused on customer service, profit, cash flow and market share.
For information regarding stock options granted to members of our
Supervisory Board, the Managing Board and our executive officers please refer to
"--Stock Option Plans" below.
The executive officers and the Managing Board were also covered in 2000
under certain group life and medical insurance programs provided by us. The
aggregate additional amount set aside by us in 2000 to provide pension,
retirement or similar benefits for executive officers and our Managing Board as
a group is estimated to have been approximately $3.5 million, which includes
statutory employer contributions for state-run retirement and similar benefit
programs. We do not have any service agreements with members of our Supervisory
Board, the Managing Board or our executive officers that provide for benefits
upon termination of employment, beyond their legal entitlement in accordance
with applicable employment laws.
Share Ownership
None of the members of our Supervisory and Managing Boards, or our
executive officers hold more than 1% of our shares.
61
Stock Option Plans
The following description of our stock options plans has been adjusted
for the 2:1 stock split effected on June 16, 1999 and the 3:1 stock split
effected on May 5, 2000. Taking into account these stock splits, the total
options outstanding as of March 31, 2000 give the right to acquire 26,441,561
Common Shares by our employees and 402,500 Common Shares by members and
professionals of our Supervisory Board, or a total of 26,844,061 shares.
On October 20, 1995, our shareholders approved resolutions authorizing
the Supervisory Board for a period of five years to adopt and administer a stock
option plan that provides for the granting to our managers and professionals of
options to purchase up to a maximum of 33.0 million Common Shares (the "1995
Stock Option Plan"). We granted options to acquire a total of 31,561,441 shares
pursuant to the 1995 Stock Option Plan as follows:
o On March 1, 1996, we granted options to purchase 7,200,000
Common Shares with an exercise price per Common Share of
$6.04. All such options will expire on March 1, 2004. As of
March 31, 2001, options to purchase 2,840,600 shares were
outstanding, of which 681,200 were held by the members of the
Managing Board and our executive officers, as a group.
o On September 12, 1997, we granted options to purchase
3,873,000 Common Shares with an exercise price per Common
Share of $14.23, which will expire on September 12, 2005. As
of March 31, 2001, options to purchase 3,515,820 shares were
outstanding, of which 1,034,100 were held by the members of
the Managing Board and our executive officers, as a group.
o On July 28, 1998, we granted options to purchase 3,900,000
Common Shares with an exercise price per Common Share of
$12.03, which will expire on July 28, 2006. As of March 31,
2001, options to purchase 3,820,140 shares were outstanding,
of which 1,069,140 were held by the members of the Managing
Board and our executive officers, as a group.
o On September 16, 1999, we granted options to purchase
8,878,200 Common Shares with an exercise price per Common
Shares of $24.88, which will expire on September 16, 2007. As
of March 31, 2001, options to purchase 8,680,200 shares were
outstanding, of which 1,772,400 were held by the members of
the Managing Board and our executive officers, as a group.
o On January 24, 2000, we made a special grant of options to
purchase 150,000 Common Shares to former employees of Arithmos
with an exercise price of $55.25 and which expire on January
24, 2008. As of March 31, 2001, options to purchase 113,730
shares were outstanding pursuant to this grant.
o On June 16, 2000, we granted options to purchase 5,331,250
Common Shares with an exercise price per Common Shares of
$62.01, which will expire on June 16, 2008. As of March 31,
2001, options to purchase 5,269,150 shares were outstanding,
of which 712,000 were held by the members of the Managing
Board and our executive officers, as a group.
o On September 18, 2000, we made a special grant of options to
purchase 70,000 Common Shares to former employees of
Waferscale Integration Inc. with an exercise price per Common
Shares of $52.88, which will expire on September 18, 2008. As
of March 31, 2001, options to purchase 69,370 shares were
outstanding.
o On December 11, 2000, we granted options to purchase 2,019,640
Common Shares with an exercise price per Common Shares of
$50.69, which will expire on December 11, 2008. As of March
31, 2001, options to purchase 1,993,200 shares were
outstanding.
o On December 18, 2000, we made a special grant of options to
purchase 26,501 Common Shares to former employees of PGI with
an exercise price per Common Shares of $44.00, which will
expire on December 18, 2008. As of March 31, 2001, options to
purchase 26,501 shares were outstanding.
62
o On March 1, 2001, we made a special grant of options to
purchase 112,850 Common Shares with an exercise price per
Common Shares of $31.65, which will expire on March 1, 2008.
As of March 31, 2001, options to purchase 112,850 shares were
outstanding.
As of March 31, 2001, of the total options outstanding under the 1995
Stock Option Plan, options to purchase 5,268,840 shares were held by the member
of the Managing Board and executive officers as a group.
On April 25, 2001, our shareholders approved resolutions authorizing
the Supervisory Board for a period of five years to adopt and administer a new
stock option plan that provides for the granting to our managers and
professionals of options to purchase up to a maximum of 60.0 million Common
Shares (the "2001 Stock Option Plan"). On April 27, 2001, our Supervisory Board
authorized the granting of options to purchase 9,462,800 options with an
exercise price per Common Share of $39.00, which will expire on April 27, 2011.
Of this amount, options to purchase 981,000 Common Shares were granted to the
member of the Managing Board and our executive officers, as a group.
In June 1996, the general servicesmeeting of shareholders approved the granting
of options to members and 1,650professionals of the Supervisory Board which
correspond to the right to purchase approximately 378,000 of our Common Shares
over a period of three years, beginning in divisional functions.1996. Following this grant, certain
persons have renounced the right to retain the stock options granted to them.
The Company'sfollowing options have been granted to members and professionals of our
Supervisory Board:
o On October 24, 1996, we granted to members and professionals
of the Supervisory Board options to purchase 198,000 Common
Shares with an exercise price per Common Share of $9.00, which
will expire on October 22, 2004. As of March 31, 2001, options
to purchase 57,000 shares were outstanding.
o On September 12, 1997, we granted to members and professionals
of the Supervisory Board options to purchase 90,000 Common
Shares with an exercise price per Common Share of $14.23,
which will expire on September 12, 2005. As of March 31, 2001,
options to purchase 30,500 shares were outstanding.
o On July 28, 1998, we granted to members and professionals of
the Supervisory Board options to purchase 103,500 Common
Shares with an exercise price per Common Share of $12.03,
which will expire on July 28, 2006. As of March 31, 2001,
options to purchase 45,000 shares were outstanding.
In 1999, the general meeting of the shareholders voted to renew the
Supervisory Board Option Plan whereby members of the Supervisory Board may
receive, during the three-year period 1999-2001, at least the same number of
options as were granted during the first three-year period. The following
options have been granted:
o On September 16, 1999, we granted options to members and
professionals of the Supervisory Board to purchase 180,000
Common Shares with an exercise price per Common Share of
$24.88, which will expire on September 16, 2007. As of March
31, 2001, options to purchase 180,000 shares were outstanding.
o On June 16, 2000, we granted options to members and
professionals of the Supervisory Board to purchase 103,500
Common Shares with an exercise price per Common Share of
$62.01, which will expire on June 16, 2008. As of March 31,
2001, options to purchase 90,000 shares were outstanding.
o On April 27, 2001, we granted options to members and
professionals of the Supervisory Board to purchase 112,500
Common Shares with an exercise price per Common Share of
$39.00, which will expire on April 27, 2009.
63
Employees
The tables below set forth the breakdown of employees by main category
of activity and geographic area for the past three years.
At December 31,
----------------------------------
1998 1999 2000
---------- -------- --------
France........................................................ 5,950 7,200 9,600
Italy......................................................... 6,350 7,650 9,200
Rest of Europe................................................ 650 850 1,050
United States................................................. 2,650 3,250 4,350
Malta and Morocco............................................. 5,450 6,000 7,450
Asia ....................................................... 8,150 9,550 12,000
----- ----- ------
Total ....................................................... 29,200 34,500 43,650
====== ====== ======
At December 31,
----------------------------------
1998 1999 2000
---------- -------- --------
Research and Development...................................... 4,400 5,350 6,800
Marketing and Sales........................................... 1,700 1,900 2,250
Manufacturing................................................. 20,200 23,800 30,450
Administration and General Services........................... 1,600 1,800 2,200
Divisional Functions.......................................... 1,300 1,650 1,950
----- ----- -----
Total ....................................................... 29,200 34,500 43,650
====== ====== ======
Our future success, in particular in a period of strong increased
demand like the current one, will also depend on itsour 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 hasWe
have 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 employeeour relations with employees are good.
As part of itsour commitment to the principles of TQEM, the Companywe 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 CompanySTMicroelectronics and coordinating all
training for STMicroelectronics'our employees. In 1999,2000, ST University organized over 96,006130,000 hours
of training for 3,6005,000 employees.
We have also established an Employee Stock Purchase Plan that includes
the following provisions:
o A total of 4.5 million shares are to be offered to employees
of STMicroelectronics N.V. and 10,000 hoursits majority owned subsidiaries
in 20 specified countries and such other countries to which
the Supervisory Board may extend the Plan, on the
recommendation of our Managing Board.
o The first 1.5 million shares offered will be new shares. The
source of the remaining 3.0 million shares is to be decided by
the Supervisory Board in due course.
o The Plan has a three year term, from 2000 to 2003 and features
semi-annual offering periods.
o For each offering period, the subscription price will be equal
to 85% of the lesser of the NYSE closing price for training
for external individuals.
Environmental Matters
The Company's manufacturing operations use many chemicals and gasesshares on
the first day of the offering period and the Companylast day of the
offering period.
o The maximum fair value of the shares that may be subscribed
per employee per offering period is subject to a variety$12,500.
The first tranche of governmental regulations related to the use, storage, dischargeEmployee Stock Purchase Plan was offered in
November 2000 and disposal of such chemicals and gases and other
emissions and wastes. Consistentthe second tranche has now been launched, with the
Company's TQEM 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 validated 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.
Item 2: Description of Property
Manufacturing
STMicroelectronics currently operates 17 main manufacturing facilities
around the world. In June 2000, the Company acquired a 6-inch microconductor
manufacturing facility owned by Nortel Networks in Ottawa, Canada. 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.
26subscription period ending May 21, 2001.
64
Location Products Technologies
-------- -------- ------------
Front-end Facilities:
Crolles, France Semicustom devices, microcontrollers and Fab: 8-inch 0.35/0.18 micron CMOS and
dedicated products 0.7/0.25 micron BiCMOS; R&D on VLSI
submicron technologies in
conjunction with France Telecom R&D
and Philips Semiconductors
Phoenix, Arizona Dedicated products Fab: 8-inch 0.5/0.35 micron CMOS,
0.5/0.35 micron BiCMOS
Agrate, Italy Nonvolatile memories, microcontrollers Fab 1: 6-inch 2.0/0.5 micron CMOS, BiCMOS
and dedicated products and BCD
Fab 2: 8-inch 0.35/0.18 micron CMOS, R&D on
nonvolatile memories
Rousset, France Microcontrollers, nonvolatile memories Fab: 6-inch 0.8/0.5 micron CMOS
and
smartcard ICs
Catania, Italy Power transistors, smart power ICs Fab 1: 5-inch 3 micron bipolar power - RF
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 0.35/0.25 CMOS
Rennes, France Dedicated and power products Fab: 6-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 Fab 1: 5-6-inch discrete
application - specific discretes-power Fab 2: 6-inch discrete
transitors
Ang Mo Kio, Singapore Dedicated products, microcontrollers, Fab 1: 5-inch power MOS, bipolar transitor, bipolar
power transistors and commodity products bipolar ICs, standard linear 1.5 micron CMOS
Carrollton, Texas Memories, microcontrollers, dedicated Fab: 6-inch 1.2/0.6 micron BiCMOS, BCD and
products and semicustom devices CMOS
products and semicustom devices
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 (jointly Nonvolatile memories, discrete and
operated with standard products
Shenzhen
Electronics Group)
Bouskoura, Morocco Subsystems, RF
STMicroelectronics has expanded its diversified manufacturing
infrastructure while improving the cost, quality and flexibility of its
operations. In 1999, STMicroelectronics has applied recent investments in its
manufacturing facilities to bring to full capacity and expand the 8-inch
front-end manufacturing facility in Crolles, France and Catania, Italy, to
continue the ramp up of an 8-inch front-end manufacturing facilities in Phoenix,
Arizona and Catania, Italy, and to build an equip the new 8-inch front-end
facilities in Rousset, France and Agrate, Italy, which are today starting
production, to expand 6-inch front-end facilities in Carrollton, Texas and
Rancho Bernardo, California, to purchase a 6-inch facility in Singapore, to
convert from 5 to 6-inch the front-end facilities in Tours and Rennes, France
and Catania, Italy and to expand its back-end facilities in Morocco, Malta,
Malaysia, Singapore and China.
The Company currently expects capital spending for 2000 to exceed $2.5
billion, significantly higher than in 1998 and 1999 to pursue and, in some
cases, complete those projects mentioned above, as well as to start construction
of a new 8-inch wafer fabrication facility in Catania, Italy that is planned to
be operational by the year 2002 and a new 300 millimeter, 12-inch wafer research
fabrication and pilot line at Crolles, France. As of December 31, 1999, the
Company had commitments of approximately $1.2 billion for equipment purchases.
The
27
Company will continue to monitor its level of capital spending, however taking
into consideration factors such as trends in the semiconductors market, capacity
utilization and announced additions.
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 capacity limitations by purchasing from subcontractors both 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 TQEM 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. TQEM in STMicroelectronics is
based on five key principles: 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. Most of the Company's manufacturing facilities have
been certified to conform to ISO international quality standards and EMAS.
Several major customers, including Hewlett-Packard, Nokia, Sharp,
DaimlerChrysler and Sanyo, have recognized STMicroelectronics' commitment to
quality and have honored the Company with quality awards in the recent past.
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.
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 such as 8-inch or larger capabilities and require
state-of-the-art submicron 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. Finally, in periods of high demand, the Company is
increasing its reliance on external contractors for foundry and back-end
service. Any failure to perform by such subcontractors could impact the
relationship of the Company with its customers and could materially affect its
results of operations.
28
Headquarters
The Company has its headquarters and executive office located in the
vicinity of Geneva Airport at Route de Pre-Bois 20, ICC Bloc A, 1215 Geneva 15,
Switzerland. The Company has its corporate legal seat and is domiciled 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 71 sales offices in 26 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.
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.
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.
On July 7, 1999 a judge for preliminary hearing in Catania, Sicily,
dismissed all charges against the members of the Board of Directors of Corimme
brought by the Public Prosecutor in Catania. This decision finally concluded the
criminal prosecution started in 1995 by the public prosecutor against certain
persons relating to alleged unauthorized use of public funds for research and
development. The judge stated that the charges against such persons for alleged
unauthorized use of public funds, had no legal basis and ordered that the files
relating to this matter be archived on the grounds that no factual basis existed
for any investigation. The Public Prosecutor did not file an appeal.
Furthermore, in relation to the various tax proceedings started in
parallel by the tax authorities in Catania against Corimme for alleged
unauthorized VAT deductions and irregular invoicing, in a ruling dated March
2000, 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. This
decision is also final.
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 believes that the various criminal and judicial proceedings
previously disclosed regarding Corimme have now been finally concluded.
Item 4: Control of Registrant
PrincipalITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
Major Shareholders
The following table sets forth certain information with respect to the
ownership of the Company'sour Common Shares as of May 5, 2000.
April 28, 2001.
Shareholders Common Shares Owned (1)
- ------------------------------------------------------------------------- ---------------------------------------
Number %
-------------- --------------
STMicroelectronics
Holding II B.V. ("ST Holding II")..................................... 389,483,280 43.91
- -------------------------------- --------------------------------
Number %
-------- ------
STMicroelectronics Holding II B.V.
("ST Holding II")........................ 389,483,280 43.55
- ----------------------
(1) Following the 2:1 stock split and 3:1 stock split effected by the Companyus on
June 16, 1999, and May 5, 2000, respectively.
29
ST Holding is 50% owned by FT1CI, a group of French shareholders that
are indirectly controlled by the French government, and 50% owned by
a group of
Italian shareholders that areFinmeccanica S.p.A., also directly and indirectly controlled by the Italian
government. TheFT1CI, 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 shareholdersFinmeccanica is represented by Finmeccanica (following the merger with
MEI-Microelettronica Italiana s.r.l. ("MEI") which became effective on December
31, 1999), an Italian holding company owned by both the Italian
Ministry of Treasury, which controls important actions of Finmeccanica due to
its significant holding in it, Istituto per la Ricostruzione Industriale-IRI
S.p.A. in liquidazione ("I.R.I.", the holding company for Italian state-owned
industrial and commercial interests), by and the public. The Italian Ministry of
Treasury (following the transfer, as of June 18, 1999,has appointed a majority of the interest previously held by
Comitato per l'intervento nella SIR ed in settori ad alta tecnologia)members of Finmeccanica's Board of
Directors and the
public. Following the sale of a substantial portion of the shareholding interest
of I.R.I. in Finmeccanica as part of a public offering of shares of
Finmeccanica, I.R.I. will transfer a sufficient number of sharespursuant to the provisions of its articles of association and
Italian Ministry of Treasury to ensure that the Italian Ministry of Treasury maintains
a minimum equity participation of 30% inlaw, retains veto rights over certain major transactions involving
Finmeccanica. The shares of France Telecom are listed on the ParisBourseEuronext Paris and the
New York Stock Exchange. Certificats d'investissement of CEA-Industrie are
listed on the ParisBourse.Euronext Paris. The shares of Finmeccanica are listed on the Milan
Stock Exchange.
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
May 5, 2000, prior to the previously mentioned sale of shares of Finmeccanica by
I.R.I. to the public:April 28, 2001:
This information was represented by an organizational chart in the
original document.
Description of Shareholding Structure: STMicroelectronics N.V. is owned
43.91%43.55% by STMicroelectronics Holding II B.V. and 56.09%56.45% by the public.
STMicroelectronics Holding II B.V. is a wholly-ownedwholly 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.Telecom. The Italian shareholder,
Finmeccanica, is owned 54.2%5% by I.R.I., 28.9%32.4% by the Italian Ministry of Treasury,
and 16.9%62.6% by the public.
- --------------
(1) Ministero del Tesoro del Bilancio e della Programmazione
Economica-Dipartimento del Tesoro.
30
Shareholder Agreements
In connection with theour formation, of the Company, Thomson-CSF and STET, as our
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,STMicroelectronics N.V., 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
65
subsequently transferred to or assumed by, as the case may be, FT2CI for
Thomson-CSF, and Finmeccanica and MEI for STET. 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. 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
transferred to or assumed by, as the case may be, MEI. Finally, following the
merger of MEI into Finmeccanica (effective on December 31, 1999), Finmeccanica
acquired all of the obligations and rights of MEI under the Holding Shareholders
Agreement.
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.us. 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, and theour Supervisory Board, of the Company, each one within its respective
sphere of competence, must give their respective prior approval before ST
Holding, the Company,STMicroelectronics N.V., or any subsidiary of the Companyour subsidiaries may: (i) modify itsour
articles of incorporation; (ii) change itsour authorized share capital, issue,
acquire or dispose of its ownour shares, change any shareholder rights or issue any
instruments granting an interest in itsour capital or profits; (iii) be liquidated
or dispose of all or a substantial and material part of itsour assets or any shares
it holdswe hold in any of itsour 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 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 our long-term
business plans and annual budgets of the Company and itsfor our subsidiaries, as well as any
significant modifications thereto, shall be approved in advance by the
Supervisory Board of each of ST Holding and of the Company,STMicroelectronics, each one within
its respective sphere of competence. 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--Public Funding." Pursuant to the terms of the Holding Shareholders Agreement, ST Holding
and the CompanySTMicroelectronics are 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 Companyus in the area of semiconductor products, subject to certain
exceptions, and to offer the Companyus 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 Companyus 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--Public Funding."further details below.
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 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 31
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, FT1CI (the "French Owner"), on the one hand, and
Finmeccanica (the "Italian Owner"), on the other hand, have agreed to maintain
equal interests in the Share capital of the Company.
The Company hasour share capital. See further details below.
We have been informed that the shareholders of FT1CI have also entered
into a separate shareholder agreement that requires the consent of the Board of
Directors, with a two-thirds majority, for certain actions taken by ST Holding,
the CompanySTMicroelectronics and itsour subsidiaries. These agreements provide for the
management of the interests of CEA-Industrie and France Telecom in ST Holding
and the Company,us, 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 CompanySTMicroelectronics and itsour subsidiaries. The Company
isWe are not a party
to such agreement.
The agreement between the shareholders of FT1CI (CEA-Industrie and
France Telecom) provides that the following acts with respect to ST Holding or
the Companyus must be approved by three-quarters of the Board of Directors of
66
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,us, (ii) any change
in the capital of ST Holding or the Company,us, or issuance, purchase or sale by ST Holding
or the Companyus of theirour 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,us, (iii) the liquidation or dissolution of ST Holding or the Companyus or the sale of all
or an important and material part of the business or assets of ST Holding or the Companyus
representing at least $10,000,000 of theour 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 participateswe participate or in which a proposal is made to
participate, or the establishment by ST Holding or the Companyus of new companies or
groups, (v) approval of the balance sheets and consolidated accounts of ST
Holding, the Companyus and itsour subsidiaries as well as the policies of distributions of
profits among the group, (vi) any agreement between ST Holding and/or the Companyus 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
Companyus and (viii) approval of strategic
multi-year plans and annual consolidated budgets of ST Holding and the Company.us. 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 Secretariat
d'Etat a l'Industrie (Secretary 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.
Pursuant to the principal Italian privatization law, certain special
government powers may be introduced into the by-laws of firms considered
strategic by the Italian government. In the case of Finmeccanica, these powers
were established by decrees adopted by the Minister of the Treasury on November
8, 1999 and Finmeccanica's by-laws were subsequently amended on November 23,
1999. The special powers of the Minister of the Treasury (who will act in
agreement with the Minister of Industry) include (i) the approval or disapproval
of the acquisition of material interests in Finmeccanica's share capital, (ii)
approval of material shareholders' agreements relating to Finmeccanica's share
capital, (iii) appointment of members of Finmeccanica's board of directors and
board of statutory auditors, and (iv) veto powers to veto resolutions to dissolve
Finmeccanica, transfer its business, merge, conduct spin-offs, sell businesses
or lines of business, including the transfer of equity participations in
subsidiaries or affiliates, transfer its registered office outside of Italy,
change Finmeccanica's corporate purposes or amend or modify any of the Minister
of the Treasury's special powers.
32
In connection with the Initial Public Offering, ST Holding II and the
Companywe entered into a
registration rights agreement with ST Holding II pursuant to which the
Companywe agreed
that, upon request from ST Holding II, the Companywe 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 Companywe will grant ST Holding II the right to include itsour Common Shares
in any registration statements covering offerings of Common Shares by the Company.us. 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'sour outstanding Common
Shares.
The French and Italian shareholders of ST Holding have agreed in a document
dated August 31, 1999, to continue to manage their interest in the
Companyus through ST
Holding until at least December 31, 2000, and accordingly
they have undertakenagreed (i) to jointly hold
100% of ST Holding's capital and voting rights, (ii) to maintain equality
between the shareholdings of
67
the French and Italian shareholders, (iii) to ensure that ST Holding maintains
more than 40% of the Company'sour share capital and voting rights on a fully diluted basis
after exercise or conversion of all stock options and convertible securities,
and (iv) to jointly exercise their decision-making powers and monitor strategies
and actions as part of ST Holding's management bodies. Both the French and
Italian governments have the authority to veto certain decisions of the French
and Italian shareholders, respectively, as explained above. The CompanyST Holding has
been informed us that Finmeccanica has agreedits shareholders have not extended this agreement. Therefore,
we cannot exclude the possibility that the percentage of our common stock and of
our voting rights held by ST Holding may change at any time. Any such
transaction, or publicity concerning such a potential transaction, could affect
the market price of our common shares and cause the market price of our common
shares to sell
its indirect shareholding in the Company for a period of 90 days from the
closing of the public offering of Finmeccanica's shares by I.R.I. or to issue
any securities convertible into or exchangeable for shares of the Company,
without the prior consent of the joint global coordinators of the Finmeccanica
offering.drop significantly.
On May 31, 1999, the Company'sour shareholders at the annual general meeting
approved the creation of 180,000,000 Preference Shares (540,000,000 Preference
Shares, as adjusted for the 3:1 stock split implemented in May 2000). 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, 1999, the
Companywe
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 theour Supervisory Board of the Company recognizing that a hostile
takeover or similar action exists and giving itsour 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 our issued share capital.
Related Party Transactions
We have in the issuednormal course of our business taken certain equity
positions, in each case less than 20% of the share capital of the Company.
Item 5: Naturecompanies in
question. In this context, we have entered into development contracts where
certain of these companies provide us services on arms' length terms. These
contracts are not material to our business.
We have formed a joint venture research and development center with
France Telecom R&D and LETI in the form of a GIE named "Centre Commun de
Microelectronique de Crolles". France Telecom R&D is a research laboratory that
is wholly owned by France Telecom, one of our indirect shareholders. The
Laboratoire d'Electronique et de Technologie d'Instrumentation is a wholly owned
research laboratory of CEA, one of our indirect shareholders. See "Item 4:
Information on the Company--Research and Development" and "--Major
Shareholders." The research center is housed at our Crolles, France
manufacturing facility, and is developing sub-micron process technologies. The
joint venture with France Telecom R&D was created in 1990 before France Telecom
became our indirect shareholder. The activity of the Centre Commun de
Microelectronique de Crolles is directed towards sub 0.13-micron technologies
with a view to preparing the technology to begin production of 300mm wafers and
associated wafer fabrication processes. The tripartite cooperation is intended
to last until the end of 2002.
We participate 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 4:
Information on the Company -- Public Funding." The shareholders of ST Holding,
the corporate parent of our principal shareholder, are controlled, directly or
indirectly, by the governments of the Republics of France and Italy. See
"--Principal Shareholders."
Sales to our shareholders and our affiliates totaled $0.2 million in
2000.
ITEM 8. FINANCIAL INFORMATION
Legal Proceedings
As is the case with many companies in the semiconductor industry, we
have 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, we could incur significant costs with
respect to the defense thereof which could have a material adverse effect on our
results of operations or financial condition.
We are currently involved in certain legal proceedings; however, we do
not believe that the ultimate resolution of pending legal proceedings will have
a material adverse effect on our financial condition.
68
Dividend policy
On April 25, 2001, our shareholders approved the payment of a cash
dividend with respect to the year ended December 31, 2000 of $0.04 per share
payable to shareholders of record as of April 27, 2001. This dividend was
approximately 2.5% of our earnings for 2000. In 2000, we paid a dividend of
$0.03 per share, which represented 4.9% of our earnings for 1999. In 1999, we
paid a dividend of $0.027 per share, which represented approximately 5.5% of our
earnings for 1998. In the future, we may consider proposing dividends
representing a similar proportion of our earnings for a particular year.
ITEM 9. THE OFFER AND LISTING.
Trading Market
CommonHistory of the Company's Shares
Since 1994, the Common Shares have been traded on the New York Stock
Exchange under the symbol "STM" and on the ParisBourseEuronext Paris (formerly known as
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 ParisBourseSBF SA (the "SBF"),Euronext Paris, 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 ParisBourseEuronext Paris 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.
Since June 5, 1998, the Common Shares have also been listed on the
Italian Stock Exchange.
The table below indicates the range of the high and low prices in U.S.
dollars for the Common SharesADSs on the New York Stock Exchange and the high and low prices
in euros for the Common Shares on the ParisBourseEuronext Paris and
33
the Italian Stock Exchange
during each quarter in 1998, 1999 and, to date in 2000. In December 1994, the Companywe
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 Companywe effected a 2:1
stock split and on May 5, 2000, the
Companywe effected a 3:1 stock split. The table below
has been adjusted to reflect the split. Each range is based on the highest or
lowest rate within each day for Common Share price ranges for the relevant
exchange.
69
New York Stock ParisBourseExchange Euronext Paris Price per Italian Stock
Exchange Price Price per Exchange
Price per Common Share Common Share(1)Share (1) Price per Common Share(2)
-------------------------------------------------------------------------Share (2)
--------------------------- --------------------------- ----------------------------
Calendar Period High Low High Low High Low
- --------------- --------- -------- -------- -------- -------- ------------- --- ---- --- ---- ---
1998
First quarter..................... $39 3/8 $ 25 5/8 EUR 37.24 EUR 23.63 - -
Second quarter(3)................. $45 7/8 $ 32 1/4 EUR 42.46 EUR 29.42 EUR 32.79 EUR 30.38
Third quarter..................... $36 1/4 $ 22 EUR 33.26 EUR 18.37 EUR 32.53 EUR 19.92
Fourth quarter.................... $41 7/16 $ 17 15/16 EUR 34.99 EUR 15.02 EUR 34.77 EUR 15.73Annual information for the past five years
1996......................... $12.02 $4.75 Euro10.09 Euro3.58 -- --
1997......................... $16.51 $8.58 Euro15.83 Euro7.96 -- --
1998......................... $15.29 $5.98 Euro14.16 Euro5.01 Lira 23,166.64 Lira 9,833.32
1999......................... $51.33 $13.42 Euro51.67 Euro11.47 Euro51.67 Euro10.68
2000......................... $73.88 $39.06 Euro76.93 Euro39.53 Euro76.67 Euro40.35
Quarterly information for the past two
years
1999
First quarter..................... $53 13/16 $ 40 1/4 EUR 48.50 EUR 34.40 EUR 46.53 EUR 34.96quarter............... $17.94 $13.44 Euro16.17 Euro11.47 Euro 16.00 Euro10.68
Second quarter.................... $24 13/16 $ 16 5/16 EUR 23.00 EUR 14.83 EURquarter.............. $24.17 $16.33 Euro23.00 Euro14.83 Euro 23.33 EUR 14.83Euro14.83
Third quarter..................... $27 1/8 $ 21 1/4 EUR 26.07 EUR 20.03 EURquarter............... $27.13 $21.27 Euro26.07 Euro20.03 Euro 26.15 EUR 20.27Euro20.27
Fourth quarter.................... $51 5/16 $ 25 EURquarter.............. $51.33 $25.00 Euro51.67 Euro23.05 Euro 51.67 EUR 23.05 EUR 51.67 EUR 23.17Euro23.17
2000
First quarter..................... $73 7/8 $ 40 11/16 EUR 76.93 EUR 39.53 EUR 76.67 EUR 40.35quarter............... $73.88 $40.67 Euro76.93 Euro39.53 Euro76.67 Euro40.35
Second quarter.............. $69.94 $46.88 Euro75.90 Euro50.50 Euro74.33 Euro51.30
Third quarter............... $68.13 $46.94 Euro74.50 Euro53.50 Euro72.90 Euro56.05
Fourth quarter.............. $52.38 $39.06 Euro60.90 Euro44.20 Euro60.80 Euro44.45
2001
First quarter............... $48.70 $29.35 Euro52.45 Euro31.55 Euro52.35 Euro31.60
Second quarter
(through June 21).. $69 1/4 $ 51 9/16 EUR 74.33 EUR 56.00 EUR 74.10 EUR 56.98April 23, 2001) $41.13 $31.05 Euro44.85 Euro35.00 Euro44.30 Euro35.20
Monthly information for most recent six months
October 2000................ $52.38 $40.06 Euro59.65 Euro46.15 Euro59.60 Euro46.60
November 2000............... $52.25 $39.06 Euro60.90 Euro47.12 Euro60.80 Euro47.20
December 2000............... $51.44 $40.69 Euro58.55 Euro44.20 Euro56.70 Euro44.45
January 2001................ $48.70 $37.00 Euro52.45 Euro37.65 Euro52.35 Euro38.15
February 2001............... $47.60 $31.20 Euro50.85 Euro34.00 Euro50.85 Euro34.05
March 2001.................. $38.40 $29.35 Euro42.48 Euro31.55 Euro42.30 Euro31.60
- ------------------------------------
Source: Reuters
(1) For periods prior to January 1, 1999, the share prices on the ParisBourseEuronext
Paris have been converted into euro at the official exchange rate of
EUREuro 1.00 = FF 6.55957.
(2) For periods prior to January 1, 1999, the share prices on the Italian
Stock Exchange have been converted into euro at the official exchange
rate of EUREuro 1.00 = Lit. 1,936.27.
(3) The shares have been listed on the
Italian Stock Exchange since June 5, 1998.
At December 31, 1999,2000, there were 289,808,140889,881,287 Common Shares issued and
outstanding, of which 31,042,38745,234,378 or 10.7%5% were registered in the Common Share
registry maintained on the Company'sour behalf in New York.
Dividends
On April 26, 2000, the Company's shareholders approved the payment of a
cash dividend with respect to the year ended December 31, 1999 of $0.09 per
Common Share payable as of May 4, 2000 to shareholders of record on April 28,
2000.
3470
1998 Liquid Yield OptionTM Notes
TheOur 1998 Liquid Yield OptionTM Notes ("LYONs") of the Company are traded on the New
York Stock Exchange and the ParisBourse.Euronext Paris. 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,Euronext Paris, in both cases as a percentage of
principal amount at maturity, during each quarter in 1999 and to date in 2000.
Each range is based on the highest or lowest rate at the end of each closing day
on the relevant exchange. We have issued a redemption notice for these LYONs and
intend to redeem them at a redemption price of $885.22 per $1,000 principal
amount on June 11, 2001. According to the information available to us, on May
11, 2001, approximately $45.6 million in total indebtedness was outstanding
under the 1998 LYONs. Based on the amount outstanding on May 11, 2001, if all
remaining holders of the 1998 LYONs chose to convert them into Common Shares
before the redemption date, 2,772,291 Common Shares would be issued.
New York Stock Exchange ParisBourseEuronext Paris
Price per LYON Price per LYON
----------------------- ---------------------------------------------------- ------------------------------------
Calendar Period High Low High Low
- --------------- -------- ------ ------- ---------- --- ---- ---
1998
Second quarter (since June 5)......... 85.13% 83.50% 99% 85.50%
Third quarter......................... 85.13% 80% 88.50% 72.10%
Fourth quarter........................ 83% 80%Annual information for the past five years
1998........................................ 89% 75%69.87% 88.88% 69.25%
1999........................................ 277.75% 88.88% 277.25% 87.63%
2000........................................ 389.25% 221.47% 379.20% 222.70%
Quarterly information for the past two years
1999
First quarter.......................... 94% 84% 97.50% 90%quarter............................... 105.04% 88.88% 104.00% 87.63%
Second quarter......................... 130% 94% 122.10% 101.30%quarter.............................. 129.66% 98.92% 132.75% 100.19%
Third quarter.......................... 154% 122% 157% 124%quarter............................... 147.03% 119.98% 146.25% 119.94%
Fourth quarter......................... 277% 145% 278% 146%quarter.............................. 277.75% 141.64% 277.25% 143.51%
2000
First quarter.......................... 390% 225% 445% 210%quarter............................... 389.25% 227.94% 379.20% 319.80%
Second quarter.............................. 368.59% 283.47% 368.05% 301.35%
Third quarter............................... 360.71% 263.38% 361.18% 263.75%
Fourth quarter.............................. 276.67% 221.47% 276.65% 222.70%
2001
First quarter............................... 256.96% 159.90% 254.13% 169.15%
Second quarter
(through June 21)....... 367% 282% 443% 332%April 23, 2001)................ 209.06% 172.48% 208.50% 171.62%
Monthly information for most recent six months
October 2000................................ 270.45% 221.47% 268.38% 222.70%
November 2000............................... 276.67% 222.10% 276.65% 226.13%
December 2000............................... 265.09% 230.70% 255.88% 229.78%
January 2001................................ 256.96% 199.79% 254.13% 203.98%
February 2001............................... 251.91% 169.17% 221.53% 208.10%
March 2001 ................................. 202.83% 159.50% 203.90% 169.15%
- ----------------------
Source: Bloomberg
71
1999 Liquid Yield OptionTM Notes
TheOur 1999 Liquid Yield OptionTM Notes ("LYONs") of the Company are traded on the New
York Stock Exchange and the ParisBourse.Euronext Paris. 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,Euronext Paris, in both cases as a percentage of
principal amount at maturity, during each quarter in 1999 and to date in 2000.
Each range is based on the highest or lowest rate at the end of each closing day
on the relevant exchange.
New York Stock ParisBourseEuronext Paris
Exchange Price per LYON Price per LYON
------------------------------- -------------------------------------------------------------------
Calendar Period High Low High Low
- --------------- ------------- ------------ ------------- ---------------- --- ---- ---
Annual information for the past five years
1999........................................ 138.09% 81.56% 140.25% 81.94%
2000........................................ 192.10% 118.27% 192.10% 118.44%
Quarterly information for the past two years
1999
Third quarter (since September 16)........... 84.06% 81.56% 80.83% 76.46%84.5% 82%
Fourth quarter........................ 139% 78.48% 129% 78.48%quarter........................... 138.09% 81.88% 140.25% 81.94%
2000
First quarter......................... 191% 119% 206% 126%quarter............................ 192.10% 119.13% 192.10% 118.48%
Second quarter........................... 182.66% 143.30% 183.25% 142.95%
Third quarter............................ 179.23% 135.65% 195% 134.75%
Fourth quarter........................... 142.06% 118.27% 201.75% 160%
2001
First quarter............................ 132.62% 94.54% 146.50% 102.50%
Second quarter
(through June 21)...... 176% 138% 198% 156%April 23, 2001)............. 114.79% 100.20% 114.41% 100.65%
Monthly information for most recent six months
October 2000................................ 138.63% 119.03% 139.20% 118.64%
November 2000............................... 142.06% 118.27% 141.72% 118.44%
December 2000............................... 136.06% 121.23% 136.25% 121.77%
January 2001................................ 132.62% 110.13% 132.83% 109.56%
February 2001............................... 130.50% 97.68% 130.82% 98.26%
March 2001 ................................. 116.66% 94.54% 112.23% 94.61%
35
- ----------------------
Source: Bloomberg
Market Information
Euronext Paris
On September 22, 2000, upon successful completion of an exchange offer,
the ParisBourse SBF SA, or the "SBF", the Amsterdam Stock Exchanges and the
Brussels Stock Exchanges merged to create Euronext, the first pan-European
exchange. Through the exchange offer, all the shareholders of SBF, the Amsterdam
Stock Exchange and the Brussels Stock Exchanges contributed their shares to
Euronext N.V., a Dutch holding company. Securities quoted on exchanges
participating in Euronext will be traded over a common Euronext platform, with
central clearinghouse, settlement and custody structures. However, these
securities will remain listed on their local exchanges. As part of Euronext,
Euronext Paris retains responsibility for the admission of shares to Paris
Bourse's trading markets as well as the regulation of those markets.
Securities approved for listing by Euronext Paris are traded in one of
three markets. The securities of most large public companies are listed on the
Premier Marche with the Second Marche available for small and medium-sized
companies. BothTrading on the PremierNouveau Marche andwas introduced in March 1996 to allow
companies seeking
72
development capital to access the Second Marchestock market. Securities of certain other
companies are operated by the SBF.
Securities are also traded on a non-regulated over-the-counter market, the Marche
Libre-OTC, which is also operated by the
SBF.Euronext Paris.
The Common Shares are listed on the Premier Marche. Shares listed on
the ParisBourseEuronext Paris 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 FF 250,000 or twenty trades).
Official trading of listed securities on the ParisBourseEuronext Paris is transacted
through providers of investment services (investment companies and other
financial institutions) and takes place continuously on each business day from
9:00 a.m. to 5:0030 p.m., with a pre-opening session from 7:3015 a.m. to 9:00 a.m.
and a pre-closing session from 5:30 p.m. to 5:35 p.m. during which transactions
are recorded but not executed and a closing auction at 5:35 p.m. Any trade
effected after the close of a stock exchange session will be recorded, on the
next ParisBourseEuronext Paris trading day, at the closing price for the relevant security
at the end of the previous day's session.
The SBFEuronext Paris publishes a daily Official Price List that includes
price information on each listed security. The ParisBourseEuronext Paris has introduced
continuous trading by computer for most listed securities.
Trading in the listed securities of an issuer may be suspended by
the
SBFEuronext Paris if quoted prices exceed certain price limits defined by the
regulations of the SBF.Euronext Paris. 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 SBFEuronext Paris may also 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 theon a 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 settlebasis on the third trading day following the trade
(reglement immediattrade. Market intermediaries are
also permitted to offer investors a deferred settlement service (service de
reglement differe) for a fee. The deferred settlement service is only available
for trades in securities which either (i) are a component of the Index SBF 120
or immediate settlement) or decide(ii) have both a total market capitalization of at least Euro 1 billion and
a daily average volume of trades of at least Euro 1 million. The Common Shares
are eligible to the deferred settlement service. Investors can elect on the
determination date (date de liquidation), which is the fifth trading day prior tobefore
the end of the month)month, either (i) to settle the trade no later than onby the last trading day of suchthe
month or (ii) upon payment ofto pay an additional fee to extendand postpone the settlement decision to the
determination date of the following month the option either to settle no later
than the last trading daymonth.
Ownership 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 traded on a deferred settlement basis
passes at the ParisBourse are settled ontime of registration of the monthly
settlement market.securities in the shareholders'
account. In accordance with French securities regulation,regulations, any sale of shares
executed on the monthlya deferred settlement marketbasis during the month of a dividend payment
date is deemed to occur after the payment of the dividend, anddividend. In such cases, the
purchaser'spurchaser' account will beis credited with an amount equal to the dividend paid and the
seller's account will beis debited inby the same amount.
Securities Trading in Italy
The Mercato Telematico Azionario (the "MTA"), the Italian automated
screen-based quotation system on which the Company'sour Common Shares are listed, is
organized and administered by Borsa Italiana S.p.A. ("Borsa Italiana") subject
to the supervision and control of the 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") and as modified by Legislative
Decree 58 of February 24, 1998 (the "Financial Act"). 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.
36
A three-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
73
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 cancelled 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
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 a decree of the Italian Ministry
of Treasury and a resolution of the CONSOB, respectively.
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
havingITEM 10. ADDITIONAL INFORMATION
Memorandum and articles of association
We were incorporated under the law of The Netherlands by deed of May
21, 1987. Set forth below is a summary of certain provisions of our articles of
association and relevant Dutch corporate law. The summary below does not purport
to be complete and is qualified in its entirety by reference to the articles of
association and relevant Dutch corporate law.
References herein to shares include common and preference shares and
references herein to shareholders include common and preference shareholders,
unless otherwise provided.
Share Capital
Our authorized share capital is Euro 1,809,600,000, consisting of
1,200,000,000 common shares and 540,000,000 preference shares, nominal value of
Euro1.04 per share. As of March 31, 2001, 890,310,233 common shares were
outstanding, as well as options to acquire 26,844,061 common shares. No
preference shares are currently outstanding. Pursuant to a shareholders'
resolution adopted at the annual general meeting on April 25, 2001, our
Supervisory Board has been authorized for a period of five years to resolve upon
(i) the issuance of any number of new ordinary or preference shares, (ii) the
terms and conditions of an issuance of shares; (iii) waiver of existing
shareholders' pro rata preemptive rights; and (iv) granting of rights to
subscribe for ordinary shares and or preference shares.
Shares are issued in registered form only. The preference shares are
intended to protect us from a hostile take-over or similar action. Share
registers are maintained in New York by The Bank of New York, the New York
Transfer Agent and Registrar (the "New York Registry"), and in Amsterdam, The
Netherlands, by Netherlands
74
Management Company B.V., the Dutch Transfer Agent and Registrar (the "Dutch
Registry"). Shares of New York Registry held through The Depository Trust
Company ("DTC") are registered in the name of Cede & Co., the nominee of DTC,
and shares of Dutch Registry held through the French clearance and settlement
system, Euroclear France, are registered in the name of Euroclear France or its
nominee.
Dividends
Our Supervisory Board may establish reserves out of our annual profits,
upon proposal of our Managing Board. The portion of our annual profits that
remains after the establishment of reserves is at the disposal of the general
meeting of shareholders. If the general meeting of shareholders resolves to
distribute profits, preference shareholders shall first be paid a percentage
equal to the Euribor interest for one-year cash loans computed over the paid up
capital on the preference shares, provided that the amount paid to preference
shareholders may not exceed the total amount resolved to be distributed to
shareholders. If the paid up capital of the preference shares is increased or
decreased in the financial year in respect of which the dividend is paid, the
payment thereon will be adjusted accordingly. The profits remaining after
payment has been made to preference shareholders may be distributed to the
common shareholders.
Our general meeting of shareholders may declare distributions out of
our share premium reserve and other reserves available for shareholder
distributions under Dutch law, upon the proposal of our Supervisory Board.
Pursuant to a resolution of our Supervisory Board, distributions approved by the
general meeting of shareholders may be fully or partially made in the form of
our new shares to be issued. We may not pay dividends if the payment would
reduce shareholders' equity below the paid-up and called portion of the share
capital, plus the reserves which are required by statute. Our Supervisory Board
may, subject to certain statutory provisions, distribute one or more interim
dividends in respect of any year before the accounts for such year have been
approved and adopted at a general meeting of shareholders. Rights to cash
dividends and distributions that have not been collected within five years after
the date on which they became due and payable shall revert to us.
At December 31, 2000, the amount of retained earnings available to pay
dividends under Dutch law was approximately $5,263 million. Retained earnings
for purposes of this calculation are based on our unconsolidated accounts using
generally accepted accounting principles in The Netherlands ("Dutch GAAP"). The
only material difference between our Dutch GAAP and U.S. GAAP accounts resulted
because we canceled our accumulated deficit through a share capital reduction in
1993. Under U.S. GAAP, as this operation was not a quasi-reorganization, the net
effect of the par value reduction was applied against capital surplus. At
December 31, 2000, under U.S. GAAP, we had accumulated earnings of approximately
$3,977 million.
As approved by the annual general meeting of shareholders on May 31,
1999, we paid a cash dividend in respect of the year ended December 31, 1998 of
$0.027 per common share on June 15, 1999 to shareholders of record as of June 1,
1999. As approved by the annual general meeting on April 26, 2000, we paid on
May 4, 2000 a cash dividend in respect of the year ended December 31, 1999 of
$0.03 per share issued and outstanding as per April 28, 2000. As approved by the
annual general meeting on April 25, 2001, we paid on May 11, 2001 a cash
dividend in respect of the year ended December 31, 2000 of $0.04 per share
issued and outstanding at April 27, 2001. In the event that dividends are
declared in the future, we expect that we would pay such dividends in U.S.
dollars, although dividends may be declared in other currencies. Cash dividends
to holders of shares of Dutch Registry will be paid to the Dutch Transfer Agent
and Registrar who will, if necessary, convert such dividends into French francs
or Italian lira at the rate of exchange on the date such dividends are paid, for
disbursement to such holders. Cash dividends to holders of shares of New York
Registry will be paid to the New York Transfer Agent and Registrar, who will, if
necessary, convert such dividends into U.S. dollars at the rate of exchange on
the date such dividends are paid, for disbursement to such holders.
Shareholder Meetings and Voting Rights
Each registered shareholder has the right to attend general meetings of
shareholders, either in person or represented by a person holding a written
proxy, to address shareholder meetings and to exercise voting rights, subject to
the provisions of the articles of association. Our ordinary general meetings of
shareholders are held at least annually, within six months after the close of
each financial year, in Amsterdam, Haarlemmermeer (Schiphol Airport), Rotterdam
or The Hague, The Netherlands. Extraordinary general meetings of shareholders
may be held as often as our Supervisory Board deems necessary, and must be held
upon the written request of registered holders
75
of at least 10% of the total outstanding share capital to our Managing Board
or our Supervisory Board specifying in detail the business to be dealt with.
We will give notice by mail to registered holders of shares of each
shareholders' meeting, and will publish notice thereof in a national daily
newspaper distributed throughout The Netherlands and in at least one daily
newspaper in each country other than the United States in which the shares are
admitted for official quotation. Such notice shall be given no later than the
twenty-first day prior to the day of the meeting and shall either state the
business to be considered or state that the agenda is open to inspection by the
shareholders at our offices. We are exempt from the proxy rules under the United
States Securities Exchange Act of 1934. Euroclear France will provide notice of
general meetings of shareholders to, and compile voting instructions from,
holders of shares held directly or indirectly through Euroclear France. DTC will
provide notice of general meetings of shareholders to holders of shares held
directly or indirectly through DTC and the New York Transfer Agent and Registrar
will compile voting instructions. In order for holders of shares held directly
or indirectly through Euroclear France to attend general meetings of
shareholders in person, such holders must withdraw their shares from Euroclear
France and have such shares registered directly in their name or in the name of
their nominee. In order for holders of shares held directly or indirectly
through DTC to attend general meetings of shareholders in person, such holders
need not withdraw such shares from DTC but must follow rules and procedures
established by the New York Transfer Agent and Registrar.
Each share is entitled to one vote. Unless otherwise required by the
articles of association or Dutch law, resolutions of general meetings of
shareholders require the approval of a majority of the votes cast at a meeting
at which at least one-third of the outstanding share capital is present or
represented.
The articles of association allow for separate meetings for holders of
common shares and for holders of preference shares. At a meeting of holders of
preference shares at which the entire issued capital of shares of such class is
represented, valid resolutions may be adopted even if the requirements in
respect of the place of the meeting and the giving of notice have not been
observed, provided that such resolutions are adopted by unanimous vote. Also,
valid resolutions of preference shareholder meetings may be adopted outside a
meeting if all holders of preference shares and holders of a right of usufruct
on preference shares indicate by letter, telegram, telex communication or
facsimile that they vote in favor of the proposed resolution, provided that no
depositary receipts for preference shares have been issued with our cooperation.
Approval of Annual Accounts and Discharge of Management Liability
Each year, our Managing Board must prepare annual accounts and submit
them to the general meeting of shareholders for approval within five months
after the end of our financial year, unless the general meeting of shareholders
has extended this period by a maximum of six months on account of special
circumstances.
Adoption of our annual accounts by the general meeting of shareholders
discharges the members of our Managing Board and our Supervisory Board from
liability in respect of the exercise of their duties during the financial year
concerned, unless an explicit reservation is made by the general meeting of
shareholders and without prejudice to the provisions of Dutch law relating to
liability of members of supervisory boards and managing boards upon bankruptcy
of a company pursuant to articles 138 and 149 of Book 2 of the Dutch Civil Code.
Under Dutch law, this discharge does not extend to matters not disclosed to
shareholders.
Liquidation Rights
In the event of our dissolution and liquidation, after payment of all
debts and liquidation expenses, the holders of preference shares shall, if
possible, receive the paid up portion of the nominal amount of their preference
shares. Any assets then remaining shall be distributed among the registered
holders of common shares in proportion to the nominal value of their
shareholdings.
Issue of Shares; Preemptive Rights
Unless limited or eliminated by the general meeting of shareholders or
our Supervisory Board as described below, registered holders of common shares
have a pro rata preemptive right to subscribe for any newly issued common
shares, except for common shares issued for consideration other than cash and
common shares issued to our employees or of one of our group companies.
Shareholders do not have a preemptive right to subscribe for any newly issued
preference shares. Holders of preference shares have no preemptive rights.
76
The general meeting of shareholders, upon proposal and on the terms and
conditions set by our Supervisory Board, has the power to issue shares. The
general meeting of shareholders may also authorize our Supervisory Board, for a
period of no more than five years, to issue shares and to determine the terms
and conditions of share issuances. At the general meeting of shareholders held
on April 25, 2001, our Supervisory Board was delegated this authority for a
period of five years.
The general meeting of shareholders, upon proposal by the Supervisory
Board, also has the power to limit or exclude preemptive rights in connection
with Monte Titoli.
Item 6:new issuances of shares. Such a resolution of the general meeting of
shareholders requires the approval of at least two-thirds of the votes cast at a
general meeting of shareholders at which at least 50% of the outstanding share
capital is present or represented. The general meeting of shareholders may
authorize our Supervisory Board, for a period of no more than five years, to
limit or exclude preemptive rights. At the general meeting of shareholders held
on April 25, 2001, our Supervisory Board was delegated this authority for a
period of five years.
Acquisition of Shares
We may acquire shares, subject to certain provisions of Dutch law and
of our articles of association, if and to the extent that (i) the shareholders'
equity less the payment required to make the acquisition does not fall below the
sum of the paid-up and called-up portion of the share capital and any reserves
required by Dutch law and (ii) the aggregate nominal value of shares that we or
our subsidiaries acquire, hold or hold in pledge would not exceed one-tenth of
our issued share capital. Share acquisitions may be effected by our Managing
Board, subject to the approval of our Supervisory Board, only if the general
meeting of shareholders has authorized the Managing Board to effect such
repurchases, which authorization may apply for a maximum period of 18 months. We
may not vote shares we hold. Our articles of association have been amended
effective as of May 5, 2000 by the general annual meeting on April 26, 2000 to
provide that we shall be able to acquire shares in our own share capital in
order to transfer these shares under employee stock option or stock purchase
plans, without an authorization of the general meeting of shareholders being
required.
Capital Reduction
Upon proposal by our Supervisory Board, the general meeting of
shareholders may resolve to reduce our issued share capital by canceling shares
held by us or by reducing the nominal value of shares, subject to certain
statutory provisions. Upon proposal by our Supervisory Board, the general
meeting of shareholders also may cancel all preference shares against payment of
the amount paid up on those shares, subject to certain statutory provisions.
Amendment of the Articles of Association
The articles of association may be amended if amendments are proposed
by our Supervisory Board and approved by a simple majority of the votes cast at
a general meeting of shareholders at which at least one-third of the outstanding
share capital is present or represented. The complete proposal for the amendment
must be made available for inspection by the shareholders and the other persons
entitled to attend general meetings of shareholders at our offices as from the
day of the notice convening such meeting until the end of the meeting. Any
amendment of the articles of association that negatively affects the rights of
the holders of a certain class of shares, requires the prior approval of the
meeting of holders of such class of shares.
Managing Board
Responsibility for our management lies with our Managing Board. Our
Managing Board consists of such number of members as resolved by the general
meeting of shareholders upon the proposal of the Supervisory Board.
The members of the Managing Board are appointed for three-year terms by
the general shareholders' meeting. Our Supervisory Board appoints one of the
members of the Managing Board to be chairman of the Managing Board. The
remuneration and other conditions of employment of the members of the Managing
Board are determined by the Supervisory Board.
The Managing Board and each member of the Managing Board is authorized
to represent us. Resolutions of our Managing Board require the approval of a
majority of its members. Under the articles of association, the Managing Board
is required to obtain prior approval from the Supervisory Board for:
77
o all proposals to be submitted to a vote at the general meeting
of the shareholders,
o the formation of all companies, acquisition or sale of any
participation and the entering into of any joint venture or
participation agreement,
o all of our multi-annual plans and the budget for the upcoming
year, covering investment policy, policy regarding research
and development, as well as commercial policy and objectives,
general financial policy and policy regarding personnel, and
o 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 in a resolution adopted by it to that
effect. The Supervisory Board has, by resolution, specified
additional resolutions of the Managing Board that require
its approval.
In addition, under the articles of association, our Managing Board
must obtain prior approval from the general meeting of shareholders for
decisions relating to:
o the sale of all or of an important part of our assets or
business enterprise(s), and
o the entering into of mergers, acquisitions or joint ventures
that the Supervisory Board considers of material significance.
The general meeting of shareholders may by resolution specify
additional resolutions that require its approval.
The general meeting of shareholders may suspend or dismiss one or more
members of the Managing Board at a meeting at which at least one-half of the
outstanding share capital is present or represented. A quorum of one-third is
required if a suspension or dismissal is proposed by the Supervisory Board. The
Supervisory Board may suspend members of the Managing Board, but a general
meeting of shareholders must be convened within three months after such
suspension to confirm or reject the suspension.
Supervisory Board
Our Supervisory Board advises our Managing Board and is responsible for
supervising the policies pursued by the Managing Board and the general course of
our affairs. In addition, certain resolutions by the Managing Board require the
prior approval of the Supervisory Board, and the Supervisory Board may by
resolution specify additional resolutions that require such approval.
Resolutions of the Supervisory Board require the approval of three-quarters of
its members, In fulfilling their duties, members of the Supervisory Board must
serve our interests.
The members of the Supervisory Board are appointed by the general
meeting of shareholders. The general meeting of shareholders, upon proposal of
the Supervisory Board, determines the number of the members of the Supervisory
Board, provided that there shall always be at least six supervisory directors.
The remuneration of the members of the Supervisory Board is determined by the
general meeting of shareholders. The general meeting of shareholders may dismiss
or suspend the members of the Supervisory Board with a simple majority vote.
Each member of the Supervisory Board must resign no later than three
years after he has been appointed, but may offer himself for re-election
following the expiry of his term of office. Each member of the Supervisory Board
must retire at the annual general meeting of shareholders held in the financial
year in which he reaches the statutory maximum age of members of the Supervisory
Board (currently 72 years).
Disclosure of Holdings
Under the Dutch Act on Disclosure of Holdings in listed companies ("Wet
melding zeggenschap in ter beurze genoteerde vennootschappen 1996"), registered
shareholders and beneficial owners must promptly notify us and the Securities
Board of The Netherlands established in Amsterdam if their holding in us
reaches, exceeds or falls below 5%, 10%, 25%, 50% or 66% of the capital interest
and/or voting rights, including rights to acquire capital interest and/or voting
rights, of us. Failure to comply constitutes a criminal offense and could result
in criminal as well as civil sanctions, including suspension of voting rights
and the right to acquire the same. We must in turn
78
inform the Conseil des Marches Financiers of all such notifications provided by
registered shareholders and beneficial owners to us.
Limitations on Right to Hold or Vote Shares
There are currently no limitations imposed by Dutch law or by the
articles of association on the right of non-resident holders to hold or vote the
shares.
Exchange Controls and Other Limitations
Affecting Security Holderscontrols
None.
Item 7:
Taxation
Certain Dutch tax consequences for holders of Common Shares
ThisFollowing is a summary describes the tax consequences that will generally apply
in case of an investment in Common Shares under Dutch and United States tax laws
in force and in effect as of the date of this annual report on Form 20-F, and is
subject to changes in Dutch or U.S. law, including changes that could have
retroactive effect. Not every potential tax consequence of such investment under
the laws of The Netherlands or the United States will be addressed. PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR TAX ADVISERS REGARDING THEIR PARTICULAR PERSONAL
TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF COMMON SHARES.
37
Dutch taxation of non-resident shareholders
This section "Dutch taxation of non-resident shareholders" describes
certainprincipal Dutch tax consequences forof the
ownership and disposition of Common Shares.
It applies only to a holder of Common Shares who is neither resident
nor deemed to be resident in The Netherlands for Dutch tax purposes and, in the
case of an individual, has not elected to be treated as a resident of The
Netherlands for Dutch taxationincome tax purposes (a "Non-Resident Shareholder"). The
summary does not apply to any Non-Resident Shareholder who is or has been or is
deemed to be or has been deemed to be an employee of us or of any entity related
to us.
It is a general summary that does not discuss every aspect of Dutch
taxation that may be relevant to a Non-Resident Shareholder, for instance if
such holder is subject to special circumstances or if such holder is subject to
special treatment under applicable law. This summary assumes that we are
organized and that our business will be conducted in the manner outlined in this
annual report on Form 20-F. Changes in our organizational structure or the
manner in which we conduct our business may invalidate the contents of this
summary. Furthermore, this summary assumes that each transaction with respect to
Common Shares is at arm's length.
Unless stated otherwise, this summary is based on Dutch tax laws in
effect as of the date of this annual report on Form 20-F. These laws are subject
to change, which changes may have retroactive effect. A change to such laws may
invalidate the contents of this summary. This summary will not be updated to
reflect changes in laws.
EACH INVESTOR SHOULD CONSULT HIS PROFESSIONAL TAX ADVISOR REGARDING THE
PARTICULAR TAX CONSEQUENCES OF HIS OWNING AND DISPOSING OF COMMON SHARES.
Withholding tax
Dividends distributed by the Companywe distribute to Non-Resident Shareholders are generally are
subject to a withholding tax imposed by The Netherlands at a rate of twenty five per cent.25%. The
expressionconcept "dividends distributed by the Company"we distribute," as used in this sectionsummary, includes but(but is not
limited to:
i.to) the following:
(i) distributions in cash or in kind, deemed and constructive
distributions, and repayments of paid-in capital not recognized as
paid-in for Dutch dividend withholding tax purposes;
ii.(ii) liquidation proceeds, proceeds of redemption of Common Shares
or, as a rule, consideration for the repurchase of Common
Shares by the Companyus in excess of the average paid-in capital recognized as
paid-in for Dutch dividend withholding tax purposes;
iii.(iii) the par value of Common Sharesshares 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 Dutch dividend withholding tax purposes, has
been made or will be made; and
iv.(iv) partial repayment of paid-in capital, recognized as paid-in for Dutch
dividend withholding tax purposes, if and to the extent that
there are net profits (zuivere winst), unless (a) the general
meeting of our shareholders of the Company has resolved in advance to make
such repayment;repayment and (b) the par value of the
79
Common Shares concerned has been reduced by an equal amount by
way of an amendment of theour articles of association.
If a Non-Resident Shareholder is resident in a country with which The
Netherlands has concluded a double taxation conventiontreaty that is in effect, between The Netherlands
and the country of residence of a Non-Resident Shareholder, such
Non-Resident Shareholder may depending on the terms of that double taxation convention, be eligible for a full or partial exemptionrelief from or refund of,the
Dutch dividend withholding tax.tax provided that such relief is duly claimed.
Legislation is in force, but not effective, pursuant to which withholding tax
will only be creditable or refundable to the beneficial owner of dividends we
distribute. The Dutch tax authorities have taken the position that the
beneficial ownership test can also be applied to deny relief from Dutch dividend
withholding tax under double taxation treaties. Following consultations with the
Dutch financial sector, the Dutch government has announced its intention to
submit a new legislative proposal on the subject of beneficial ownership of
dividends. The intention is that this new legislation will take effect
retroactively to April 27, 2001.
We are not required to withhold dividend tax from a dividend we
distribute to a Non-Resident Shareholder, who is resident in the Netherlands
Antilles or Aruba or in a member state of the European Union or in a country
that has concluded a double taxation treaty with The Netherlands, to the extent
that the temporary special distribution tax, discussed below in the section
"Distribution tax," applies to the distribution.
Dutch -- U.S. Shareholders.double taxation treaty
Under the Tax ConventionDutch -- United States double taxation treaty of December 18,
1992 concluded between the United States and The Netherlands (the "Convention""Dutch -- U.S. Treaty"), the dividend withholding tax rate on
dividends paidwe distribute in respect of Common Shares held 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 mayDutch -- U.S. Treaty will
generally 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. As a rule, if the 15% rate or an exemption in case of a
qualifying U.S. pension fund, is applicable pursuant tounder the
Convention, the
Company is allowed to pay out a dividend under deduction of 15%, or respectively
without any deduction,Dutch -- US Treaty, we may apply this rate at source if, at the payment date,
the relevant shareholders have submitted thea 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.USA. Only
where the applicantperson entitled to relief has not been able to claim full
or partialthe relief at
source, will he be entitled to a refund of the excess tax withheld. In that case
he should mention in the Formas yet file a form IB 92 USA and state the circumstances that
prevented him from claiming relief at source.
QualifyingDividends paid by us to qualifying U.S. pension funds and qualifying
U.S. exempt organizations can only askmay be eligible for full relief of the Dutch dividend
withholding tax.
Distribution tax
We are subject to a temporary special distribution tax at a rate of 20%
to the extent that dividends we distribute during the period from January 1,
2001 up to and including December 31, 2005 are classified as "excessive." For
purposes of this distribution tax, dividends we distribute are considered to be
"excessive" to the extent that during a particular calendar year the total
thereof exceeds the highest of the following three amounts:
(i) 4% of our market capitalization at the beginning of the
relevant calendar year;
(ii) twice the amount of the average annual dividends (exclusive of
extraordinary distributions) that we distributed in the three
calendar years immediately preceding January 1, 2001; and
(iii) our consolidated commercial result for the preceding book
year, subject to certain adjustments.
See the section "Withholding tax" for a full refunddiscussion of the concept
"dividends we distribute."
The special distribution tax withheldwill not be levied if and to the extent
the aggregate amount of dividends we distribute during the period from January
1, 2001 up to and including December 31, 2005 exceeds the fair market value of
our assets ending on December 31, 2000, net of liabilities and provisions and
reduced by usingour paid-in capital.
The special distribution tax will be reduced in proportion to the
Form IB 95 USA, which form also includespercentage of our shares that were held, at the time of the "excessive"
distribution, during an uninterrupted period of three years, by individuals or
entities (other than investment institutions (beleggingsinstellingen) as defined
in the Dutch Corporate Income Tax Act 1969) holding at least 5% of our nominal
paid-in capital, provided such shareholders are resident in The Netherlands, the
Netherlands Antilles or Aruba, or in a banker's affidavit.
38member state of the European Union, or in
a country that has concluded a double taxation treaty with The Netherlands. In
that connection, shares that have been held since September 14, 1999 are deemed
to have been held during an uninterrupted periodof three years. The special
distribution tax is not
80
a withholding tax; it is imposed directly on us. Therefore, if it is reduced
because there are shareholders who own at least 5% of our paid-in capital, we
will receive the benefit of the reduction and it will inure indirectly to all of
our shareholders, not only to the shareholders whose shareholdings caused the
reduction to apply.
Taxes on income and capital gains
Individuals
A Non-Resident Shareholder who is an individual will not be subject to
any Dutch taxes on income or capital gains in respect of dividends distributed by the Companywe distribute
(other than the withholding tax described above) or in respect of any gain
realized on the disposal of Common Shares, provided that:unless:
(i) such Non-Resident Shareholder does not haveholder derives profits from an enterprise, whether as an
entrepreneur (ondernemer) or pursuant to a co-entitlement to
the net worth of such enterprise (other than as an
interest in anentrepreneur or a shareholder), which 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, thesuch holder's
Common Shares are attributable; andattributable to that enterprise, or
(ii) such Non-Resident Shareholder does not haveholder derives benefits from Common Shares that are
taxable as benefits from miscellaneous activities in The
Netherlands (resultaat uit overige werkzaamheden in
Nederland), or
(iii) such holder's Common Shares form part or are deemed to form
part of a substantial interest or a deemed substantial interest(aanmerkelijk belang) in the Company or,
if such holderus
that does have such an interest, it formsnot form part of the assets of an enterprise.
Generally,See the section "Withholding tax" for a discussion of the concept
"dividends we distribute."
A Non-Resident Shareholder who is an individual may, inter alia, derive
benefits from Common Shares that are taxable as benefits from miscellaneous
activities in The Netherlands:
(i) if the investment activities of such individual go beyond the
activities of an active portfolio investor, for instance in
case of the use of insider knowledge (voorkennis) or
comparable forms of special knowledge; or
(ii) if such individual makes Common Shares available or is deemed
to make Common Shares available, legally or in fact, directly
or indirectly, to certain connected individuals, associations
or entities.
The holder of Common Shares will not havehas a substantial interest in us if he, his spouse, certain other relatives (including foster children)
or certain persons sharing his household, do not hold,such
holder - alone or together whetherwith his partner (partner) - has, directly or
indirectly, the ownership of, or certain other rights, for instance a right of
usufruct, over shares of us representing five per cent5% or more of theour total issued and
outstanding capital (or the issued and outstanding capital of any class of
shares) of the
Company,, or rights to acquire, directly or indirectly, shares, whether or not
already issued, that represent at any time (and from time to time) five per cent5% or more of theour total issued and
outstanding capital (or the issued and outstanding capital of any class of
shares) of the Company or the ownership of, or certain rights, for instance a right of
usufruct, over profit participating certificates (winstbewijzen) that relate to
five per cent5% or more of theour annual profit of the
Company and/or to five per cent5% or more of theour liquidation proceedsproceeds. If
a holder of the
Company. A deemed substantial interest is present if (part of)Common Shares has a substantial interest has been disposedpursuant to the previous
sentence, his Common Shares form part of a substantial interest. Furthermore,
the holder's Common Shares form part of a substantial interest in us if such
holder's partner or any of the relatives by blood or by marriage in the direct
line (including foster-children) of the holder or of his partner holds shares
that form part of, or isare deemed to form part of, a substantial interest in us.
Finally, if a holder's Common Shares do not form part of a substantial interest
pursuant to the two previous sentences, they may be deemed to form part of a
substantial interest in us if they have been acquired or are deemed to have been
disposed of, onacquired by such holder under a non-recognition basis.
Net wealth taxprovision.
Entities
A Non-Resident Shareholder who is (a) a legal person, or (b) a
partnership or other form of association without legal personality that has a
capital that is wholly or partly divided into shares, or (c) a trust or a form
of co-investment (doelvermogen) or a similar legal form that is for Dutch
purposes taxable as a corporation, will not be subject to any Dutch net wealth taxtaxes on
income or capital gains in respect of any payment under the Common Shares or in
respect of any gain realized on the disposal of Common Shares, provided that the
following two conditions are satisfied.
81
(i) All of the following are true:
- such Non-Resident Shareholder is not an
individual or, if he is an individual, provided that such Non-Resident
Shareholder does not haveholder derives profits from an enterprise,
whether as an entrepreneur (ondernemer) or pursuant
to a co-entitlement to the net worth of such
enterprise (other than as an interest in anentrepreneur or a
shareholder), which 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, theNetherlands;
- such holder's Common Shares are attributable.attributable to that
enterprise; and
- the benefits derived from such holder's Common Shares
are not exempt under the participation exemption (as
laid down in the Dutch Corporate Income Tax Act
1969).
(ii) If such holder's Common Shares form part or are deemed to form
part of a substantial interest (aanmerkelijk belang) in us,
these Common Shares form part of the assets of an enterprise.
See the section "Taxes on income and capital gains - Individuals" for a
discussion of the concept "substantial interest in us."
Gift and inheritance taxes
No gift tax or inheritance taxes will arise in The Netherlands with
respect to an acquisition of Common Shares by way of a gift by, or on the death
of, a Non-Resident Shareholder, unless:
(i) such 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 or were attributable; or
(ii) in the case of a gift of Common Shares by an individual who at
the time of the gift was a Non-Resident Shareholder, such
individual dies within 180 days after the date of the gift,
while (at the time of his death) being resident or deemed to
be resident in The Netherlands.
For purposes of Dutch gift and inheritance tax, an individual who holds
the
Dutch nationality will be deemed to be resident in The Netherlands if he has
been resident in The Netherlands at any time during the ten years preceding the
date of the gift or his death. For purposes of Dutch gift tax, an individual not
holding the Dutch nationality will be deemed to be resident in The Netherlands if he
has been resident in The Netherlands at any time during the twelve months
preceding the date of the gift.
39
Capital tax
Dutch capital tax will be payable by the Company at a rate of 0.9 per
cent of any contribution made in respect of the Common Shares.
Other taxes and duties
No Dutch registration tax, transfer tax, stamp duty or any other
similar documentary tax or duty will be payable in The Netherlands in respect of
or in connection with the subscription, issue, placement, allotment or delivery of the Common Shares.
United States Taxation
The following discussion is a summary of certain U.S. federal income
tax consequences of the ownership and disposition of Common Shares by you if you
are a U.S. Holders,Holder, as defined below. This summary applies to you only toif you are
a beneficial owner of Common Shares (a) who owns, directly or indirectly, less
than 10% of theour voting stock, of the Company, (b) who is (i) aan individual citizen or resident
of the United States for U.S. federal income tax purposes, (ii) a U.S. domestic
corporation, or (iii) otherwisean estate whose income is subject to U.S. federal income
taxation onregardless of its source, or (iv) a net income basis in respecttrust if a court within the United
States is able to exercise primary supervision over its administration and one
or more U.S. persons have the authority to control all of the Common
Shares,substantial
decisions of the trust, (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 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
82
general summary, prospective purchasersinvestors 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 Companyus with respect to the Common Shares (including the amount of any
Netherlands taxes withheld therefrom) will generally be includable in theyour 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'sour 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'sour current or
accumulated earnings and profits, it will be treated first as a tax-free return
of the U.S. Holder'syour 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.us. 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'syour U.S. federal income tax liability. Under current Dutch law, the Companywe,
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.us. To the extent that the Company haswe
have withheld an amount from dividends paid to shareholders which itwe then isare
not required to remit to any
40
taxing authority in The Netherlands, such amount in
all likelihood would not qualify as a creditable tax for U.S. tax purposes. The CompanyWe
will endeavor to provide to U.S. Holdersyou information concerning the extent to which it haswe
have applied the reduction described above to dividends paid to U.S. Holders.you. 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 Companyus 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 thatIf you do not elect to claim a
foreign tax credit you may instead claim aan itemized 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. Holderyou will recognize
capital 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'syour tax basis 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. Inloss and will be treated as long-term gain or loss if your holding period in the
case of
a U.S. Holder who isCommon Shares exceeds one year. If you are 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. The deductibility of capital losses
is subject to significant limitations.
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. PersonsU.S. persons who are required to establish their
exempt status generally must provide such certification on IRS Form W-9
(Request("Request for Taxpayer Identification Number and Certification)Certification"). Non-U.S.
holders generally are not subject to U.S. information reporting or backup
withholding. However, such holders may be required to provide certification of
non-U.S. status in connection with payments received 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.United States or
through U.S.-related financial intermediaries. Finalized Treasury regulations
have
83
generally expanded the circumstances under which U.S. information reporting
and backup withholding may apply
for payments made after December 31, 2000.apply. Holders of Common Shares should consult their
tax advisors regarding the application of the U.S. information reporting and
backup withholding rules, including the finalized Treasury regulations.
Backup withholding is not an additional tax. 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 toDocuments on display
The documents filed by us with the information appearing under the caption
"Selected Consolidated Financial Data" on page 34 of the Company's 1999 Annual
Report submitted as a Report on Form 6-K to theU.S. Securities and Exchange
Commission on June 19, 2000 (the "1999 Annual Report")can be read at its public reference facilities at Room 1024, 450
Fifth Street, N.W., 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 35 through 43 of the 1999 Annual Report, which information
is hereby incorporated by reference.
Item 9A: Quantitative and Qualitative Disclosures About Market Risk
The Company isWashington, D.C. 20549.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in financial market conditions in the normal
course of business due to itsour operations in different foreign currencies and itsour
ongoing investing and financing activities. Market risk is the uncertainty to
which future earnings or asset/liability values are exposed due to operating
cash flows denominated in foreign currencies and various financial instruments
used in the normal course of operations. The Company has
41
We have established policies,
procedures and internal processes governing itsour management of market risks and
the use of financial instruments to manage itsour exposure to such risks.
The Company isWe are exposed to changes in interest rates primarily as a result of
itsour borrowing activities which include long-term debt used to fund business
operations. The Company borrowsWe borrow in U.S. dollars as well as in other currencies from banks
and other sources. The CompanyWe primarily entersenter into debt obligations to support general
corporate and local purposes including capital expenditures and working capital
needs. The nature and amount of the Company'sour long-term debt can be expected to vary as a
result of future business requirements, market conditions, and other factors.
The principal interest rate risks to which the Company iswe are exposed relate to the Company'sour
investment portfolio and long-term debt obligations. The CompanyWe primarily utilizesutilize
fixed-rate debt and doesdo not expect changes in interest rates to have a material
effect on income or cash flows in 2000.2001.
The functional currency of the Company'sour subsidiaries is generally the local
currency. The Company'sOur operating cash flows are denominated in various foreign currencies
as a result of itsour international business activities and certain of itsour
borrowings are exposed to changes in foreign exchange rates. The
CompanyWe continually
evaluates itsevaluate our foreign currency exposure based on current market conditions and
the business environment. In order to mitigate the impact of changes in foreign
currency exchange rates, the Company enterswe enter into forward exchange contracts. The magnitude
and nature of such activities are explained further in Note 22 to the
Consolidated Financial Statements.
The Company places itsWe place our cash and cash equivalents with high credit quality
financial institutions. The Company managesWe manage the credit risks associated with financial
instruments through credit approvals, investment limits and centralized
monitoring procedures but doesdo not normally require collateral or other security
from the parties to the financial instruments with off-balance sheet risk. The Company isWe
are averse to principal loss and managesmanage the safety and preservation of itsour
invested funds by limiting default risk, market risk and reinvestment risk.
The Company entersWe enter into forward contracts and foreign currency options to protect
against the volatility of foreign currency exchange rates and to cover a portion
of both itsour probable anticipated, but not firmly committed, transactions and
transactions with firm foreign currency commitments. The risk of loss associated
with purchased options is limited to premium amounts paid for the option
contracts. The risk of loss associated with forward contracts is equal to the
exchange rate differential from the date the contract is made until the time it
is settled.
Forward contracts outstanding as of December 31, 19992000 have remaining
terms of one to 133 months, maturingwhich matured mainly during the first quarter 2000.of 2001.
The notional amounts of foreign exchange forward contracts totaled $611,567$780.4
million at December 31, 1999,2000, and $634,870$611.6 million at December 31, 1998.1999. The
principal currencies covered are the U.S. dollar, the euro, the Italian lira,
the Japanese yen the Euro, the British pound and the Swiss franc.
The Company doesWe do not anticipate any material adverse effect on itsour financial
position, result of operations or cash flows resulting from the use of the Company'sour
instruments in the future. There can be no assurance that these strategies will
be
84
effective or that transaction losses can be minimized or forecasted accurately.
The Company doesWe do not use financial instruments for speculative or trading purposes.
The information below summarizes the Company'sour market risks associated with cash
equivalents, debt obligations, and other significant financial instruments as of
December 31, 1999.2000. The information below should be read in conjunction with
Notes 134, 14 and 22 to the Consolidated Financial Statements.
The table below presents principal amounts and related weighted-average
interest rates by year of maturity for the Company'sour investment portfolio and debt
obligations (in thousands of U.S. dollars, except percentages):
Fair value at
2000December 31,
2001 2002 2003 2004 2005 Thereafter TOTAL December 31, 1999
------------------------------------------------2000
------ ------ ------ ------ ------ ---------- ------- ----- -----------------
Assets:
Cash equivalents 1,823,086 1,823,086 1,823,086equivalents..... 2,295,703 2,295,703 2,295,703
Average interest 6.18% 6.18%
rate 6.57% 6.57%
Long-term debt:
Fixed rate 96,669 86,976 87,168 9,688 10,795 1,153,850 1,445,146 2,845,234rate........... 105,972 111,572 84,457 57,555 47,492 2,339,406 2,806,454 3,325,678
Average interest 4.97% 5.54% 5.68% 4.25% 3.97% 2.20% 2.82%
rate 5.72% 6.01% 5.91% 5.45% 5.01% 3.26% 3.62%
42
Amounts in thousands
of U.S. dollars
---------------------------------------------
Long-term debt by currency as of December 31, 2000:
U.S. dollar......................................... 2,445,569
Italian lira........................................ 128,398
French franc........................................ 199,593
Other currencies.................................... 32,894
------
TOTAL in U.S. dollars.................................. 2,806,454
=========
Amounts in thousands
of U.S. dollars
---------------------
Long-term debt by currency as of December 31, 1999:
U.S. dollardollar........................................ 1,157,366
Italian liralira....................................... 192,432
French francfranc....................................... 82,993
Other currenciescurrencies................................... 12,355
------
TOTAL in U.S. dollarsdollars................................. 1,445,146
=========
Amounts in thousands
of U.S. dollars
------------------------
Long-term debt by currency as of December 31, 1998:
U.S. dollar 455,885
Italian lira 231,752
French franc 98,628
Other currencies 14,844
------
TOTAL in U.S. dollars 801,109
=======85
The following table provides information about the Company'sour foreign exchange
forward contracts at December 31, 19992000 (in thousands of U.S. dollars):
Average Contractual
Forward Exchange
Buy Sell Notional Amount Forward Exchange Rate Fair Value
----------------- --------------------- ----------------------------- --------------------------- -------- ------------------- -------- ----------
Foreign currency forward exchange contracts to buy U.S. dollars for foreign currencies:
U.S. dollar........ Euro 273,082 0.89 (12,772)
U.S. dollar........ French franc 25,000 7.30 (845)
U.S. dollar........ Italian lira 96,112 1,738.98 18,779
U.S. dollar........ Malaysian ringgit 106,063 3.79 206
U.S. dollar........ Singapore dollar Euro 50,373 1.02 (943)94,360 1.73 (11)
------
Total............. 594,617 5,357
======= =====
Foreign currency forward exchange contracts to buy euro for foreign currencies:
Euro............... Malaysian ringgit 5,155 3.25 415
Euro............... U.S. dollar British pound 34,790 1.62 6160,000 0.85 6,121
------ -----
Total.............. 65,155 6,536
====== =====
Foreign currency forward exchange contracts to buy Japanese yen for foreign
currencies:
Japanese yen....... Euro 26,108 101.51 (1,465)
Japanese yen(1).... French franc 12,619 7.08 (1,959)
Japanese yen....... Malaysian ringgit 3,684 0.03 (71)
----- ----
Total.............. 42,411 (3,495)
====== =======
Foreign currency forward exchange contracts to buy Swiss francs for foreign currencies
Swiss franc........ Euro 1,833 1.52 (6)
Swiss franc........ French franc 2,138 4.36 (26)
Swiss franc........ U.S. dollar Italian lira 144,066 1,785.35 8,062
U.S. dollar Malaysian ringgit 131,760 3.79 185
------- -----
Total 360,989 7,365
------- -----31,765 1.67 771
------ ---
Total.............. 35,736 739
====== ===
Foreign currency forward exchange contracts to buy Singapore dollars for foreign currencies:
Singapore dollardollar... Euro 4,968 1.68 31418 1.61 (2)
Singapore dollardollar... Japanese yen (1) 36,186 1.61 (410)
Singapore dollar U.S. dollar 77,600 1.66 180
------- -----
Total 118,754 (199)
------- -----21,035 0.02 323
------ ---
Total.............. 21,453 321
====== ===
Foreign currency forward exchange contracts to buy French francs for foreign
currencies:
French francfranc....... U.S. dollar 43,000 6.43 (547)15,000 7.79 1,551
------ -----
Total 43,000 (547)
------ -----
Foreign currency forward exchange contracts to buy Japanese yen for foreign
currencies:
Japanese yen Euro 19,558 104.92 460
Japanese yen(1) French franc 17,015 6.16 696
------ -----
Total 36,573 1,156
------ -----
Foreign currency forward exchange contracts to buy Euro for foreign currencies:
Euro Malaysian ringgit 781 3.85 (2)
Euro U.S. dollar 23,000 1.02 379
------ ---
Total 23,781 377
------ ---
Foreign currency forward exchange contracts to buy Swiss francs for foreign
currencies:
Swiss franc French franc 2,706 4.09 (2)
Swiss franc U.S. dollar 16,345 1.58 (236)
------ -----
Total 19,051 (238)
------ -----Total.............. 15,000 1,551
====== =====
Foreign currency forward exchange contracts to buy Swedish kroners for foreign currencies:currencies
Swedish kronerkroner..... U.S. dollar 7,000 8.43 (56)4,560 9.49 7
----- ----
Total 7,000 (56)
----- -----
Total.............. 4,560 7
===== =
Foreign currency forward exchange contracts to buy British pounds for foreign currencies:
British poundpound...... French franc 2,419 10.19 811,491 11.06 (73)
----- --
Total 2,419 81
----- - --
TOTAL 611,567 7,939----
Total.............. 1,491 (73)
===== ====
TOTAL.............. 780,423 10,943
======= ===========
- ----------------------
(1) Forward exchange rate for 100 Japanese yen.
4386
The following table provides information about the Company'sour foreign exchange
forward contracts at December 31, 19981999 (in thousands of U.S. dollars):
Average Contractual
Forward Exchange
Buy Sell Notional Amount Rate Fair Value
------------------ ------------------- ------------------------------ --------------------------- -------------------- ------------------------------ --------------------- ------------
Foreign currency forward exchange contracts to buy U.S. dollars for foreign currencies:
U.S. dollar........ Euro 50,373 1.02 (943)
U.S. dollar........ British pound 34,790 1.62 61
U.S. dollar........ Italian lira 144,066 1,785.35 8,062
U.S. dollar........ Malaysian ringgit 131,760 3.79 185
------- -----
Total.............. 360,989 7,365
======= =====
Foreign currency forward exchange contracts to buy Singapore dollars for foreign currencies:
Singapore dollar... Euro 4,968 1.68 31
Singapore dollar... Japanese yen (1) 36,186 1.61 (410)
Singapore dollar... U.S. dollar German mark 47,910 1.70 (827)
U.S. dollar Euro 1,757 1.19 26
U.S. dollar French franc 10,000 5.53 118
U.S. dollar Italian lira 121,832 1,738.98 (10,124)
U.S. dollar Japanese yen 1,304 121.55 (79)
U.S. dollar Malaysian ringgit 10,142 3.80 0
U.S. dollar Spanish peseta 2,337 144.50 (41)77,600 1.66 180
------ -----
--------
Total 195,282 (10,927)
------- --------Total.............. 118,754 (199)
======= =====
Foreign currency forward exchange contracts to buy French francs for foreign
currencies:
French franc Singapore dollar 1,136 0.30 (4)
French francfranc....... U.S. dollar 130,000 5.60 (418)
------- -----
Total 131,136 (422)
------- -----
Foreign currency forward exchange contracts to buy Italian lira for foreign
currencies:
Italian lira(1) Singapore dollar 565 1.00 (5)
Italian lira U.S. dollar 115,000 1,662.10 187
Italian lira(1) Malaysian ringgit 62 2.35 0
-- ---
Total 115,627 182
------- ---
Foreign currency forward exchange contracts to buy Singapore dollars for foreign
currencies:
Singapore dollar Japanese yen(2) 25,653 1.39 (839)
Singapore dollar U.S. dollar 78,000 1.64 (274)43,000 6.43 (547)
------ -----
Total 103,653 (1,113)
------- -------
Foreign currency forward exchange contracts to buy Swiss francs for foreign
currencies:
Swiss franc French franc 2,851 4.11 (8)
Swiss franc Italian lira 731 1,218.50 2
Swiss franc Singapore dollar 202 1.23 (5)
Swiss franc U.S. dollar 40,205 1.36 (404)
------ -----
Total 43,989 (415)
------ -----
Foreign currency forward exchange contracts to buy German marks for foreign
currencies:
German marks Malaysian ringgit 396 2.28 0
German marks Singapore dollar 4,138 1.02 114
German marks U.S. dollar 14,000 1.69 132
------ ---
Total 18,534 246
------ ---
Foreign currency forward exchange contracts to buy Euro for foreign currencies:
Euro French franc 8,503 6.58 (30)
----- ----
Total 8,503 (30)
----- ----Total.............. 43,000 (547)
====== =====
Foreign currency forward exchange contracts to buy Japanese yen for foreign
currencies:
Japanese yenyen....... Euro 19,558 104.92 460
Japanese yen(1).... French franc 5,652 21.69 380
Japanese yen Italian lira 1,739 14.41 32
Japanese yen(2) Malaysian ringgit 104 3.20 0
--- ---
Total 7,495 41217,015 6.16 696
------ -----
---Total.............. 36,573 1,156
====== =====
Foreign currency forward exchange contracts to buy Malaysian ringgiteuro for foreign currencies:
Euro............... Malaysian ringgit 781 3.85 (2)
Euro............... U.S. dollar 5,470 3.80 023,000 1.02 379
------ -----
---
Total 5,470 0Total.............. 23,781 377
====== =====
Foreign currency forward exchange contracts to buy Swiss francs for foreign currencies
Swiss franc........ French franc 2,706 4.09 (2)
Swiss franc........ U.S. dollar 16,345 1.58 (236)
------ -----
---Total.............. 19,051 (238)
====== =====
Foreign currency forward exchange contracts to buy Swedish kroners for foreign currencies:
Swedish kroner..... U.S. dollar 7,000 8.43 (56)
----- -----
Total.............. 7,000 (56)
===== =====
Foreign currency forward exchange contracts to buy British pounds for foreign currencies:
British poundpound...... French franc 3,510 9.44 (32)
British pound Italian lira 1,671 2,730.00 192,419 10.19 81
----- ---
Total 5,181 (13)
-----
----
TOTAL 634,870 (12,080)Total.............. 2,419 81
===== =====
TOTAL.............. 611,567 7,939
======= ========
- -----------------=====
- ----------------------
(1) Forward exchange rate for 1000 Italian lira.
(2) Forward exchange rate for 100 Japanese yen.
44ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
87
Item 10: Directors and Officers of Registrant
Supervisory Board
The management of the Company is entrusted to the Management Board
under the supervision of the Supervisory Board. The Supervisory Board advises
the Management Board and is responsible for supervising the policies pursued by
the Management Board and the general course of affairs of the Company and its
business. In fulfilling their duties under Dutch law, the members of the
Supervisory Board must serve the interests of the Company and its business.
The Supervisory Board consists of such number of members as is resolved
by the general meeting of shareholders upon proposal of the Supervisory Board,
with a minimum of six members. The members of the Supervisory Board are
appointed upon proposal of the Supervisory Board by the general shareholders'
meeting by a majority of the votes cast at a meeting where at least one-third of
the outstanding share capital is present or represented.
Pursuant to various shareholders agreements, the membership of the
Supervisory Board of the Company must include three members designated by the
French shareholders from the Board of Directors of FT1CI (following the merger
of FT2CI and FT1CI, a corporation owned by CEA-Industrie and France Telecom),
and three members designated by the Italian shareholder. See "Item 4: Control of
Registrant--Shareholder Agreements." The Supervisory Board of the Company
currently includes two members who are not affiliated with ST Holding and its
direct and indirect shareholders.
The members of the Supervisory Board appoint a chairman and vice
chairman of the Supervisory Board from among the members of the Supervisory
Board (with approval of at least three-quarters of the members of the
Supervisory Board) and may appoint one or more members as a delegate supervisory
director to communicate on a regular basis with the Management Board.
Resolutions of the Supervisory Board require the approval of at least
three-quarters of its members. The Supervisory Board must meet upon request by
two or more of its members or by the Management Board. The Supervisory Board has
adopted internal regulations to clarify the manner by which it carries out the
supervisory duties imposed upon it by law, the Company's Articles of Association
and resolutions of the shareholders and the Supervisory Board itself. By such
resolution the Supervisory Board has authorized (i) the establishment of a
secretariat (headed by an individual approved by it and appointed for a one-year
renewable term) whose functions are to: (a) assist the Chairman and Vice
Chairman of the Supervisory Board in the operations of the Board, (b) implement
and oversee the execution within the Company of decisions adopted by the
Supervisory Board, and (c) cooperate in and contribute to the execution of the
functions of the designated Secretary and Assistant Secretary of the Supervisory
Board; (ii) (a) the possibility of the appointment by the members of the
Supervisory Board of assistants and (b) the appointment by such board of two
controllers to exercise operational and financial control over the operations of
the Company who, with assistants, will also review operation reports and the
implementation of Supervisory Board decisions; and (iii) the establishment by
the Supervisory Board of advisory committees. In addition, the Supervisory Board
has established procedures for the preparation of Supervisory Board resolutions
and the setting of the Board's calendar.
Members of the Supervisory Board must retire no later than at the
ordinary general meeting of shareholders held after a period of three years
following their appointment, but may be re-elected. A member of the Supervisory
Board must retire at the ordinary general meeting of shareholders held in the
year in which he reaches the age prescribed by Dutch law for retirement of a
supervisory director (currently at age 72). Members of the Supervisory Board may
be suspended or dismissed by the general meeting of shareholders. The
Supervisory Board may make a proposal to the general meeting of shareholders for
the suspension or dismissal of one or more of its members. The members of the
Supervisory Board may receive compensation if authorized by the general meeting
of shareholders.
The shareholders agreement between the group of French shareholders and
the group of Italian shareholders, as shareholders of ST Holding, also includes
certain provisions requiring the approval of the Supervisory Board of ST Holding
for certain actions by ST Holding, the Company and its subsidiaries. In
addition, pursuant to the shareholders agreement among the group of French
shareholders and a decree issued by certain Ministries of The Republic of
France, the approval by members of the Supervisory Board appointed by the French
shareholders of certain actions to be taken by the Company or its subsidiaries
requires the approval of the Board of
45PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
88
Directors of FT1CI and is subject to a veto by certain Ministries of
The Republic of France. These requirements for the prior approval of various
actions to be taken by the Company and its subsidiaries may give rise to a
conflict of interest between the interests of the Company and the individual
shareholders approving such actions, and may result in a delay in the ability of
the Management Board to respond as quickly as may be necessary in the rapidly
changing environment of the semiconductor industry. Such approval process is
subject to the provisions of Dutch law requiring members of the Supervisory
Board to act independently in the supervision of the management of the Company.
The members of the Supervisory Board are:
Name Position Year Appointed Age
- ---- -------- -------------- ---
Jean-Pierre Noblanc Chairman 1994 61
Bruno Steve Vice Chairman 1989 58
Tom de Waard Member 1998 53
Remy Dullieux Member 1993 49
Riccardo Gallo Member 1997 56
Francis Gavois Member 1998 64
Alessandro Ovi Member 1994 56
Robert M. White Member 1996 61
Jean-Pierre Noblanc has been the Chairman of the Supervisory Board
since May 31, 1999, and has been a member of the Supervisory Board since 1994.
He served as Vice Chairman of the Supervisory Board from June 1996 to May 31,
1999. Mr. Noblanc is presently General Manager of the Components Sector of CEA
Industrie. Prior to joining CEA Industrie, Mr. Noblanc served at CNET, the
Research Center of France Telecom, as Director of the Applied Research Center of
Bagneux and of the Microelectronics Center of Grenoble. Mr. Noblanc holds a
degree in engineering from the Ecole Superieure d'Electricite and a doctoral
degree in physical sciences from the University of Paris. Mr. Noblanc is an
Associate Member of the Committee on Applications of the French Academy of
Sciences and a director of Thomson S.A. Mr. Noblanc also serves on the Board of
Directors of CEA Industrie, FT1CI and Picogiga S.A.
Bruno Steve has been a member of the Company's Supervisory Board since
1989 and its Chairman until May 31, 1999. He served as Vice Chairman of the
Supervisory Board from 1989 to July 1990. From July 1990 to March 1993, Mr.
Steve served as Chairman of the Supervisory Board. He has been with I.R.I.,
Finmeccanica's parent company, Finmeccanica and other affiliates of I.R.I. in
various senior positions for over 17 years. Mr. Steve is currently President of
the board of statutory auditors of Alitalia S.p.a., Italia Express S.p.a. and
Iritecna S.p.a. in liquidazione and member of statutory auditors of Stretto di
Messina S.p.A. and Sigma S.p.A. Until December 1999, he served as Chairman of
MEI. He served as the Chief Operating Officer of Finmeccanica from 1988 to July
1997 and Chief Executive Officer from May 1995 to July 1997. He was Senior Vice
President of Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior to
1984, Mr. Steve served in several key executive positions at Telecom Italia,
I.R.I.'s holding company for the telecommunications sector.
Tom de Waard was appointed to the Supervisory Board in 1998. Mr. de
Waard is a partner of Clifford Chance, a leading English law firm, since March
2000. Prior to that, he was a partner at Stibbe, Simont, Monahan, & Duhot, where
he has held several positions since 1979 and has gained extensive experience
working with major international companies, particularly with respect to
corporate finance. He is a member of the Amsterdam bar and received his law
degree from Leiden University in 1979.
Remy Dullieux has been a member of the Supervisory Board since 1993. He
is a graduate of the Ecole Polytechnique. Since June 1996, Mr. Dullieux has
served as a France Telecom Executive Manager for the Northern and Eastern areas
of France. From 1991 to June 1996, Mr. Dullieux served as Group Executive Vice
President for Strategic Procurement and Development of France Telecom. From 1985
to 1988, Mr. Dullieux served as Regional Manager of Creteil. Mr Dullieux also
serves on the Board of Directors of FT1CI.
Riccardo Gallo was appointed to the Supervisory Board in 1997. He is
Associate Professor of Industrial Economics at the Engineering Faculty of "La
Sapienza" University in Rome. He has also been a member of the board of
directors of Comitato Sir from 1981 until the present. From 1982 to 1991, he
served as Director General at
46
the Italian Ministry of the National Budget. In the early 1990s, he served as
Vice Chairman of I.R.I. In 1994, he was appointed by the Italian Minister of
Industry as Extraordinary Commissioner of Fidia, a research-oriented
pharmaceutical company.
Francis Gavois was appointed to the Supervisory Board in 1998. Mr.
Gavois is the Chairman of the Supervisory Board of ODDO et Cie. He is also a
member of the Board of Directors of Plastic Omnium, FT1CI and the Supervisory
Board of the Consortium de Realisation (CDR). From 1984 to 1997, Mr. Gavois held
several positions, including Chairman of the Board of Directors and President of
Banque Francaise du Commerce Exterieur (BFCE). Prior to that time Mr. Gavois
held positions in the French government. He is Inspecteur des Finances and a
graduate of the Institut d'Etudes Politiques de Paris and the Ecole Nationale
d'Administration.
Alessandro Ovi has been a member of the Supervisory Board since 1994.
He received a doctoral degree in Nuclear Engineering from the Politecnico in
Milan and a masters degree in operations research from Massachusetts Institute
of Technology. He currently serves on the boards Italtel, Carnegie Mellon
University and Corporation Development Committee of the Massachusetts Institute
of Technology. Until April 2000, Mr. Ovi was the Chief Executive Officer of
Tecnitel S.p.a., a subsidiary of Telecom Italia Group. Prior to joining Tecnitel
S.p.A., Mr. Ovi was the Senior Vice President of International Affairs and
Communications at I.R.I.
Robert M. White was appointed to the Supervisory Board in June 1996.
Mr. White is a University Professor and Director of the Data Storage Systems
Center at Carnegie Mellon University and serves as a member of several corporate
boards, including those of Ontrack Data Systems, Inc., and Read-Rite, Inc. He is
a member of the U.S. National Academy of Engineering. From 1990 to 1993, Mr.
White served as Under Secretary of Commerce for Technology in the United States
Government. Prior to 1990, Mr. White served in several key executive positions
at Xerox Corporation, Control Data Corporation and MCC. He received a doctoral
degree in physics from Stanford University and graduated with a degree in
physics from Massachusetts Institute of Technology.
The Supervisory Board has established an Audit Committee currently chaired by
Mr. de Waard and also comprised of Messrs. Gavois, Ovi and White, a Compensation
Committee comprised of the Chairman (Mr. Noblanc), the Vice Chairman (Mr. Steve)
and an independent director (Mr. White) and a Strategic Committee comprised of
Messrs. Noblanc and Steve.
Management Board
The management of the Company is entrusted to the Management Board
under the supervision of the Supervisory Board. Under the Articles of
Association, the Management Board must obtain prior approval from the
Supervisory Board for (i) all proposals to be submitted to a vote at the general
meeting of shareholders; (ii) the formation of all companies, acquisition or
sale of any participation, and conclusion of any cooperation and participation
agreement; (iii) all multi-year plans of the Company and the budget for the
coming year, covering investment policy, policy regarding research and
development, as well as commercial policy and objectives, general financial
policy, and policy regarding personnel; and (iv) all acts, decisions or
operations covered by the foregoing and constituting a significant change with
respect to decisions already taken by the Supervisory Board. The Management
Board must seek approval from the general meeting of shareholders for decisions
relating to (i) the sale of all or of an important part of the Company's assets
or concerns; and (ii) all mergers, acquisitions or joint ventures which the
Company wishes to enter into and which the Supervisory Board considers to be of
material significance. In addition, under the Articles of Association, the
Supervisory Board may specify by resolution certain actions by the Management
Board that require its prior approval. Following the adoption of such a
resolution, the actions by the Management Board requiring such prior approval
include the following: (i) modification of its Articles of Association; (ii)
change in its authorized share capital, issue, acquisition or disposal of its
own shares, change in any shareholder rights or issue of any instruments
granting an interest in its capital or profits; (iii) liquidation or disposal of
all or a substantial and material part of its assets or any shares it holds in
any of its subsidiaries; (iv) entering into any merger, acquisition or joint
venture agreement (and, if substantial and material, any agreement relating to
intellectual property) or formation of a new company; (v) approval of such
company's draft consolidated balance sheets and financial statements or any
profit distribution by such company; (vi) entering into any agreement with any
of the direct or indirect French or Italian shareholders outside the normal
course of business; (vii) submission of documents reporting on (a) approved
policy, expected progress and results and (b) strategic long-term business plans
and consolidated annual budgets or any modifications to such; (viii) preparation
of long-term business plans and annual budgets; (ix) adoption and implementation
of such long-term business plans and
47
annual budgets; (x) approval of all operations outside the normal course of
business, including operations already provided for in the annual budget; and
(xi) approval of the quarterly, semi-annual and annual consolidated financial
statements prepared in accordance with internationally accepted accounting
principles. Such resolution also requires that the Management Board obtain prior
approval from the Supervisory Board for (i) the appointment of the members of
the statutory management, administration and control bodies of the Company's
French and Italian subsidiaries; and (ii) the nomination of the statutory
management, administration and control bodies of the Company and each of the
Company's other direct and indirect subsidiaries followed by confirmation to the
Supervisory Board of such nominees' appointments. The general meeting of
shareholders may also specify certain actions of the Management Board that
require shareholder approval. The Company's Articles of Association provide that
the Management Board must obtain shareholder approval prior to (i) the sale of
all or an important part of the Company's assets and concerns; and (ii) all
mergers, acquisitions or joint ventures which the Company wishes to enter into
and which the Supervisory Board considers to be of material significance. See
"Item 1: Description of Business" and "Item 13: Interest of Management in
Certain Transactions."
The Management Board shall consist of such number of members as
resolved by the general meeting of shareholders upon the proposal of the
Supervisory Board. The members of the Management Board are appointed for three
year terms upon proposal by the Supervisory Board at the general shareholders'
meeting by a majority of the votes cast at a meeting where at least one-third of
the outstanding share capital is present or represented. The Supervisory Board
appoints one of the members of the Management Board to be chairman of the
Management Board (upon approval of at least three-quarters of the members of the
Supervisory Board). Resolutions of the Management Board require the approval of
a majority of its members. Mr. Pasquale Pistorio, the Company's President and
Chief Executive Officer, is currently the sole member of the Management Board.
His term expires in 2002.
The general meeting of shareholders may suspend or dismiss one or more
members of the Management Board at a meeting at which at least one-half of the
outstanding share capital is present or represented. No quorum is required if a
suspension or dismissal is proposed by the Supervisory Board. The Supervisory
Board may suspend members of the Management Board, but a general meeting of
shareholders must be convened within three months after such suspension to
confirm or reject the suspension. The Supervisory Board shall appoint one or
more persons who shall, at any time, in the event of absence or inability to act
of all the members of the Management Board, be temporarily responsible for the
management of the Company. Upon delegation from the Supervisory Board, the
Compensation Committee determines the compensation and other terms and
conditions of employment of the members of the Management Board.
Executive Officers
The executive officers of the Company support the Management Board in
its management of the Company, without prejudice to the Management Board's
ultimate responsibility. The Company is organized in a matrix structure with
geographical regions interacting with product divisions, bringing all levels of
management closer to the customer and facilitating communication among research
and development, production, marketing and sales organizations. The executive
officers of the Company are:PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Years in
Years with Semiconductor
Name Position Company(1) Industry Age
---- -------- ---------- ------------- ---Page
Pasquale Pistorio President and Chief Executive Officer 20 36 64
Georges Auguste Corporate Vice President, Total Quality and 13 26 51
Environmental Management
Laurent Bosson Corporate Vice President, Front-end 17 17 57
Manufacturing
Carlo Bozotti Corporate Vice President, Memory Products Group 23 23 47
Salvatore Castorina Corporate Vice President, Discrete and 18 34 63
Standard ICs Group
48
Years in
Years with Semiconductor
Name Position Company(1) Industry Age
---- -------- ---------- -------- ---
Alain Dutheil Corporate Vice President, Strategic Planning 17 30 55
and Human Resources
Philippe Geyres Corporate Vice President, Consumer and 16 24 48
Microcontroller Group
Maurizio Ghirga Corporate Vice President, Chief Financial 17 17 62
Officer
Jean-Claude Marquet Corporate Vice President, Asia/Pacific 14 33 58
Region
Pier Angelo Martinotti Corporate Vice President, New Ventures 19 32 59
Group
Joel Monnier Corporate Vice President, Central Research 17 26 54
and Development
Piero Mosconi Corporate Vice President, Treasurer 36 36 60
Carmelo Papa Corporate Vice President, Region Five 16 16 51
Richard Pieranunzi Corporate Vice President, Americas Region 19 34 61
Aldo Romano Corporate Vice President, Telecommunications, 35 35 59
Peripherals and Automotive Group
Giordano Seragnoli Corporate Vice President, Back-end 35 37 63
Manufacturing and Subsystems Products Group
Keizo Shibata Corporate Vice President, Japan Region 8 35 63
Enrico Villa Corporate Vice President, European Region 32 32 59
- --------------
(1) Including years with Thomson Semiconducteurs or SGS Microelettronica.
Pasquale Pistorio has more than 36 years of experience in the
semiconductor industry. After graduating in Electrical Engineering from the
Polytechnical University of Turin in 1963, he started his career selling
Motorola products. Mr. Pistorio joined Motorola in 1967, becoming Director of
World Marketing in 1977 and General Manager of the International Semiconductor
Division in 1978. Mr. Pistorio joined SGS Microelettronica as President and
Chief Executive Officer in 1980 and became President and Chief Executive Officer
of the Company upon its formation in 1987.
Georges Auguste has served as Corporate Vice President, Total Quality
and Environmental Management since 1999. Mr. Auguste received a degree in
engineering from the Ecole Superieure d'Electricite (SUPELEC) in 1974 and a
diploma in business administration from the Caen University in 1976. Prior to
joining the Company, Mr. Auguste worked with Philips Components from 1974 to
1986, in various positions in the field of manufacturing. From 1990 to 1997 he
headed the Company's operations in Morocco and from 1997 to 1999 Mr. Auguste
served as director of Total Quality and Environmental Management.
Laurent Bosson has served as Corporate Vice President, Front-end
Manufacturing and VLSI Fabs since 1989 and from 1992 to 1996 he was given
additional responsibility as President and Chief Executive Officer of the
Company's operations in the Americas. Mr. Bosson received a Masters degree in
Chemistry from the University of Dijon in 1969. He joined Thomson-CSF in 1964
and has held several positions in engineering and manufacturing. In 1982, Mr.
Bosson was appointed General Manager of the Tours and Alencon facilities of
Thomson Semiconducteurs. In 1985, he joined the French subsidiary of SGS
Microelettronica as General Manager of the Rennes, France manufacturing
facility.
Carlo Bozotti has served as Corporate Vice President, Memory Products
since August 1998. Mr. Bozotti joined SGS Microelettronica in 1977 after
graduating in Electronic Engineering from the University of Pavia. Mr. Bozotti
served as Product Manager for the Industrial, Computer Peripheral and Telecom
divisions and as Product
49
Manager for the Monolithic Microsystems' Telecom business unit from 1986 to
1987. He was appointed Director of Corporate Strategic Marketing and Key
Accounts for the Headquarters Region in 1988 and became Vice President,
Marketing and Sales, Americas Division in 1991. Mr. Bozotti has served as
Corporate Vice President, Memory Products since August 1998, after having served
as Corporate Vice President, Europe and Headquarters Region from 1994 to 1998.
Salvatore Castorina has served as Corporate Vice President, Discrete
and Standard ICs Group since 1989. Mr. Castorina received his engineering degree
in Electronics from the Polytechnical University of Turin and began his career
as a teacher of electrical and electronic technologies prior to joining
Thomson-CSF in Milan in 1965. In 1967, he joined Motorola Semiconductors and
held various positions in sales and marketing. In 1981, Mr. Castorina joined the
Company as General Manager of Transistors in Catania and became the General
Manager of the Company's Discrete Division in 1989.
Alain Dutheil has served as Corporate Vice President, Strategic
Planning and Human Resources since 1994 and 1992, respectively. Mr. Dutheil is
also President of the Company's French subsidiary. After graduating in
Electrical Engineering from the Ecole Superieure d'Ingenieurs de Marseilles
(ESIM), Mr. Dutheil joined Texas Instruments in 1969 as a Production Engineer,
becoming Director for Discrete Products in France and Human Resources Director
for Texas Instruments, France in 1980 and Director of Operations for Texas
Instruments, Portugal in 1982. He joined Thomson Semiconducteurs in 1983 as
General Manager of a plant in Aix-en-Provence, France and then became General
Manager of the Company's Discrete Products Division. From 1989 to 1994, Mr.
Dutheil served as Director for Worldwide Back-end Manufacturing, in addition to
serving as Corporate Vice President for Human Resources from 1992 until the
present.
Philippe Geyres has served as Corporate Vice President, General Manager
Consumer and Microcontroller Group (formerly Programmable Products Group) since
1990. Mr. Geyres graduated from the Ecole Polytechnique in 1973 and began his
career with IBM in France before joining Schlumberger Group in 1980 as Data
Processing Director. He was subsequently appointed Deputy Director of the IC
Division at Fairchild Semiconductors. Mr. Geyres joined Thomson Semiconducteurs
in 1983 as Director of the Bipolar Integrated Circuits Division. He was
appointed Strategic Programs Director in 1987 and, later the same year, became
Corporate Vice President, Strategic Planning of the Company.
Maurizio Ghirga became Corporate Vice President, Chief Financial
Officer in 1987, after having served as chief financial controller of SGS
Microelettronica since 1983. Mr. Ghirga has a degree in Business Administration
from the University of Genoa. He spent more than ten years of his career in
various financial capacities at ESSO Company (an Exxon subsidiary in Italy) and
prior to joining the Company was Financial Controller of one of the largest
refinery plants in Italy and of an ESSO chemical subsidiary.
Jean-Claude Marquet has served as Corporate Vice President,
Asia/Pacific Region since July 1995. After graduating in Electrical and
Electronics Engineering from the Ecole Breguet Paris, Mr. Marquet began his
career in the French National Research Organisation and later joined Alcatel. In
1969, he joined Philips Components. He remained at Philips until 1978, when he
joined Ericsson, eventually becoming President of Ericsson's French operations.
In 1985, Mr. Marquet joined Thomson Semiconducteurs as Vice President Sales and
Marketing, France. Thereafter, Mr. Marquet served as Vice President Sales and
Marketing for France and Benelux, and Vice President Asia Pacific and Director
of Sales and Marketing for the region.
Pier Angelo Martinotti has served as Corporate Vice President, General
Manager New Ventures Group since 1994. A graduate in Electronic Engineering from
the Polytechnical University of Turin, Mr. Martinotti began his career at the
Company in 1965 as an Application and Marketing Engineer. In 1968, he joined
Motorola Semiconductors in the area of strategic marketing in Europe, and in
1975 became the Marketing (Sales) Director for Europe. From 1986 to 1990, Mr.
Martinotti was Chief Executive Officer of Innovative Silicon Technology, a
former subsidiary of the Company. Mr. Martinotti was appointed Director of
Corporate Strategic Planning in 1990.
Joel Monnier has served as Corporate Vice President, Director of
Central Research and Development since 1989. After graduating in Electrical
Engineering from the Institut National Polytechnique of Grenoble, Ecole
Nationale Superieure de Radio Electricite, Mr. Monnier obtained a doctoral
degree in microelectronics at LETI/CENG. He began his career in the
semiconductor industry in 1968 as a researcher with CENG, and
50
subsequently joined the research and development laboratories of Texas
Instruments in Villeneuve Loubet, France and Houston, Texas, eventually becoming
Engineering Manager and Operation Manager at Texas Instruments. Mr. Monnier
joined Thomson-CSF in 1983 as head of the research and manufacturing unit of
Thomson Semiconducteurs. In 1987, he was appointed Vice President and Corporate
Director of Manufacturing.
Piero Mosconi has served as Corporate Vice President, Treasurer since
1987. After graduating in accounting from Monza in 1960, Mr. Mosconi joined the
faculty at the University of Milan. Mr. Mosconi worked with an Italian bank
before joining the Foreign Subsidiaries Department at SGS Microelettronica in
1964 and becoming Corporate Director of Finance in 1980.
Carmelo Papa has served as Corporate Vice President, Region Five since
January 2000. Mr . Papa received his degree in nuclear physics at Catania
University. Mr. Papa joined the Company in 1983 and since 1986 has been Director
of Product Marketing and Customer Service for Transistors and Standard ICs.
During this time, he has overseen a substantial growth both in the product
portfolio and the sales volume. He has also played a key role both in the
expansion of the Company's facility in Catania, Italy, from its origin as a
low-cost assembly plant to its present position as one of the Company's most
important and dynamic centres, hosting advanced R&D in areas ranging from
process technology to fuzzy logic and other "soft computing" disciplines,
leading-edge wafer manufacturing and Sales and Marketing HQ for the Company's
Discrete and Standard Circuits division.
Richard Pieranunzi has served as Corporate Vice President, Americas Region since
August 1996. Mr. Pieranunzi received his BSEE from the University of Rhode
Island, and started his career in process engineering. Later, he joined
Motorola's international marketing organization, including in Europe where he
held management positions in sales and strategic marketing and applications. Mr.
Pieranunzi joined SGS Semiconducteurs in 1981 as Marketing and Sales Manager
and, upon the formation of the Company in 1987, he became Vice President
Marketing and Sales for the U.S. organization. For three years, Mr. Pieranunzi
headed the Company's Corporate Strategic Marketing and Corporate Key Account
programs.
Aldo Romano has served as Corporate Vice President, General Manager
Telecommunications, Peripherals and Automotive Group (formerly Dedicated
Products Group) since 1987. Mr. Romano is also Managing Director of the
Company's Italian subsidiary. A graduate in Electronic Engineering from the
University of Padua in 1963, Mr. Romano joined SGS Microelettronica in 1965 as a
designer of linear ICs, becoming head of the linear IC design laboratory in 1968
and head of Marketing and Applications in 1976. Mr. Romano became Director of
the Bipolar IC Division (which has evolved into the Dedicated Products Group) in
1980.
Giordano Seragnoli has served as Corporate Vice President, General
Manager Subsystems Products Group since 1987 and since 1994, Director for
Worldwide Back-end Manufacturing. After graduating in Electrical Engineering
from the University of Bologna, Mr. Seragnoli joined the Thomson Group as RF
Application Designer in 1962 and joined SGS Microelettronica in 1965.
Thereafter, Mr. Seragnoli served in various capacities within the Company,
including Strategic Marketing Manager and Subsystems Division Manager,
Subsystems Division Manager (Agrate), Technical Facilities Manager, Subsystems
Division Manager and Back-End Manager.
Keizo Shibata has served as Corporate Vice President and President of
the Company's Japanese subsidiary since 1992. Mr. Shibata obtained bachelors and
masters degrees in Engineering from Osaka University and has 31 years of
experience in the semiconductor industry. Prior to joining the Company, Mr.
Shibata was employed with Toshiba Corporation since 1964 in various capacities.
From 1987 to 1988, Mr. Shibata served as Chairman of both World Semiconductor
Trade Statistics and the Trade Policy Committee of the Electric Industry
Association of Japan.
Enrico Villa has served as Corporate Vice President, Region Five since
January 1, 1998. Mr. Villa has served in various capacities within the Company
since 1968 after obtaining a degree in Business Administration from the
University of Genoa and has 30 years of experience in the semiconductor
industry. He is currently a member of the European Electronics Component
Association ("EECA") for which he is now Chairman of the European Semiconductor
Council as well as Chairman for Europe at the Joint Steering Committee of the
World Semiconductor Council.
51
As is common in the semiconductor industry, the Company's success
depends to a significant extent upon, among other factors, the continued service
of its key senior executives and research and development, engineering,
marketing, sales, manufacturing, support and other personnel, and on its ability
to continue to attract, retain and motivate qualified personnel. The competition
for such employees is intense, and the loss of the services of any of these key
personnel without adequate replacement or the inability to attract new qualified
personnel could have a material adverse effect on the Company. The Company does
not maintain insurance with respect to the loss of any of its key personnel.
Item 11: Compensation of Directors and Officers
The aggregate cash compensation payable for 1999 to the members of the
Supervisory Board by the Company was approximately $460,000. The amount of cash
compensation for 1999 paid to the executive officers of the Company and members
of the Management Board as a group by the Company and its subsidiaries was
approximately $8.5 million.
In 1989, the Company established a Corporate Executive Incentive
Program (the "EIP") that entitles selected executives and members of the
Management Board to a yearly bonus based upon the individual performance of such
executives. The maximum bonus awarded under the EIP is based upon a percentage
of the executive's or member's salary and is adjusted to reflect the overall
performance of the Company. The participants in the EIP must satisfy certain
personal objectives that are focused on customer service, profit, cash flow and
market share.
The executive officers and the Management Board were also covered in
1999 under certain group life and medical insurance programs provided by the
Company. The aggregate additional amount set aside by the Company in 1999 to
provide pension, retirement or similar benefits for executive officers and the
Management Board of the Company as a group is estimated to have been
approximately $3.3 million.
Item 12: Options to Purchase Securities from Registrant or Subsidiaries
Stock Option Plans
The following description of the Company's stock options plans has been
adjusted for the 2:1 stock split effected on June 16, 1999 and the 3:1 stock
split effected on May 5, 2000. Taking into account these stock splits, the total
options outstanding as of May 27, 2000 give the right to acquire 19,945,300
Common Shares by its employees and 319,500 Common Shares by members and
professionals of the Supervisory Board.
All options to purchase Common Shares under the Company's first stock
option plan (the "1989 Stock Option Plan") expired on December 18, 1999.
On October 20, 1995, the shareholders of the Company approved
resolutions authorizing the Supervisory Board for a period of five years to
adopt and administer a new stock option plan which provides for the granting to
managers and professionals of the Company of options to purchase up to a maximum
of 33.0 million Common Shares (the "1995 Stock Option Plan"). The Company has
granted options to acquire a total of 23,851,200 shares pursuant to the 1995
Stock Option Plan as follows:
o The Company granted options to purchase 7,200,000 Common
Shares with an exercise price per Common Share of $6.04. All
such options will expire on March 1, 2004. As of May 27, 2000,
options to purchase 3,352,910 shares were outstanding.
o The Company granted options to purchase 3,873,000 Common
Shares with an exercise price per Common Share of $14.23,
which will expire on September 12, 2005. As of May 27, 2000,
options to purchase 3,805,050 shares were outstanding.
o The Company granted options to purchase 3,900,000 Common
Shares with an exercise price per Common Share of $12.03,
which will expire on July 28, 2006. As of May 27, 2000,
options to purchase 3,861,300 shares were outstanding.
52
o The Company granted options to purchase 8,878,200 Common
Shares with an exercise price per Common Shares of $24.88,
which will expire on September 16, 2007. As of May 27, 2000,
options to purchase 8,779,200 shares were outstanding.
The Company also made a special grant of options under the 1995 Stock
Option Plan to former employees of Arithmos, a company which designs controller
ICs for flat panel displays and LCD monitors with an exercise price of $55.25
and which will expire on January 24, 2008. As of May 27, 2000, options to
purchase 126,840 shares were outstanding pursuant to this grant.
As of May 27, 2000, of the total options outstanding under the 1995
Stock Option Plan, options to purchase 4,868,280 shares were held by executive
officers as a group.
In June 1996, the general meeting of shareholders approved the granting
of options to members and professionals of the Supervisory Board which
correspond to the right to purchase approximately 432,000 Common Shares of the
Company over a period of three years, beginning in 1996. The following options
have been granted:
o In 1996, the Company granted to members and professionals of
the Supervisory Board options to purchase 198,000 Common
Shares with an exercise price per Common Share of $9.00, which
will expire on October 22, 2004. As of May 27, 2000, options
to purchase 63,000 shares were outstanding.
o In 1997, the Company granted to members and professionals of
the Supervisory Board options to purchase 90,000 Common Shares
with an exercise price per Common Share of $14.23, which will
expire on September 12, 2005. As of May 27, 2000, options to
purchase 31,500 shares were outstanding.
o In 1998, the Company granted to members and professionals of
the Supervisory Board options to purchase 90,000 Common Shares
with an exercise price per Common Share of $12.03, which will
expire on July 28, 2006. As of May 27, 2000, options to
purchase 45,000 shares were outstanding.
In 1999, the general meeting of the shareholders voted to renew the
Supervisory Board Option Plan whereby members of the Supervisory Board may
receive, during the three-year period 1999-2001, at least the same number of
options as were granted during the first three-year period. The following
options have been granted:
o The Company granted options to members and professionals of
the Supervisory Board to purchase 180,000 Common Shares with
an exercise price per Common Share of $24.88 which will expire
on September 16, 2007. As of May 27, 2000, options to purchase
180,000 shares were outstanding.
Item 13: Interest of Management in Certain Transactions
The Company has formed a joint venture research and development center
with France Telecom R&D in the form of a GIE. France Telecom R&D is a research
laboratory that is wholly owned by France Telecom, one of the indirect
shareholders of the Company. See "Item 1: Description of Business--Research and
Development" and "Item 4: Control of Registrant." The research center is housed
at the Company's Crolles, France manufacturing facility, and is developing
submicron process technologies. The joint venture between the Company and France
Telecom R&D was created in 1990 before France Telecom became an indirect
shareholder of the Company.
The Company has signed an agreement providing for a research and
development cooperation with GRESSI, the research and development GIE formed by
France Telecom R&D and LETI, a research laboratory that is a department of
CEA-Industrie, the parent of one of the indirect shareholders of the Company.
See "Item 4: Control of Registrant." The objectives of the cooperation is to
develop basic know-how on innovative aspects of VLSI technology evolution which
can be transferred to industrial applications, and to address the development of
innovative process steps and process modules to be used in future generations of
VLSI products. The cooperation agreement was based upon a multi-year plan
through 1998, of which the Company bore half of the total cost. The cooperation
with GRESSI was superseded, as of January 1, 1999, by a tripartite cooperation
arrangement between the Company, France Telecom R&D and LETI, within the
framework of an extended GIE named Centre Commun de Microelectronique de
Crolles. This cooperation is directed towards sub 0.18 micron technologies with
a view to
53
preparing the technology to begin production of 12-inch wafers and associated
wafer fabrication processes. The tripartite cooperation is intended to last
until the end of 2002.
The Company participates in certain programs sponsored by the French
and Italian governments for the funding of research and development and
industrialization through direct grants as well as low interest financing. See
"Item 1: Description of Business--Public Funding." The shareholders of ST
Holding, the corporate parent of the Company's principle shareholder, are
controlled, directly or indirectly, by the governments of the Republics of
France and Italy. See "Item 4: Control of Registrant."
Sales to shareholders of the Company and their affiliates totaled $19.0
million in 1999.
PART II
Item 14: Description of Securities to be Registered
Not applicable.
PART III
Item 15: Default Upon Senior Securities
None.
Item 16: Changes in Securities and Changes in Security for
Registered Securities and Use of Proceeds
On April 26, 2000, the Company's shareholders approved a 3:1 stock
split, changing the par value of each Common Share to EUR 1.04. The changes
became effective May 5, 2000. After these changes and as of May 27, 2000 the
Company's authorized share capital was EUR 1,809,600,000 consisting of
1,200,000,000 Common Shares and 540,000,000 Preference Shares of EUR 1.04
nominal value each.
PART IV
Item 17: Financial Statements
Not applicable.
Item 18: Financial Statements
See "Item 19: Financial Statements and Exhibits" for a list of
financial statements filed pursuant to this Item 18.
54
Item 19: Financial Statements and Exhibits
With the exception of the items incorporated by reference elsewhere in
this annual report, the 1999 Annual Report is not deemed to be filed as part of
this annual report.
(a) Financial Statements
The financial statements, together with the report thereon of
PricewaterhouseCoopers N.V. dated January 25, 2000, appearing on pages 44-59
of the 1999 Annual Report, are incorporated herein by reference.
Reference Page
--------------------------------
1999 Annual
Form 20-F Report
-------------- -----------------
Financial Statements:
Report of Independent Accountants for Years Ended December 31, 2000, 1999 1998 and 1997.................................. -- 591998................ F-2
Consolidated Statement of Income for the Years Ended December 31, 2000, 1999 1998 and 1997.................................. -- 441998............. F-3
Consolidated Balance Sheet as ofat December 31, 19992000 and 1998............ -- 451999....................................... F-4
Consolidated Statement of Cash Flows for the Years Ended December 31, 2000, 1999 1998 and 1997....................................... -- 461998......... F-5
Consolidated Statement of Changes in Shareholders' Equity for the Years Ended December 31, 2000,
1999 1998 and 1997....................................... -- 471998.................................................................................. F-6
Notes to Consolidated Financial Statements............................. -- 48-58Statements........................................................ F-7
Financial Statement Schedules:
For each of the three years in the period ended December 31, 19992000 Schedule II
Valuation and
Qualifying Accounts.....................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......Schedule................................. S-2 --
(b) ExhibitsITEM 19. EXHIBITS
1.1 Articles of Association, as amended as of May 5, 2000, of
STMicroelectronics N.V. (incorporated by reference to the Company
2.1Annual Report on Form
20-F for the year ended December 31, 1999, as filed with the Commission on June
27, 2000)
4.1 Indenture, dated as of November 16, 2000, among STMicroelectronics
N.V. as issuer and The Bank of New York, as Trustee, of our Zero Coupon Senior
Convertible Bonds due 2010
8.1 Subsidiaries of the Company (see Note 3 to the Consolidated
Financial Statements)
2.210.1 Consent of PricewaterhouseCoopers N.V.
99.1 Pages 34 to 59 of the 1999 Annual Report, submitted to the
Securities and Exchange Commission as a Report on Form 6-K by
STMicroelectronics N.V. on June 19, 2000. With the exception
of the information on these pages, the 1999 Annual Report is
not deemed filed as part of this annual report on Form 20-F.
5589
CERTAIN TERMS
ASD........................ application-specific discrete technology
ASIC....................... application-specific IC
ASSP....................... application-specific standard product
ATM........................ asynchronous transfer mode
BCD........................ bipolar, CMOS and DMOS process technology
BiCMOS..................... bipolar and CMOS process technology
CAD........................ computer aided design
CIM........................ computer integrated manufacturing
CMOS....................... complementary metal oxide silicon
DMOS....................... diffused metal oxide silicon
DRAMS...................... dynamic random access memory
DSP........................ digital signal processor
EMAS....................... The Eco-Management and Audit Scheme (EAMS) is the voluntary European
Community scheme for companies performing industrial activities for the
evaluation and improvement of environmental performance
EEPROM..................... electrically erasable programmable read-only memory
EPROM...................... erasable programmable read-only memory
GPS........................ global positioning system
HCMOS...................... high-speed complementary metal-oxide-silicon
IC......................... integrated circuit
IGBT....................... insulated gate bipolar transistors
ISDN....................... integrated services digital network
JavaCard(TM)applets........ application software for smartcard developed on Java platform
Java....................... operating system developed by Sun Microsystems
Kbit....................... Kilobit
Mbit....................... Megabit
MCUs....................... microcontroller units
MIPS....................... million instructions per second
MOS........................ metal oxide silicon process technology
MOSFET..................... metal oxide silicon field effect transistor
MPEG....................... motion picture experts group
NVRAM...................... nonvolatile SRAM
OEM........................ original equipment manufacturer
OTP........................ one-time programmable
PROM....................... programmable read-only memory
RAM........................ random access memory
RF......................... radio frequency
RISC....................... reduced instruction set computing
ROM........................ read-only memory
SAM........................ serviceable available market
SLIC....................... subscriber line interface card
SPC........................ statistical process control
SRAM....................... static random access memory
STB........................ set-top box
TAM........................ total available market
VLSI....................... very large scale integration
VoIP....................... VoiceADSL............................asymetrical digital subscriber line
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
CDMA............................code division multiple access
CIM.............................computer integrated manufacturing
CMOS............................complementary metal oxide silicon
DMOS............................diffused metal oxide silicon
DRAMS...........................dynamic random access memory
DSP.............................digital signal processor
EMAS............................the Eco-Management and Audit Scheme (EAMS)
is the voluntary European Community scheme
for companies performing industrial
activities for the evaluation and
improvement of environmental performance
EEPROM..........................electrically erasable programmable read-only
memory
EPROM...........................erasable programmable read-only memory
GPS.............................global positioning system
HCMOS...........................high-speed complementary metal-oxide-silicon
IC..............................integrated circuit
IGBT............................insulated gate bipolar transistors
ISDN............................integrated services digital network
JavaCard(TM)applets.............application software for smartcard developed
on Java platform
Java............................operating system developed by Sun Microsystems.
Kbit............................Kilobit
Mbit............................Megabit
MCUs............................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
TAM.............................total available market
VLSI............................very large scale integration
VDSL............................very high-bit rate digital subscriber line
VoIP............................voice over Internet protocol
56WCDMA...........................wide-band CDMA
90
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, theThe registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report to be signedAnnual Report on its behalf by the undersigned, thereunto duly authorized.behalf.
STMICROELECTRONICS N.V.
Date: June 27, 2000May 15, 2001
By: /S/ PASQUALE PISTORIO
-----------------------/s/ Pasquale Pistorio
---------------------------------------
Name: Pasquale Pistorio
Title: President and
Chief Executive Officer
5791
INDEX TO FINANCIAL STATEMENTS
Page
Financial Statements:
Report of Independent Accountants for Years Ended December 31, 2000, 1999 and 1998................ F-2
Consolidated Statement of Income for the Years Ended December 31, 2000, 1999 and 1998............. F-3
Consolidated Balance Sheet as at December 31, 2000 and 1999....................................... F-4
Consolidated Statement of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998......... F-5
Consolidated Statement of Changes in Shareholders' Equity for the Years Ended December 31, 2000,
1999 and 1998.................................................................................. F-6
Notes to Consolidated Financial Statements........................................................ F-7
Financial Statement Schedules:
For each of the three years in the period ended December 31, 2000 Schedule II
Valuation and
Qualifying Accounts............................................................................ S-1
Report of Independent Accountants on Financial Statement Schedule................................. S-2
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Supervisory Board and Shareholders of
STMicroelectronics N.V:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in shareholder's
equity present fairly, in all material respects, the financial position of
STMicroelectronics N.V. and its subsidiaries at December 31, 2000 and December
31, 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers N.V.
PricewaterhouseCoopers N.V.
Amsterdam, The Netherlands
February 1, 2001
F-2
STMicroelectronics N.V.
CONSOLIDATED STATEMENT OF INCOME
Year ended
-----------------------------------------------------
December 31, December 31, December 31,
In thousands of U.S. dollars except per share amounts 1998 1999 2000
- --------------------------------------------------------------------------------------------------------------------
Net sales 4,210,618 5,023,109 7,764,404
Other revenues 37,134 33,167 48,799
-----------------------------------------------------
Net revenues 4,247,752 5,056,276 7,813,203
Cost of sales (2,622,943) (3,054,476) (4,216,921)
-----------------------------------------------------
Gross profit 1,624,809 2,001,800 3,596,282
Selling, general and administrative (488,072) (534,178) (703,675)
Research and development (689,785) (835,964) (1,026,348)
Other income and expenses 76,458 39,840 (83,533)
-----------------------------------------------------
Operating income 523,410 671,498 1,782,726
Net interest income 8,691 35,624 46,703
-----------------------------------------------------
Income before income taxes and minority interests 532,101 707,122 1,829,429
Income tax expense (120,351) (157,214) (375,119)
-----------------------------------------------------
Income before minority interests 411,750 549,908 1,454,310
-----------------------------------------------------
Minority interests (629) (2,656) (2,207)
-----------------------------------------------------
Net income 411,121 547,252 1,452,103
-----------------------------------------------------
Earnings per share (Basic) 0.49 0.64 1.64
-----------------------------------------------------
Earnings per share (Diluted) 0.48 0.62 1.58
The accompanying notes are an integral part of these consolidated financial statements
F-3
STMicroelectronics N.V.
CONSOLIDATED BALANCE SHEET
As at
------------------------------------
December 31, December 31,
In thousands of U.S. dollars 1999 2000
- -------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 1,823,086 2,295,703
Marketable securities -- 35,155
Trade accounts and notes receivable 913,282 1,496,446
Inventories 619,402 876,476
Other receivables and assets 435,784 554,035
---------------------------------
Total current assets 3,791,554 5,257,815
---------------------------------
Intangible assets, net 179,947 286,121
Property, plant and equipment, net 3,873,019 6,201,071
Investments and other non-current assets 85,783 135,488
---------------------------------
4,138,749 6,622,680
---------------------------------
Total assets 7,930,303 11,880,495
---------------------------------
Liabilities and shareholders' equity
Current liabilities
Bank overdrafts 26,471 35,599
Current portion of long-term debt 96,669 105,972
Trade accounts and notes payable 998,881 1,745, 553
Other payables and accrued liabilities 381,845 509,165
Accrued and deterred income tax 189,308 299,638
---------------------------------
Total current liabilities 1,693,174 2,695,927
---------------------------------
Long-term debt 1,348,477 2,700,482
Reserves for pension and termination indemnities 108,294 110,244
Other non-current liabilities 191,660 216,235
---------------------------------
1,648,431 3,026,961
---------------------------------
Total liabilities 3,341,605 5,722,888
---------------------------------
Commitments and contingencies
---------------------------------
Minority interests 24,757 32,958
---------------------------------
Common stock 1,112,680 1,133,739
Capital surplus 1,395,307 1,689,824
Accumulated result 2,551,817 3,977,316
Accumulated other comprehensive income (495,863) (676,230)
---------------------------------
Shareholders' equity 4,563,941 6,124,649
---------------------------------
Total liabilities and shareholders' equity 7,930,303 11,880,495
---------------------------------
The accompanying notes are an integral part of these consolidated financial statements
F-4
STMicroelectronics N.V.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended
------------------------------------------------------------
December 31, December 31, December 31,
In thousands of U.S. dollars 1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 411,121 547,252 1,452,102
Add (deduct) non-cash items:
Depreciation and amortization 704,004 806,789 1,108,180
Amortization of discount on convertible debt 4,657 12,576 29,077
Other non-cash items 5,240 4,285 10,133
Minority interest in net income of subsidiaries 629 2,656 2,207
Deferred taxes 34,333 28,711 (4,535)
Changes in assets and liabilities:
Trade accounts and notes receivable (115,879) (164,564) (631,049)
Inventories (18,807) (38,340) (299,993)
Trade accounts and notes payable 45,982 208,899 579,436
Other assets and liabilities, net (58,733) 61,018 186,214
----------------------------------------------------------
Net cash provided by operating activities 1,012,547 1,469,282 2,431,772
----------------------------------------------------------
Cash flows from investing activities:
Payment for purchases of tangible assets (947,253) (1,347,537) (3,317,600)
Other investing activities (18,997) (190,290) (249,543)
----------------------------------------------------------
Net cash used in investing activities (966,250) (1,537,827) (3,567,143)
----------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 424,955 756,836 1,661,202
Repayment of long-term debt (72,396) (48,080) (87,223)
Increase (decrease) in short-term facilities (233,261) (110,308) 30,665
Capital increase 233,334 230,437 38,175
Dividends paid -- (22,848) (26,603)
----------------------------------------------------------
Net cash provided by financing activities 352,632 806,037 1,616,216
----------------------------------------------------------
Effect of changes in exchange rates (334) (15,158) (8,228)
----------------------------------------------------------
Net cash increase 398,595 722,334 472,617
----------------------------------------------------------
Cash and cash equivalents at beginning of the period 702,157 1,100,752 1,823,086
----------------------------------------------------------
Cash and cash equivalents at end of the period 1,100,752 1,823,086 2,295,703
----------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements
F-5
STMicroelectronics N.V.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
In thousands of U.S. dollars, except per share amounts Accumulated
Other
Common Capital Accumulated Comprehensive Shareholders'
Stock Surplus Result Income (Loss) Equity
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Balance as of December 31, 1997 1,073,990 930,945 1,616,292 (313,781) 3,307,446
Capital increase 22,753 204,581 227,334
Comprehensive income:
Net Income 411,121 411,121
Other comprehensive income, net of tax 137,409 137,409
-------------
Comprehensive income 548,530
------------------------------------------------------------------------------------
Balance as of December 31, 1998 1,096,743 1,135,526 2,027,413 (176,372) 4,083,310
------------------------------------------------------------------------------------
Capital increase 15,937 259,781 275,718
Comprehensive income:
Net Income 547,252 547,252
Other comprehensive loss, net of tax (319,491) (319,491)
-------------
Comprehensive income 227,761
Dividends, $0.027 per share (22,848) (22,848)
------------------------------------------------------------------------------------
Balance as of December 31, 1999 1,112,680 1,395,307 2,551,817 (495,863) 4,563,941
------------------------------------------------------------------------------------
Capital increase 21,059 294,517 315,576
Comprehensive income:
Net Income 1,452,103 1,452,103
Other comprehensive loss, net of tax (180,367) (180,367)
-------------
Comprehensive income 1,271,736
Dividends, $0.03 per share (26,604) (26,604)
------------------------------------------------------------------------------------
Balance as of December 31, 2000 1,133,739 1,689,824 3,977,316 (676,230) 6,124,649
------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements
F-6
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
1. The Company
STMicroelectronics N.V. (formerly known as SGS-THOMSON Microelectronics
N.V.) (the "Company") was formed in 1987 by the combination of the
semiconductor business of SGS Microelettronica (then owned by Societa
Finanziaria Telefonica (S.T.E.T.), an Italian corporation) and the
non-military business of Thomson Semiconducteurs (then owned by
Thomson-CSF, a French corporation) whereby each company contributed their
respective semiconductor businesses in exchange for a 50% interest in the
Company. The Company designs, develops, manufactures and markets a broad
range of semiconductor integrated circuits and discrete devices that are
used in a wide variety of microelectronic applications.
The Company is registered in The Netherlands with its statutory domicile
in Amsterdam.
At December 31, 2000, the Company was 43.77% (December 31, 1999: 44.80%)
owned by STMicroelectronics Holding II B.V., and 56.23% by the public
(December 3l, 1999: 55.20%).
At December 31, 1999, and at December 31, 2000, STMicroelectronics Holding
II B.V. was 100% owned by STMicroelectronics Holding N.V.
At December 31, 1999, STMicroelectronics Holding N.V. was owned as follows:
- 50% by FT1CI, a French holding company, whose shareholders are
CEA-Industrie (51%) and France Telecom (49%).
- 50% by Finmeccanica, an Italian holding company, whose shareholders are
Istituto per la Ricostruzione Industriale S.p.a. (I.R.I.) (54.2%), the
Italian Ministry of Treasury (28.9%) and the public (16.9%).
At December 31, 2000, STMicroelectronics Holding N.V. was owned as follows:
- 50% by FT1CI, a French holding company, whose shareholders are
CEA-Industrie (51%) and France Telecom (49%).
- 50% by Finmeccanica, an Italian holding company, whose shareholders are
Istituto per la Ricostruzione Industriale S.p.a. (I.R.I.) (5.0%), the
Italian Ministry of Treasury (32.4%) and the public (62.6%).
2. Summary of accounting policies
2.1) Principles of consolidation
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP).
The Company's consolidated financial statements include the assets,
liabilities and results of operations of its majority-owned
subsidiaries. The ownership of other interest holders is reflected as
minority interests. Intercompany balances and transactions have been
eliminated in consolidation.
2.2) Use of estimates
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes to
the financial statements.
Actual results could differ from those estimates and may affect
amounts reported in future periods.
2.3) Foreign currency
The U.S. dollar is the reporting currency for the Company because the
dollar is the currency of reference in terms of market pricing in the
world-wide semiconductor industry. Furthermore, there is no currency
in which the majority of transactions are denominated, and revenues
from external sales in U.S. dollars exceed revenues in any other
currency.
F-7
STMICROELECTRONICS 1.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
The functional currency of each subsidiary throughout the group is
generally the local currency.
For consolidation purposes, assets and liabilities of these
subsidiaries are translated at current rates of exchange at the
balance sheet date. Income and expense items are translated at the
average exchange rate for the period. The effects of translating the
financial position and results of operations from local functional
currencies are included in "other comprehensive income".
Assets, liabilities, revenue, expenses, gains or losses arising from
foreign currency transactions are recorded in the functional currency
of the recording entity at the exchange rate in effect at the date of
the transaction. At each balance street date, recorded balances
denominated in a currency other than the recording entity's functional
currency are translated at the exchange rate prevailing at that date.
The related exchange gains and losses are recorded in the income
statement.
The Company conducts its business on a global basis in various major
international currencies. As a result, it is exposed to adverse
movements in foreign currency exchange rates.
The Company utilizes foreign exchange forward contracts and currency
options to cover foreign currency exposure. For the forward contracts
and currency options that are considered identifiable hedges,
recognition of gains and losses is deferred until settlement of the
underlying commitments. Realized gains and losses are recorded as
other income or expense when the underlying exposure materializes or
the hedged transaction is no longer expected to occur. The discount or
premium on these forward contracts designated as a hedge, are recorded
as an asset or liability and amortized to interest expense over the
terms of the contract. For the forward contracts and currency options
that are not considered identifiable hedges, recognition of gains and
losses is recognized at each reporting period, based on the fair
market value of the forward contract. Realized gains or losses are
recorded as other income and expense.
2.4) Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2.5) Income recognition
* Sales
Revenue on sales of semiconductor products is recognized upon transfer
of the ownership of the goods at shipment. 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.
* Fundings
Government fundings are recognized as the related costs are incurred,
commencing when the fundings' contract is signed with the relevant
government department or agency. Government fundings for research and
development are included in "other income and expenses". Government
fundings for capital expenditures are deducted from the cost of the
related fixed assets and reduce depreciation over the assets'
remaining estimated useful lives.
* Other revenue
Other revenue consists of co-development contract fees, certain
contract indemnity payments and patent royalty income. Other revenue
is recognized rateably over the term of the agreement.
In December 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), providing the staff's view on
applying generally accepted accounting principles to selected revenue
recognition issues. The Company adopted SAB 101 in the fourth quarter
of 2000, as required. The adoption of SAB 101 did not have a material
effect on the Company's financial position or overall trends in
results of operations.
2.6) Advertising costs
Advertising costs are expensed as incurred. Advertising expenses for
1998, 1999 and 2000 were $16,012. $21,102 and $30,421, respectively.
F-8
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
2.7) Research and development
Research and development costs are charged to expense as incurred.
Research and development costs include costs incurred by the Company
as well as the Company's share of costs incurred by other research and
development interest groups.
2.8) Start-up costs
Start-up costs incurred in the Company's new manufacturing
facilities, before reaching a minimum level of production, are
included in "other income and expenses" in the accompanying
consolidated statement of income.
2.9) Income taxes
The provision for current taxes represents the income taxes expected
to be payable for the current year. Deferred tax assets and
liabilities are recorded for all temporary differences arising between
the tax and book bases of assets and liabilities and for the benefits
of tax credits and loss carryforwards. Those deferred tax assets and
liabilities are measured using the enacted tax rates at which they are
expected to be realized or paid. A valuation allowance is provided
where necessary to reduce deferred tax assets to the amount expected
to be "more likely than not" realized in the future.
2.10) Earnings per share
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the
period.
Diluted earnings per share are computed by dividing net income (less
interest expense, net of tax effects, related to convertible debt) by
the weighted average number of common shares and common share
equivalents outstanding during the period. The weighted average shares
used to compute diluted earnings per share include the incremental
shares of common stock relating to outstanding options and convertible
debt to the extent such incremental shares are dilutive.
2.11) Cash equivalents
All highly liquid investments purchased with an original maturity of
ninety days or less are considered to be cash equivalents.
2.12) Marketable securities
Management determines the appropriate classification of debt and
equity securities at the time of purchase and reassesses the
classification at each reporting date. All marketable securities are
classified as available-for-sale and are reported at fair value with
net unrealized gains or losses reported as a separate component of
comprehensive income in the statement of shareholders' equity.
Unrealized losses that are other than temporary are recognized in net
income. Gains and losses on securities sold are determined based on
the specific identification method and are included in other income
and expense.
2.13) 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.
2.14) Intangible assets
Intangible assets include the cost of technologies and licenses
purchased from third parties, amortized over a period ranging from
three to seven years, and goodwill acquired in business combinations
amortized over its estimated useful life, generally three to five
years.
The carrying value of long-lived assets, including intangibles, is
evaluated whenever changes in circumstances indicate the carrying
amount of such assets may not be recoverable.
In performing such review for recoverability, the Company compares the
expected future cash flow to the carrying value of long-lived assets
and identifiable intangibles. If the anticipated undiscounted future
cash flows are less than the carrying amount of such assets, the
Company recognizes an impairment loss for the difference between the
carrying amount of the assets and their estimated fair value.
F-9
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
2.15) Property, plant and equipment
Property, plant and equipment are stated at cost, net of government
fundings. 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.
When property, plant or equipment is retired or otherwise disposed of,
the net book value of the asset is removed from the Company's books
and the net gain or loss is included in the determination of income.
2.16) Investments
The equity accounting method is used when the Company has both a 20%
to 50% equity interest and the ability to exercise significant
influence over the investee. The Company also holds certain equity
investments constituting less than 20% ownership of the investee.
These investments are carried at historical cost. Although the market
value of the investments is not readily determinable, management
believes the fair value of these investments exceeds their carrying
amounts.
For those investments with readily determinable market values, the
Company has accounted for those investments as available-for-sale.
These investments are reported at fair value with the net unrealized
gains or losses reported as a separate component of comprehensive
income in the statement of shareholders' equity. Unrealized losses
that are other than temporary are recognized in net income.
2.17) Pension and termination indemnities
The Company sponsors various retirement plans for its employees; such
plans include both defined benefit and defined contribution plans.
Upon retirement, the Company's employees receive benefits provided by
the pension plan arrangements. These plans conform with local
regulations and practices of the countries in which the Company
operates.
2.18) Comprehensive income
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 and the unrealized gain or
loss on marketable securities.
2.19) Stock splits
In May 1999, the Company's shareholders approved a two-for-one stock
split of the Company's common stock.
The record date for the stock split was June 16, 1999, and the
distribution date was June 17, 1999.
In April 2000, the Company's shareholders approved a three-for-one
stock split of the Company's common stock.
The record date for the stock split was May 5, 2000, and the
distribution date was May 6, 2000.
All earnings per share amounts, references to common stock,
shareholders' equity amounts and stock option plan data have been
restated as if the stock splits had occurred as of the earliest period
presented.
2.20) New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (FAS 133),
"Accounting for Derivative Instruments and Hedging Activities". FAS
133 is required to be adopted for fiscal years beginning after June
15, 2000. This statement establishes accounting and reporting
standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the balance sheet, and the
measurement of those instruments at fair value. The Company has
adopted the standards required by this statement in the first quarter
of 2001. Management believes that adoption of FAS 133 has not had a
material effect on the Company's financial position or results of
operations.
F-10
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
3. Consolidated entities
The consolidated financial statements include the accounts of
STMicroelectronics N.V. and the following entities as of December 31, 2000:
Percentage
Ownership
(Direct or
Legal Seat Name Indirect)
- -------------------------------------------------------------------------------------------------------
United Kingdom London STMicroelectronics LTD 100
London Thomson Components LTD 100
Bristol STMicroelectronics E.E.I.G. 100
Canada Nepean STMicroelectronics (Canada), Inc. 100
Israel Netania W.S.I. Ltd. 100
Sweden Stockholm STMicroelectronics A.B. 100
Germany Munich STMicroelectronics GmbH 100
Switzerland Geneva STMicroelectronics S.A. 100
Malta Malta STMicroelectronics LTD 100
Spain Madrid STMicroelectronics S.A. 100
France Paris STMicroelectronics S.A. 100
Paris STMicroelectronics S.A.S. 100
Italy Milano STMicroelectronics S.R.L. 100
Catania CO.RI.M.ME. 100
Milano Accent S.R.L. 51
Singapore Singapore STMicroelectronics PTE LTD 100
Singapore STMicroelectronics ASIA PACIFIC PTE LTD 100
Malaysia Muar STMicroelectronics SDN BHD 100
Muar STMicroelectronics (Malaysia) SDN BHD 100
Japan Tokyo STMicroelectronics KK 100
Hong Kong Hong Kong STMicroelectronics LTD 100
Australia Sydney STMicroelectronics PTY LTD 100
United States Dallas STMieroelectronics Inc. 100
Rancho Bernardo STMicroelectronics (RB), Inc. 100
Dallas STMicroelectronics Leasing Co. Inc. 100
La Jolla Metaflow Technologies Inc. 100
Wilsonville The Portland Group, Incorporated 100
Brazil Sao Paulo STMicroelectronics Ltda 100
Morocco Casablanca STMicroelectronics S.A. 100
Casablanca Electronic Holding S.A. 100
China Shenzhen Shenzhen STS Microelectronics Co. LTD 60
Shenzhen STMicroelectronics (Shenzen) Co. LTD. 100
India New Delhi STMicroelectronics PTE LTD 100
Finland Helsinki STMicroelectronics OY 100
- -------------------------------------------------------------------------------------------------------
4. Marketable securities and certain investments
The marketable securities and certain investments had a cost basis of
$31,831 and a fair value of $42,093 at December 31, 2000. The unrealized
gain at December 31, 2000 related to these investments was $10,262. The
Company did not own any marketable securities or investments accounted for
at fair value at December 31, 1999. For fiscal years 1998, 1999 and 2000,
gross realized gains and losses were $0, $0 and $8,952, respectively.
F-11
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
5. Trade accounts and notes receivable
Trade accounts and notes receivable consist of the following:
- --------------------------------------------------------------------------------
December 31, December 31,
--------------------------------
1999 2000
- --------------------------------------------------------------------------------
Trade accounts and notes receivable 924,872 1,512,270
Less valuation allowance (11,590) (15,824)
--------------------------------
Total 913,282 1,496,446
- --------------------------------------------------------------------------------
During 1998 no customer individually represented over ten percent of
consolidated net revenues. In 1999, one customer represented 11.4% of
consolidated net revenues and in 2000 one customer represented 13.4% of
consolidated net revenues.
6. Inventories
Inventories consist of the following:
- --------------------------------------------------------------------------------
December 3l, December 31,
--------------------------------
1999 2000
- --------------------------------------------------------------------------------
Raw materials 101,590 88,501
Work-in-process 395,320 588,263
Finished products 122,492 199,712
--------------------------------
Total 619,402 876,476
- --------------------------------------------------------------------------------
7. Other receivables and assets
Other receivables and assets consist of the following:
- --------------------------------------------------------------------------------
December 31, December 31,
-------------------------
1999 2000
- --------------------------------------------------------------------------------
Receivables from government agencies 152,237 139,418
Taxes and other government receivables 61,523 99,499
Down payment to suppliers 11,394 20,283
Loans to employees 3,557 3,914
Prepaid expenses 17,648 71,800
Sundry debtors 35,053 97,708
Deferred tax assets 73,079 71,651
Other 81,293 49,762
-------------------------
Total 435,784 554,035
- --------------------------------------------------------------------------------
Receivables from government agencies relate to research and development
contracts, industrialization contracts and capital expenditures.
8. Intangible assets
Intangible assets consist of the following:
- --------------------------------------------------------------------------------
December 31, December 31,
-------------------------
1999 2000
- --------------------------------------------------------------------------------
Goodwill 67,417 116,898
Technologies and licenses 202,560 315,532
Less accumulated amortization (90,030) (146,309)
-------------------------
Total 179,947 286,121
- --------------------------------------------------------------------------------
F-12
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
9. Property, plant and equipment
Property, plant and equipment consist of the following:
--------------------------------------------------------------------------
December 31, 1999 Gross Depreciation Net
--------------------------------------------------------------------------
Land and buildings 616,035 (132,973) 483,062
Machinery and equipment 6,216,830 (3,266,819) 2,950,011
Other tangible fixed assets 321,494 (235,968) 85,526
Construction in progress 354,420 -- 354,420
--------------------------------------
Total 7,508,779 (3,635,760) 3,873,019
--------------------------------------------------------------------------
--------------------------------------------------------------------------
December 31, 2000 Gross Depreciation Net
--------------------------------------------------------------------------
Land and buildings 710,456 (144,422) 566,034
Machinery and equipment 8,698,233 (3,689,854) 5,008,379
Other tangible fixed assets 385,581 (254,406) 131,175
Construction in progress 495,483 -- 495,483
--------------------------------------
Total 10,289,753 (4,088,682) 6,201,071
--------------------------------------------------------------------------
10. Investments and other non-current assets
Investments and other non-current assets consist of the following:
--------------------------------------------------------------------------
December 31, December 31,
--------------------------
1999 2000
--------------------------------------------------------------------------
Investments 20,056 18,132
Long-term deposits and receivables 12,435 66,426
Deferred tax assets 33,373 15,916
Debt issuance costs, net 19,919 35,014
---------------------------
Total 85,783 135,488
--------------------------------------------------------------------------
11. Shareholders' equity
Public offerings of shares
In connection with a secondary offering of common stock in June 1998, the
Company issued 18,000,000 new shares of common stock, which resulted in an
increase in common stock and capital surplus of $20,378 and $188,320,
respectively. In connection with a secondary offering of common stock in
September 1999, the Company issued 8,970,000 new shares of common stock,
which resulted in an increase in common stock and capital surplus of
$9,740 and $207,027, respectively.
Outstanding shares
The authorized share capital of the Company is EUR 1,809,600,000,
consisting of 1,200,000,000 common shares and 540,000,000 preference
shares each with a nominal value of EUR 1.04. As of December 31, 1998,
1999 and 2000, the number of shares of common stock outstanding at a par
value of EUR 1.04 was 854,868,636 shares, 869,424,420 shares and
889,881,287 shares, respectively. There were no preference shares
outstanding as of December 31, 1998, 1999 and 2000.
Preference shares
In May 1999, the Company's shareholders approved the creation of
540,000,000 preference shares. The preference shares entitle a holder to
full voting rights and to a preferential right to dividends and
distributions upon liquidation. In May 1999, the Company entered into an
option agreement with ST Holding II B.V. in order to protect the Company
from a hostile takeover or other similar action. The option agreement
provides for 540,000,000 preference shares to be issued to ST Holding II
B.V. upon their request based on approval by the Company's Supervisory
Board. ST Holding II B.V. would be required to pay at least 25% of the
par value of the preference shares to be issued, and to retain ownership
of at least 33% of the Company's issued share capital.
Stock option plans
In 1995, the Shareholders voted to adopt the 1995 Stock Option Plan (the
"1995 Plan") whereby options for up to 33,000,000 shares may be granted in
installments over a five year period. Under the 1995 Plan, the options may
be granted to purchase shares of common stock at a price not lower than
the market price of the shares on the date of grant, and generally vest
over four years and are exercisable over a period of eight years.
In 1996, the Shareholders voted to adopt the Supervisory Board Option Plan
whereby each member of the Supervisory Board was eligible to receive,
during the three year period 1996-1998, 18,000 options for 1996 and
F-13
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
9,000 options for both 1997 and 1998, to purchase shares of common stock
at the closing market price of the shares on the date of the grant. In the
same three-year period, each professional of the Supervisory Board was
eligible to receive 9,000 options for 1996 and 4,500 options for both 1997
and 1998. Under the Plan, the options vest over one year and are
exercisable for a period expiring eight years from the date of grant.
In 1999, the Shareholders voted to renew the Supervisory Board Option Plan
whereby each member of the Supervisory Board may receive, during the three
year period 1999-2001, 18,000 options for 1999 and 9,000 options for both
2000 and 2001, to purchase shares of capital stock at the closing market
price of the shares on the date of the grant. In the same three-year
period, each professional of the Supervisory Board may receive 9,000
options for 1999 and 4,500 options for both 2000 and 2001.
Under the Plan, the options vest over one year and are exercisable for a
period expiring eight years from the date of grant.
A summary of stock option activity for the plans for the three years ended
December 31, 2000, follows:
Price Per Share
---------------
Number of Weighted
Shares Range Average
---------------------------------------
Outstanding at December 31, 1997 12,000,180 $1.50-$14.23 $ 8.48
Options granted:
1995 Plan 3,900,000 $12.03 $12.03
Supervisory Board Plan 90,000 $12.03 $12.03
Options cancelled (57,390) $6.04-$14.23 $ 8.00
Options exercised (344,460) $1.54- $9.00 $ 2.14
---------------------------------------
Outstanding at December 31, 1998 15,588,330 $1.54-$14.23 $ 9.53
Options granted:
1995 Plan 8,878,200 $24.88 $24.88
Supervisory Board Plan 180,000 $24.88 $24.88
Options cancelled (161,640) $6.04-$24.88 $14.30
Options exercised (2,767,200) $1.33-$14.23 $ 5.47
---------------------------------------
Outstanding at December 31, 1999 21,717,690 $6.04-$24.88 $16.41
Options granted:
1995 Plan 7,570,890 $50.69-$62.01 $58.77
Supervisory Board Plan 103,500 $62.01 $62.01
Options cancelled (253,950) $ 6.04-$62.01 $27.57
Options exercised (1,988,195) $ 6.04-$24.88 $ 6.94
---------------------------------------
Outstanding at December 31, 2000 27,149,935 $6.04-$62.01 $28.98
- --------------------------------------------------------------------------------
Stock options exercisable were as follows:
- --------------------------------------------------------------------------------
December 31, December 31, December 31,
-----------------------------------------
1998 1999 2000
- --------------------------------------------------------------------------------
Options exercisable 820,920 2,631,330 5,149,338
Weighted average exercise price $4.92 $6.46 $9.72
- --------------------------------------------------------------------------------
The weighted average remaining contractual life of options outstanding as of
December 3l, 1999 and December 31, 2000 was 6.4 and 6.1 years respectively.
F-14
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
The range of exercise prices, the weighted average exercise price and the
weighted average remaining contractual life of options outstanding as of
December 31, 2000 was as follows:
----------------------------------------------------------------------
Weighted
Weighted average
Option price average renaming
Number of shares range exercise price contractual life
----------------------------------------------------------------------
3,017,360 $6.04 $6.04 3.2 years
3,657,455 $14.23 $14.23 4.7 years
3,885,840 $12.03 $12.03 5.6 years
8,918,100 $24.88 $24.88 6.7 years
126,840 $55.25 $55.25 7.1 years
5,391,700 $62.01 $62.01 7.5 years
70,000 $52.88 $52.88 7.7 years
2,019,640 $50.69 $50.69 7.9 years
63,000 $9.00 $9.00 3.8 years
----------------------------------------------------------------------
The range of exercise prices, the weighted average exercise price and the
weighted average remaining contractual life of options exercisable as of
December 31, 2000 was as follows:
----------------------------------------------------------------------
Weighted
Weighted average
Option price average renaming
Number of shares range exercise price contractual life
----------------------------------------------------------------------
3,017,360 $6.04 $6.04 3.2 years
1,843,978 $14.23 $14.23 4.7 years
63,000 $9.00 $9.00 3.8 years
45,000 $12.03 $12.03 5.6 years
180,000 $24.88 $24.88 6.7 years
----------------------------------------------------------------------
Employee stock purchase plans
In June 1998, the Company offered to certain of its employees worldwide
the right to acquire up to 2,400 shares of capital stock per employee, at
a price of $10.59 (63 French francs, 18,467 Italian lira) per share,
representing a discount of twelve percent from the market price. A total
of 1,729,794 shares were issued to participating employees worldwide as
a result of the offering.
In November 2000, the Company offered to certain of its employees
world-wide the right to acquire up to 275 shares of capital stock per
employee, at a price of $38.675 (45 Euro) per share, representing a
discount of fifteen percent from the market price. A total of 559,929
shares were issued to participating employees worldwide as a result of
the offering.
Fair value of stock-based compensation
The Company has various stock option plans and employee stock purchase
plans, as described above. The Company applies the intrinsic-value-based
method prescribed by Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" (APB 25), and related Interpretations, in
accounting for stock-based awards to employees. Under APB 25, the Company
generally recognizes no compensation expense with respect to such awards.
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 using the following weighted-average
assumptions:
1998 1999 2000
---- ---- ----
Expected life (years) 5 5 5
Volatility 38.2% 41.0% 42.2%
Risk-free interest rate 5.4% 5.8% 6.0%
Dividend yield --- 0.1% 0.05%
The weighted average fair value of options granted during 1998, 1999 and
2000 was $5.65, $11.08 and $27.12 per option, respectively.
F-15
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the grant dates consistent with
FAS 123, the Company's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below:
Year ended Year ended Year ended
Dec 31, 1998 Dec 31, 1999 Dec 31, 2000
------------ ------------ ------------
Net income
Pro forma 393,398 522,593 1,387,278
Pro forma earnings per share
Basic 0.47 0.61 1.57
Diluted 0.46 0.59 1.51
These pro forma amounts include amortized fair values attributable to
stock-based awards granted after December 31, 1995 only, and are therefore
not representative of future pro forma amounts.
Retained earnings
At December 31, 2000, the amount of retained earnings available to pay
dividends under Dutch law was approximately $5,263,500 (1999: $3,653,000).
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, 2000.
Other comprehensive income
The accumulated balances related to each component of other comprehensive
income were as follows:
- ------------------------------------------------------------------------------------------------------------
Foreign Accumulated
currency Unrealized other
translation gains (losses) comprehensive
gains (losses) on securities income (loss)
- ------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1997 (313,781) --- (313,781)
Other comprehensive income, net of tax 137,409 --- 137,409
- ------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1998 (176,372) --- (176,372)
Other comprehensive income, net of tax (319,49l) --- (319,491)
- ------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1999 (495,863) --- (495,863)
Other comprehensive income, net of tax (190,629) 10,262 (180,367)
- ------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2000 (686,492) 10,262 (676,230)
- ------------------------------------------------------------------------------------------------------------
F-16
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
12. Earnings per share
For the years ended December 31, 1998, 1999 and 2000 earnings per share
(EPS) was calculated as follows:
Year ended Year ended Year ended
Dec 31, 1998 Dec 31, 1999 Dec 31, 2000
------------ ------------ ------------
Basic EPS
---------
Net income 411,121 547,252 1,452,103
Weighted average shares outstanding 845,112,048 859,111,668 885,728,493
Basic EPS 0.49 0.64 1.64
Diluted EPS
-----------
Net income 411,121 547,252 1,452,103
Convertible debt interest, net of tax 4,566 13,387 28,204
----------- ----------- -----------
Net income adjusted 415,687 560,639 1,480,307
Weighted average shares outstanding 845,112,048 859,111,668 885,728,493
Dilutive effect of stock options 3,795,378 7,995,558 13,831,539
Dilutive effect of convertible debt 15,425,754 34,116,684 36,499,180
----------- ----------- -----------
Number of shares used in calculating EPS 864,333,180 901,223,910 936,059,212
Diluted EPS 0.48 0.62 1.58
13. 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.
- ----------------------------------------------------------------------------------------------------------------------------
December 31, December 31,
----------------------------
1999 2000
- ----------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year 87,949 102,363
Service cost 8,087 7,762
Interest cost 5,693 6,189
Benefits paid (3,110) (2,532)
Actuarial losses 9,137 14,053
Foreign currency translation adjustments (3,656) (5,964)
Other (1,737) 634
----------------------------
Benefit obligation at end of year 102,363 122,505
----------------------------
Change in plan assets:
Plan assets at fair value at beginning of year 83,287 99,448
Actual return on plan assets 13,424 1,266
Employer contributions 8,080 2,777
Benefits paid (3,110) (2,532)
Foreign currency translation adjustments (2,286) (6,076)
Other 53 405
----------------------------
Plan assets at fair value at end of year 99,448 95,288
----------------------------
Funded status (2,915) (27,217)
Unrecognized prior service cost 7,853 6,967
Unrecognized transition obligation (3,022) (2,310)
Unrecognized net actuarial gain (loss) (2,034) 16,957
----------------------------
Accrued benefit cost (118) (5,603)
----------------------------
Net amount recognized in the balance sheet consists of the following:
Prepaid benefit cost 5,663 7,423
Accrued benefit liability (8,005) (15,174)
Intangible asset 2,224 2,148
----------------------------
Net amount recognized (118) (5,603)
----------------------------
- ----------------------------------------------------------------------------------------------------------------------------
F-17
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
The components of the net periodic benefit cost includes the following:
- ---------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
-------------------------------------------
1998 1999 2000
- ---------------------------------------------------------------------------------------------------------------------------
Service cost 5,618 8,087 7,762
Interest cost 5,202 5,693 6,189
Expected return on plan assets (6,147) (5,956) (7,020)
Amortization of unrecognized transition obligation (366) (324) (303)
Recognized gains and losses 56 503 70
Recognition of prior service cost 762 850 847
-------------------------------------------
Net periodic benefit cost 5,125 8,853 7,545
- ---------------------------------------------------------------------------------------------------------------------------
The weighted average assumptions used in the determination of the net pension
cost for the pension plans were as follows:
Assumptions 1998 1999 2000
-------------------------------------------
Discount rate 7.16% 6.30% 6.22%
Salary increase rate 4.49% 3.81% 4.15%
Expected rate of return on funds 8.42% 7.04% 6.20%
- ---------------------------------------------------------------------------------------------------------------------------
The Company also has defined contribution pension plans which provide
retirement benefits to certain of its employees.
The benefit accrues to the employees on a pro-rata basis, adjusted for
inflation, during their employment period and is based on the individuals'
salary. As of December 31, 1999 and 2000, the Company accrued $100,290 and
$99,961 respectively, for these defined contribution pension plans. The annual
cost of these plans amounted to approximately $13,800, $15,200 and $18,000 in
1998, 1999 and 2000 respectively.
14. Long-term debt
Long-term debt, all of which is unsecured, includes debt held by the following subsidiaries:
-----------------------------------------------------------------------------------------------------------------
December 3l, December 3l,
-------------------------
1999 2000
-----------------------------------------------------------------------------------------------------------------
STMicroelectronics S.A. (France)
- 4.90% Bank loan due 2002 30,718 21,278
- 4.88% Bank loan due 2002 30,718 21,278
- 5.21% Other bank loans 21,557 157,037
STMicroelectronics s.r.l. (Italy)
- 5.68% Bank loan due 2002 52,033 32,928
- 5.35% Bank loan due 2006 34,322 27,501
- 4.22% Other bank loans 95,234 57,955
STMicroelectronics N.V. (Netherlands)
- 1.75% Liquid Yield Option Notes (LYONs due 2008) 398,251 112,520
- 2.44% Liquid Yield Option Notes (LYONs due 2009) 725,813 743,371
- 3.75% Convertible Bonds (due 2010) -- 1,486,738
STMicroelectronics (other countries)
- 6.53% Other bank loans 56,500 145,848
-------------------------
Total long-term debt 1,445,146 2,806,454
Less current portion 96,669 105,972
-------------------------
Long-term debt, less current portion 1,348,477 2,700,482
-----------------------------------------------------------------------------------------------------------------
F-18
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
Long-term debt is denominated in the following currencies:
-----------------------------------------------------------------------------------------------------------------
December 3l, December 31,
-------------------------
1999 2000
U.S. dollar 1,157,366 2,445,569
Italian lira 192,432 128,398
French franc 82,993 199,593
Other 12,355 32,894
-------------------------
Total 1,445,146 2,806,454
-----------------------------------------------------------------------------------------------------------------
Aggregate future maturities of long-term debt outstanding are as follows:
----------------------------------------------------------------------------
December 31,
------------
2000
----------------------------------------------------------------------------
2001 105,972
2002 111,572
2003 84,457
2004 57,555
2005 47,492
Thereafter 2,399,406
------------
Total 2,806,454
----------------------------------------------------------------------------
In June 1998, the Company issued $513,852 face value of zero-coupon
subordinated convertible notes (LYONs), due 2008, for net proceeds of
$421,837. The notes are convertible at any time by the holders at the rate
of 53.712 shares of the Company's common stock for each one thousand
dollar face value of the notes. The notes may be redeemed by the holders on
June 10, 2003 or by the Company on or after that date at the book value,
payable in cash. The notes are subordinated to all the other existing and
future indebtedness of the Company.
In September 1999, the Company issued $918,530 face value of zero-coupon
subordinated convertible notes (LYONs), due 2009, for net proceeds of
$708,288. The notes are convertible at any time by the holders at the rate
of 26.292 shares of the Company's common stock for each one thousand dollar
face value of the notes. The notes may be redeemed by the holders on
September 22, 2004 or by the Company on or after that date at the book
value, payable in cash. The notes are subordinated to all the other
existing and future indebtedness of the Company.
In November 2000, the Company issued $2,145,923 face value of zero-coupon
unsubordinated convertible bonds, due 2010, for net proceeds of $1,457,828.
The debt discount of $665,923 is amortized straight-line over the term of
the debt and recorded as interest expense. The notes are convertible at any
time by the holders at the rate of 9.32 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 November 16, 2005 or by the Company on or after
that date at the book value, payable in cash. The notes are unsubordinated
to all the other existing and future indebtedness of the Company.
During 1999, $52,476 face amount of convertible bonds were converted into
939,528 shares of common stock. During 2000, $333,580 face amount of
convertible bonds were converted into 17,908,743 shares of common Stock.
Credit facilities
The Company has revolving line of credit agreements with several financial
institutions totaling $884,000. At December 31, 2000, amounts available
under the lines of credit are reduced by borrowings of $35,599 at an average
interest rate of 6.47%.
F-19
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
15. Other payables and accrued liabilities
Other payables and accrued liabilities consist of the following:
--------------------------------------------------------------------------------------------------------------------
December 31, December 31,
---------------------------
1999 2000
--------------------------------------------------------------------------------------------------------------------
Taxes other than income taxes 64,950 50,228
Salaries and wages 111,125 181,516
Social charges 53,781 70,957
Advances received on fundings 38,686 10,562
Commercial rebates 23,775 32,755
Royalties payable 13,195 42,313
Other 76,333 120,834
---------------------------
Total 381,845 509,165
--------------------------------------------------------------------------------------------------------------------
16. Other revenues
Other revenues consist of the following:
--------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
-------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------------------------------------------
Licensing revenues 1,765 -- --
Miscellaneous sales 27,833 30,205 41,229
Other 7,536 2,962 7,570
-------------------------------------------
Total 37,134 33,167 48,799
--------------------------------------------------------------------------------------------------------------------
17. Other income and expenses
Other income and expenses consist of the following:
--------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
-------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------------------------------------------
Research and development funding 63,531 60,352 42,065
Start-up costs (12,609) (24,736) (115,137)
Exchange gain, net 19,019 14,653 15,767
Other 6,517 (10,429) (26,228)
-------------------------------------------
Total 76,458 39,840 (83,533)
--------------------------------------------------------------------------------------------------------------------
18. Net interest income
Net interest income consists of the following:
--------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
-------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------------------------------------------
Income 54,294 81,888 111,403
Expense (45,603) (46,264) (64,700)
-------------------------------------------
Total 8,691 35,624 46,703
Cash paid for interest was $48,569 in 1998, $48,086 in 1999 and $64,681
in 2000. Capitalized interest was $5,487 in 1998, $8,317 in 1999 and
$1,846 in 2000.
19. Income tax
Income before income tax expense is comprised of the following:
F-20
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
--------------------------------------------------------------------------------------------------------------------
December 31, December 3l, December 31,
-------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------------------------------------------
Loss recorded in The Netherlands (18,730) (17,494) (6,393)
Income from foreign operations 550,831 724,616 1,835,822
-------------------------------------------
Income before income tax expense 532,101 707,122 1,829,429
--------------------------------------------------------------------------------------------------------------------
STMicroelectronics N.V. and its subsidiaries are individually liable for
income tax. Tax losses can only offset profits generated by the taxable
entity incurring such loss.
Income tax expense is comprised of the following:
--------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
-------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------------------------------------------
Domestic taxes - current (3,886) (4,353) (7,585)
Foreign taxes - current (82,132) (130,904) (342,837)
-------------------------------------------
Current taxes (86,018) (135,257) (350,422)
Deferred taxes (34,333) (21,957) (24,697)
-------------------------------------------
Income tax expense (120,351) (157,214) (375,119)
--------------------------------------------------------------------------------------------------------------------
The principal items comprising the differences in income taxes computed
at The Netherlands statutory rate (35%) and the effective income tax rate
are the following:
--------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
-------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------------------------------------------
Income tax expense computed at statutory rate (186,235) (247,493) (640,300)
Benefit (deductions) for financial reporting with no tax effect 7,864 (699) (13,349)
Variation in valuation allowance 397 3,107 (7,185)
Other tax and credits 2,995 8,549 (4,770)
Earnings of subsidiaries taxed at different rates 54,628 79,322 290,485
-------------------------------------------
Income tax expense (120,351) (157,214) (375,119)
--------------------------------------------------------------------------------------------------------------------
Permanent differences reflect mainly the effects of capital allowance
programs and special tax incentive programs existing in some Asia Pacific
and Mediterranean countries, and of various non-deductible items.
Included in the line "Earnings of subsidiaries taxed at different rates"
are benefits related to certain tax holidays totaling $41,758 in 1998,
$49,911 in 1999, $225,193 in 2000.
Deferred tax assets and liabilities consist of the following:
--------------------------------------------------------------------------------------------------------------------
December 31, December 31,
---------------------------
1999 2000
--------------------------------------------------------------------------------------------------------------------
Tax loss carryforwards and capital allowances 74,321 22,672
Inventory 41,256 32,702
Other assets 111,447 67,375
---------------------------
Total deferred tax assets 227,024 122,749
Valuation allowance (12,251) (5,066)
---------------------------
Deferred tax assets, net 214,773 117,683
Fixed assets depreciation (272,184) (191,632)
Other liabilities (52,979) (25,086)
---------------------------
Deferred tax liabilities (325,163) (216,718)
---------------------------
Net deferred income tax liability (110,390) (99,035)
--------------------------------------------------------------------------------------------------------------------
Deferred income taxes were classified in the consolidated balance as follows:
F-21
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
--------------------------------------------------------------------------------------------------------------------
December 31, December 31,
---------------------------
1999 2000
--------------------------------------------------------------------------------------------------------------------
Other receivables and assets 73,079 71,651
Investments and other non-current assets 33,373 15,916
Accrued and deferred income tax (31,072) (8,041)
Other non-current liabilities (185,770) (178,561)
Net deferred income tax liability (110,390) (99,035)
--------------------------------------------------------------------------------------------------------------------
As of December 31, 2000, the Company and its subsidiaries have net
operating loss carryforwards of $66,323 which expire between 2001 and
2006.
The Company paid $75,886 cash for income taxes in 1998, $99,930 cash for
income taxes in 1999 and $242,929 cash for income taxes in 2000.
20. Commitments
Lease commitments
The Company leases land. building, plant and equipment under
non-cancellable lease agreements. As of December 31, 2000 the future
minimum lease payments to which the Company was committed under operating
leases were as follows:
-------------------------------------------------------------------------
Year
-------------------------------------------------------------------------
2001 16,231
2002 12,524
2003 11,331
2004 9,681
2005 7,629
Thereafter 19,124
--------
Total 76,520
-------------------------------------------------------------------------
Other commitments
As of December 31, 2000, the Company had commitments of $1,670,263 for
equipment purchases.
21. Contingencies
The Company is involved in various lawsuits, claims, investigations and
proceedings incidental to the normal conduct of its operations. These
matters mainly include the risks associated with external patents
utilization, various investigations, claims from customers and tax
disputes. Management has accrued for these loss contingencies when the
loss is probable and can be estimated. Management believes that these
contingencies will not have a material adverse effect on the business,
financial condition or results of operations of the Company.
During 2000, the Company acquired a manufacturing facility. The terms of
the agreement require the Company to pay additional amounts up to $40,000
if certain conditions are met during the next three years. The contingent
payments have not been recorded as of December 31, 2000, as it is not
beyond a reasonable doubt that the amounts will be paid.
22. Financial Instruments and Risk Management
Financial instruments and derivatives are used exclusively for purposes
other than trading.
Foreign exchange forward contracts and currency options
The Company enters into foreign exchange forward contracts and currency
options to manage exposure to fluctuations in foreign currency exchange
rates and to cover a portion of both its probable anticipated, but not
firmly committed. transactions and transactions with firm foreign
currency commitments. These transactions include international sales by
various subsidiaries in foreign currencies, foreign currency denominated
purchases, intercompany sales and other intercompany transactions. Such
contracts outstanding as of December 31, 2000 have remaining terms of one
to three months, maturing mainly during the first quarter of 2001.
F-22
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
The notional amounts of foreign exchange forward contracts totaled
$611,567 and $780,423 at December 31, 1999 and 2000, respectively. The
principal currencies covered are the US dollar, the euro, the Italian
lira, the Japanese yen, and the Swiss franc.
The risk of loss associated with purchased options is limited to premium
amounts paid for the option contracts. The risk of loss associated with
forward contracts is equal to the exchange rate differential from the
time the contract is entered into until the time it is settled.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of interest-bearing
investments, financial instruments with off-balance sheet risks
(primarily forward contracts), and trade receivables. The Company places
its cash and cash equivalents and certain other financial instruments
with a variety of high credit quality financial institutions and has not
experienced any material losses relating to such instruments. The Company
invests its excess cash in accordance with its investment policy which
aims to minimize credit risk.
The Company controls the credit risks associated with financial
instruments through credit approvals, investment limits and centralized
monitoring procedures but does not normally require collateral or other
security from the parties to the financial instruments with off-balance
sheet risk. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers and their
dispersion across many geographic areas. The Company monitors the
creditworthiness of its customers to which it grants credit terms in
the normal course of business. The Company does not anticipate
non-performance by counterparties which could have a significant impact
on its financial position or results of operations.
Fair value or financial instruments
The estimates of fair value were obtained using prevailing financial
market information resulting from various valuation techniques. The
methodologies used to estimate fair value are as follows:
Cash and cash equivalents, accounts and notes receivable, bank
overdrafts, short-term borrowings, accounts and notes payables
The carrying amounts reflected in the consolidated financial statements
are reasonable estimates of fair value because of the relatively short
period of time between the origination of the instruments and their
expected realization.
Long-term debt and current portion of long-term debt
The fair values of long-term debt were determined based on quoted market
prices, and by estimating future cash flows on a borrowing-by-borrowing
basis and discounting these future cash flows using the Company's
incremental borrowing rates for similar types of borrowing arrangements.
Foreign exchange forward contracts
The fair values of these instruments are estimated based upon quoted
market prices for the same or similar instruments.
------------------------------------------------------------------------------------------------------------------------
1999 2000
-------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------------------------------------------------------------------------------
Balance sheet
- Bank loans (including current portion) 321,082 323,482 463,825 465,922
- Convertible debt 1,124,064 2,521,752 2,342,629 2,859,756
Off-balance sheet
-Forward exchange contracts 10,412 7,939 8,886 10,943
------------------------------------------------------------------------------------------------------------------------
F-23
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
23. Related party transactions
Transactions with significant shareholders and their affiliates were as
follows:
--------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
-------------------------------------------
1998 1999 2000
--------------------------------------------------------------------------------------------------------------------
Sales 5,608 19,033 196
Research and development expenses (16,215) (16,958) (13,663)
Other purchases and expenses (12,406) (2,772) (17,991)
Accounts receivable 1,872 6,222 774
Accounts payable 10,509 1,876 1,346
--------------------------------------------------------------------------------------------------------------------
24. Segment information
In June 1997, the United States Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information" (FAS 131),
which the Company adopted effective December 31, 1998. FAS 131 requires
that enterprises report certain information about operating segments. It
also requires that enterprises report certain information about their
products and services, the geographic areas in which they operate, and
their major customers.
The Company concluded that it has two principal businesses and operates
in two segments: the Semiconductor segment and the Subsystems segment.
In the Semiconductor segment, the Company designs, develops, manufactures
and markets a broad range of products, including discrete, memories and
standard commodity components, ASICSs (full custom devices and semicustom
devices) and ASSPs for analog, digital, and mixed-signal applications.
In the Subsystems segment, the Company designs, develops, manufactures
and markets subsystems and modules for the Telecom, Automotive and
Industrial markets including mobile phone accessories, battery chargers,
ISDN power supplies and in-vehicle equipment for electronic toll payment.
The Subsystems segment does not meet the requirements for a reportable
segment as defined in FAS 131. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies.
The following is a summary of operations by entities located within the
indicated geographic areas for 1998, 1999 and 2000. Long-lived assets
consist of net property and equipment and other intangible assets.
Net revenues
---------------------------------------------------------------------------------
December 31, December 31, December 31,
-------------------------------------------
1998 1999 2000
---------------------------------------------------------------------------------
France 474,580 451,243 651,116
Italy 171,143 174,087 249,588
Germany 444,362 470,554 611,115
Other European countries 737,112 828,879 1,484,654
USA 978,662 1,222,743 1,761,783
Singapore 1,261,165 1,669,129 2,277,772
Other countries 180,728 239,641 777,175
-------------------------------------------
Total 4,247,752 5,056,276 7,813,203
---------------------------------------------------------------------------------
Long-lived assets
---------------------------------------------------------------------------------
December 31, December 31, December 31,
-------------------------------------------
1998 1999 2000
---------------------------------------------------------------------------------
France 1,169,273 1,239,540 1,889,729
Italy 899,689 1,117,241 1,650,506
Germany 1,134 1,094 1,620
Other European countries 19,922 236,202 345,359
USA 587,734 736,187 1,081,327
Singapore 216,817 245,386 649,116
Other countries 472,007 477,316 869,530
-------------------------------------------
Total 3,366,576 4,052,966 6,487,187
F-24
STMICROELECTRONICS N.V.
Notes to consolidated financial statements
(In thousands of U.S. dollars, except per share amounts)
25. Subsequent Events (Unaudited)
At the annual shareholders' meeting held on April 25, 2001, the shareholders
approved the payment of a cash dividend of $0.04 per share and the creation of a
new five-year stock option plan that provides for the granting to management and
selected employees of options to purchase up to a maximum of 60 million Common
Shares. On April 27, 2001, the Supervisory Board authorized the granting of
options to purchase 9,462,800 Common Shares under the new plan.
The Company issued a redemption notice for the LYONs due 2008 for a redemption
price of $885.22 per $1,000 principal amount on June 11, 2001. On May 11, 2001,
approximately $45,600 in total indebtedness was outstanding under the LYONs due
2008; based on this amount outstanding, if all remaining holders chose to
convert the instruments into Common Shares before the redemption date, 2,772,291
Common Shares would be issued.
F-25
STMICROELECTRONICS N.V.
VALUATION AND QUALIFYING ACCOUNTS
(Currency - Thousands of U.S. dollars)
Balance asat Charged to Balance at
Valuation and qualifying accounts beginning Translation costs and end of
deducted from the related asset accounts of period adjustment expenses Deductions period
--------- ----------- ---------- ---------- --------- ------------ ----------
1999
Inventories.........................2000
Inventories.............................. 42,137 -- 73,835 (42,137) 73,835
Accounts Receivable ..................... 11,590 (621) 4,869 (14) 15,824
1999
Inventories.............................. 53,955 -- 42,137 (53,955) 42,137
Accounts Receivable ..................................... 10,494 (452) 1,662 (114) 11,590
1998
Inventories.........................Inventories.............................. 68,182 -- 53,955 (68,182) 53,955
Accounts Receivable ................Receivable...................... 15,228 89 (3,741) (1,082) 10,494
1997
Inventories......................... 45,176 -- 68,182 (45,176) 68,182
Accounts Receivable................. 18,152 (1,902) 7 (1,029) 15,228
S-1
Report of Independent Accountants on
Financial Statement Schedule
To the Supervisory Board and Shareholders of STMicroelectronics N.V.:
Our audits of the consolidated financial statements referred to in our report
dated January 25, 2000February 1, 2001 appearing on page 59 of the 1999 Annual Report to
Shareholders of STMicroelectronics N.V. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 20-F)20-F also
included an audit of the financial statement schedule listed in Item 1918 of this
Form 20-F. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers N.V.
Amsterdam, The Netherlands
January 25, 2000February 1, 2001
S-2
INDEX TO EXHIBITS
Name Page
---- ----
1.1 Articles of Association, as amended as of May 5, 2000,
of the Company..................................................................
2.2 Consent of PricewaterhouseCoopers N.V...........................................
99.1 Pages 34 to 59 of the 1999 Annual Report, submitted to the Securities and
Exchange Commission as a Report on Form 6-K by STMicroelectronics N.V. on June
19, 2000........................................................................
1.1 Articles of Association, as amended as of May 5, 2000, of
STMicroelectronics N.V. (incorporated by reference to the Annual Report on
Form 20-F for the year ended December 31, 1999, as filed with the Commission on
June 27, 2000)
4.1 Indenture, dated as of November 16, 2000, among STMicroelectronics
N.V. as issuer and The Bank of New York, as Trustee, of our Zero Coupon Senior
Convertible Bonds due 2010
8.1 Subsidiaries of the Company (see Note 3 to the Consolidated
Financial Statements)
10.1 Consent of PricewaterhouseCoopers N.V.
E-1