AS FILED WITH THEAs filed with the Securities and Exchange Commission on June 30, 1999
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
ON JUNE 29, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTONWashington, D.C. 20549
----------------
FORM 20-F
[_]|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(B)12(b) OR (G)(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X]|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBERFor the fiscal year ended: December 31, 19971998
OR
[_]|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE
SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER:For the transition period from to
Commission file number: 1-13546
----------------
STMICROELECTRONICSSTMicroelectronics N.V.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NOT APPLICABLE THE NETHERLANDS
(TRANSLATION OF REGISTRANT'S (JURISDICTION OF INCORPORATION
NAME INTO ENGLISH) OR ORGANIZATION)
TECHNOPARC DU PAYS DE GEX -(Exact name of Registrant as specified in its charter)
Not Applicable The Netherlands
(Translation of Registrant's (Jurisdiction of incorporation
name into English) or organization)
Technoparc du Pays de Gex -- B.P. 112 Route de Pre-Bois
165, RUE EDOUARD BRANLYrue Edouard Branly ICC Bloc A
01637 SAINT GENIS POUILLY
FRANCE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)Saint Genis Pouilly 1215 Geneva 15
France Switzerland
(Addresses of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
-------------------- -----------------------
COMMON SHARES, NOMINAL VALUE NLG 13.75 PER SHARE NEW YORK STOCK EXCHANGE
LIQUID YIELD OPTION(TM) NOTES DUE JUNE 10, 2008 NEW YORK STOCK EXCHANGE
----------------Name of each exchange on
Title of each class: which registered:
Common Shares, nominal value Euro 3.12 per share New York Stock Exchange
Liquid Yield OptionTM Notes due June 10, 2008 New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NONE
----------------None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
----------------None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
COMMON SHARES, NOMINAL VALUE NLG 13.75 PER COMMON SHARE: 139,132,397142,478,106 Common Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]|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
Cautionary Statement Regarding Forward-Looking Statements........... 2
Item 1. Description of Business................................... 3
Item 2. Description of Property................................... 31
Item 3. Legal Proceedings......................................... 35
Item 4. Control of Registrant..................................... 35
Item 5. Nature of Trading Market.................................. 39
Exchange Controls and Other Limitations Affecting Security
Item 6. Holders................................................... 41
Item 7. Taxation.................................................. 41
Item 8. Selected Consolidated Financial Data...................... 45
Management's Discussion and Analysis of Financial
Item 9. Condition and Results of Operations....................... 47
Quantitative and Qualitative Disclosures About Market
Item 9A. Risk...................................................... 58
Item 10. Directors and Officers of Registrant...................... 61
Item 11. Compensation of Directors and Officers.................... 68
Options to Purchase Securities from Registrant or
Item 12. Subsidiaries.............................................. 68
Item 13. Interest of Management in Certain Transactions............ 69
PART II
Item 14. Description of Securities to be Registered *.............. 71
PART III
Item 15. Defaults Upon Senior Securities *......................... 71
Changes in Securities and Changes in Security for
Item 16. Registered Securities *................................... 71
PART IV
Item 17. Financial Statements*..................................... 71
Item 18. Financial Statements...................................... 71
Item 19. Financial Statements and Exhibits......................... 71
Certain Terms....................................................... II-2
- --------Cautionary Statement Regarding Forward-Looking Statements..................... 3
Presentation of Financial Information......................................... 3
Item 1. Description of Business............................................. 4
Item 2. Description of Property.............................................31
Item 3. Legal Proceedings...................................................34
Item 4. Control of Registrant...............................................36
Item 5. Nature of Trading Market............................................40
Item 6. Exchange Controls and Other Limitations Affecting Security Holders..44
Item 7. Taxation............................................................44
Item 8. Selected Consolidated Financial Data................................48
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................48
Item 9A. Quantitative and Qualitative Disclosures About Market Risk..........48
Item 10. Directors and Officers of Registrant................................51
Item 11. Compensation of Directors and Officers..............................59
Item 12. Options to Purchase Securities from Registrant or Subsidiaries......60
Item 13. Interest of Management in Certain Transactions......................61
PART II
Item 14. Description of Securities to be Registered *........................62
PART III
Item 15. Defaults Upon Senior Securities *...................................62
Item 16. Changes in Securities and Changes in Security for
Registered Securities *
PART IV
Item 17. Financial Statements *..............................................62
Item 18. Financial Statements................................................62
Item 19. Financial Statements and Exhibits...................................62
Certain Terms ................................................................64
* Omitted because item is not applicable.
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this annual report that are not
historical facts, including without limitation, certain statements made in the
sections hereof entitled "Item 1: Description of Business" and "Item 9:
Management's Discussion and Analysis of Financial Condition and Results of
Operations," are statements of future expectations and other forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1933, as
amended) that are based on management's current views and assumptions and
involve known and unknown risks and uncertainties that could cause actual
results, performance or events to differ materially from those in such
statements due to, among other factors, (i) the highly cyclical nature of the
semiconductor industry,
downturn, (ii) competition, (iii) increased industry capacity,
(iv) variability of operating results, (v) capital requirements, (vi) new
product developments and technological change, (vii) manufacturing risks, (viii)
the loss of key personnel, (ix) economic downturn in Asia,any of our major markets,
(x) possible acquisitions, (xi) control of the Company and potential conflicts
of interest, (xii) key customers and strategic relationships, (xiii)
intellectual property issues, (xiv) certain legal proceedings, (xv) the
uncertainties of state support for research and development and other funding,
(xvi) international operations, (xvii) currency fluctuations, (xviii) dependence
on certain sources of supply, (xix) environmental regulationregulations and (xx) year 2000
compliance. See "Risk Factors" included in the Company's Prospectuses dated June
5, 1998.
2PRESENTATION OF FINANCIAL AND OTHER INFORMATION
References in this annual report to published industry data are
references to data published by Dataquest, Inc. ("Dataquest") and references to
trade association data are references to World Semiconductor Trade Statistics
("WSTS"). Except as otherwise disclosed herein, all references to the Company's
market positions in this annual report are based on 1998 revenues according to
published industry data. Certain terms used in this annual report are defined in
"Certain Terms."
In this annual report, references to the "EU" are to the European Union,
references to the "Euro" and the "euro" are to the euro currency of the EU,
references to the "United States" are to the United States of America and
references to "$" or to "U.S. dollars" are to United States dollars.
3
PART I
ITEMItem 1: DESCRIPTION OF BUSINESS
THE COMPANYDescription of Business
The Company
STMicroelectronics N.V. (the "Company") is a global independent limited
liability semiconductor company that designs, develops, manufactures and markets
a broad range of semiconductor integrated circuits and discrete devices used in
a wide variety of microelectronic applications, including automotive products,
computer systems,peripherals, telecommunications systems, consumer products, industrial
automation and control systems and automotive products.systems. According to published industry data, in 19971998
STMicroelectronics maintained its position as one of
the top 10ranked ninth among worldwide suppliers of semiconductor
devices. On the basis of 19971998 revenues, STMicroelectronics was the world's
leading supplier of MPEG 2 decoder ICs, smartcard ICs,MCUs, special automotive ICs
and EPROM memories, the second leading supplier of EEPROM memories and the secondthird
leading supplier of analog monolithic and mixed-signal ICs, disk drive ICs and EEPROM memories.
The Company currently offers more than 3,000 main types of products to
approximately 700800 direct customers. Major customers include Alcatel, Bosch,
Bull, Chrysler, Ericsson, Ford, Gemplus, Hewlett-
Packard,Hewlett-Packard, IBM, Matsushita, Motorola,
Nokia, Nortel Networks, Philips, Pioneer, Samsung, Schlumberger, Seagate
Technology, Siemens, Sony, Thomson Multimedia and Western Digital. The Company
also sells its products through distributors.
The Company offers a diversified product portfolio and develops products
for a wide range of market applications to reduce its dependence on any single
product, industry or application market. TheWithin 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 signalmixed-signal content. Products include differentiated ICs (which the Company
defines as being its dedicated products, semicustom devices and
microcontrollers) and analog ICs (including mixed-signal ICs), the majority of
which are also differentiated ICs. As a leading provider of differentiated ICs,
the Company has developed close relationships with customers, resulting in early
knowledge of customers'their evolving requirements. These relationships have enabled the Company to
identifyrequirements and opportunities to increase the functionality of products and to create
solutions that meet customers' needs. The customized nature of differentiatedaccess their
markets for other products. Differentiated ICs, makes themwhich are less vulnerable to
competitive pressures than standard commodity products. Differentiated ICsproducts, accounted for
approximately 57%62% of the Company's net revenues in 1997,1998 compared to
approximately 59%57% in 1996.1997. The Company also targets applications that require
substantial analog and mixed-signal content and can exploit the Company's system
level expertise. Analog ICs accounted for approximately 49%51% of the Company's
1998 net revenues in 1997, compared to approximately 46%49% in 1996,1997, while discrete devices
accounted for approximately 14%13% of the Company's net revenues in both 1997 and 1996.1998 compared
to approximately 14% in 1997. In recent years these families of products,differentiated ICs, in particular
analog ICs, have experienced less volatility in sales growth rates and average
selling prices than the overall semiconductor industry.
STMicroelectronics' products are manufactured and designed using a broad
range of manufacturing processes and proprietary design methods.
STMicroelectronics uses all of the prevalent function-oriented process
technologies, including CMOS, bipolar and nonvolatile memory technologies. In
addition, by combining basic processes, the Company has developed advanced
systems-oriented technologies that enable it to produce differentiated and
application-specificapplication- specific products, including BiCMOS technologies (bipolar and CMOS)
for mixed-signal applications, BCD technologies (bipolar, CMOS and DMOS) for
intelligent power applications and embedded memory technologies. This broad
technology portfolio, a cornerstone of the Company's strategy for many years,
enables the Company to meet the increasing demand for "system-on-a-
chip""system-on-a-chip"
solutions. To complement this depth and diversity of process and design
technology, the Company also possesses a broad intellectual property portfolio
that it has used to enter into cross-licensing agreements with many major
semiconductor manufacturers.
In September 1997, STMicroelectronics was awarded the 1997 European
Quality Award for Business Excellence in the category of large businesses by the
European Foundation for Quality Management (the "EFQM"). In presenting
STMicroelectronics with the award, the EFQM committee cited the Company's
commitment to the principles
4
of Total Quality Management ("TQM") in its business practices. TQM defines a
3
common set of objectives and performance measurements for employees in all
geographic regions, at every stage of product design development and production
for all product lines. See "Item 2: Description of Property--
Manufacturing.Property--Manufacturing."
In 1997, theThe Company introduced in 1998 several new products and plans to further
develop and produce superintegrated, system-level silicon solutions for a set of
targeted applications such as computer peripherals (including hard disk drives,
inkjet printers and monitors), digital consumer devices (including set-top
boxes, DVDs and digital television), wireless telecommunications products
(digital cellular handsets, digital cordless and pagers), digital networks
(ADSL, with xDSLalready in high volume production, and ATM, currently under development)
andas well as automotive electronics (including injection control, safety, and car
multimedia navigation).
In November 1997, the Company and Daewoo Electronics announced an agreement
to establish a joint design center company in Seoul, Korea. The center will be
used to develop ICs for existing consumer electronics applications and future
products for digital and high definition television, digital VCR and DVD,
telecommunications, computing and other products jointly selected by the two
companies. The Company also confirmed that it entered into a partnership with
British Sky Broadcasting ("B Sky B") to develop a complete hardware and
software reference platform for digital set-top boxes to support B Sky B's
launch of digital satellite television service in the spring of 1998. As a
result of this agreement, STMicroelectronics will be supplying the set-top box
manufacturers selected by B Sky B with chips for all the major functions of
the box as well as memory components.
In addition to the many dedicated and semicustom ICs developed using
power analog, digital and mixed signal technologies, the Company has focused its
research and manufacturing efforts on developing an advanced range of the key
technological building blocks required by the targeted applications. These
building blocks include (i) MPEG 2 ICs, (ii) a family of 16 bit (ST10) and 32
bit (ST20) microcontrollers, (iii) a family of DSP cores for embedded
applications based on the current D950 solution and the D960ST100 (currently under
development), (iv) microprocessor architecture (x86 equivalent) aimed at
integrated applications and (v) the ability to integrate nonvolatile memory
(particularly EEPROM and flash) functionality.
Applying its broad range of technologies and its expertise in diverse
application domains, the Company is currently embedding dedicated, and
semicustom
circuits and applying these advanced building blocks on the same chip. Superintegrated
products developed to date include the STi5500 Omega chip (a platform for
digital consumer applications such as set-top boxesboxes), which has achieved
significant design wins.
At the beginning of 1999, the Company implemented organizational changes
to better orient its product groups to end use applications. As a result, the
former Dedicated Products Group ("DPG") has become the Telecommunications,
Peripherals and DVDs)Automotive Groups ("TPA"), while the ST PCformer Programmable
Products Group has become the Consumer (a one-chip computer for motherboards of low-end
personal computers and network computers),Microcontroller Groups ("CMG").
Consequently, the V187 (a superintegrated chip-
set for hard disk drives) and the M39432 (a one-chip nonvolatile memory
integrating both an EEPROM and a flash memory). The Company is also developing
superintegrated chips for wireless telecommunications and automotive
applications.
The Company's products are now organized into fourthe following
principal product groups:
Dedicatedo Telecommunications, Peripherals and Automotive,
o Consumer and Microcontroller,
o Memory Products,
o Discrete and Standard ICs, Memory Products and
Programmable Products.ICs.
As part of its activities outside the fourabove principal product groups, the
Company also has a New Ventures Group, which identifies and develops new
business opportunities to complement the Company's existing businesses, and a
Subsystems Product Group, which produces subsystems for industrial and other
applications.
The DEDICATED PRODUCTS GROUP producesTelecommunications, Peripherals and Automotive Groups (formerly the
Dedicated Products Group) produce application-specific semiconductor products
using advanced bipolar, CMOS, BiCMOS, mixed-signal and power technologies. The
Group's dedicatedGroups' products are used in all major end-user applications, including emerging
applications such new applications as mobile communications networks, asynchronous transfer mode
communications systems, global positioning systems, flat panel displays, hard
disk drives and digital video systems.printers. The breadth of the Group'sGroups' customer and application
base provides it with a source of stability in the cyclical semiconductor
market, while itstheir position as a strategic supplier of application-specific
products provides it with opportunities to supply its customers' requirements for
other products, including discrete devices, programmable productsmicrocontrollers and memories.
5
The DISCRETE AND STANDARD ICS GROUP produces discrete power devices,
power transistors, standard linearConsumer and logicMicrocontroller Groups (formerly the Programmable
Products Group) produce microcontrollers, graphic controllers and MPEG decoder
ICs and radio frequency
("RF") products.image processing semicustom devices for digital set-top boxes, DVDs,
digital cameras, TVs, monitors and other products particularly targeted at high
growth digital applications.
The Group's discrete and standard
4
products are manufactured using mature technological processes that are
less capital intensive than the Company's other principal products. TheMemory Products Group has a diverse customer base and broad product portfolio.
The MEMORY PRODUCTS GROUP produces a broad range of memory products,
including EPROMs, chips for smartcards, EEPROMs, flash memories and specialty
nonvolatile SRAMs. According to published industry data, the Company was the
leading supplier of EPROMs in 1997,1998, accounting for approximately 32%38% of
worldwide EPROM sales, as well as the leading supplier of microcontroller-based
smartcard chipsICs and the second leading supplier of EEPROMs. The Company has
developed proprietary know-how for flash memory devices and has started mass
production for this market. The Group does not produce DRAMs, a commodity memory
product.
The Discrete and Standard ICs Group produces discrete power devices, power
transistors, standard linear and logic ICs and radio frequency ("RF") products.
The Group's discrete and standard products are manufactured using mature
technological processes that are less capital intensive than the Company's sales of smartcard chips in 1997 totaled approximately
$222 million (approximatelyother
principal products. The Group has a 30% increase on 1996 smartcard sales)diverse customer base and broad product
portfolio.
One of the approximately $515 million worldwide market (according to Company
estimates), reinforcingsignificant new product introductions of 1998 by the Company's leading market position with
approximatelyNew
Ventures Group was the STPC Industrial, a 43% market share.
In February 1998, the Company and Mitsubishi announcedsuperintegrated PC-on-a-chip that
they will
jointly develop a new generation of flash memory products, starting with
multi-level 64Mbit, which will provide the advantages of both DINOR and
NOR architecturesoffers full PC functionality for applications such as well as associated processes from 0.20 through 0.18
micron.
The PROGRAMMABLE PRODUCTS GROUP produces 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.
In December 1997, STMicroelectronics and Hitachi, Ltd ("Hitachi")
announced an agreement to collaborate on the development of next-
generation SuperH microprocessors for consumer electronics and multimedia
applications. Under the agreement, the two companies will develop the new
64-bit SH-5/ST50 series based on Hitachi's original SuperH architecture
and STMicroelectronics' know-how in 64-bit microprocessors, for
interactive set-topkiosks,
point-of-sale terminals, Internet-surfing boxes, digital video products, car multimediasecurity access systems and
other consumer-orientated products.industrial PCs.
The NEW VENTURES GROUP identifies and develops new business
opportunities to complement the Company's existing businesses and exploit
its technological know-how, manufacturing capabilities and global
marketing team. Initial activities have focused on manufacturing and
marketing x86 microprocessors and products based on x86 embedded cores.
New activities include design and manufacturing of "system on silicon"
solutions based on the 486 CPU core.
In 1997, STMicroelectronics introduced the ST PC Consumer chip, a low
cost, high performance multimedia PC on a single chip with a view to
developing new generations of ST PC products. The new device integrates a
high performance processor that is fully compatible with standard fifth
generation x86 devices, comprehensive support logic, a graphics subsystem
and a video pipeline. In 1997, STMicroelectronics also acquired a
majority interest in Metaflow Technologies Incorporated ("Metaflow"), a
specialist developer of microprocessor architecture, which is working
with the Company in the development of x86 products and cores. The
Company also has licensed the high speed Rambus interface for its
Multimedia IC product family.
STMicroelectronics has substantially increased its front-end manufacturing
capacity in recent years through the addition of new 8-inch submicron
fabrication plants designed to meet the growing demand for its products. The
Company has added anVolume
production of 8-inch 0.5/0.25 micron facilitywafers is now underway in Crolles, France thatwhich is already
operating at close to full capacity, and production is ramping up production
at new 8-inch, 0.5/0.35 micron facilities in Phoenix,
Arizona and Catania, Italy. NewThe buildings for new 8-inch submicron fabrication
plants are currently under
constructionhave been completed at existing plant sites in Rousset (France), and Agrate
(Italy) and construction of a new submicron facility is underway in Singapore.
An additional 8-inch submicron fabrication plant in Italy is planned to become
operational by the year 2001. The Company has decided to build a new 300
millimeter, 12-inch wafer research fabrication and pilot line at Crolles
(France) using 0.18 micron and below process technology. The pilot line will be
operated in partnership with LetiLETI and CNET, which are already
5
working with the
Company in Crolles. The Company has also announced plans for a new center for
advanced research and development and industrialization in the field of
nonvolatile memories in Agrate (Italy) to target 0.13 micron CMOS technology
generation by 2003.
STMicroelectronics is international in scope. The Company operates
front-
endfront-end and/or back-end manufacturing facilities in Europe, the United States,
the Mediterranean and Asia Pacific regions, and conducts research and
development primarily in France and Italy and design, marketing and sales
activities in each of the electronics industry's major economic regions: Europe,
the United States, the Asia Pacific region and Japan. In 1997,1998, approximately
43.6%41.6% of the Company's net revenues originated in Europe (compared to 43.4%43.6% in
1996)1997), approximately 22.4%22.1% in the Americas (compared to 21.9%22.4% in 1996)1997),
approximately 26.5%29.4% in the Asia Pacific region (compared to 27.3%26.5% in 1996)1997),
approximately 5.3%4.3% in Japan (compared to 5.5%5.3% in 1996)1997) and approximately 2.2%2.6% in
Region Five (including emerging markets such as South America, Africa, Eastern
Europe and the Middle East) (compared to 1.9%2.2% in 1996)1997). See "--Sales,
Marketing and Distribution." In 1997,1998, more than one-third30% of the 6-inch equivalent
wafers manufactured by the Company were manufactured outside Europe and
approximately 57%56% of the Company's employees were located outside Europe.
STMicroelectronics believes that strategic alliances are critical to
success in the semiconductor industry, and has entered into strategic alliances
with customers, other semiconductor manufacturers and major suppliers of design
software. The Company has entered into several strategic customer alliances,
including alliances with Alcatel, Bosch, Daewoo Electronics, Hewlett-Packard,
Marelli, Nokia, Nortel Networks, Pioneer, Seagate Technology, Thomson Multimedia
and Western Digital, among others. Customer alliances provide the Company with
valuable systems and
6
application know-how and access to markets for key products, while allowing the
Company's customers to share some of the risks of product development with the
Company and gain access to the Company's process technologies and manufacturing
infrastructure. Alliances with other semiconductor manufacturers, such as the
recently announcedcooperation with Philips Semiconductors in Crolles, France, for the development
of advanced CMOS logic manufacturing processes, the agreement with Mitsubishi
for CMOS flash memory processes using 0.20 through 0.18 micron and the agreement
with Hitachi on SuperH microprocessors, permit costly research and development
and manufacturing resources to be shared to mutual advantage for joint
technology development. The Company has also entered into technology
development alliances with customers and other manufacturers. In 1997, the
Company extended the technology cooperation agreements with CNET (the research
laboratory of France Telecom), and with Philips Semiconductors aimed at the
joint development in Crolles, France of advanced submicron CMOS logic
manufacturing processes. Other agreements include the ongoing cooperation with
also for the development of CMOS logic, the cooperation with Nortel
Networks for the development of 0.5/0.35 micron BiCMOS technology, and the new agreement with
Mitsubishi for CMOS flash memory processes using 0.20 through 0.18 micron.technology. The Company
has established joint development programs with leading suppliers such as Air
Liquide, Applied Materials, ASM Lithography, Canon, Hewlett-Packard, KLA-Tencor,KLA-
Tencor, LAM, MEMC, Schlumberger, Teradyne and Wacker and with CAD tool producers
including Cadence and Synopsys. It is a participant in Sematech I 300I for the
development of 300 millimeter wafer manufacturing processes. STMicroelectronics
is active in joint European research efforts such as the new MEDEA program
(which succeeded JESSI in 1997), and also cooperates with major research
institutions and universities.
In March 1998, STMicroelectronics with its partners Philips Semiconductors
and CNET completed the first phase of the development of HCMOS-8, the next
generation CMOS process, at Crolles, France. This process is targeted at
high-
performancehigh-performance and low-power applications and will have a 0.15 micron
effective gate length (equivalent to 0.18 micron drawn). Prototyping in this
process will beginbegan in the second half of 1998. At the same time, STMicroelectronics
has started production of its 0.20 micron effective gate length (0.25 micron
drawn) CMOS technology, known as HCMOS-7.HCMOS- 7. This process will beis used to produce
"system-on-chip" products incorporating tens of millions of transistors combined
with embedded memory for telecom, digital consumer and PC applications.
RECENT DEVELOPMENTS
More specific recent developments include the following:
Within the DEDICATED PRODUCTS GROUP, in 1997 STMicroelectronics signed
an agreement with Alcatel to access the technology for implementing ATM
over Asymmetrical Digital Subscriber Line
6
(ADSL) with rate adaptive capability, which increases data transmission
over existing telephone subscriber loop networks. The Company intends to
develop a family of highly integrated xDSL ICs as a result of this
partnership. STMicroelectronics also has entered into a product
development agreement with Philips Semiconductors to develop jointly and
promote a front-end chip-set for Digital Video Broadcast-Terrestrial
(DVB-T*), the European standard for terrestrial broadcasting of digital
television signals. Applying third-generation bipolar-CMOS-DMOS (BCD3)
technology, STMicroelectronics also introduced a super smart power
doorlock (L9942) IC that combines on one chip all of the functions needed
to control and drive a doorlock actuator motor. In the computer
peripherals area, the Company is currently developing superintegrated
solutions using its broad range of technologies (CMOS, BiCMOS, BCD) and
its distinctive know-how in microcontrollers/DSP cores, dedicated IC
megacells and embedded memory capability for hard disk drive application.
The same methodology is applied to other computer peripherals such as
monitors and inkjet printers.
In October 1997, ST Microelectronics introduced the first of its
Starman chip-set to equip the receivers for the first direct-to-listener
satellite systems now being developed by WorldSpace to be launched in
1998. WorldSpace will operate three geostationary satellites in Asia,
Africa and Latin America. The Company will supply the Starman chip-set to
consumer electronics equipment manufacturers selected by WorldSpace.
The Company has joined forces with Logitech to market a kit for
implementing video camera functions in desktop computer monitors. The kit
comprises a chip-set manufactured by the Company and software driver
designed by Logitech and will be marketed to manufacturers of computer
monitors.
Within the DISCRETE AND STANDARD ICS GROUP, in 1997 STMicroelectronics
announced that it will support the VCX standard for logic devices with a
new family of products, designed for high-end applications, that combine
high speed and low power dissipation in applications operating in the 1.8
to 3.6V range. The Company also introduced monolithic TRANSIL diode
arrays designed to provide low cost, reliable protection against
electrostatic overloads for computer I/O parts, modems and similar
systems employing data outputs. Another new family of products, low
voltage power MOSFETs known as the NE series, are being produced with a
new technology that provides substantial advantages over conventional
cellular power MOSFET processes. In 1997, the Company also introduced the
VIPer 100, STMicroelectronics' new device in a family of intelligent
power ICs for switch mode power supply applications.
In the first quarter of 1998, the Company extended its offering of
VIPower technology by introducing a Smart H Bridge Driver that can
sustain high peak current streams for short time periods. The Company
also introduced innovative front-end and packaging technologies that
significantly increase MOSFET power density and a new range of products
based on its Application Specific Discrete (ASD) technology that
integrate two key telephone set functions into a single surface mounting
package.
Within the MEMORY PRODUCTS GROUP, in 1997 the Company acquired a
minority interest in WaferScale Integration, a specialist in nonvolatile
memory architectures. The Company also introduced an 8 Mbit single
voltage flash memory that can operate down to 1.8 volts, offering
significant advantages in portable applications. In 1997, the Company
introduced a series of flash memory ICs combining 4 Mbit flash memory and
a 256 Kbit parallel EEPROM memory for use in cellular phones and other
portable equipment. In the smartcard area, STMicroelectronics introduced
a new device (ST1GRF42) for use in high volume contactless and contact-
based applications, and also licensed the Java Card implementation
(called Solo(TM)) from Schlumberger for advanced security MCU smartcard
chips.
In February 1998, the Company and Mitsubishi announced that they will
join their efforts and resources to develop a new generation of flash
memory products, starting with multi-level 64Mbit, which will provide the
advantages of both DINOR and NOR architectures as well as associated
processes from 0.20 through 0.18 micron.
7
Within the PROGRAMMABLE PRODUCTS GROUP, in 1997 STMicroelectronics
introduced the STi5500 Omega chip, the first in a family of highly
integrated devices that combine an MPEG 2 audio/video decoder with a 32-
bit microprocessor and other functions to create a complete DVD or set-
top box back-end on a single chip. The STi5500, designed to replace three
existing ICs, will enter volume production in 1998.
In December 1997, STMicroelectronics and Hitachi announced an
agreement to collaborate on the development of next-generation SuperH
microprocessors for consumer electronics and multimedia applications.
Under the agreement, the two companies will develop the new 64-bit SH-
5/ST50 series based on Hitachi's original SuperH architecture and
STMicroelectronics' know-how in 64-bit microprocessors, for interactive
set-top boxes, digital video products, car multimedia systems and other
consumer-orientated products.
In March 1998, STMicroelectronics introduced a chip-set that enables
customers, for the first time, to make a complete Global Positioning by
Satellite ("GPS") navigation system with only two ICs, for use in
automotive applications.
In April 1998, STMicroelectronics introduced the STi7000 chip, the
first integrated solution for High-Definition Television (HDTV) combining
an MPEG-2 decoder with an advanced display and format converter into one
single chip.
Certain major international PC OEMs and add-in card manufacturers have
selected the Company's RIVA 128(TM) 3D, PCI/AGP multimedia accelerator to
deliver visual computing on PC platforms. The RIVA 128, which was
developed in conjunction with nVidia, combines advanced interactive 3D
graphics acceleration and industry-leading 2D graphics acceleration with
superior video and imaging capabilities into a single-chip mainstream
multimedia accelerator.
Within the NEW VENTURES GROUP, in 1997 STMicroelectronics introduced
the ST PC Consumer chip, a low cost, high performance multimedia PC on a
single chip with a view to developing new generations of ST PC products.
The new device integrates a high performance processor that is fully
compatible with standard fifth generation x86 devices, comprehensive
support logic, a graphics subsystem and a video pipeline. In 1997,
STMicroelectronics also acquired a majority interest in Metaflow, a
specialist developer of microprocessor architecture, that is working with
the Company in the development of x86 products and cores. The Company
also has licensed the high speed Rambus interface for its Multimedia IC
product family.
In order to remain competitive in emerging technologies, STMicroelectronics
has entered into several strategic agreements. The Company has also entered
into technology development alliances with customers and other manufacturers.
The Company has recently extended the technology cooperation agreement with
Philips Semiconductors aimed at the joint development in Crolles, France of
advanced submicron CMOS logic manufacturing processes. Other agreements
include the ongoing cooperation with CNET (the research laboratory of France
Telecom), also for the development of CMOS logic, and the cooperation with
Nortel for the development of 0.5/0.35 micron BiCMOS technology, and the new
agreement with Mitsubishi for CMOS flash memory processes using 0.20 through
0.18 micron.
In March 1998, STMicroelectronics and its partners completed the first
phase of the development of HCMOS-8, the next generation CMOS process, at
Crolles, France. This process is targeted at high-performance and low-power
applications and will have a 0.15 micron effective gate length (equivalent to
0.18 micron drawn). Prototyping in this process is scheduled to begin in the
second half of 1998. At the same time, STMicroelectronics has started
production of its 0.20 micron effective gate length (0.25 micron drawn) CMOS
technology, known as HCMOS-7. This process will be used to produce "system-on-
chip" products incorporating tens of millions of transistors combined with
embedded memory for telecom, digital consumer and PC applications.
8
INDUSTRY BACKGROUNDIndustry Background
Semiconductors are the basic building blocks used to create an increasing
variety of electronic products and systems. Since the invention of the
transistor in 1948, continuous improvements in semiconductor process and design
technologies have led to smaller, more complex and more reliable devices at a
lower cost per function. As performance has increased and size and cost have
decreased, semiconductors have expanded beyond their original primary
applications (military applications and computer systems), to applications such
as telecommunications systems, automotive products, consumer goods and
industrial automation and control systems. In addition, system users and
designers have demanded systems with more functionality, higher levels of
performance, greater reliability and shorter design cycle times, all in smaller
packages at lower costs. These demands have resulted in increased semiconductor
content as a percentage of system cost. Calculated on the basis of TAMthe total
available market (the "TAM"), which includes all semiconductor products, as a
percentage of worldwide revenues from production of electronic equipment
according to published industry data, semiconductor pervasiveness has increased
from approximately 9% in 1991 to approximately 15%13% in 1997.1998. The demand for
electronic systems has also expanded geographically with the emergence of new
markets, particularly in the Asia Pacific region.
Semiconductor sales have increased significantly over the long term but
have experienced significant cyclical variations in growth rates. According to
trade association data the TAM increased from $17.8 billion in 1983 to $132$125.6
billion in 19961998 (growing at a compound annual rate of approximately 17%14%). At the
same time the serviceable available market (the "SAM"), accordingwhich prior to trade association data), while1995
consisted of the SAMTAM without DRAMS, microprocessors and opto-electronic products
and commencing in 1995 and for all subsequent periods presented, includes
microprocessors as a result of the Company's production of x86 products,
increased from approximately $15.0 billion in 1983 to $103$107.0 billion in 19961998
(growing at a compound annual rate of approximately 16%14%). In 1996,1998, the TAM
decreased by 8.6%, while in 1997 the TAM increased by 4.0%.8.4 %. Based on preliminary trade association data for the first quarter of
1998,1999, the TAM decreasedincreased in the first quarter of 19981999 by approximately 4.9%6.8% compared to the
first quarter of 1997.1998. The SAM increased 3.5%decreased 5.2% in 19961998 compared to 1995 and 9.9% in 1997 compared to
1996;1997; however,
based on preliminary trade association data for the first quarter of 1998,1999, the SAM decreasedincreased
by approximately 2.5% in the first quarter
of 19983.5% compared to the first quarter of 1997.1998. In 1997,1998, approximately
33.4%7
33% of all semiconductors were shipped to the Americas, 23.4%21% to Japan, 21.2%23% to
Europe, and 22%23% to the Asia Pacific region.
Although cyclical changes in production capacity in the semiconductor
industry and demand for electronic systems have resulted in pronounced cyclical
changes in the level of semiconductor sales and fluctuations in prices and
margins for semiconductor products from time to time, the semiconductor industry
has experienced substantial growth over the long term. Factors that are
contributing to long-term growth include the development of new semiconductor
applications, increased semiconductor content as a percentage of total system
cost, emerging strategic partnerships and growth in the electronic systems
industry in the Asia Pacific region.
SEMICONDUCTOR CLASSIFICATIONSSemiconductor Classifications
The process technologies, levels of integration, design specificity,
functional technologies and applications for different semiconductor products
vary significantly. As differences in these characteristics have increased, the
semiconductor market has become highly diversified as well as subject to
constant and rapid change. Semiconductor product markets may be classified
according to each of these characteristics.
Semiconductors can be manufactured using different process technologies,
each of which is particularly suited to different applications. Since the
mid-
1970s,mid-1970s, the two dominant processes have been bipolar (the original technology
used to produce integrated circuits) and CMOS (complementary
metal-oxide-
silicon)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 9
technologies. For intelligent power applications,
BCD technologies have been developed that combine bipolar, CMOS and DMOS
technologies. Such systems-
orientedsystems-oriented technologies require more process steps and
mask levels, and are more complex than the basic function-oriented technologies.
The use of systems- oriented technologies requires knowledge of system design
and performance characteristics (in particular, analog and mixed-signal systems
and power systems) as well as expertise and experience with several
semiconductor process technologies.
Semiconductors are often classified as either discrete devices (such as
individual diodes, thyristors, transistors as well as opto-electronic products)
or integrated circuits (in which thousands of functions are combined on a single
"chip" of silicon to form a more complex circuit). Compared to the market for
ICs, there is typically less differentiation among discrete products supplied by
different semiconductor manufacturers. Also, discrete markets have generally
grown at slower, but more stable, rates than IC markets.
Semiconductors may also be classified as either standard components or
application-specific ICs ("ASICs"). Standard components are used by a large
group of systems designers for a broad range of applications, while ASICs are
designed to perform specific functions in specific applications. Generally,
there are three types of ASICs: full-custom devices, semicustom devices and
application-specific standard products ("ASSPs"). Full custom devices are
typically designed to meet the particular requirements of one specific customer.
Semicustom devices are more standardized ICs that can be customized with
efficient CAD tools within a short design cycle time to perform specific
functions. ASSPs are standardized ASICs that are designed to perform specific
functions in a specific application, but are not proprietary to a single
customer.
8
The two basic functional technologies for semiconductor products are
analog and digital. Analog (or linear) devices monitor, condition, amplify or
transform analog signals, which are signals that vary continuously over a wide
range of values. Analog circuits are critical as an interface between electronic
systems and a variety of real world phenomena such as sound, light, temperature,
pressure, weight or speed. Electronics systems continuously translate analog
signals into digital data, and vice versa.
The analog semiconductor market consists of a large and growing group of
specific markets that serve numerous and widely differing applications,
including applications for automotive systems, instrumentation, computer
peripheral equipment, industrial controls, communications devices, video
products and medical systems. Because of the varied applications for analog
circuits, manufacturers typically offer a greater variety of devices to a more
diverse group of customers. Compared to the market for commodity digital devices
such as standard memory and logic devices, the analog market is characterized by
longer product life cycles, products that are less vulnerable to technological
obsolescence, and lower capital requirements due to the use of mature
manufacturing technologies. Such characteristics have resulted in growth rates
that have been less volatile than growth rates for the overall semiconductor
industry.
Digital devices perform binary arithmetic functions on data represented by
a series of on/off states. Historically, the digital IC market has been
primarily focused on the fast growing markets for computing and information
technology systems. Increasing demands for high-throughput computing and
networking and the proliferation of more powerful personal computers and
workstations in recent years have led to dramatic increases in digital device
density and integration. As a result, significant advances in electronic system
integration have occurred in the design and manufacture of digital devices.
There are two major types of digital ICs: memory products and logic
devices. Memory products, which are used in electronic systems to store data and
program instructions, are generally classified as either volatile memories
(which lose their data content when power supplies are switched off) or
nonvolatile memories (which retain their data content without the need for
constant power supply). Volatile memories are used to store data in virtually
all computer systems, from large and mid-range computers to personal computers
and workstations. Memory products are typically standard, general purpose ICs
that can be manufactured in high volumes using basic CMOS processes, and they
are generally differentiated by cost and physical and performance
characteristics, including data capacity, die size, power consumption and access
speed.
10
The primary volatile memory devices are DRAMs, which accounted for 67.5%60.9%
of semiconductor memory sales in 1997,1998, and SRAMs (static RAMs). DRAMs are
volatile memories that lose their data content when power supplies are switched
off, whereas SRAMs are volatile memories that allow the storage of data in the
memory array but without the need for clock or refresh logic circuitry. SRAMs
are roughly four times as complex as DRAMs (four transistors per bit of memory
compared to one transistor) and are significantly more expensive than DRAMs per
unit of storage. DRAMs are used in a computer's main memory to temporarily store
data retrieved from low cost external mass memory devices such as hard disk
drives. SRAMs are principally used as caches and buffers between a computer's
microprocessor and its DRAM-based main memory.
Nonvolatile memories are typically used to store program instructions that
control the operation of microprocessors and electronic systems. Among such
nonvolatile memories, read-only memories ("ROMs") are permanently programmed
when they are manufactured while programmable ROMs (PROMs) can be programmed by
system designers or end-users after they are manufactured. Erasable PROMs
(EPROMs) may be erased and reprogrammed several times, but to do so EPROMs must
be physically removed from electronic systems, exposed to ultraviolet light,
reprogrammed using an external power supply and then returned to the systems.
Electrically erasable PROMs (EEPROMs) can be erased byte by byte and
reprogrammed "in-system" without the need for removal. Using EEPROMs, a system
designer or user can program or reprogram systems at any time. "Flash" memories
are products
9
that represent an intermediate solution for system designers between EPROMs and
EEPROMs based on their cost and functionality.
Flash memories are typically less expensive than EEPROMs, but can also be
erased and rewritten. The entire contents of a flash memory or large blocks of
data (not individual bytes) can be erased with a "flash" of current. Because
flash memories can be erased and reprogrammed electrically and in-system, they
are more flexible than EPROMs and, therefore, may replace EPROMs in many of
their current applications. Flash memories may also be used for solid state mass
storage of data, a potentially high volume application, and in other
applications including, in particular, mobile telephone systems. Flash
memories are smaller and use less power than the hard disk drives now commonly
used for mass data storage, and, therefore, are considered candidates to
replace disk drives, particularly in portable computers.
Logic devices process digital data to control the operation of electronic
systems. The largest segment of the logic market, standard logic devices,
includes microprocessors, microcontrollers and digital signal processors.
Microprocessors are the central processing units of computer systems.
Microcontrollers are complete computer systems contained on single integrated
circuits that are programmed to specific customer requirements. They contain
microprocessor cores as well as logic circuitry and memory capacity.
Microcontrollers control the operation of electronic and electromechanical
systems by processing input data from electronic sensors and generating
electronic control signals, and are used in a wide variety of consumer products
(alarm systems, household appliance controls and video products), automotive
systems (engine control and dashboard instrumentation), computer peripheral
equipment (disk drives, facsimile machines, printers and optical scanners),
industrial applications (motor drives and process controllers), and
telecommunications systems (telephones, answering machines and digital cellular
phones). Digital signal processors ("DSPs") are parallel processors used for
high complexity, high speed real-time computations in a wide variety of
applications, including answering machines, modems, digital cellular telephone
systems, audio processors and data compression systems. Standard devices are
intended to be utilized by a large group of systems designers for a broad range
of applications. Consequently, standard devices usually contain more functions
than are actually required and, therefore, may not be cost-
effectivecost-effective for certain
specific applications. In addition to standard logic devices, a broad range of
full-custom, semicustom and ASSP logic devices has been developed for a wide
variety of applications. These devices are typically designed to meet particular
customer requirements. Compared to memory markets, logic device markets are much
more differentiated and dependent upon intellectual property and advanced
product design skills.
Analog/digital (or "mixed-signal") ICs combine analog and digital devices
on a single chip to process both analog signals and digital data. Historically,
analog and digital devices have been developed separately as they are
fundamentally different and it has been technically difficult to combine analog
and digital devices on a
11
single IC. System manufacturers have generally
addressed mixed-signal requirements using printed circuit boards containing many
separate analog and digital circuits acquired from multiple suppliers. However,
system designers are increasingly demanding system level integration in which
complete electronic systems containing both analog and digital functions are
integrated on a single IC.
Mixed-signal ICs are typically characterized as analog ICs due to their
similar market characteristics, including longer product life cycles, diverse
applications and customers and more stable growth through economic cycles as
compared to digital devices. However, certain parts of the mixed-signal market
are becoming higher volume markets as the increasing use of mixed-signal devices
has enhanced the options of system designers and contributed to the development
of new applications, including multimedia, video conferencing, automotive, mass
storage and personal communications.
THE SEMICONDUCTOR MARKET10
The Semiconductor Market
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)
-------------------------------- ---------------------------------------Worldwide Semiconductor Sales(1) Compound Annual Growth Rates(2)
------------------------------------------ --------------------------------------
1983 1988 1993 1995 1996 1997 1998 83-88 88-93 93-95 95-96 96-97 93-9797-98 93-98
---- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
------ ------ ----- -----
(IN BILLIONS(in billions $) (EXPRESSED AS PERCENTAGES)(expressed as percentages)
--------------- --------------------------
Integrated Circuits..... 13.3 35.9 66.0 126.1 114.9 119.5 22.0 13.0 38.2 (8.9) 4.0 16.0Circuits. $13.3 $35.9 $66.0 $114.9 $119.5 $109.1 22.0% 13.0% 38.2% (8.8)% 10.6%
Analog (linear and
mixed-signal)............ 2.8 7.2 10.7 16.6 17.0 19.7 19.1 20.8 8.2 24.6 2.4 15.9 16.5(3.4) 12.3
Digital Logic..........Logic...... 6.7 17.8 34.1 56.0 61.9 70.4 67.0 21.6 13.9 28.1 10.5 13.6 19.8(4.9) 14.5
Memory:
DRAM.................DRAM.......... 1.7 6.3 13.1 40.8 25.1 19.7 14.0 30.0 15.8 76.5 (38.5) (21.5) 10.7
Others...............(29.2) 1.3
Others........ 2.0 4.6 8.1 12.6 10.9 9.6 9.0 18.1 12.0 24.7 (13.5) (11.9) 4.3
---- ----(5.8) 2.0
----- ----- ----- ------ ------ --- ----- ----- ------ ------ -----
Total Memory.... 3.7 10.9 21.2 36.0 29.3 23.0 24.1 14.2 58.7 (21.6) 1.6
Total digital....... 10.4 28.7 55.3 97.9 99.6 90.0 22.5 14.0 40.7 (9.8) 10.2
Discrete............. 3.7 7.0 8.6 12.9 13.1 11.9 13.6 4.2 27.6 (9.4) 6.7
Opto-electronics.... 0.7 2.1 2.6 4.1 4.5 4.6 24.6 4.4 28.6 2.5 11.7
----- ----- ----- ------ ------ ------ ----- ----- ------ ------ -----
TAM............. 17.8 45.0 77.3 132.0 137.2 125.6 20.4 11.4 36.7 (8.4) 10.2
===== ===== ===== ====== ====== ====== ===== ===== ====== ====== =====
Europe............... 3.3 8.1 14.6 27.6 29.1 29.4 19.7 12.5 39.0 1.1 15.0
Americas............ 7.8 13.4 24.7 42.7 45.9 41.4 11.4 13.0 37.9 (9.6) 10.9
Asia Pacific........ 1.2 5.4 14.2 27.5 30.1 28.9 35.1 21.3 44.1 (4.4) 15.3
Japan................ 5.5 18.1 23.8 34.2 32.1 25.9 26.9 5.6 29.2 (19.2) 1.7
------ ----- ----- ------ ------ ---- ----- ----- ----- ---- ---- ---------- ------ -----
----
Total Memory.......... 3.7 10.9 21.2 53.4 36.0 29.3 24.1 14.2 58.7 (32.6) (18.6) 8.4
---- ---- ---- ----- ----- ----- ---- ---- ---- ------ ----- ----
Total digital........... 10.4 28.7 55.3 109.4 97.9 99.6 22.5 14.0 40.7 (10.5) 1.7 15.8
Discrete................ 3.7 7.0 8.6 14.0 12.9 13.1 13.6 4.2 27.6 (7.9) 1.6 11.1
Opto-electronics........ 0.7 2.1 2.6 4.3 4.1 4.5 24.6 4.4 28.6 (4.7) 9.8 14.7
---- ---- ---- ----- ----- ----- ---- ---- ---- ------ ----- ----
TAM...................TAM............. $ 17.8 45.0 77.3 144.4 132.0 137.2 20.4 11.4 36.7 (8.6) 4.0 15.4
==== ==== ====$45.0 $77.3 $132.0 $137.2 $125.6 20.4% 11.4% 36.7% (8.4)% 10.2%
===== ===== ===== ==== ==== ========== ====== ====== ===== ====
Europe.................. 3.3 8.1 14.6 28.2 27.6 29.1 19.7 12.5 39.0 (2.1) 5.4 18.8
Americas................ 7.8 13.4 24.7 47.0 42.7 45.9 11.4 13.0 37.9 (9.1) 7.5 16.8
Asia Pacific............ 1.2 5.4 14.2 29.5 27.5 30.1 35.1 21.3 44.1 (6.8) 9.5 20.7
Japan................... 5.5 18.1 23.8 39.7 34.2 32.1 26.9 5.6 29.2 (13.9) (6.1) 7.8
---- ---- ---- ----- ----- ----- ---- ---- ---- ------ ----- ----
TAM................... 17.8 45.0 77.3 144.4 132.0 137.2 20.4 11.4 36.7 (8.6) 4.0 15.4
==== ==== ==== ===== ===== ===== ==== ==== ========== ====== =====
====
- --------- --------------
(1) Source: WSTS.
(2) Calculated using end points of the periods specified.
During the 1960s and 1970s, the development of semiconductor process
technologies was critical to the success of participants in the industry. As
process technologies matured, manufacturing sciences became important; in the
1980s, the emphasis shifted to increasing production volumes and yields and
lowering production costs. The large capital expenditures and other resources
required during this period to develop advanced manufacturing capabilities
resulted in a stratification of the industry between broad range suppliers
operating multiple front-end and back-end manufacturing facilities and specialty
niche players operating small wafer fabs or subcontracting wafer production.
With the continuing development of new semiconductor applications and
increasing demands of system designers for more integrated systems-oriented
products, semiconductor manufacturers must continually improve 12
their core
technology and manufacturing competencies. In addition, the increasing diversity
and complexity of semiconductor products, the demands of technological change,
and the costs associated with keeping pace with industry developments have
contributed to the growth of cooperative product design and development and
manufacturing alliances with customers as well as among semiconductor suppliers.
Alliances with customers provide the manufacturer with valuable systems and
application know-how and access to markets for key products, while allowing the
manufacturer's customers to share some of the risks and benefits of product
development. Customers also gain access to the manufacturer's process
technologies and manufacturing infrastructure. Alliances with other
semiconductor manufacturers permit costly
11
research and development and manufacturing resources to be shared to mutual
advantage for joint technology development.
The Company believes that major new growth segments in the semiconductor
market are developing, in particular for digital multimedia, networking and
wireless communications applications. New applications have emerged, such as
set-top boxes, digital television, digital video discs, digital mobile computing
and communicationcommunications, smartcards, automotive multimedia, digital still imaging and
mass storage, that are requiring new and rapidly evolving semiconductor
technologies. The Company believes many of these new products will require a
high level of semiconductor integration, combining various technologies such as
bipolar, analog, CMOS, power and nonvolatile memory, on a single chip.
To compete as a broad line semiconductor manufacturer, management
believes that it is important to have: (i) a broad and diverse customer base;
(ii) a diversified product portfolio (including analog, digital mixed-signal and
power products) and experience in several application markets; (iii) a broad
range of process technologies (including basic function-oriented and advanced
systems-oriented technologies); (iv) design extension and CAD tools in both
analog and digital technologies; (v) an efficient, quality, global manufacturing
infrastructure; (vi) global marketing and technical support; and (vii) a
worldwide network of strategic alliances with customers and other semiconductor
manufacturers. The Company also believes that its independence from any single
system group manufacturer is an advantage for STMicroelectronics in working
closely with customers in different market segments.
STRATEGYStrategy
In 1996 the Company achieved its Vision 2000 objective, originally
adopted in 1993, to become one of the world's top ten semiconductor suppliers
and to achieve operating results better than the average of the top ten
semiconductor suppliers. The Company maintained its position as oneIn 1998, according to published industry data,
STMicroelectronics ranked ninth among worldwide suppliers of the world's top ten
semiconductor
suppliers in 1997.devices. Management's objective is to consolidate and improve its ranking within
the top ten semiconductor suppliers while sustaining or improving its operating
results relative to its peer group. The key elements of the Company's strategy
are set forth below.
Broad Range Supplier. The Company offers a diversified product portfolio
and develops products for a wide range of market applications to reduce its
dependence on any single product, industry or application market. As a broad
range supplier, the Company provides its customers with a single source of
supply for multiple product needs. Within its
diversified product portfolio, the Company has focused on developing products that
exploit its technological strengths includingin creating customized, system-level
solutions with substantial analog and mixed-signal content. Products include
differentiated ICs (which the Company defines as being its dedicated products,
semicustom devices and microcontrollers).
Differentiated and analog ICs foster(including mixed-signal
ICs), the majority of which are also differentiated ICs. As a leading provider
of differentiated ICs, the Company has developed close relationships with
customers, resulting in early knowledge of their evolving requirements and
opportunities to access their markets for other products, andproducts. Differentiated ICs,
which are less vulnerable to competitive pressures than standard commodity
products. Differentiated ICsproducts, accounted for approximately 57%62% of the Company's net revenues in 19971998
compared to approximately 59%57% in 1996.1997. The Company also targets applications
that require substantial analog and mixed-signal content and can exploit the
Company's system level expertise. Analog ICs (including mixed-signal ICs), the majority
of which are also differentiated ICs, accounted for approximately 49%51% of
the Company's 19971998 net revenues compared to approximately 46%49% in 1996,1997, while
discrete devices accounted for approximately 14%13% of the Company's 1997 and
1996 net revenues.revenues
in 1998 compared to approximately 14% in 1997. In recent years differentiated
ICs, in particular analog ICs, and discrete devices have experienced less volatility in sales growth
rates and average selling prices than the overall semiconductor industry.
13
However, as a broad range supplier, the Company can also benefit from
selling standard products. Consistent with this view, the Company has
established the Gold Standard program to promote the sale of certain standard
products meeting specified quality, cost and lead-time criteria. The related
initiatives include worldwide advertising, promotional task forces in all
regions, special distribution initiatives and worldwide training of sales and
marketing personnel.
12
Total standard products (including all nonvolatile memories, discrete
devices, and all standard logical and linear ICs) represented over 40%approximately 38%
of the Company's sales in 1997,1998 and, in management's view, increased sales of
these products represent an opportunity to improve cash flow because they requirethe
manufacture of standard products requires little capital investment.
Leader in a Broad Range of Process and Design Technologies. The Company
intends to continue to exploit its expertise and experience with a wide range of
process and design technologies to develop its capabilities. The Company is
committed to continuing to increase research and development expenditures in the
future as well as continuing to develop alliances with other semiconductor
manufacturers and supplierscompanies and suppliers of software development tools. Technological advances in
the areas of transistor performance and interconnection technologies are being
developed through the Company's logic products and semicustom devices. In 1996,1998
the Company developed a 0.25 micron,
six-metal layers process that can be used to create either circuits which
operate at high speed (clock frequencypursued the development of 400 MHZ at 2.5V) or circuits with
low power consumption (1.0V supply) and capable of densities of up to 30,000
gates per millimeter square. In 1997 the Company started to develop the advanced process steps necessary for
its 0.18 micron seven metal layer process that can operate at high clock speeds
(frequency of 500 MHZ at 1.8V) and capable of densities of up to 50,000 gates
per square millimeter. The first
phase of development of this process was completed at the beginning of 1998. The Company continually works with key suppliers to
develop advanced and standardized design methodologies for its CMOS processes as
well as libraries of macrofunctions and megafunctions for many of its products,
and is focusing on improving its concurrent engineering practices to better
coordinate design activities and reduce overall time-to-market. It is also
working closely with many of its key suppliers to develop easy-to-use design
tools for specific applications. Alliances with other semiconductor
manufacturers are generally designed both to permit costly research and
development and manufacturing resources to be shared to mutual advantage for
joint technology development and to reduce time to market. Technology development alliances have been
formed with customers and other manufacturers, including Philips
Semiconductors, aimed at the joint development of advanced CMOS 0.25/0.18
micron semiconductor manufacturing processes, and the new agreement with
Mitsubishi for CMOS flash memory processes using 0.20 through 0.18 micron. The
Company has also established joint development programs with leading suppliers
such as Applied Materials, ASM Lithography, LAM Research and Air Liquide, and
with CAD Tools producers including Cadence and Synopsys. It is a participant
in Sematech I 300I for the development of 300 millimeter (12-inch) wafer
manufacturing processes. STMicroelectronics is active in joint European
research efforts such as the new MEDEA program (which succeeded JESSI as of
1997), and also cooperates with major research institutions and universities.
Diversified Customer Base with Focus on Strategic Alliances. The Company
works with its key customers to identify evolving needs and new applications and
to develop innovative products and product features. The Company also seeks to
use its access to key customers as a supplier of application-specific products
to establish itself as a supplier across a broad range of products. Alliances
with customers allow the Company and its customers to share some of the risks of
product development and the customers to gain access to the Company's process
technologies and manufacturing infrastructure. The Company has targeted
alliances with customers in each of its key application markets of
telecommunications, automotive, consumer and computer. It has established
alliances with, among others, Alcatel, Bosch, Daewoo Electronics,
Hewlett-
Packard,Hewlett-Packard, Marelli, Nokia, Nortel Networks, Pioneer, Seagate Technology,
Thomson Multimedia and Western Digital. In establishing these alliances, the
Company has also aimed to cover its key geographical markets.
Integrated Presence in Key Regional Markets. The Company has consistently
sought to develop a competitive advantage by building an integrated presence in
each of the world's three major economic zones: Europe, Asia and North America.
An integrated presence means having manufacturing, design, sales and marketing
capabilities in each region, in order to ensure that the Company is well
positioned to anticipate and 14
meet its customers' business requirements in local
markets. Therefore, the Company has established front-end manufacturing
facilities in the United States (in Phoenix, CarroltonCarrollton and Rancho Bernardo), in
Europe (Agrate, Casteletto, Catania, Crolles, Rennes, Rousset and Tours) and in
Asia (Singapore); the more labor-intensive back-end facilities have been located
in Malaysia, Malta, Morocco, Singapore and China, enabling the Company to take
advantage of favorable production costs (particularly labor costs). With major
design centers and local sales and marketing groups within close proximity of
key customers in each region, the Company believes it can maintain strong
relationships with its customers. STMicroelectronics intends to continue to
build its integrated local presence in each region where it competes in its
efforts to better serve its customers and to develop an early presence in
potential high growth markets such as China, where the Company has both a
back-end facility and a design center, and India, where the Company has a design
center.
Balanced Sales by Application and Region in High Growth Market Segments.
The Company has developed a strong product portfolio across major application
markets including computer peripherals, wireless communications, digital
consumer electronics, smartcards, automotive and power management. While the
Company is consolidating its
13
position in its established high volume businesses, including switching, engine
management, car safety, traditional analog TV, VCR, computer peripherals, power
and industrial and consumer appliances, it has also been investing research and
development and design resources to develop the next generation of high growth
applications, such as smartcards, portable computing, digital consumer (DVD, new
generations of set-top boxes, digital TV), wireless communications (digital
cellular phones), high speed modems (xDSL), new automotive products (car
multimedia) and new generations of hard
disk drive.mass storage devices. The Company also
maintains a geographically diverse customer base across a broad range of market
applications.
To date, the Company's growth has been attributable primarily to internal
growth. However, in 1998, the Company announced the acquisition from Adaptec of
Peripheral Technology Solutions Group which is specialized in the design of
products for the hard disk drive market, as well as the purchase of Vision
Group, a leading designer and supplier of CMOS sensors. These purchases and
acquisitions were completed in 1999. Furthermore, the Company may, from time to
time, consider making selected acquisitions that the Company believes would
complement or expand its existing business. Announcements concerning potential
acquisitions could be made at any time. Acquisitions involve a number of risks
that could adversely affect the Company's operating results, including: (i) the
diversion of management's attention; (ii) the assimilation of the operations and
personnel of the acquired companies; (iii) the assumption of potential
liabilities, disclosed or undisclosed, associated with the business acquired,
which liabilities may exceed the amount of indemnification available from the
seller; (iv) the risk that the financial and accounting systems utilized by the
business acquired will not meet the Company's standards; (v) the risk that the
businesses acquired will not maintain the quality of products and services that
the Company has historically provided; (vi) the inability to attract and retain
qualified management for the acquired business; and (vii) the inability of the
Company to retain customers of the acquired entity. There can be no assurance
that (a) the Company will be able to consummate future acquisitions on
satisfactory terms, if at all, (b) adequate financing will be available for
future acquisitions on terms acceptable to the Company, if at all, or (c) any
operations acquired will be successfully integrated or that such operations will
ultimately have a positive impact on the Company. See "Item 9: Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Announcements concerning
potential acquisitions could be made at any time.
CUSTOMERS AND APPLICATIONSCustomers and Applications
STMicroelectronics designs, develops, manufactures and markets over 3,000
main types of products that it sells to more than approximately 700800 direct customers. The
Company also sells its products through distributors. To many of its key
customers the Company provides a wide range of products, including dedicated
products, discrete devices, memory products and programmable products. The
Company's position as a strategic supplier of application-
specificapplication-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.
15
The following table sets forth certain of the Company's significant
customers and certain applications for its products:
- ---------------------------------------------------------------------------------------------
TELECOMMUNICATIONS
Customers: Alcatel Fujitsu Nokia Samsung
AT&T Goldstar Nortel Siemens
Daewoo Italtel Philips
Ericsson Motorola Sagem
---------------------------------------------------------------------------------
Applications: Answering machines Modems
Central office switching systems PBX systems
Digital cellular telephones Telephone sets (corded and cordless)
ISDN controllers
- ---------------------------------------------------------------------------------------------
COMPUTER SYSTEMS
Customers: ACER Compaq Hewlett-Packard Seagate Technology
Adaptec Creative IBM Tatung
Technology
ATI Technologies Cyrix Matsushita Western Digital
Bull DEC Olivetti Xerox
Canon Epson Quantum
---------------------------------------------------------------------------------
Applications: Disk drives Optical scanners
Monitors Photocopiers
Network controllers Printers
- ---------------------------------------------------------------------------------------------
AUTOMOTIVE
Customers: BMW Daimler-Benz Ford Marelli
Bosch Delco Hyundai Valeo
Chrysler Fiat Peugeot S.A. Renault
---------------------------------------------------------------------------------
Applications: Alternator regulators Ignition circuits
Airbags Injection circuits
Antiskid braking systems Instrument
Automotive entertainment systems Electric motor controllers
Body and chassis electronics Multiplex wiring kits
Central locking systems Transmission control systems
Engine management systems Global positioning systems
- ---------------------------------------------------------------------------------------------
CONSUMER PRODUCTS
Customers: Canal Plus Goldstar Nokia Sharp
Canon Grundig Pace Sony
Creative Kenwood Philips Thomson Multimedia
Technology
Daewoo Matsushita Pioneer
General NEC Samsung
Instrument
---------------------------------------------------------------------------------
Applications: Audio power amplifiers Pay television decoders
Audio processors Satellite receiver decoding circuits
Cable television systems Set up boxes
Compact disk players TV sets and monitors
Digital video encoders and decoders Video cassette recorders
Graphic equalizers
- ---------------------------------------------------------------------------------------------
INDUSTRIAL AND OTHER
APPLICATIONS
Customers: Astec Emerson Mannesman Schlumberger
Asea Brown Boveri Gemplus Orga Siemens
Bull IBM Philips Schneider
---------------------------------------------------------------------------------
Applications: Battery chargers Motor controllers
Chips for smartcards Power supplies
Industrial automation and control Smartcard readers
systems
Intelligent power switches Switch mode power supplies
Lighting systems (lamp ballasts)
- ---------------------------------------------------------------------------------------------
1614
Telecommunications
- --------------------------------------------------------------------------------
Customers: Alcatel Lucent Technologies Nortel Network Samsung
Bosch Motorola Philips Siemens
Ericsson Nokia Sagem Telital
Applications: Answering machines Modems
Central office switching systems PBX systems
Digital cellular telephones Telephone sets
(corded and cordless)
xDSL chip set
- --------------------------------------------------------------------------------
Computer Systems
Customers: ACER Creative Technology NEC 3D Labs
Adaptec Epson Olivetti Western Digital
ATI Technologies Hewlett-Packard Quantum Xerox
Bull IBM Samsung
Compaq Maxtor Seagate Technology
Applications: Data storage Photocopiers
Monitors and displays Printers
Graphics chip sets
- --------------------------------------------------------------------------------
Automotive
Customers: Bosch Delphi Marelli Siemens
Chrysler Ford Motorola Valeo
Daimler-Benz Kenwood Pioneer
Applications: Alternator regulators Ignition circuits
Airbags Injection circuits
Antiskid braking systems Multiplex wiring kits
Automotive entertainment systems Transmission control systems
Body and chassis electronics Global positioning systems
Engine management systems
- --------------------------------------------------------------------------------
Consumer Products
Customers: Bose Corporation Kenwood Philips Sony
Daewoo Matsushita Pioneer Thomson Multimedia
General Instrument NEC Samsung
Lucky Goldstar Nokia Networks Scientific Atlanta
Grundig Pace Sharp
Applications: Audio power amplifiers Digitial TVs
Audio processors Digital video disks
Cable television systems Set-top boxes
Compact disk players TV sets and monitors
Digital cameras Video cassette recorders
- --------------------------------------------------------------------------------
(continued)
15
- --------------------------------------------------------------------------------
Industrial and Other Applications
Customers: Astec Giescke & Devrient Philips Siemens
Delta Liton Schlumberger
De La Rue Mannesman Schneider
Emerson Orga
Gemplus
Applications: Battery chargers Motor controllers
Smartcards ICs Power supplies
Industrial automation and control Switch mode power supplies
systems
Intelligent power switches
Lighting systems (lamp ballasts)
- --------------------------------------------------------------------------------
In 1997, one1998, no single customer accounted for more than 5%10% of the Company's
net revenues, (two customers accounted for more than 5% of net revenues in 1996), and sales to the Company's top ten customers accounted for
approximately 39%43% of the Company's net sales in 1997 (38%1998 (39% in 1996)1997). The Company
has several large customers, certain of whom have entered into strategic
alliances with the Company. Many of the Company's key customers operate in
cyclical businesses and have in the past, and may in the future, vary order
levels significantly from period to period. In addition, approximately 22%18% of
the Company's net revenues in 19971998 were made through distributors, compared to
approximately 21%22% in 1996.1997. There can be no assurance that such customers or
distributors, or any other customers, will continue to place orders with the
Company in the future at the same levels as in prior periods. The loss of one or
more of the Company's customers or distributors, reduced bookings or product
returns by its key customers or distributors, could adversely affect the
Company's operating results. In addition, in a declining market the Company has
been in the past and may in the future be driven to lower prices in response to
competitive pressures. Despite price reductions, however, in an industry
downturn order cancellations may be expected, particularly by distributors and
for commodity products.
PRODUCTS AND TECHNOLOGYProducts 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 until
recently, x86 microprocessors.
TheIn 1998, the Company had four principal products groups: Dedicated
Products, Programmable Products, Memory Products and Discrete and Standard ICs.
Certain information with respect to revenues for these product groups for 1998
is shown in the table below. For a breakdown of the Company's net revenues by
Group and geography for the last three years, see "Item 9: Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations." Revenues for future periods will be
calculated according to the new groups described below.
16
1998 Group Revenues by Region
------------------------------------------------------------------
(percentage of Group net revenues)
Total
Total (% of total North
(in millions) net revenues) Europe America Asia Pacific (1) Region Five Japan
--------------- ------------- -------- --------- ---------------- ------------- ------
Dedicated Products
Group...................... $ 1,865.6 43.9% 36% 21% 37% 2% 4%
Programmable
Products................... 783.4 18.4% 37% 33% 24% 3% 3%
Memory Products............ 659.6 15.5% 54% 16% 18% 2% 10%
Discrete and Standard
ICs........................ 828.7 19.5% 44% 21% 30% 4% 1%
- ---------------
(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 of 1999, the Company implemented organizational changes
to better orient its products groups to end use applications. Its products are
now organized into fourthe following principal product groups: Telecommunications,
Peripherals and Automotive (formerly Dedicated Products), Consumer and
Microcontroller (formerly Programmable Products), Memory Products and Discrete
and Standard ICs, Memory Products and
Programmable Products.ICs. As part of its activities outside the four 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.
DEDICATED PRODUCTS GROUPTelecommunications, Peripherals and Automotive Groups
The Dedicated Products Groups was reorganized into the Telecommunications
Group, designs, developswhich has two applications divisions, and manufacturesthe Automotive and Peripherals
Group, which has four divisions. The video products which formed part of the
former Dedicated Products Group are today encompassed within the Consumer and
Microcontroller Groups. The Groups also have two support divisions (i) digital
signal processing and microcontrollers cores and (ii) digital and mixed
analog/digital semi-custom. The Telecommunications, Peripherals and Automative
Groups are responsible for the design, development and manufacture of
application-specific products using advanced bipolar, CMOS, BiCMOS mixed-
signalmixed-signal
and power technologies as well as mixed analog/digital semicustom devices. The
Group offersGroups offer complete system solutions to customers in several application
markets. As the largest of STMicroelectronics' product groups, the
Dedicated Products Group generated revenues of $1,696.3 million in 1997 (a
decrease of 5% over 1996 revenues), representing approximately 42.2% of
STMicroelectronics' 1997 revenues. Approximately 36% of the Group's net
revenues in 1997 were generated in Europe, while approximately 22%, 36%, and
6% were generated in the Americas, the Asia Pacific region, and Japan,
respectively. Many of the dedicated products sold to the Asia Pacific region
are sold to U.S.-based original equipment manufacturers located in the region.
All of the Group'sGroups' products are ASSPs, full-custom or full custom devices.semicustom
devices that may also include DSP and micro-controllers cores.
The Dedicated Products Group worksTelecommunications, Peripherals and Automotive Groups work closely
with customers to develop application-specific products using
STMicroelectronics' technologies and manufacturing capabilities. The breadth of
the Group'sGroups' 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 provide itprovides them with opportunities to supply such customers' requirements for
other products, including discrete devices, programmable productsmicrocontrollers and memory
products.
The GroupTelecommunications, Peripherals and Automotive Groups particularly
emphasizesemphasize dedicated ICs for telecommunications,
audio, automotive, powercomputer peripherals and computer applications.industrial
application segments, as well as for communication, computing and networking
application segments.
17
The Telecommunications Group is organized into the following six producthas two divisions:
(i)
wireline telecommunications; (ii) wireless telecommunications; (iii) computer
and industrial; (iv) audio and automotive; (v) video; and (vi) mixed analog
and digital semicustom devices.
17
Wireline Telecommunications Products. The Company's
telecommunications products are used primarily in telephone sets,
modems and subscriber line interface cards (SLICs) for digital
central office switching equipment. The GroupCompany is targeting
applications in high speed communications networks and telephone
sets and asynchronous transfer mode ("ATM") communication systems.
In 1997, STMicroelectronics signed an agreement with Alcatel to obtainDuring 1998, significant developments in the technologyCompany's
telecommunications product area included the introduction of the
ToscaTM two-chip set for implementing ATM over AsymetricalAsymmetric Digital Subscriber LineLoop (ADSL)
with rate adaptive capability, which increases data transmission over
existing telephone subscriber loop networks.and the delivery of more than 300,000 full-rate ADSL chip sets to
the leading equipment manufacturer. The Company intendsalso formed a
partnership with Telia Research AB to develop a familyVery high bit-rate
Digital Subscriber Loop (VDSL) system to support broadband
communications facilities for interactive multimedia Internet
access, video-on-demand, and other advanced services. The Company
furthermore announced the Pegas.usBTM chip set, the first host
signal processing modem to take advantage of highly integrated, xDSL ICsthe Universal Serial
Bus for connection to personal computers, as well as a resultsuper-
integrated IC that includes a digital signal processor (DSP) plus
all of this partnershipthe analog functions needed for phone, fax, modem and
its
own development efforts.
Wirelessanswering machine functions.
(ii) Wirelesss Telecommunications Products. In wireless
telecommunications, the Company focuses its product offerings on
cellular phones, pagers and wireless local loop applications,
serving the major OEMs in each of these areas with customer-specificdifferentiated
ICs. In cellular phones, the Company is supplying products for
both the analog and digital market segments (including GSM and
CDMA) and reinforcing its leading position in energy management
(50 million units shipped in 1998), audio CODEC (30 million units
shipped in 1998), and RF/IF ICs (30 million units shipped in
1998). The Company has gained experience and know-how with the
major silicon components of cellular phone applications, and is
developing system and software capabilities to provide full
solutions for specifically targeted applications.
Computerapplications, particularly in
the baseband processor, where in 1998 the Company shipped
approximately 7 million D950 and Industrial Products. STMicroelectronics' computerpursued the development of its
new ST100 DSP cross core currently under development.
The Peripherals and industrial products include components for computer peripheral equipment,
facsimile machines, photocopiers, industrial automation systems and lighting
applications. Its key products are powerAutomotive Group has four divisions:
(i) Data Storage. STMicroelectronics produces ICs for motorseveral data
storage applications, in particular disk drives with advanced
solutions for read and write digital channels, controllers, host
interfaces, digital power processing and read/write amplifiers, intelligent powermicromachinery. The group
is working actively on super-integrating these macro-functions. In
1998, the Company announced the acquisition from Adaptec of
Peripheral Technology Solutions Group which is specialized in the
design of products for the hard disk drive market. The acquisition
was completed in 1999. The acquisition complements the Company's
activities with respect to (i) product line, giving the Company
access to leading disk controller products and know-how, (ii)
design teams, contributing Adaptec's designers with CMOS read
channel product design expertise, (iii) geography, providing the
Company a base in Silicon Valley, and (iv) customer base, adding
customers in Asia Pacific and Japan. In 1998, the Company also
signed a cooperation agreement with IBM to accelerate the
development of advanced system-on-a-chip products, particularly
ICs for spindledata storage applications and PC-compatible information
appliances.
(ii) Printers. STMicroelectronics is focusing on inkjet printer
components and is an important supplier of pen chips, motor
controldrivers, head drivers and head positioning in computer disk drives and battery chargers for portable
electronic systems, particularly mobile telephone sets.image processors. The Company is currently developing superintegrated solutions using its broad rangean
important partner of technologies (CMOS, BiCMOS, BCD)Hewlett-Packard for technology development
and its expertise in microcontrollers/DSP
cores, dedicated IC megacells and embedded memory capabilitymanufacturing. Since the beginning of the cooperation with
Hewlett-Packard, the Company has supplied more than 400,000 wafers
for hard disk
drivepen chip applications.
The same methodology is being applied to develop ICs for
other computer peripherals such as monitors and inkjet printers.18
(iii) Audio and Automotive Products. STMicroelectronics' audio products
include audio power amplifiers, audio processors and graphic
equalizer ICs. The Company has sold more than 1.2 billion audio
power amplifier ICs since 1972. The Company's automotive products
include alternator regulators, airbag controls, antiskid braking
systems, ignition circuits, injection circuits, multiplex wiring
kits and products for body and chassis electronics, engine
management and instrumentation systems. The Company is currently
targeting the
emerging application ofdeveloping solutions for global positioning systems. Applying third-generation
bipolar-CMOS-DMOS (BCD3) technology,systems (GPS) and
multi-media in 1997 STMicroelectronics introducedthe car. In 1998, the Company signed a super smart power doorlock (L9942) ICstrategic
alliance for car entertainment systems with Pioneer Electronics of
Japan. Due to its super-integration know-how, the Company has
successfully expanded its presence beyond Europe to the United
States and Japan, further accessing key customers such as
Mitsubishi and Denso.
In 1998, the Company announced the launch of two devices (ST20 GPG
and STB 5600) that combines on one chip all of the
functions needed to control and drive a doorlock actuator motor. In October
1997, ST Microelectronics introduced the first of its Starman chip-set to
equip the receivers for the first direct-to-listener satellite systems now
being developed by WorldSpacetime allow a complete GPS system
to be launchedimplemented by using just two chips. In the fourth quarter
of 1998, the Company also delivered the first working prototypes
of a single chip system called Euterpe, that combines voice
recognition, voice synthesis and text to speech technologies.
(iv) Industrial and Power Supplies. STMicroelectronics designs and
manufactures products for industrial automation systems, lighting
applications (lamp ballast), battery chargers and switch mode
power supplies (SMPS). Its key products are power ICs for motor
controllers and read/write amplifiers, intelligent power ICs for
spindle motor control and head positioning in 1998. WorldSpace will operate
three geostationary satellitescomputer 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 Asia, Africathe field of semicustom (digital and Latin America.analog) as well as in DSP
and microcontrollers cores. The Company will supply the Starman chip-setis 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 consumer electronic equipment
manufacturers selected by WorldSpace.
Video Products. STMicroelectronics producesdevelop ICs for other computer peripherals such as monitors and
inkjet printers.
Consumer and Microcontroller Groups
The Consumer and Microcontroller Groups are the successors to the
Programmable Products Group and is responsible for the design, development and
manufacture of designs, develops and manufactures microcomponents (including
microcontrollers and digital signal processors), digital semicustom devices,
graphic controllers and MPEG decoder ICs and image processing semicustom devices
for many diverse products targeted at high growth digital applications,
including information technology, automotive and multimedia.
The Consumer and Microcontroller Groups are divided into the Consumer
Group and the Microcontrollers Group, each further divided into several
divisions.
The Consumer Group has four divisions:
(i) Digital Video. Emerging digital video technologies offer a number
of advantages over traditional analog video, including the ability
to compress video data for transmission and storage, to transmit
and reproduce video data without perceptible image degradation and
to randomly access and edit video data. In 1998, the digital
consumer market grew due to the strong growth of digital TV
satellite broadcasting in the United States and digital TV in the
United Kingdom.
19
This division delivers large volumes of MPEG decoder ICs suitable
for video CD products, personal computers, set-top boxes
(including cable, satellite and terrestrial DVD) and digital TV
applications. The majority of these products implement the MPEG 2
standard. In 1998, STMicroelectronics started volume production of
the STi5500 Omega chip, the first in a family of highly integrated
devices that combine an MPEG 2 audio/video decoder with a 32-bit
microprocessor and other functions to create a complete set-top
box back-end section on a single chip. Among recent important
developments for digital TV, the Company introduced the STi5505,
the world's first device to integrate a complete DVD back-end
decoder and a 32-bit host processor on a single. In April 1998,
STMicroelectronics introduced the STi7000 chip, the first
integrated solution for High-Definition Television (HDTV)
combining an MPEG 2 decoder with an advanced display and format
converter into one single chip. Production of the STi7000 started
in the fourth quarter of 1998. The Company has also been selected
to provide the conditional access module to Canal+ for digital TV.
(ii) Consumer Broad Band Division. This division develops chip sets monitors,
videocassette recorders, satellite receivers, pay-tv decodersfor
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
disks.players, digital broadcast and data exchange on cable as well as
for the IEEE 1394 serial digital interface.
(iii) TV, Monitor and Camera Division. This division targets analog
television and video camera recorders, monitors and flat panel
displays and image capturing and transmission. In addition to the
traditional analog TV and monitor businesses, in 1998, the
division started to address the market for digital cameras. In
order to achieve its goals with respect to this market, the
Company made in late 1998 an offer to acquire Vision Group plc, a
U.K. company based in Edinburgh, Scotland, which has developed a
technology for the production of CMOS sensors, and completed the
acquisition in 1999. The Company also signed a partnership
agreement with Live Picture to design a new microchip that will
enable digital camera users to create instantly 360-degree
panoramic photos and to introduce other virtual reality features.
With CMOS imaging technology it is focusingthus possible to produce the
principal features of a camera on developing productsa single IC, which is
significantly cheaper than using a multi-component chip set based
on traditional Charge Coupled Devices (CCD) technology. Potential
applications of the technology include PC cameras for transmitting
images across the Internet, digital still cameras, camcorders,
security cameras, videophones, automotive applications, biometrics
and toys.
(iv) Graphics Products. In 1998, the Company produced over 5 million
Riva 128 and 128ZY graphic accelerators to deliver visual
computing on PC platforms. The RIVA 128 was developed in
the growing satellite and digital cable television markets. Leveraging its
BCD Technology know-how, the Group is now targeting the emerging market of
flat panel displays.conjunction with nVidia. In 1997,early 1999, the Company entered into a
product developmentpartnership agreement with Philips Semiconductors to develop jointlyVideologic of the United Kingdom for
developing the next generation 3D accelerator aimed at the PC and
promotedigital consumer market.
The Microcontroller Group has one division and two support groups:
(i) Microcontroller Division. This division provides competitive,
high-volume 8-bit microcontrollers for all major application
segments and 16-bit DSP for the mass market. This family of
products has been developed with a front-
end chip-set for Digital Video Broadcast-Terrestrial (DVB-T*),wide portfolio of processes
capable of embedding nonvolatile memories such as EPROM, EEPROM
and flash memories.
Within the European
standard for terrestrial broadcasting of digital television signals.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 also joined forceshas entered an agreement with
LogitechHitachi to co-develop a 64-bit microcontroller core (ST50) based on Hitachi
original Super H architecture and STMicroelectronics know-how in 64-bit
20
microprocessors for interactive set-top boxes, digital video products, car
multimedia systems and other consumer oriented products.
The Microcontroller Development Tools Group is concerned with software and
hardware development tools for microcontroller cores and with software
methodology for the microcontrollers and application divisions.
Memory Products Group
The Memory Products Group designs, develops and manufactures a broad range
of semiconductor memory products but does not produce DRAMs. According to
published industry data, on the basis of 1998 revenues, STMicroelectronics was
the leading producer of EPROMs, with a 38% market share, and the second leading
supplier of EEPROMs.
According to published industry data, the total market for memory devices
in 1998 was approximately $23.0 billion including DRAMs (61%), SRAMs (17%) and
nonvolatile memories (22%).
The Company's Memory Products Group is organized into the following
divisions: (i) EPROMs; (ii) flash memories; (iii) smartcard products; (iv)
EEPROMs and application-specific memories; and (v) SRAMs.
EPROMs. STMicroelectronics produces a kitbroad range of EPROMs, from 16 Kbit
to 32 Mbit. According to published industry data, STMicroelectronics
consolidated its world's leading market position for implementing
video camera functionsEPROMS in desktop computer monitors.1998, with
revenues of $188 million or approximately 38% of worldwide EPROM sales. The
kit comprises a chip-
set manufactured byCompany currently produces EPROMs using 0.40 micron CMOS technologies.
The EPROM market is relatively mature, and worldwide sales declined in
1998 according to published industry data. The Company has succeeded in
maintaining its market leadership because of its EPROM technology, which has
allowed the Company and software driver designed by Logitech and
will be marketed to manufacturersbuild one of computer monitors.
Mixed-Signal Semicustom Devices. STMicroelectronics and its predecessor
companies have also manufactured mixed-signal BiCMOS semicustom gate arrays,
standard cells and embedded arrays since 1985. Mixed-signal devices combine
standard cells of digital gates and analog devices onthe broadest product portfolios currently
offered in the market. At the same semicustom IC.
18
Suchtime, this technology has permitted
continuous improvement of manufacturing yields and reduction of die size, giving
the Company an advantageous cost position. Efficient manufacturing in its
Singapore assembly plant together with STMicroelectronics' sales and
distribution channels have contributed to the exploitation of the Company's
technological advantage.
Flash Memories. The Company currently supplies single voltage (down to 3.0
volt) NOR cell structure flash memory products up to 16 Mbit, and is introducing
into production a family of 32 Mbit flash memories operating at 1.8 volt and
manufactured using 0.25 micron technology. The Company is jointly developing
with Mitsubishi a new generation of flash memory products, starting with
multi-level 64 Mbit, as well as associated processes from 0.20 through 0.18
micron. The market for flash memories is growing fast, according to published
industry data, driven by cellular phones and digital consumer applications
growth.
Smartcard Products. Smartcards are credit card-like devices can becontaining
integrated circuits that store data and provide an array of security
capabilities. They are used in a wide and growing variety of analog/digital applications,
including public pay telephone systems (primarily in France and Germany),
cellular telephone systems (primarily in Europe), bank cards (primarily in
France) and pay television systems (primarily in the United States, United
Kingdom and France). Other applications include medical record applications,
card-access security systems and toll-payment applications. In 1998, the
Company's total number of smartcard chips sold since 1983 exceeded one billion,
with more than 100 million microcontroller-based smartcard ICs shipped per year
since 1997. According to independent market analysts, the 1998 volume confirmed
the Company's leading market position with approximately a 43% share in
microcontroller-based smartcard ICs that form the basis for such advanced
applications as electronic purses, bankcards, pay TV and GSM systems.
In 1998, the Company was awarded certifications to ITSEC level E3 High,
the most stringent level normally required in commercial applications, for two
products that will be used in the French health card project, indicating the
21
Company's leadership position in terms of independent security certifications.
The Company also introduced the ST16RF product range, the world's first dual
mode (contact/contactless) smartcard microcontrollers. Originally developed for
the French public transport system in Paris (RATP) and rail operator (SNCF),
these devices have potential uses in public transport ticketing, with trial now
underway in Nice, France. In November 1998, the Company also announced the
world's first ISO 1443 type B contactless memory designed for use in electronic
tags, RF/ID and similar applications where the memory is powered by the received
carrier electromagnetic wave as well as a new addition to the ST19 family of
smartcard chips, the ST19 SF64, which is a device particularly suited to high
end telecoms, Java Cards and similar multiapplication cards.
EEPROMs and Application-Specific Memories. The Company offers serial
EEPROMs up to 256 Kbit and parallel EEPROMs up to 1 Mbit. Serial EEPROMs are the
most popular type of EEPROMs and are generally used in computer, peripherals,automotive and
consumer applications. Parallel EEPROMs account for a smaller portion of the
EEPROM market, being used mainly in telecommunications productsequipment.
STMicroelectronics entered the parallel EEPROM market in late 1993. The Company
intends to work closely with its key customers and industrial
systems. STMicroelectronics manufactures a wide rangestrategic allies to identify
and develop new application-specific memory devices using mixed technologies. In
1998, the sales of mixed-signal
semicustom devices, including a 0.5 micron BiCMOS librarythis division represented, according to industry data,
approximately 17% of cells.
DISCRETE AND STANDARD ICS GROUPthe world market for EEPROM and other nonvolatile memory
compared to approximately 14% in 1997.
SRAMS. The Company focuses on producing nonvolatile SRAMs (battery
back-up) used in computers and telecommunications equipment.
Discrete and Standard ICs Group
The Discrete and Standard ICs Group designs, develops and manufactures
discrete power devices, power transistors, standard linear and logic ICs, and RF
products. Including revenues from RF products, the Group generated revenues
of $846.8 million in 1997 (an increase of 8.0% over 1996 revenues),
representing approximately 21.1% of STMicroelectronics' net revenues.
Approximately 46% of the Group's 1997 revenues were generated in Europe, while
approximately 23%, 30%, and 1% were generated in the Americas, the Asia
Pacific region, and Japan, respectively. According to preliminary published industry data, based on 19971998 revenues,
STMicroelectronics is among the leading suppliers of power transistors (1997 total market of $5 billion) and among
the top two suppliers of thyristors, (1997 total market of $906 million).worldwide.
The Group's discrete and standard products are manufactured using mature
technological processes. Although such products are less capital intensive than
the Company's other principal products, the Company is continuously improving
product performance and developing new product features. The Group has a diverse
customer base, and a large percentage of the Group's products are sold through
distributors.
Discrete Power Devices. STMicroelectronics manufactures and sells a
variety of discrete power devices, including rectifiers, protection devices and
thyristors (SCRs and triacs). The Company's devices are used in various
applications, including in particular telecommunications systems (telephone
sets, modems and line cards), household appliances and industrial systems (motor
control and power control devices). More specifically, rectifiers are used in
voltage converters and voltage regulators, protection devices are used to
protect electronic equipment from power supply spikes or surges, and thyristors
are used to vary current flows through a variety of electrical devices,
including lamps and household appliances. In 1997, theThe Company introduced monolithic TRANSIL diode arrays designedoffers a highly successful
range of standard products built with its proprietary Application Specific
Discretes (ASDTM) technology, which allows a variety of discrete structures to
provide low cost,
reliable protection against electrostatic overloadsbe merged into a single device optimized for computer I/O parts,
modems and similar systems employing data outputs.specific applications such as EMI
filtering for cellular phones.
Power Transistors. STMicroelectronics designs, manufactures and sells
power transistors, which (like the Company's discrete power devices) operate at
high current and voltage levels in a variety of switching and pulse mode
systems. The Company has three power transistor divisions: bipolar transistors,
power MOSFETs (metal-oxide-silicon field effect transistors) and new power
transistors such as IGBTs.
22
The Company's bipolar power transistors are used in a variety of
high-
speed,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 19971998 revenues, STMicroelectronics is
among the leading suppliers of bipolar transistors, including RF power
transistors (1997 total market of $2.2 billion).transistors. The Company introduced power MOSFETs in 1991 to extend the use of
power transistors to new high-frequency, high-voltage applications, including
automotive components, crowbar protection devices, resonant converters and power
factor correction devices. According to industry data, the Company has
been ranked number five worldwide in the fast growing segment of the power
MOSFETs. A new family of products, low voltage power MOSFETs
known as the NE series, areis being produced with a new technology that provides
substantial advantages over conventional cellular power MOSFET processes.
The Company also offers a family of VIPower (vertical integration power)
products, as well as omnifets and application-specific devices. VIPower products
exhibit the operating characteristics of power transistors while incorporating
full thermal, short circuit and overcurrent protection and allowing logic level
input. VIPower products are used in consumer goods (lamp ballasts) and
automotive products (ignition circuits, central locking systems and transmission
circuits). In 1997, the Company introduced the VIPer 100,
STMicroelectronics' new device in a family of intelligent power ICs for switch
mode power supply applications. Omnifets are power MOSFETs with fully-fully integrated protection devices
that are used in a variety of sophisticated automotive and
19
industrial
applications. Application-specific devices are semicustom ICs that integrate
diodes, rectifiers and thyristors on the same chip, thereby providing
cost-effective and space-saving components with a short design time.
In the first quarter of 1998, the Company extended its offer of VIPower
technology by introducing a Smart H Bridge Driver that can sustain high peak
current streams for short time periods. The Company also introduced innovative
front-end and packaging technologies that significantly increase MOSFET power
density and a new range of products based on its Application Specific Discrete
(ASD) technology that integrate two key telephone set functions into a single
surface mounting package.
Standard Logic and Linear ICs. The Company produces a variety of bipolar
and HCMOS logic devices, including clocks, registers, gates and latches. Such
devices are used in a wide variety of applications, including increasingly in
portable computers, computer networks and telecommunications systems. The
Company also offers standard linear ICs covering a variety of applications,
including amplifiers, comparators, decoders, detectors, filters, modulators,
multipliers and voltage regulators.
In 1997, STMicroelectronics announced that
it will support the VCX standard for logic devices with a new family of
products, designed for high-end applications, that combine high speed and low
power dissipation in applications operating in the 1.8 to 3.6V range.
Radio Frequency Products. The Company supplies components for RF
transmission systems used in television broadcasting equipment, radar systems,
telecommunications systems and avionic equipment. At present, most of the
Company's RF products are sold in the United States. 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.
MEMORY PRODUCTS GROUP
The Memory Products Group designs, developsSales, Marketing and manufactures a broad range
of semiconductor memory products. The Memory Products Group generated revenues
of $708.6 million in 1997 (a decrease of 3.8% over 1996 revenues),
representing approximately 17.6% of STMicroelectronics' 1997 revenues.
Approximately 57% of the Group's 1997 revenues were generated in Europe, while
approximately 17%, 15% and 11% were generated in the Americas, the Asia
Pacific region, and Japan, respectively. According to published industry data,
on the basis of 1997 revenues, STMicroelectronics was the leading producer of
EPROMs (1997 total market of $740 million, declining in 1998) and the second
leading supplier of EEPROMs (1997 total market of $1.2 billion, increasing in
1998).
According to published industry data, the total market for memory devices
in 1997 was approximately $29.3 billion, with DRAMs, SRAMs, ROMs, EPROMs,
flash and EEPROMs accounting for approximately 67.5%, 13.1%, 3.5%, 2.5%, 9.2%
and 4.2% of the total, respectively.
The Company's Memory Products Group is organized into the following
divisions: (i) EPROMs; (ii) smartcard products; (iii) flash memories; (iv)
EEPROMs and application-specific memories; and (v) SRAMs.
EPROMs. STMicroelectronics produces a broad range of EPROMs, from 16 Kbit
to 16 Mbit. According to published industry data, STMicroelectronics
consolidated its world's leading market position for EPROMS in 1997, with
revenues of $251 million (compared to $337 million in 1996) or approximately
32% of worldwide EPROM sales. The Company currently produces EPROMs using 0.5
micron CMOS technologies. The Company has entered into an agreement with
WaferScale Integrated, a specialist in nonvolatile memory architecture in
which the Company acquired a minority interest in 1997, for the development of
advanced architecture designed to reduce die size by over 20% in high level
memory products.
The EPROM market is relatively mature, and worldwide sales declined in 1996
and 1997 according to published industry data due to declining prices. The
Company has succeeded in maintaining its market leadership
20
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 the Singapore and Malaysia assembly
plants together with STMicroelectronics' sales and distribution channels have
contributed to the exploitation of the Company's technological advantage.
Smartcard Products. Smartcards are credit card-like devices containing
integrated circuits that store data and provide an array of security
capabilities. They are used in a wide and growing variety of applications,
including public pay telephone systems (primarily in France and Germany),
cellular telephone systems (primarily in Europe), bank cards (primarily in
France) and pay television systems (primarily in the United Kingdom and
France). Other potential applications include medical record applications,
card-access security systems and toll-access applications. The Company's sales
of smartcard chips in 1997 totaled approximately $222 million (approximately a
30% increase on 1996 smartcard sales) of the approximately $515 million
worldwide market (according to Company estimates), reinforcing the Company's
leading market position with approximately a 43% market share.
STMicroelectronics' cumulative shipments of integrated circuits for smartcards
passed the one billion mark in 1996.
Smartcards incorporate a variety of products manufactured by the Company,
including microcontrollers, EPROMs, EEPROMs and flash memory components.Distribution
In 1997, STMicroelectronics introduced a new device (ST1GRF42) for use in high
volume contactless and contact-based applications, and also licensed the Java
Card implementation (called Solo) from Schlumberger for advanced security MCU
smartcard chips. In 1996, SGS-THOMSON was the first company to obtain security
certification for banking and Pay-TV applications according to the ITSEC
European norms.
Flash Memories. The Company is using its EPROM and EEPROM know-how to
develop advanced flash memory products. The Company currently supplies single
voltage (1.8 volt) NOR cell structure flash memory products up to 8 Mbit, and
is developing a family of 16 Mbit and 64 Mbit flash memories. In 1997, the
Company also introduced a series of flash memory ICs combining 4 Mbit flash
memory and a 256 Kbit parallel EEPROM memory for use in cellular phones and
other portable equipment. The Company intends to develop a broad portfolio of
flash memory devices to cover all EPROM-like market needs, including dual
voltage and single voltage devices up to 16 Mbit. The Company also intends to
develop specific processes based on current technology to produce 64 Mbit 0.35
micron devices for the mass storage market. The Company is using its flash
memories and fast SRAMs as the focal point of its process development efforts
due to their standardized design features, manufacturability and potential
high volumes.
In February 1998, the Company and Mitsubishi announced that they will
jointly develop a new generation of flash memory products, starting with
multi-level 64 Mbit, which will provide the advantages of both DINOR and NOR
architecture, as well as associated processes from 0.20 through 0.18 micron.
EEPROMs and Application-Specific Memories. The Company offers 1.2 micron
serial EEPROMs up to 16 Kbit and parallel EEPROMs up to 64 Kbit. Serial
EEPROMs are the most popular type of EEPROMs and are generally used in
computer, automotive and consumer applications. Parallel EEPROMs account for a
smaller portion of the EEPROM market, being used mainly in telecommunications
equipment. STMicroelectronics entered the parallel EEPROM market in late 1993.
The Company intends to work closely with its key customers and strategic
allies to identify and develop new application-specific memory devices using
mixed technologies.
SRAMS. The Company focuses on producing nonvolatile SRAMs (battery back-up)
used in computers and telecommunications equipment.
PROGRAMMABLE PRODUCTS GROUP
The Programmable Products Group designs, develops and manufactures
microcomponents (including microcontrollers and digital signal processors),
digital semicustom devices, graphic controllers and MPEG
21
decoder ICs and image processing semicustom devices for many diverse products
targeted at high growth digital applications, including information
technology, automotive and multimedia. The Group generated revenues of $642.1
million in 1997 (a decrease of 6.9% over 1996), representing approximately
16.0% of STMicroelectronics' 1997 revenues. Approximately 44% of the Group's
1997 revenues were generated in Europe, while approximately 35%, 16% and 5%
were generated in the Americas, the Asia Pacific region and Japan,
respectively.
Microcomponents. The Company's microcomponents division manufactures and
sells microcontrollers, microprocessors and digital signal processors.
Based on its experience with a variety of second-sourced microcontrollers,
the Company has developed its complete "ST" family of proprietary
microcontroller products, ranging from the 8-bit ST6, ST7 and ST9
microcontrollers to the 16-bit ST10 and 32-bit ST20 devices. The ST10 and ST20
families are designed to address the full spectrum of embedded processor
applications, from computer peripherals such as hard disk drives and printers
to high volume consumer appliances such as digital telephone handsets and
digital satellite receivers. STMicroelectronics' microcontrollers draw on the
Company's large product and technology portfolios to combine logic devices,
EPROMs, EEPROMs, flash memories and various macrofunctions around a range of
second-sourced and proprietary cores. The Company has also developed a line of
starter kits and code generators and compilers that permit system designers to
quickly and easily implement the Company's microcontrollers into their
electronic systems. The Company is targeting emerging applications for
microcontrollers, including televisions, monitors, set-top boxes for cable and
satellite receivers, cellular telephones, global positioning systems and
automobile navigation systems.
Digital signal processors ("DSPs") are processors used for high complexity,
high speed real-time computations. DSPs are used in a wide variety of multi-
media applications. While STMicroelectronics does not sell DSPs as stand-alone
products, the Company and its predecessors have been producing embedded DSPs
for more than ten years. The Company is producing the D950 core, a fixed point
DSP core based upon the Company's 0.5 micron/3.3V triple-level-metal HCMOS5
technology for a wide range of applications in the computer,
telecommunications and consumer markets. The Company is prototyping a 0.35
micron/2.7V five-metal layer HCMOS6 technology version of the D950 core and is
developing a new DSP core (D960) with high performance at very low power
dissipation. Examples of applications include mobile phones, telephone
answering machines, fax machines, modems, disk drives, video conferencing
systems and speech, sound, music and other multimedia functions.
In December 1997, STMicroelectronics and Hitachi announced an agreement to
collaborate on the development of next-generation SuperH microprocessors for
consumer electronics and multimedia applications. Under the agreement, the two
companies will develop the new 64-bit SH-5/ST50 series based on Hitachi's
original SuperH architecture and STMicroelectronics' know-how in 64-bit
microprocessors, for interactive set-top boxes, digital video products, car
multimedia systems and other consumer-orientated products.
In March 1998, STMicroelectronics introduced a chip-set that enables
customers, for the first time, to make a complete Global Positioning by
Satellite ("GPS") navigation system with only two ICs, for use in automotive
applications.
Digital Semicustom Devices. Semicustom devices are ICs containing
standardized lines or arrays of transistors that can be configured or
interconnected to perform specific functions after a short design cycle time.
STMicroelectronics manufactures a wide range of digital semicustom devices,
including high-speed low-voltage 0.35 micron CMOS five-metal layer standard
cells. A 0.25 micron CMOS process is available for designs in a semicustom
environment.
STMicroelectronics' semicustom devices are supported by libraries of cells,
macro functions and design tools. STMicroelectronics supports popular CAD
tools and platforms, and has strategic alliances with Cadence Design Systems,
Inc., Mentor, Inc. and Synopsys, Inc. to develop semicustom CAD tools.
STMicroelectronics is
22
developing proprietary libraries for semicustom devices for
telecommunications, computer and consumer applications.
Image Processing. STMicroelectronics has created a business unit to design
and manufacture products for the emerging digital video processing industry.
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.
Despite the advantages of digital video, its widespread adoption has been
constrained by the lack of high-performance, cost-effective compression
devices and by the absence of digital video compression standards. Video
compression, which uses complicated mathematical algorithms operating at high
speeds to encode the large amounts of data that result from digitizing video
signals, is both highly complex and technically challenging. Digital video
compression technology is expected to contribute to the development of a
number of new or enhanced applications in the consumer electronics, computer
and communications markets, including video CD players, interactive game
consoles and video conferencing systems.
The Company's image processing business unit delivers large volumes of
Motion Picture Experts Group ("MPEG") decoder ICs suitable for video CD
products, personal computers, set-top boxes (including both cable and
satellite) and digital TV applications. These products implement the MPEG 2
standard. According to industry data and the Company's estimation, in 1997
STMicroelectronics was the leading supplier of MPEG 2 decoder ICs with an
approximately 50% share of the MPEG 2 decoders market. In 1997,
STMicroelectronics introduced the STi5500 Omega chip, the first in a family of
highly integrated devices that combine an MPEG 2 audio/video decoder with a
32-bit microprocessor and other functions to create a complete DVD or set-top
box back-end on a single chip. The STi5500, designed to replace three existing
ICs, is scheduled to enter volume production in 1998. In April 1998,
STMicroelectronics introduced the STi7000 chip, the first integrated solution
for High-Definition Television (HDTV) combining an MPEG-2 decoder with an
advanced display and format converter into one single chip. The Company
expects production of the STi7000 to start in the fourth quarter of 1998.
The Company has developed and is currently supplying a single chip solution
(called Omega) integrating a 32-bit microcontroller core, an MPEG 2 decoder IC
and a transport function IC, as well as an MPEG 2 HDTV full decoder for
implementation of ATV in the United States. Certain major international PC
OEMs and add-in card manufacturers have selected the Company's RIVA 128(TM)
3D, PCI/AGP multimedia accelerator to deliver visual computing on PC
platforms. The RIVA 128, which was developed in conjunction with nVidia,
combines advanced 3D graphics acceleration, industry leading 2D graphics
acceleration with superior video and imaging capabilities into a single-chip
mainstream multimedia accelerator. The Company has licensed the high speed
Rambus interface for its Mulitmedia IC product family.
NEW VENTURES GROUP
STMicroelectronics established the New Ventures Group in May 1994 to bring
together various major product initiatives that would otherwise have been
coordinated within and across individual product groups. The Group identifies
and develops new business opportunities to complement the Company's existing
businesses and exploit its technological know-how, manufacturing capabilities
and global marketing team. Initial activities have focused on manufacturing
and marketing x86 and products based on x86 embedded cores. New activities
include design and manufacturing of "system on silicon" solutions based on the
486 CPU core.
The Company expects to be able to use microprocessor technology, its broad
range of other products and technologies and its strengths in developing and
marketing application-specific products to produce powerful x86 core-based
embedded applications and derivative products.
In 1997, STMicroelectronics introduced the ST PC Consumer chip, a low cost,
high performance multimedia PC on a single chip with a view to developing new
generations of ST PC products. The new device integrates a high performance
processor that is fully compatible with standard fifth generation x86 devices,
23
comprehensive support logic, a graphics subsystem and a video pipeline. In
1997, STMicroelectronics also acquired a majority interest in Metaflow, a
specialist developer of microprocessor architecture, that is working with the
Company in the development of x86 products and cores. The Company also has
licensed the high speed Rambus interface for its Multimedia IC product family.
SALES, MARKETING AND DISTRIBUTION
In 1997, the Company derived approximately 78%82% of its revenues from sales
directly to customers through its regional sales organizations (compared to
approximately 79%78% in 1996)1997) and 22%18% of its net revenues from sales through
distributors (compared to approximately 21%22% in 1996)1997). The Company operates
regional sales organizations in Europe, North America, the Asia Pacific region,
Japan and, since January 1, 1998, in "Region Five" which includes emerging
markets such as South America, Africa, Eastern Europe, the Middle East and
India. In 1997,1998, approximately 43.6%41.6% of the Company's revenues originated in
Europe (compared to approximately 43.4%43.6% in 1996)1997), while 22.4%22.1% originated in the
Americas (compared to approximately 21.9%22.4% in 1996)1997), 26.5%29.4% originated in the Asia
Pacific region (compared to approximately 27.3%26.5% in 1996)1997), 5.3%4.3% originated in
Japan (compared to approximately 5.5%5.3% in 1996)1997) and 2.2%2.6% originated in Region
Five (compared to approximately 1.9%2.2% in 1996)1997). In 1996 the Company's sales in the Asia Pacific region passed the $1 billion
level. One1998, no single customer
accounted for more than 5%10% of the Company's net revenues, and sales to the
Company's top ten customers accounted for approximately 43% of the Company's net
sales in 1997.1998 (39% in 1997).
23
The European region is divided into ten sales and marketing units: five
major accounts groups organized by market segments (telecom, industrial and
smartcards, consumer, automotive and computer), four geographically-configuredgeographically configured
units to cover mid-sized OEM customers (France and the Benelux, Central Europe,
Northern Europe and Southern Europe) and a distribution unit.
In North America, the sales and marketing team is organized into five
business units that are located near major centers of activity for either a
particular application or geographic region: automotive (Detroit, Michigan),
industrial and consumer (Chicago, Illinois), computer and peripheral equipment
(San Jose, California)California and Longmont, Colorado following the acquisition of
Adaptec), communications (Dallas, Texas) and distribution (Boston,
Massachusetts). Each business unit has a sales force that specializes in the
relevant business sector, providing local customer service, market development
and specialized application support for differentiated system oriented products.
This structure allows STMicroelectronics to monitor emerging applications, to
provide local design support, and to identify new products for development in
conjunction with the various product divisions as well as to develop new markets
and applications with its current product portfolio. A central product marketing
operation in Boston provides product support and training for standard products
for the North America region, while a logistics center in Phoenix supports
just-in-time delivery throughout North America. In addition, a comprehensive
distribution business unit provides product and sales support for the nationwide
distribution network.
In the Asia Pacific region, sales and marketing is organized by country
and is managed from the Company's regional sales headquarters in Singapore. The
Company has sales offices in Taiwan, Korea, China, Hong Kong, Malaysia, Thailand
and Australia. The Singapore sales organization provides central marketing,
customer service, technical support, shipping, laboratory and design services
for the entire region. In addition, there are design centers in Taiwan, Korea,
Hong Kong and Hong Kong.Shenzhen.
In Japan, the large majority of the Company's sales are made through
distributors, as is typical for foreign suppliers to the Japanese market.
However, the Company's sales and marketing engineers in Japan work directly with
the customers as well as with the distributors to meet customers' needs. The
Company provides marketing and technical support services to customers through
sales offices in Tokyo and Osaka. In addition, the Company has established a
design center and application laboratory in Tokyo. The design center designs
custom ICs for Japanese clients, while the application laboratory allows
Japanese customers to test STMicroelectronics' products in specific
applications.
Region Five was created as of January 1, 1998 and includes emerging
markets such as South America, Africa, Eastern Europe, the Middle East and
India. Prior to that time, these markets had been covered, where 24
appropriate, by
the other existing sales and marketing organizations. Region Five also includes
the design center in India, which employs 300428 people in a wide range of
activities. The Company intends to increase its focus on the new sales and
marketing region to enhance its presence in these new markets.
The Company's central marketing efforts are organized into a central
strategic marketing organization and a key account management organization. The
strategic marketing organization is organized by application market. The focus
is on system research and development and the timely generation of the advanced
system know-how and intellectual property that is critical to the successful
introduction of future generations of differentiated products.
In 1996, the Company undertook the Gold Standard program, a long-term
commitment to excellence in standard products. The program consists of
manufacturing and offering standard products at the same price level as the
market but with a superior level of quality, service and lead time. The related
initiatives included worldwide advertising, promotional task forces in all
regions, special distribution initiatives and worldwide training of salespeople
and marketing personnel.
24
In addition to the central strategic marketing team, the Company has
established key account management teams to serve key multinational customers.
The key account management teams work with the Company's regional and divisional
managers to provide a broad range of products to its major accounts and to
develop complete systems solutions for customers.solutions. The teams build strategic relationships with
the Company's major accounts that can lead to the development of new products,
increased access to evolving technologies and enhanced knowledge of customer
requirements.
Each of the five regional sales organizations operate dedicated
distribution organizations. To support the distribution network,
STMicroelectronics operates logistic centers in Saint Genis, France, France;Phoenix,
ArizonaArizona; and Singapore, and has made considerable investments in warehouse
computerization and logistics support.
The Company also uses distributors and representatives to distribute its
products around the world. Typically, distributors handle a wide variety of
products, including products that compete with STMicroelectronics' products, and
fill orders for many customers. Most of the Company's sales to distributors are
made under agreements allowing for price protection and/or the right of return
on unsold merchandise. The Company recognizes revenues when it ships products to
distributors. Sales representatives generally do not offer products that compete
directly with the Company's products, but may carry complementary items
manufactured by others. Representatives do not maintain a product inventory;
instead, their customers place large quantity orders directly with
STMicroelectronics and are referred to distributors for smaller orders.
RESEARCH AND DEVELOPMENTResearch and Development
Management believes that research and development is critical to the
Company's success and is committed to increasing research and development
expenditures in the future. Despite significant cost reductions following the
Company's formation in 1987, and particularly in 1990 and 1991 when the Company
experienced losses, management did not reduce research and development spending.
This commitment to research and development continues unabated, with the Company
spending $690 million or 16.2% of revenue on research and development in 1998.
The table below sets forth information with respect to the Company's research
and development spending since 19931994 (not including design center, process
engineering, pre-production or industrialization costs):
YEAR ENDED DECEMBERYear ended December 31,
--------------------------------------
1993----------------------------------------------------
1994 1995 1996 1997 ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PERCENTAGES)1998
-------- -------- ------- -------- -------
(in millions, except percentages)
Expenditures.................. $270.9Expenditures.......................... $338.3 $440.3 $532.3 $610.9 $689.8
as a percentage of net revenues..................... 13.3%revenues....... 12.8% 12.4% 12.9% 15.2% 16.2%
As a result of the history of the Company, approximately 83%81% of the
Company's research and development expenses in 19971998 were incurred in Europe,
primarily in France and Italy. See "--State Support for the Semiconductor
Industry." As of December 31, 1997,1998, approximately 4,1004,400 employees were employed
in research and development activities.
25
Central research and development units conduct research on the basic VLSI
technologies, packaging technologies and design tools that are used by all
product groups and the front-end manufacturing organization. STMicroelectronics'
central research and development activities are conducted in Crolles, France;
Agrate, Italy; Carrollton, Texas; Phoenix, Arizona; Berkeley, California; and
Noida, India. The central research and development units participate in several
strategic partnerships. The Company's manufacturing facility at Crolles, France
houses a research and development center that is operated in the legal form of a
French Groupement d'interet economique ("GIE") pursuant to a partnership
agreement in effect until the end of 1998 between the Company and CNET, the
research laboratory of France Telecom, an indirect shareholder of the Company.
This center has developed submicron process technologies
25
and is currently working on the development of 0.18 micron and future generation
technologies.technologies, including copper interconnect, low k dielectric, silicon
germanium, embedded RAMs and RF options. The Company has also entered into an agreement
with Philips Semiconductorsand CNET have decided to
jointly develop such sub-micron CMOS logic
processes in Crolles, France which has recently been extended throughextend the year
2000. A technical center in Noida, India, develops design software and CAD
libraries and tools.
The Company has signed an agreement providing forGIE to include as a research and
development cooperation with GRESSI, the research and development Groupement
d'Interet Economique ("GIE") formed by the CNET, a research laboratory wholly
owned by France Telecom, andmember the Laboratoire d'Electronique de
Technologie d'Instrumentation ("LETI"), a research laboratory of CEA, the parent company
ofCEA-Industrie,
one of the indirect shareholders of the Company. The Company is also cooperating
with Philips Semiconductors to jointly develop sub-micron CMOS logic processes
in Crolles, France under an agreement which has been extended through the year
2000.
In 1998, the Company also cooperated with GRESSI, the research and
development GIE formed by the CNET and LETI. The objectives of the cooperation
arewere to develop know-how on innovative aspects of VLSI technology evolution
which can be transferred to industrial applications, and to address the
development of innovative process steps and process modules to be used in future
generations of VLSI products. The cooperation agreement is based uponprovided for a
pluriannual plan through 1998, and the Company is expected to bearbore half of the program's total
cost. The cooperation with GRESSI was superseded, as of January 1, 1999, by a
tripartite cooperation arrangement between the Company, CNET and LETI, within
the framework of an extended GIE named Centre Commun de Microelectronique de
Crolles. This cooperation is directed towards sub 0.18 micron technologies with
a view to preparing the technology to begin production of 12-inch wafers and
associated wafer fabrication processes. The tripartite cooperation is intended
to last until the end of 2002 and the related contractual arrangements are in
the process of being finalized.
A technical center in Noida, India, develops design software and CAD
libraries and tools. At the Agrate, Italy site, the Company is developing
nonvolatile memory technologies and programmable logic processes using a pilot
line which is being upgraded to 8-inch with a capability of 0.25 micron and
below. See "Item 13: Interest of Management in Certain Transactions." The
Company has developed a wide network of cooperation with several universities in
the United Kingdom (Bristol and Newcastle), Italy (Bologna, Catania, Milan,
Pavia and Turin), France (Grenoble, Marseille, Toulouse and Tours), in the
United States (Carnegie Mellon, Stanford, Berkeley and UCLA) and Singapore for
basic research projects on design and process development.
In addition to central research and development, each operating division
also conducts independent research and development activities on specific
processes and products.
STATE SUPPORT FOR THE SEMICONDUCTOR INDUSTRYState Support for the Semiconductor Industry
Due to the importance of the semiconductor industry, various government
authorities in the world, including the European Commission and individual
countries in Europe, have established programs for the funding of research and
development, innovation, industrialization and training in the industry. In
addition, many countries grant various forms of tax relief, direct grants and
other incentives to semiconductor companies as well as other industries to
encourage investment. The Company has structured its operations to benefit from
such programs and incentives and expects to continue to do so in the future.
Unlike certain of its competitors, however, the Company does not receive
significant direct or indirect financing from defense development programs.
The main European programs in which the Company is involved include: (i)
the Micro-Electronics Development for European Application ("MEDEA") cooperative
research and development program, (ii) European Union research and development
projects such as ESPRIT (European Strategic Programme for Information
Technology) and RACE (Research and Development in Advanced Communications
Technologies for Europe), (iii) national programs for research and development
and industrialization in the electronics industries, and (iv) investment
incentive programs for the economic development of certain regions. The
pan-European programs are generally open to eligible companies operating and
investing in Europe and cover a period of several years. In Italy, both
electronics and economic development programs are open to eligible companies
regardless of their ownership or country of incorporation.
26
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. ESPRIT started in 1983 and is being
extended
26
through 1998 within the fourth framework program of the European Commission on
Information and Communication Technologies ("ICT"). In Italy, the Programma Nazionale per la Microelettronica has
18 participants, and various programs for intervention in the Mezzogiorno
(southern Italy) are open to eligible companies, including non-European
companies, operating in the region and regulated by specific laws. Italian
programs often cover several years, but funding is typically subject to annual
budget appropriation. In France, support for microelectronics is provided to
over 30 companies manufacturing or using semiconductors. The amount of support
under French programs is decided annually and subject to budget appropriation.
As a result of the history of the Company, its research and development
facilities and activities are mainly concentrated in France and Italy, and the
substantial majority of the Company's state funding has been derived from
programs in such countries. The Company has entered into funding agreements with
France and Italy which set forth the parameters of state support under certain
national programs and require, among other things, compliance with European
Commission ("EC") regulations and approval by EC authorities and annual and
project-by-project reviews and approvals.
The EC adopted guidelines in 1995 seeking to limit state aid for research
and development activities routinely performed in the normal course of the
business. There can be no assurance that the Company will be able to continue to
benefit from state aid previously committed, that such aid will not be revoked
or discontinued at any time or that aid granted by a materialnational government for
research and development will not be reviewed or challenged by the EC.
Funding of programs in France and Italy is subject to annual
appropriation, and if such governments were unable to provide anticipated
funding on a timely basis or if existing government-funded programs were
curtailed or discontinued, such an occurrence could have a material adverse
effect on the Company's business, operating results and financial condition.
From time to time the Company has experienced delays in the receipt of funding
under these programs. As the availability and timing of such funding are
substantially outside the Company's control, there can be no assurance that the
Company will continue to benefit from such government support, that funding will
not be delayed from time to time, that sufficient alternative funding would be
available if necessary or that any such alternative funding would be provided on
terms favorable to the Company as those previously provided.
Public authority funding for research and development is reported in
"Other Income and Expenses" in the Company's consolidated statements of income.
See Note 1918 to the consolidated audited financial statements for each of the
years in the three-year period ended December 31, 1997,1998, including the Notes
thereto (collectively, the "Consolidated Financial Statements") included
elsewhere in this annual report on Form 20-F. Such funding has totalled $89.6 million,
$63.8
million, 55.3 million and $55.3$63.5 million in the years 1995, 1996, 1997 and 1997,1998,
respectively. Public funding for industrialization costs (which include certain
costs incurred to bring prototype products to the production stage) is offset
against expenses in computing cost of sales, and has the effect of increasing
the Company's gross profit. Such funding of industrialization costs has totalled
$11.8 million, $4.6 million, and $6.2 million and $3.1 million in 1995, 1996, 1997 and 1997,1998,
respectively. See Note 1918 to the Consolidated Financial Statements. Government
support for capital expenditures funding has totalled $64.5 million, $93.3 million, $30.2
million, and $30.2$182.4 million in the years 1995, 1996, 1997 and 1997,1998, respectively. Such
funding has been used to support the Company's capital investment; while receipt
of these funds is not directly reflected in the Company's results of operations,
the resulting lower amounts recorded in property, plant and equipment reduce the
level of depreciation recognized by the Company.
Low interest financing has been made available (principally in Italy)
under programs such as the Italian Republic's Fund for Applied Research,
established in 1968 for the purpose of supporting Italian research projects
meeting specified program criteria. At year-end 1995, 1996, 1997 and 1997,1998, the Company
had $115.4 million, $95.2 million, $63.7 million
27
and $63.7$49.4 million, respectively, of indebtedness outstanding under
state-assisted financing programs at an average interest cost of 2.6%2.3%, 2.3%2.1% and
2.1%, respectively.
INTELLECTUAL PROPERTYIntellectual Property
Intellectual property rights which apply to various Company products
include patents, copyrights, trade secrets, trademarks and maskwork rights.
STMicroelectronics owns more than 15,00017,000 original invention patents or pending
patent applications, most of which have been registered in several countries
around the world. In 1997,1998, the Company filed 561671 original patent applications
around the world. Management believes that its intellectual property
27
represents
valuable property and intends to protect the Company's investment in technology
by enforcing all of its intellectual property rights.
The Company has entered into several patent cross-licenses with several
major semiconductor companies, consisting primarily of most of the major
Japanese and Korean semiconductor companies. Pursuant to a 1977 license agreement (the "Intel License Agreement"),
STMicroelectronics' U.S. subsidiary ("ST Microelectronics U.S.") is licensed
to make, have made, use and sell (in addition to other rights) products that
practice all Intel patents filed prior to March 1999 for the life of such
patents. The Intel License Agreement was originally entered into by Mostek
Corporation ("Mostek") and Intel. ST Microelectronics U.S. succeeded to the
interest of Mostek under the Intel License Agreement upon the Company's
formation in 1987. ST Microelectronics U.S.'s succession rights under the
Intel License Agreement were upheld in a court judgment rendered in July 1992
which is now final as well as in a court judgment dated December 30, 1994
which has been confirmed on appeal.
The Company has also acquiredannounced that it
has signed a majority ownership interestbroad patent cross-license agreement with IBM in MetaflowJune 1998 and is working with
Metaflow and others to develop and manufacture x86
microprocessors and related products.Intel in January 1999.
The Company's success depends in part on its ability to obtain patents,
licenses and other intellectual property rights covering its products and their
design and manufacturing processes. To that end, the Company has acquired
certain patents and patent licenses and intends to continue to seek patents on
its inventions and manufacturing processes. The process of seeking patent
protection can be long and expensive, and there can be no assurance that patents
will issue from currently pending or future applications or that, if patents are
issued, they will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to the Company. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
countries. Competitors may also develop technologies that are protected by
patents and other intellectual property rights and therefore such technologies
may be unavailable to the Company or available to the Company subject to adverse
terms and conditions. Litigation, which could demand financial and management
resources, may be necessary to enforce patents or other intellectual property
rights of the Company.
Also, there can be no assurance that litigation will not be commenced in
the future against the Company regarding patents, maskworks, copyrights,
trademarks or trade secrets, or that any licenses or other rights to necessary
intellectual property could be obtained on acceptable terms. The failure to
obtain licenses or other intellectual property rights, as well as the expense or
outcome of litigation, could adversely affect the Company's results of
operations or financial condition. The Company has from time to time received,
and it may in the future receive, communications alleging possible infringement
of certain patents and other intellectual property rights of others. Regardless
of the validity or the successful assertion of such claims, the Company could
incur significant costs with respect to the defense thereof which could have a
material adverse effect on the Company's results of operations or financial
condition.
See "Item 3: Legal Proceedings."
BACKLOGBacklog
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. The Company's backlog decreased during 1997 in difficult semiconductor
market conditions. In the first quarter of 1998, backlog increased marginally
compared to year-end 1997. 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.
The resulting lower levels of backlog haveSuch reduced lead time can reduce management's ability to forecast production
levels and revenues.
The Company's backlog decreased during 1998 in difficult semiconductor
market conditions. In the first quarter of 1999, backlog increased compared to
year-end 1998.
28
STMicroelectronics also sells certain products to key customers pursuant
to frame contracts. Frame contracts are annual fixed-price contracts with
customers setting forth the terms of purchase and sale of specific products that
may be ordered in the future. These contracts allow the Company to schedule
production capacity in advance and allow customers to manage their inventory
levels consistent with just-in-time principles while 28
shortening the cycle times
required to produce ordered products. Orders under frame contracts are also
subject to risks of price reduction, order cancellation and order
cancellation.
COMPETITIONmodifications as to
quantities actually ordered.
Competition
Markets for the Company's products are intensely competitive. While only a
few companies compete with STMicroelectronics in all of the Company's product
lines, the Company faces significant competition in each of its product lines.
STMicroelectronics competes with major international semiconductor companies,
some of which have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. Smaller niche companies are also increasing
their participation in the semiconductor market, and semiconductor foundry
companies have expanded significantly, particularly in Asia. Competitors include
manufacturers of standard semiconductors, application-specific ICs and fully
customized ICs, including both chip and board-level products, as well as
customers who develop their own integrated circuit products and foundry
operations. Some of the Company's competitors are also its customers.
The Company gained market share in 1998, when the Company's net sales grew
5.7% while the TAM decreased 8.4% and the SAM decreased 5.2%, according to trade
association data. The Company gained market share in 1995 and 1996 against both
the TAM and the SAM although it lost market share against both the TAM and the
SAM in 1997. The Company does not manufacture DRAMs, which are commodity memory
products sold in high volumes that have experienced severe price cutting in
1996, 1997 and to date in 1998. The Company's absence from the DRAM market contributed to
the Company's outperformance of the semiconductor industry in 1996, when the
Company's net revenues increased by approximately 15.8%. According to trade
association data, the TAM increased by 4% in 1997 compared to 1996, while the
SAM increased 10%. The Company gained market share in 1995 and 1996 against
both the TAM and the SAM, lost market share against both the TAM and the SAM
in 1997 and, based on preliminary data for the first quarter of 1998, gained market share against both the TAM and
the SAM in the first quarter of 19981999, when the Company's revenues grew 10.7%
compared to the first quarter of 1997. The Company attributes its lower market
share in 1997 in part to its marginal presence in1998 while the x86 microprocessor
marketTAM grew 6.8% and the market for datacom products, two market segments that
experienced sustained growth in 1997, and in part to fierce competition for
hard disk drives and a market slowdown in sales of set-top boxes, two market
segments in which the Company has strong market positions.SAM grew 3.5%.
The Company believes that recent difficult market conditions have led
certain of its competitors to redirect their marketing focus and manufacturing
capacity toward products that compete with the Company's products. The Company
believes increased competition in its core product markets is generating greater
pricing pressure, increased competition for market share in the SAM, and a
generally more challenging market environment for the Company.
According to trade association data, the SAM increased approximately 9.9%
in 1997 over 1996. The Company's net revenues for 1997 decreased 2.5% compared
to net revenues for 1996, due in part to declining prices resulting from
production overcapacity in the industry and strong competition from foundry
and other manufacturers in certain product families, as well as the impact of
the appreciation of the U.S. dollar on net revenue registered in European and
Japanese currencies and a less favorable product mix. The Company's gross
profit margin declined from 41.4% in 1996 to 38.9% in 1997. There can be no
assurance that the Company will experience revenue growth at or above the
growth rate for the TAM or the SAM, or that increased competition in the
Company's core product markets will not lead to further price erosion, lower
revenue growth rates and lower margins for the Company.
According to published industry data and other industry sources,
investment in worldwide semiconductor fabrication capacity totalled
approximately $39
billion in 1995, $44 billion in 1996, and $40 billion in 1997 and $28 billion in 1998,
or approximately 27%33%, 33%29% and 29.2%,22 %, respectively, of the TAM for such years. In
addition to international semiconductor companies, companies specializing in
operating semiconductor foundries such as UMC, TSMC and CharterChartered
Semiconductors, have added significant capacity, particularly in Asia. These
additions to capacity have contributed to an increase of supply over demand and
to declines in average selling prices and the downturn in the industry. These
has also been a shift in existing industry capacity to production of products
that compete with the Company's products. The Company believes that fluctuations
in the rate of industry capacity additions relative to the growth rate in demand
for semiconductor products could continue to contribute to fluctuations in
average selling prices and affect the Company's results of operations.
29
The Company's primary competitors include Advanced Micro Devices, Inc.,
Hitachi,
Intel Corporation, Lucent Technologies, Inc., Mitsubishi Electric Corporation,
Motorola, Inc., National Semiconductor Corporation, Nippon Electric Company, Ltd., Philips
Semiconductors, Samsung, Siemens, Texas Instruments Incorporated and Toshiba. The market for the Company's new x86
microprocessors is currently dominated by Intel Corporation. Companies
primarily operating foundries include UMC, TSMC and Charter Semiconductors.
29
The Company competes in different product lines to various degrees on the
basis of price, technical performance, product features, product system
compatibility, customized design, availability, quality and sales and technical
support. In particular, standard products may involve greater risk of
competitive pricing, inventory imbalances and severe market fluctuations than
differentiated products. The Company's ability to compete successfully depends
on elements both within and outside of its control, including successful and
timely development of new products and manufacturing processes, product
performance and quality, manufacturing yields and product availability, customer
service, pricing, industry trends and general economic trends.
EMPLOYEESEmployees
At December 31, 1997,1998, the Company employed approximately 28,72829,182 people,
of whom approximately 5,6505,938 were employed in France, 5,9796,357 were employed in
Italy, 610637 were employed in the rest of Europe, 2,7412,655 were employed in the
United States, 5,2975,449 were employed in Malta and Morocco and 8,4514,686 were employed
in Singapore, Malaysia and Japan. As of December 31, 19971998 approximately 4,1004,400
employees were engaged in research and development, 1,700 in marketing and
sales, 20,200 in manufacturing, 1,4001,600 in administration and general services and
1,300 in divisional functions.
The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate highly qualified technical, marketing,
engineering and management personnel. Unions are present in France, Italy,
Malta, Morocco and Singapore. The Company has not experienced any significant
strikes or work stoppages in recent years, other than in connection with
national strikes in Italy, and management believes that the Company's employee
relations are good.
As part of its commitment to the principles of TQM, the Company decided
in July 1994 to develop an internal education organization called "ST
University", responsible for organizing training courses to executives,
engineers, technicians and sales personnel within the Company and coordinating
all training for STMicroelectronics' employees. In 1997,1998, ST University organized
over 64,000100,000 hours of training for 2,2003,500 employees.
In order to optimize the training given by ST University and the
requirements of the Company's personnel, as well as to optimize costs, ST
University has endeavored to qualify internal trainers chosen from among the
Company's personnel, and 85 such trainers have been qualified to date.
ENVIRONMENTAL MATTERSEnvironmental Matters
The Company's manufacturing operations use many chemicals and gases and
the Company is subject to a variety of governmental regulations related to the
use, storage, discharge and disposal of such chemicals and gases and other
emissions and wastes. Consistent with the Company's TQM principles, the Company
has established proactive environmental policies with respect to the handling of
such chemicals and gases and emissions and waste disposals from its
manufacturing operations. The Company has engaged outside consultants to audit
its environmental activities and has created environmental management teams,
information systems, education and training programs, and environmental
assessment procedures for new processes and suppliers. All of the Company's
plants are certified for the Eco-ManagementEco- Management and Audit Scheme ("EMAS") and seven sites have
also obtained ISO 14001 certification. The Company expects
that all of its sites will obtain ISO 14001 certification during 1998.
30
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.
ITEMYear 2000
Reference is made to the information appearing under the caption "Year
2000" on pages 36 through 39 of the Registrant's 1998 Annual Report, which
information is incorporated herein by reference.
30
As of May 29, 1999, the Company's groups have fully completed Phases 1
to 3 and substantially completed Phases 4 and 5. Approximately 83% of items
involved have a status of tested and certified compliant. For the 17% not yet
tested and certified compliant, approximately 85% of the preparatory work has
been completed. Globally, the Company is near 95% completion relative to the
total work load, and is on schedule relative to the Year 2000 Project plan. At
May 29, 1999, 94% of front-end equipment and 96% of back-end equipment had been
tested or certified compliant. The Company's target is to have 100% tested
compliance by mid 1999, but there remains the possibility of some delays due to
the late delivery of solutions by certain suppliers. At May 29, 1999, 95% of
facilities equipment was tested or certified compliant. For business software
systems including financial accounting, sales order management and human
resources systems applications which are not otherwise being upgraded, specific
year 2000 compliance is being worked on internally. The Company expects to
complete most such upgrades by the end of June 1999. At May 29, 1999, 64% of
corporate materials suppliers and virtually all corporate equipment suppliers
have indicated that they are currently Year 2000 Compliant. Substantially all
other significant suppliers are on schedule to achieve Year 2000 Compliance in
due time before January 1, 2000. The Company has determined the magnitude of the
remaining tasks (completion of Phases 4 and 5) and has fixed schedules and
assigned resources accordingly. The Company has estimated the total capital
costs related to its Year 2000 activities to be in the range of approximately
$40 million.
Item 2: DESCRIPTION OF PROPERTY
MANUFACTURINGDescription of Property
Manufacturing
STMicroelectronics currently operates 17 main manufacturing facilities
around the world. The table below sets forth certain information with respect to
STMicroelectronics' current manufacturing facilities, products and technologies.
Front-end manufacturing facilities are wafer fabrication plants and back-end
facilities are assembly, packaging and final testing plants.
31
LOCATION PRODUCTS TECHNOLOGIES
-------- -------- ------------Location Products Technologies
- --------------------- ------------------------------------------- --------------------------------------------------
FRONT-END FACILITIES:Front-end Facilities:
Crolles, France Semicustom devices, x86, Fab -microcontrollers Fab- 8-inch 0.5/0.18 micron CMOS and
and dedicated products 0.7/0.25 micron CMOS
microcontrollers and dedicated and 0.7/0.5 micron BiCMOS;
products R&D on
VLSiVLSI submicron technologies in
conjunction with CNET and Philips
Semiconductors
Phoenix, Arizona Dedicated products Fab - 8-inch 0.7/0.35 micron CMOS,
0.5/0.35 micron BiCMOS
Agrate, Italy Nonvolatile memories, microcontrollers and Fab 1- 6-inch 0.8/0.5 micron CMOS
microcontrollers and
dedicated products Fab 2- 6-inch 2.0/1.00.8 micron BiCMOS and
BCD
Fab 3- 6-inch 0.5/0.250.35/0.18 micron CMOS pilot
line being converted to 8-inch
Rousset, France Microcontrollers, nonvolatile memories and Fab - 6-inch 0.60.8/0.5 micron CMOS
memories and
smartcard ICs
Catania, Italy Power transistors, smart power ICs Fab 1-5-inch1- 5-inch 3 micron bipolar ICspower
and flashnonvolatile memories power
Fab 2-6-inch2- 6-inch 4/1 micron MOS power
Fab 3-6-inch3- 6-inch 4/1 micron pilot line
Fab 4-8-inch 0.7/0.354- 8-inch 0.5/0.25 CMOS
Rennes, France Dedicated and power products Fab - 5-inch 2 micron BiCMOS, BCD and
bipolar
Castelletto, Italy Smart power BCD Fab - 6-inch 4.0/1.00.8 micron
bipolar and mixed BCD pilot line
Tours, France Protection thyristors, diodes and application- Fab 1-4/1- 4/5-inch discrete
application-specificspecific discretes Fab 2-4/2- 4/5-inch discrete
Ang Mo Kio, Singapore Dedicated products, microcontrollers, power Fab 1- 5-inch 1.5 micron CMOS and microcontrollers, power power MOS
transistors and commodity products MOS
Fab 2- 5-inch 6/3 micron bipolar transistor
Fab 3-5-inch 23- 5-inch 2.0/1.2 micron bipolar ICs
Fab 4-5-inch4- 5-inch 5 micron standard linear
Carrollton, Texas Memories, microcontrollers, dedicated Fab 1-- 6-inch 1.20.7 micron CMOS and
dedicatedBiCMOS, 1.0
products and semicustom BiCMOS
devices Fab 2- 6-inchmicron BCD and 0.8/0.6 micron
CMOS
Rancho Bernardo, Dedicated products Fab -6-inch 1- 6-inch 1.0 micron BCD
California
BACK-END FACILITIES:Back-end Facilities:
Muar, Malaysia StandardDedicated 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 DiscreteNonvolatile memories, discrete and Standardstandard
products
Bouskoura, Morocco Subsystems, RF
31
STMicroelectronics has expanded its diversified manufacturing
infrastructure while improving the cost, quality and flexibility of its
operations. STMicroelectronics has applied recent investments in its
manufacturing facilities to bring to close to full capacity the 8-inch front-
endfront-end
manufacturing facility in Crolles, France, to continue the ramp up of the new
32
8-inch front-end manufacturing facilityfacilities in Phoenix, Arizona to complete
the building of and to begin equipping the third 8-inch front-end
manufacturing facility in Catania,
Italy, and to continue to build and equip a new back-end facility in Shenzhen,
China. During 1997,Capital expenditures for 1998 were devoted principally (i) to the
Company completed
conversion from 4-inch to 5-inchexpansion of the two front-end wafer fabrication plants
in Tours, France, from 5-inch to 6-inch of the front-end wafer fabrication
facility in Rousset, France, and has installed a new 6-inch module in the
Rancho Bernardo, California front-end wafer fabrication facility. In addition,
the Company has continued the construction of a new 8-inch front-end wafer fabrication plant in Crolles, France,
(ii) to equip and upgrade both the new 8-inch and existing 6-inch front-end
facilities at the Catania, Italy plant, (iii) to the extension and conversion of
an existing facility in Rousset, France,Agrate, Italy, (iv) to the expansion of the 6-inch
facility in Carrollton, Texas, (v) to the ramp-up of production at the Phoenix,
Arizona 8-inch front-end facility, (vi) to the expansion of the back-end
facilities in Muar, Malaysia, and (vii) to the expansion of the back-end
facilities in Morocco, Malta and Shenzhen, China.
The Company currently expects that capital spending for 1999 will
continue to be at levels at least as high as in each of the last three years,
and possibly higher. The most significant of the Company's 1999 capital
expenditure projects are expected to be the conversion from 6-inch to 8-inch conversion
and
expansion ofat one of its front-end wafer fabricationfabrications plants in Agrate, Italy,
and has started the increase of capacity of the 8-inch facilities in Catania, Italy, the
completion of construction of aits new 8-inch front-end wafer fabricationfabrications
facility in Singapore.Rousset, France, the conversion of its facilities in Crolles, France
to 0.25 micron and 0.18 micron processes, the increase of capacity of the 8-inch
facilities in Phoenix, Arizona and the expansion of the back-end facilities in
Muar and Morocco. The Company has also identified one morean additional 8- inch front-end wafer
fabrication plantfacility to be built in Italy that is planned to be operational by
the year 2001. The Company has decided to build a new 300 millimeter, 12-inch
wafer research fabrication and pilot line at Crolles (France) using 0.18 micron
and below process technology. The pilot lineCompany will be operated in partnership with Leti and CNET, which are already working with
the Company in Crolles. The Company has also announced plans for a new center
for advanced research and development and industrializationcontinue to monitor its level of
capital spending, however, taking into consideration factors such as trends in
the field of
nonvolatile memories in Agrate (Italy) to target 0.13 micron CMOS technology
generationsemiconductor market, capacity utilization and announcements by 2003. In 1997 the Company closed its last major 4-inch
fabrication plant, and almost all of the Company's production is now
manufactured on 5-, 6- and 8-inch wafers.
In April 1998, STMicroelectronics signed an agreement with Burr-Brown
Corporation bringing together Burr-Brown's circuit design expertise in high
performance analog and mixed signal circuits and the Company's advanced mixed
signal process technology and know-how. Under the agreement, Burr-Brown will
design integrated circuits using the Company's bipolar-CMOS-DMOS (BCD) mixed
signal process technology. The Company will also provide Burr-Brown with
front-end manufacturing and packaging services.competitors.
In 1994, the Company created a joint venture with a subsidiary of the
Shenzhen Electronics Group ("SEG") that built and equipped a back-end
manufacturing facility mentioned above in the Futian free-trade zone of Shenzhen
in southern China. STMicroelectronics owns a 60% interest in the joint venture,
with a subsidiary of SEG owning the remaining 40%. Construction of the plant and
equipment installation was completed in 1996 as scheduled and production started
at the end of 1996. The joint venture will have invested approximately $120$150
million in the project by the end of 1998.1999. SEG is a diversified export-oriented
electronics company controlled by the Shenzhen Municipal Government that
manufactures communications equipment, computers and electronic products and
components and engages in import-export trading, financial investment management
and real estate.
Although each fabrication plant is dedicated to specific processes, the
Company's strategy is to develop local presences, better serve customers and
mitigate manufacturing risks by having key processes operated in different
manufacturing plants. The Company is also seeking to take advantage of current
industry overcapacity by qualifying subcontractors on a limited basis both for
wafer foundry and back-end services and thereby minimizing its capital
expenditure needs.
The Company's manufacturing processes are highly complex, require
advanced and costly equipment and are continuously being modified in an effort
to improve yields and product performance. Impurities or other difficulties in
the manufacturing process can lower yields, interrupt production or result in
losses of products in process. As system complexity has increased and sub-
micronsub-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 32
or that the Company will not experience
production difficulties in the future.
In addition, during past periods of high revenue growth for the Company, the
Company's manufacturing facilities, particularly back-end assembly, packaging
and testing facilities, have operated at high capacity.
STMicroelectronics is fostering a corporate-wide TQM culture that
defines a common set of objectives and performance measurements for employees in
all geographic regions, at every stage of product design, development,
production and consignment for all product lines. TQM in STMicroelectronics is
based on five key principles:
33
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-
directedself-directed work
force with a common set of values, objectives and problem-
solvingproblem-solving processes.
Since 1987, the Company has improved average AIQ (electrical) status levels from
5,000 ppm to 14 ppm inat the third quarterend of 1997.1998. The Company uses through-the-wall
mounted equipment for clean rooms to reduce the risk of wafer contamination from
equipment. The Company also uses robot confinement systems to reduce the risk of
wafer contamination. The Company's CIM systems provide management with real time
data on all aspects of the performance of its manufacturing systems. Most of the
Company's manufacturing facilities have been certified to conform to ISO
international quality standards. Several major customers, including
in 1997, Hewlett-
Packard,Hewlett-Packard, Nokia, Sharp, Chrysler and Sanyo, have recognized
STMicroelectronics' commitment to quality and have honored the Company with
quality awards.awards in the recent past. In September 1997, the Company was awarded
the 1997 European Quality Award For Business Excellence in the category of large
business by the EFQM.
STMicroelectronics' manufacturing processes use many raw materials,
including silicon wafers, lead frame, mold compound, ceramic packages and
chemicals and gases. The Company obtains its raw materials and supplies from
diverse sources on a just-in-time basis. Although supplies for the raw materials
used by the Company are currently adequate, shortages could occur in various
essential materials due to interruption of supply or increased demand in the
industry.
The Company has principal executive offices located in the vicinity of
Geneva Airport at Route de Pre-Bois 20, ICC Bloc A, 1215 Geneva 15, Switzerland
and at Technoparc du Pays de Gex- BP112,Gex-BP112, 165 rue Edouard Branly, 01637 St. Genis
Pouilly, France. The latter office is maintained by the Company's French
subsidiary. The Company also maintains executive offices in
Agrate Brianza, Italy, and Paris, France. The Company's corporate seat is in Amsterdam, The Netherlands. The
Company also operates nine research and development centers and 31 design
centers. The Company maintains regional sales headquarters in Geneva,
Switzerland, Boston, Massachusetts, Singapore and Tokyo, Japan, and has 5762 sales
offices in 2324 countries throughout Europe, North America, andJapan, the Asia
Pacific region.region and Region Five. In general, the Company owns its manufacturing
facilities and leases most of its sales offices.
As is common in the semiconductor industry, the Company has from time to
time experienced difficulty in ramping up production at new facilities or
effecting transitions to new manufacturing processes and, consequently, has
suffered delays in product deliveries or reduced yields. There can be no
assurance that the Company will not experience manufacturing problems in
achieving acceptable yields, product delivery delays or interruptions in
production in the future as a result of, among other things, capacity
constraints, construction delays, ramping up production at new facilities,
upgrading or expanding existing facilities, changing its process technologies,
or contamination or fires, storms, earthquakes or other acts of nature, any of
which could result in a loss of future revenues. In addition, the development of
larger fabrication facilities that include 8-inch or larger capabilities and
require 0.50.25 micron or smaller technology has increased the potential for losses
associated with production difficulties, imperfections, or other causes of
defects. In the event of an incident leading to an interruption of production at
a fab, the Company may not be able to shift production to other facilities on a
timely basis or the customer may decide to purchase products from other
suppliers, and in either case the loss of revenues and impact on the Company's
relationship with its customers could be significant. The Company's operating
results could also be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capacity if revenues do
not increase commensurately.
33
ITEMItem 3: LEGAL PROCEEDINGSLegal Proceedings
As is the case with many companies in the semiconductor industry, the
Company has from time to time received communications alleging possible
infringement of certain intellectual property rights of others. Irrespective of
the validity or the successful assertion of such claims, the Company could incur
significant costs with respect to the defense thereof which could have a
material adverse effect on the Company's results of operations or financial
condition.
34
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.
Criminal proceedings are currently ongoing against certain current and
former Company employees in connection with alleged unauthorized use of public
funds for research and development in the management of the research and
development consortium Corimme, in which the Company's Italian subsidiary
("STMicroelectronics Italy") has a two-thirds voting interest (the remaining
one-third interest is held by the University of Catania). The proceedings
started in 1994 when, following some fiscal audits made by the tax authorities
of Catania at the premises of Corimme, the tax authorities in Catania informed
the public prosecutor of alleged criminal violations relating to taxes
(unauthorized VAT deductions and irregular invoicing for services between
Corimme and STMicroelectronics Italy) and the use of public financing
(unauthorized use of public funds intended solely for research and development
activities) from 1988 to 1994. As part of the tax proceedings, the VAT office
of Catania issued verification notices against Corimme alleging unauthorized
VAT deductions and irregular invoicing and against STMicroelectronics Italy
alleging improper invoicing for alleged production services performed by
Corimme for the account of STMicroelectronics Italy. To date, several tax
commissions and courts of competent jurisdiction have upheld the positions of
STMicroelectronics Italy and Corimme. However, appeals are still pending and
no final decision has been reached yet.
The public prosecutor in Catania, alsoItaly commenced a criminal
investigation into alleged unauthorized use of public funds for research and
development. Based on a report from a panel of experts appointed by the public
prosecutor, the prosecutor issued a request for indictment in June 1997 against
the 11 members of the Board of Directors of the research and development
consortium Corimme, comprisingin which the Company's Italian subsidiary
("STMicroelectronics Italy") has a two-thirds voting interest (the remaining
one-third interest is held by the University of Catania). The people indicted
included eight employees or ex-employees of STMicroelectronics Italy and three
professors of the University of Catania.
Following suchthe request for indictment, the 11 members of Corimme's Board
of Directors filed an incidente probatorio in December 1997, requesting the
appointment of a panel of independent experts to verify the assertions made by
the public prosecutor's experts. During a hearing on March 25, 1998, the judge
for the preliminary hearing accepted the incidente probatorio and named a panel
of independent experts, who will make a report to her to decide on the
request for indictment.experts. The panelcollege of independent experts, commenced its reviewin their public
report filed with the court in February 1999, concluded that not only were the
accusations formulated by the public prosecutor concerning the use of public
funds for research and development unfounded, but also that the research and
development performed by Corimme had been very wide ranging, complex, as well as
fully in line with requirements for the public funding received. The court will
now hold hearings to make a decision on May 7, 1998the pursuit of charges against the 11
indicted persons in light of the report from the independent college of experts.
In parallel, the tax authorities in Catania had issued proceedings
against Corimme for alleged unauthorized VAT deductions and irregular invoicing
for the years 1988 to 1993, and the tax authorities in Milan had issued
proceedings against STMicroelectronics Italy for alleged VAT infringements
during the years 1990 to 1994 and income tax infringements during the years 1990
to 1992 for invoicing for allegedly noneligible production services performed by
Corimme for the account of STMicroelectronics Italy.
In a final ruling in March 1999, the Commissione Tributaria Centrale
confirmed the previous decisions favorable to Corimme entered by the Commissione
Tributaria Provinciale and the Commissione Tributaria Regionale, with respect to
the years 1988 and 1989.
The Commissione Tributaria Provinciale of Catania has 120 daysruled in favor of
Corimme with respect to complete its review, subjectthe years 1990 to extensions
permitted1993, in first instance, and the
Commissione Tributaria Provinciale of Milan has ruled in favor of
STMicroelectronics Italy with respect to VAT claims for the years 1990 to 1994.
Presently, appeals are pending before the Commissione Tributaria Regionale.
The Commissione Tributaria Provinciale of Milan has also ruled in favor
of STMicroelectronics Italy on the various income tax proceedings for the period
1990-1992. The tax authorities have accepted these rulings by law.waiving their
right of appeal.
The Company's management believes that Corimme's contractual and other
requirements have been honored in all material respects in accordance with the
requirements and with applicable financial procedures provided by the Italian
government and has no grounds to suspect malfeasance. The Company has offered
to cooperate in fullcooperated
fully with the authorities in the conduct of the inquiry. Although it isremains
impossible to determine with certainty the ultimate scope or outcome of the investigation,remaining
ongoing investigations, management believes the investigationinvestigations will not have a
material effect on the financial condition or results of operations of the
Company.
3435
ITEMItem 4: CONTROL OF REGISTRANT
PRINCIPAL SHAREHOLDERSControl of Registrant
Principal Shareholders
The following table sets forth certain information with respect to the
ownership of the Company's Common Shares as of June 10, 1998.
COMMON SHARES
SHAREHOLDERS OWNED1999.
Shareholders Common Shares Owned (1)
- ------------ ---------------
NUMBER %
---------- ----
STMicroelectronics Holding II B.V. ("ST Holding II")............ 79,863,880 56.2
- -------------------- -----------------------
Number(2) %
---------- ----
STMicroelectronics Holding II B.V. ("ST Holding II").....79,863,880 55.9
- --------------
(1) Prior to the offer and sale of Common Shares by the Company and ST
Holding II, completed on June 10, 1998 (the "Share Offering"), ST
Holding II held 68.9% of the outstanding Common Shares of the
Company. In connection with
the Share Offering, the Company and ST Holding II granted the underwriters
of such offering an overallotment option exercisable within thirty days of
June 5, 1998 for 450,000 and 2,400,000 Common Shares, respectively.
Assuming such over-allotment option is exercised in full, ST Holding II
will own 77,463,880 Common Shares, or 54.3% of the outstanding Common
Shares. Simultaneously with the Share Offering, the Company offered
and sold $513,852,000 principal amount at maturity Liquid Yield
Option(TM)OptionTM Notes (the "Notes") convertible, subject to certain
conditions, into Common Shares at a conversion rate of 8.952 Common
Shares per $1,000 principal amount at maturity. Assuming all Notes
are converted, ST Holding II will own 54.4%54.2% of the outstanding
Common Shares (52.6% if the Share
over-allotment option is also exercised in full).Shares. These calculations do not give effect to Common
Shares that may be issued under the Employee Stock Plan or pursuant
to options granted to members and professionals of the Supervisory
Board.
(2) On June 16, 1999, the Company effected a 2:1 stock split.
ST Holding is 50% owned by a group of French shareholders that are
indirectly controlled by the French government and 50% owned by a group of
Italian shareholders that are indirectly controlled by the Italian government.
The group of French shareholders is comprised of France Telecom, the French
state-controlled telephone company, and CEA-Industrie, a corporation controlled
by the French atomic energy commission, who hold through FT1CI. The group of
Italian shareholders is represented by MEI-Microelettronica Italiana s.r.l.
("MEI"), an Italian holding company owned by Istituto per la Ricostruzione
Industriale-IRI S.p.A. ("I.R.I."), the holding company for Italian state-owned
industrial and commercial interests, and Comitato per l'intervento nella SIR ed
in settori ad alta tecnologia ("Comitato SIR"). As of June 18, 1999, the
interest previously held by Comitato SIR was transferred to Ministero del Tesoro
del Bilancio e della Programmazione Economica-Dipartimento del Tesoro, the
Italian Ministry of Treasury. The shares of France Telecom are listed on the
ParisBourse and the New York Stock Exchange. Certificats d'investissement of
CEA-Industrie are listed on the ParisBourse.
The officers and directors of the Company as a group do not own a
material number of Common Shares.
On September 26, 1997, the Board of Directors of Thomson-CSF approved the
sale of its entire minority interest in FT2CI, the French holding company that
owned a 50% indirect interest in the Company through ST Holding and ST Holding
II to FT1CI, a holding company whose shareholders are CEA-Industrie and France
Telecom. The purchase price for such transaction was $1,226,500,000, and the
transfer of shares was completed on October 6, 1997. As a result of the
transaction, CEA-Industrie and France Telecom have doubled their joint
indirect interest in the Company. The Company has been informed by CEA-
Industrie and France Telecom that FT1CI and FT2CI were merged at the end of
1997, with FT1CI as the surviving company in the merger. These transactions do
not modify the equality in ownership interests between the French shareholders
and the Italian shareholders.
35
The chart below illustrates the current shareholding structure:structure as of
June 10, 1999:
36
This information was represented by an organizational chart in the
original document.
Description of Shareholding Structure: STMicroelectronics N.V. is owned
56.2%55.9% by STMicroelectronics Holding II B.V. and 43.8%44.1% by the public.
STMicroelectronics Holding II B.V. is a wholly-owned subsidiary of
STMicroelectronics Holding N.V. which is 50% owned by a group of French
shareholders and 50% owned by a group of Italian shareholders. The French
shareholder, FT1CI, is owned 51% by CEA-Industrie and 49% by France Telecom,
respectively. The Italian shareholder, MEI, is owned 50.1% and 49.9% by I.R.I.
and Comitato SIR(1), respectively.
- --------------
(1) As of June 18, 1999, the interest previously held by Comitato SIR respectively.
SHAREHOLDER AGREEMENTSwas
transferred to Ministero del Tesoro del Bilancio e della Programmazione
Economica-Dipartimento del Tesoro, the Italian Ministry of the Treasury.
Shareholder Agreements
In connection with the formation of the Company, Thomson-CSF and STET,
as shareholders of the Company, entered into a shareholders agreement on April
30, 1987. In connection with the formation of ST Holding in 1989, which
coincided with the acquisition by Thorn EMI of its interest in the Company, the
shareholders agreement (as amended, the "Holding Shareholders Agreement") was
amended to apply to the parties' ownership in ST Holding. The rights and
obligations of Thomson-CSF and STET under the Holding Shareholders Agreement
were subsequently transferred to or assumed by, as the case may be, FT2CI for
Thomson-CSF, and Finmeccanica and MEI for STET. In connection with the transfer
by Finmeccanica of its interest in ST Holding to MEI, the rights and obligations
of Finmeccanica under the Holding Shareholders Agreement were subsequently
transferred to or assumed by, as the case may be, MEI.
The Holding Shareholders Agreement contemplates that the parties shall
agree upon common proposals and jointly exercise their powers of decision and
their full control of the strategies and actions of ST Holding and the Company.
Under the Holding Shareholders Agreement, the Supervisory Board of ST Holding,
which is composed of three representatives of the French Owner and three
representatives of the Italian Owner, must give its prior approval before ST
Holding, the Company, or any subsidiary of the Company may: (i) modify its
articles of incorporation; (ii) change its authorized share capital, issue,
acquire or dispose of its own shares, change any shareholder rights or issue any
instruments granting an interest in its capital or profits; (iii) be liquidated
or dispose of all or a substantial and material part of its assets or any shares
it holds in any of its subsidiaries; (iv) enter into any merger, acquisition or
joint venture agreement (and, if substantial and material, any agreement
relating to intellectual property) or form a new company; (v) approve such
company's draft consolidated balance sheets and financial statements or any
profit
37
distribution by such company; or (vi) enter into any agreement with any of the
direct or indirect French or Italian Owners outside the normal course of
business. The Holding Shareholders Agreement also provides that long-term
business plans and annual budgets of the Company and its subsidiaries, as well
as any significant modifications thereto, shall be approved in advance by the
Supervisory Board of ST Holding. In addition, the Supervisory Board of ST
Holding shall also decide upon operations of exceptional importance contained in
the annual budget even after financing thereof shall have been approved.
36
Such agreement also provides that similar and adequate levels of
research, development and technological innovation shall be achieved by the
Company and its subsidiaries in France and Italy and that there shall be no
substantial discrepancy in the percentage of state financing compared to
research, development and technological innovation expenditures by the Company
and its subsidiaries in each such country. See "Item 1: Description of
Business--State Support for the Semiconductor Industry." Pursuant to the terms
of the Holding Shareholders Agreement, ST Holding is not permitted, as a matter
of principle, to operate outside the field of semiconductor products. The
parties to the Holding Shareholders Agreement also undertake to refrain directly
or indirectly from competing with the Company in the area of semiconductor
products, subject to certain exceptions, and to offer the Company opportunities
to commercialize or invest in any semiconductor product developments by them.
Any financing or capital provided by the parties to ST Holding or the Company is
intended to be provided pro rata based on the parties' respective shareholdings
in ST Holding. In the Holding Shareholders Agreement, the parties state that it
is of the utmost importance that the French and Italian governments grant
sufficient and continuous financial support for research and development, and
undertake to take suitable actions with a view to obtaining such funding. See
"Item 1: Description of Business--
StateBusiness--State Support for the Semiconductor Industry."
In the event of a disagreement that cannot be resolved between the
parties as to the conduct of the business and actions contemplated by the
Holding Shareholders Agreement, each party has the right to offer its interest
in ST Holding to the other, which then has the right to acquire, or to have a
third party acquire, such interest. If neither party agrees to acquire or have
acquired the other party's interest, then together the parties are obligated to
try to find a third party to acquire their collective interests, or such part
thereof as is suitable to change the decision to terminate the agreement. The
Holding Shareholders Agreement otherwise terminates in the event that one of the
parties thereto ceases to hold shares in ST Holding.
Pursuant to the terms of the Holding Shareholders Agreement and for the
duration of such agreement, FT2CI (the "French Owner"), on the one hand, and MEI
(the "Italian Owner"), on the other hand, have agreed to maintain equal
interests in the share capital of ST Holding and maintain, together, ownership
of the majority of ST Holding's issued voting shares. As a result of the merger
of FT1CI and FT2CI, the rights and obligations of FT2CI under the Holdings
Shareholders Agreement have been transferred to FT1CI. The admission of a third
party to the share capital of ST Holding, whether through the sale of ST
Holding's outstanding shares or through the issue by ST Holding of new shares,
or by any other means, must be unanimously agreed upon. In the event of a new
shareholder, the parties undertake to ensure that the balance between the French
and Italian shareholdings is maintained until at least December 31, 1998.
The Company has been informed that, pursuantPursuant to a Memorandum of Understanding dated February 24, 1998, the
arrangements set forth in the Holding Shareholders Agreement are beingwere extended until
at least December 31, 1998. The Company has also been informed that the
Shareholders Agreement between FT1CI and Thomson-
CSFThomson-CSF relating to the management
of their respective holdings in ST Holding and the Company has terminated due to the sale of Thomson-CSF's holdings in FT2CI.on October
6, 1997.
The Company has been informed that the shareholders of FT1CI have also
entered into a separate shareholder agreement that requires the consent of the
Board of Directors of each such company to certain actions taken by ST Holding,
the Company and its subsidiaries. These agreements provide for the management of
the interests of CEA-Industrie and France Telecom in ST Holding and the
Company, with the object of defining between them the positions, strategies and
decisions to be taken by the French Owner in ST Holding affecting the management
of ST Holding, and the Company and its subsidiaries. The Company is not a party
to such agreement.
38
The agreement between the shareholders of FT1CI (CEA-Industrie and
France Telecom) provides that the following acts with respect to ST Holding or
the Company must be approved by three-quarters of the Board of Directors of
FT1CI (which consists of five directors, three of whom are chosen by
CEA-Industrie and two of whom are chosen by France Telecom): (i) any
modification of the articles of association of ST Holding or the Company, (ii)
any change in the capital of ST Holding or the Company, or issuance, purchase or
sale by ST Holding or the Company of their shares or rights attached thereto, or
the issuance of any securities giving rights to a share in the capital or
profits of ST Holding or the Company, (iii) the liquidation or dissolution of ST
Holding or the Company or the sale of all or an important and material part of
the business or assets of ST
37
Holding or the Company representing at least
$10,000,000 of the consolidated shareholders' equity of the Company, (iv) any
merger, acquisition, partnership in interest or the execution of any material
agreement relating to intellectual property rights, in each case in which ST
Holding or the Company participates or in which a proposal is made to
participate, or the establishment by ST Holding or the Company of new companies
or groups, (v) approval of the balance sheets and consolidated accounts of ST
Holding, the Company and its subsidiaries as well as the policies of
distributions of profits among the group, (vi) any agreement between ST Holding
and/or the Company and the shareholders of FT1CI which is out of the ordinary
course of business, (vii) the approval of, or material modifications to,
shareholders agreements with the Italian Owner with respect to ST Holding or the
Company and (viii) approval of strategic multi-year plans and annual
consolidated budgets of ST Holding and the Company. Transfers of shares in FT1CI
to third parties are subject to the approval of at least four members of the
Board of Directors, and are subject to a right of first refusal of the other
shareholders, as well as other provisions. In the event CEA-Industrie proposes
to sell its interest in FT1CI, in whole or in part, France Telecom has the right
to require the acquiroracquirer to purchase its interest as well. The FT1CI shareholders
agreement terminates upon the termination of FT1CI.
As is the case with other companies controlled by the French Government,
the French Government has appointed a Commissaire du Gouvernement and a
Controleur d'Etat for FT1CI. Pursuant to Decree No. 94-214, dated March 10,
1994, these Government representatives have the right (i) to attend any board
meeting of FT1CI, and (ii) to veto any board resolution or any decision of the
president of FT1CI within 10 days of such board meeting (or, if they have not
attended the meeting, within 10 days of the receipt of the board minutes or the
notification of such president's decision); such veto lapses if not confirmed
within one month by the Ministry of the Economy or the Ministry of Industry.
FT1CI is subject to certain points of the arrete of August 9, 1953 pursuant to
which the Ministry of the Economy and any other relevant ministries (a) have the
authority to approve decisions of FT1CI relating to budgets or forecasts of
revenues, operating expenses and capital expenditures, and (b) may set
accounting principles and rules of evaluation of fixed assets and amortization.
In connection with the Initial Public Offering, ST Holding II and the
Company entered into a registration rights agreement pursuant to which the
Company agreed that, upon request from ST Holding II, the Company will file a
registration statement under the Securities Act of 1933, as amended, to register
Common Shares held by ST Holding II, subject to a maximum number of five
requests in total as well as a maximum of one request in any twelve-month
period. Subject to certain conditions, the Company will grant ST Holding II the
right to include its Common Shares in any registration statements covering
offerings of Common Shares by the Company. ST Holding II will pay a portion of
the costs of any requested or incidental registered offering based upon its
proportion of the total number of Common Shares being registered, except that ST
Holding II will pay any underwriting commissions relating to Common Shares that
it sells in such offerings and any fees and expenses of its separate advisors,
if any. Such registration rights agreement will terminate upon the earlier of
December 15, 2004 and such time as ST Holding II and its affiliates own less
than 10% of the Company's outstanding Common Shares.
The Company has been informed by ST Holding II that it does not currently
have any plans to reduce its ownership interest to less than a controlling
interest in the Company for the foreseeable future. The timing and size of any
future primary or secondary offerings will depend upon a variety of factors,
including in particular market conditions.
The French and Italian shareholders of ST Holding have agreed that they
willin the
Memorandum of Understanding dated February 24, 1998, which has not been
modified, to continue to manage their interest in the Company through ST Holding
until at least December 31, 1998, and accordingly, for so long as they hold
their interests in ST Holding, they have undertaken (i) to jointly hold 100% of
ST Holding's capital and voting rights, (ii) to maintain equality between the
shareholdings of the French and Italian shareholders, (iii) to ensure that ST
Holding maintains more than 50% of the Company's share
39
capital and voting rights, and (iv) to jointly exercise their decision-making
powers and monitor strategies and actions as part of ST Holding's management
bodies.
38
ITEMOn May 31, 1999, the Company's shareholders at the annual general
meeting approved the creation of 180,000,000 Preference Shares. These Preference
Shares entitle a holder to full voting rights at any meeting of shareholders and
to a preferential right to dividends. On May 31, 1998, the Company entered into
an option agreement with ST Holding II, which provides that Preference Shares
shall be issued to ST Holding II upon request subject to the adoption of a
resolution of the Supervisory Board of the Company recognizing that a hostile
takeover or similar action exists and giving its consent to the exercise of the
option and upon payment of at least 25% of the par value of the Preference
Shares to be issued. The option is contingent upon ST Holding II retaining at
least 33% of the issued share capital of the Company.
Item 5: NATURE OF TRADING MARKET
COMMON SHARESNature of Trading Market
Common Shares
Since 1994, the Common Shares have been traded on the New York Stock
Exchange under the symbol "STM" and on the Bourse de ParisParisBourse and were quoted on SEAQ
International. On June 5, 1998, the Common Shares were also listed for the first
time on the Italian Stock Exchange, where they have been traded since that date.
The Common Shares have been included in the CAC 40, the principal index
published by the SBF-Bourse de Paris,SBF-ParisBourse, since November 12, 1997. The CAC 40 is derived
daily by comparing the total market capitalization of 40 stocks included in the
monthly settlement market of the Bourse de ParisParisBourse to a baseline established on
December 31, 1987. Adjustments are made to allow for expansion of the sample due
to new issues. The CAC 40 indicates the trends in the French stock market as a
whole and is one of the most widely followed stock price indices in France.
The table below indicates the range of the high and low prices in U.S.
dollars for the Common Shares on the New York Stock Exchange and the high and
low prices in French francseuros for the Common Shares on the Bourse de ParisParisBourse during each quarter
since the Company's Initial Public Offering.in 1997, 1998 and to date 1999. In December 1994, the Company completed the
Initial Public Offering of 21,000,000 Common Shares at an initial price to the
public of $22.25 per share. On June 16, 1999, the Company effected a 2:1 stock
split. The table below has been adjusted to reflect the split.
40
NEW YORK STOCK EXCHANGE BOURSE DE PARIS
PRICE PER COMMON SHARE PRICE PER COMMON SHARE
---------------------------- -----------------------
CALENDAR PERIOD HIGH LOW HIGH LOWNew York Stock Exchange ParisBourse
Price per Common Share Price per Common Share(1)
------------------------- ---------------------------------
Calendar Period High Low High Low
- --------------- ------------ ----------- ----------- --------------- --- ---- ---
19941997
First quarter..................... $ 40-7/16 $ 31-7/8 Euro 33.39 Euro 26.91
Second quarter.................... $ 44 $ 31-1/4 Euro 37.66 Euro 28.06
Third quarter..................... $ 49-17/32 $ 40-9/32 Euro 47.79 Euro 35.83
Fourth quarter
(beginning December
quarter.................... $ 47 $ 25-3/4 Euro 43.07 Euro 23.87
1998
First quarter..................... $ 39-3/8 1994).............$ 25-5/8 Euro 37.24 Euro 23.63
Second quarter.................... $ 45-7/8 $ 32-1/4 Euro 42.46 Euro 29.42
Third quarter..................... $ 36-1/4 $ 22 3/Euro 33.26 Euro 18.37
Fourth quarter.................... $ 41-7/16 $ 17-15/16 Euro 34.99 Euro 15.02
1999
First quarter..................... $ 53-13/16 $ 40-1/4 $ 21 5/8 FRF 126.0 FRF 116.1
1995
First quarter......... $ 32 1/2 $ 22 1/2 FRF 160.0 FRF 119.0
Second quarter........ $ 41 7/8 $ 29 1/4 FRF 205.5 FRF 142.0
Third quarter......... $ 57 1/2 $ 40 3/8 FRF 288.0 FRF 197.0
Fourth quarter........ $ 49 $ 40 3/8 FRF 244.0 FRF 201.0
1996
First quarter......... $ 41 3/8 $ 29 1/2 FRF 211.9 FRF 141.0
Second quarter........ $ 47 1/2 $ 34 5/8 FRF 246.5 FRF 175.5
Third quarter......... $ 49 7/8 $ 29 3/4 FRF 258.0 FRF 150.0
Fourth quarter........ $ 70 5/8 $ 44 3/8 FRF 397.0 FRF 228.0
1997
First quarter......... $ 80 5/8 $ 64 5/8 FRF 438.0 FRF 353.0
Second quarter........ $ 86 $ 65 1/8 FRF 494.0 FRF 431.2
Third quarter......... $ 98 1/2 $ 81 1/4 FRF 605.0 FRF 481.5
Fourth quarter........ $ 94 $ 51 1/2 FRF 565.0 FRF 313.1
1998
First quarter......... $ 78 3/4 $ 51 1/4 FRF 488.5 FRF 310.0Euro 48.50 Euro 34.40
Second quarter (through June 25)....23).. $ 9072-1/2 $ 6649 Euro 67.95 Euro 44.50
- --------------
(1) For periods prior to January 1, 1999, the share prices on the ParisBourse
have been converted into euros at the official exchange rate of Euro
1.00 = FRF 553.0 FRF 401.06.55957.
At December 31, 1997,1998, there were 139,132,397142,478,106 Common Shares issued and
outstanding, of which 11,437,48214,331,742 or 8.22%10.05% were registered in the Common Share
registry maintained on the Company's behalf in New York.
LIQUID YIELD OPTION(TM) NOTESSince June 5, 1998, the Common Shares have also been listed on the
Italian Stock Exchange. The table below indicates the range of high and low
prices in euros for the Common Shares on the Italian Stock Exchange, as adjusted
for the 2:1 stock split.
Calendar Period Italian Stock Exchange
Price per Common Share(1)
---------------------------------
High Low
------------ --------------
1998
Second quarter (since June 5, 1998)..... Euro 32.79 Euro 30.38
Third quarter........................... Euro 32.53 Euro 19.92
Fourth quarter.......................... Euro 34.77 Euro 15.73
1999
First quarter........................... Euro 46.53 Euro 34.96
Second quarter (through June 23)........ Euro 67.23 Euro 45.94
- --------------
(1) For periods to January 1, 1999, the share prices on the Italian Stock
Exchange have been converted into euros at the official exchange rate of
Euro 1.00 = Lit. 1,936.27.
41
Dividends
On May 31, 1999, the Company's shareholders approved the payment of a
cash dividend with respect to the year ended December 31, 1998 of $0.16 per
Common Share payable as of June 15, 1999 to shareholders of record on June 1,
1999.
Liquid Yield OptionTM Notes
The Liquid Yield Option(TM)OptionTM Notes ("LYONs") of the Company are traded on
the New York Stock Exchange and the Bourse de Paris. SinceParisBourse. The table below indicates the
daterange of initial
listing (June 5, 1998) through June 25, 1998, the high and low price per LYONprices on the New York Stock Exchange was 86.88% and 83.38%the high and
low prices for the LYONs on the ParisBourse, in both cases as a percentage of
principal amount at maturity, respectively,during each quarter in 1998 and the high and low price per LYON on the Bourse de
Paris was 99.00% and 84.00% of principal amount at maturity, respectively.
39
BOURSE DE PARISto date in 1999.
New York Stock Exchange ParisBourse
Price per LYON Price per LYON
------------------------ ------------------------
Calendar Period High Low High Low
- --------------- ---- --- ---- ---
1998
Second quarter (since June 5, 1998)... 85-1/8% 83-1/2% 99% 85.5%
Third quarter......................... 85-1/8% 80% 88.5% 72.1%
Fourth quarter........................ 83% 80% 89% 75%
1999
First quarter.......................... 94% 84% 97.5% 90%
Second quarter (through June 23)....... 130% 94% 122.1% 101.3%
ParisBourse
The securities of most large public companies are listed on the
Premier Marche with the Second Marche available for small and medium-sized
companies. Both the Premier Marche and the Second Marche are operated by the
SBF-Bourse
de ParisSBF-ParisBourse (the "SBF"). Securities are also traded on the Hors-Cote, or over-
the-counter marketMarche Libre-OTC
which is also operated by the SBF, however, since this market will
be phased out in July 1998, no new admission can be granted for listing on
this market. A new over-the-counter market, organized by the SBF, the Marche
Libre-OTC was created in September, 1996.SBF.
The Common Shares are listed on the Premier Marche. Shares listed on
the Bourse de ParisParisBourse are placed in one of four categories depending on the volume of
transactions. The Common Shares are listed in the category known as Continu A,
which includes the most actively traded shares (with a minimum daily trading
volume of FF250,000 or twenty trades).
Official trading of listed securities on the Bourse de ParisParisBourse is transacted
through providers of investment services (investment companies and other
financial institutions) and takes place continuously on each business day from
10:00 a.m. to 5:00 p.m., with a pre-opening session from 8:30 a.m. to 10:00 a.m.
Any trade effected after the close of a stock exchange session will be recorded,
on the next Bourse de ParisParisBourse trading day, at the closing price for the relevant
security at the end of the previous day's session. The SBF publishes a daily
Official Price List that includes price information on each listed security. The
Bourse de ParisParisBourse has introduced continuous trading by computer for most listed
securities.
Trading in the listed securities of an issuer may be suspended by the
SBF if quoted prices exceed certain price limits defined by the regulations of
the SBF. In particular, if the quoted price of a Continu A security varies by
more than 10 percent from the previous day's closing price, trading may be
suspended for up to 15 minutes. Further suspensions for up to 15 minutes are
also possible if the price again varies by more than five percent. The SBF may
also
42
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 Bourse de ParisParisBourse
are settled in either of two ways: in the cash settlement market or the monthly
settlement market. The Common Shares are settled in the marche a reglement
mensuel (monthly settlement market). In the monthly settlement market, the
purchaser may elect to settle on the third trading day following the trade
(reglement immediat or immediate settlement) or decide on the determination date
(date de liquidation,liquidation), which is the fifth trading day prior to the end of the
month) either (i) to settle the trade no later than on the last trading day of
such month or (ii) upon payment of an additional fee, to extend to the
determination date of the following month the option either to settle no later
than the last trading day of such month or to postpone further the selection of
a settlement date until the next determination date (a procedure known as
report). Such purchaser may decide to renew its option on each subsequent
determination date upon payment of an additional fee. The majority of
transactions in equity securities on the Bourse de ParisParisBourse are settled on the monthly
settlement market. In accordance with French securities regulation, any sale of
shares executed on the monthly settlement market during the month of a dividend
payment date is deemed to occur after payment of the dividend, and the
purchaser's account will be credited with an amount equal to the dividend paid
and the seller's account will be debited in the same amount.
40Securities Trading in Italy
The Mercato Telematico Azionario (the "MTA"), the Italian automated
screen-based quotation system on which the Company's Common Shares are listed,
is organized and administered by Borsa Italiana S.p.A. ("Borsa Italiana")
subject to the supervision and control of CONSOB, the public authority charged,
inter alia, with regulating investment companies, securities markets and public
offerings of securities in Italy to ensure the transparency and regularity of
dealings and protect investors. Borsa Italiana was established to manage the
Italian regulated financial markets (including the MTA) as part of the
implementation in Italy of the EU Investment Services Directive pursuant to
Legislative Decree No. 415 of July 23, 1996 (the "Eurosim Decree"). Borsa
Italiana became operative in January 1998, replacing the administrative body
Consiglio di Borsa, and has issued rules governing the organization and the
administration of the Italian stock exchange, futures and options markets as
well as the admission to listing on and trading in these markets. The
shareholders of Borsa Italiana are primarily financial intermediaries.
A five-day rolling cash settlement period applies to all trades of
equity securities in Italy effected on a regulated market. Any person, through
an authorized intermediary, may purchase or sell listed securities following (i)
in the case of sales, deposit of the securities; and (ii) in the case of
purchases, deposit of 100% of such securities' value in cash, or deposit of
listed securities or government bonds of an equivalent amount. No "closing
price" is reported for the electronic trading system, but an "official price",
calculated for each security as a weighted average of all trades effected during
the trading day net of trades executed on a "cross-order" basis, and a
"reference price", calculated for each security as a weighted average of the
last 10% of the trades effected during such day, are reported daily.
If the opening price of a security (established each trading day prior
to the commencement of trading based on bids received) differs by more than 10%
(or such other amount established by Borsa Italiana) from the previous day's
reference price, trading in that security will not be permitted until Borsa
Italiana authorizes it. If in the course of a trading day the price of a
security fluctuates by more than 5% from the last reported sale price (or 10%
from the previous day's reference price), an automatic five minute suspension in
the trading of that security will be declared. In the event of such a
suspension, orders already placed may not be modified or canceled and new orders
may not be processed. Borsa Italiana has the authority to suspend trading in any
security, among other things, in response to extreme price fluctuations. In
urgent circumstances, CONSOB may, where necessary, adopt measures required to
ensure the transparency of the market, orderly trading and protection of
investors.
Italian law requires that trading of equity securities, as well as any
other investment services, may be carried out on behalf of the public only by
registered securities dealing firms and banks (with minor exceptions). Banks and
43
ITEMinvestment services firms organized in a member nation of the EU are permitted
to operate in Italy provided that the intent of the bank or investment services
firm to operate in Italy is communicated to (i) Bank of Italy and to (ii) Bank
of Italy and CONSOB, respectively, by the competent authority of the member
state. Non-EU banks and non-EU investment services firms may operate in Italy
subject to a specific authorization granted by decree of the Italian Ministry of
Treasury and CONSOB, respectively. The settlement of stock exchange transactions
is facilitated by Monte Titoli.
The settlement of stock exchange transactions is facilitated by Monte
Titoli, a centralized securities clearing system owned by the Banca d'Italia
and certain major Italian banks and financial institutions. Almost all Italian
banks and some registered securities dealing firms have securities accounts with
Monte Titoli. Beneficial owners of shares may hold their interests through
specific deposit accounts with any depositary having an account with Monte
Titoli. Beneficial owners of shares held with Monte Titoli may transfer their
shares, collect dividends, create liens and exercise other rights with respect
to those shares through such accounts.
Participants in Euroclear and Cedelbank may hold their interests in
shares and transfer the shares, collect dividends and exercise their
shareholders' rights through Euroclear and Cedelbank. A holder may require
Euroclear and Cedelbank to transfer its shares to an account of such holder with
an Italian bank or any authorized broker having an account with Monte Titoli.
Item 6: EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERSExchange Controls and Other Limitations
Affecting Security Holders
None.
ITEMItem 7: TAXATIONTaxation
The following is a summary of certain tax consequences of the
acquisition, ownership and disposition of the Common Shares based on tax laws of
The Netherlands and the United States as in effect on the date of this annual
report on Form 20-F, and is subject to changes in Netherlands or U.S. law,
including changes that could have retroactive effect. The following summary does
not take into account or discuss the tax laws of any country other than The
Netherlands or the United States, nor does it take into account the individual
circumstances of an investor. Prospective investors in the Common Shares in all
jurisdictions are advised to consult their own tax advisers as to Netherlands,
U.S. or other tax consequences of the purchase, ownership and disposition of the
Common Shares.
NETHERLANDS TAXATIONNetherlands Taxation
The following summary of Netherlands tax considerations is based on
present Netherlands tax laws as interpreted under officially published case law.
The description is limited to the tax implications for an owner of Common Shares
who is not, or is not deemed to be, a resident of The Netherlands for purposes
of the relevant tax codes (a "non-resident Shareholder" or "Shareholder").
Withholding Tax
Dividends distributed by the Company are subject to a withholding tax
imposed by The Netherlands at a rate of, generally, 25%. The expression
"dividends distributed by the Company" as used herein includes, but is not
limited to:
44
(i) distributions in cash or in kind, deemed and constructive
distributions and repayments of paid-in capital not
recognized for Netherlands dividend withholding tax purposes;
(ii) liquidation proceeds, proceeds of redemption of Common Shares
or, as a rule, consideration for the repurchase of Common
Shares by the Company in excess of the average paid-in
capital recognized for Netherlands dividend withholding tax
purposes;
(iii) the par value of Common Shares issued to a Holder of Common
Shares or an increase of the par value of Common Shares, as
the case may be, to the extent that it does not appear that a
contribution, recognized for Netherlands dividend withholding
tax purposes, has been made or will be made; and
(iv) partial repayment of paid-in capital, recognized for
Netherlands dividend withholding tax purposes, if and to the
extent that there are net profits ("zuivere winst"), unless
the general meeting of shareholders of the Company has
resolved in advance to make such repayment and provided that
the par value of the Common Shares concerned has been reduced
by an equal amount by way of an amendment of the Articles of
Association.
If a Holder of Common Shares is resident in a country other than The
Netherlands and if a double taxation convention is in effect between The
Netherlands and such country, such Holder may, depending on the terms of such
double taxation convention, be eligible for a full or partial exemption from, or
refund of, Netherlands dividend withholding tax.
U.S. Shareholders. Under the Tax Convention of December 18, 1992,
concluded between the United States and The Netherlands (the "Convention"), the
withholding tax on dividends paid by the Company to a resident of the United
States (as defined in the Convention) who is entitled to the benefits of the
Convention under Article 26 may be reduced to 15% pursuant to Article 10 of the
Convention. Dividends paid by the 41
Company to U.S. pension funds and U.S. exempt
organizations may be eligible for an exemption from dividend withholding tax.
Relief/refund Procedure. If the 15% rate, or an exemption in case of a
qualifying U.S. pension fund, is applicable pursuant to the Convention, the
Company is allowed to pay out a dividend under deduction of 15%, or respectively
without any deduction, if, at the payment date, the relevant shareholders have
submitted the duly signed form IB 92 USA, which form includes a banker's
affidavit. Holders of Common Shares through DTC will initially receive dividends
subject to a withholding rate of 25%. An additional 10% of the dividend will be
paid to holders upon receipt by the dividend disbursing agent of notification
from the Participants in DTC that such holders are eligible for the reduced rate
under the Convention. Only where the applicant has not been able to claim full
or partial relief at source, will he be entitled to a refund of the excess tax
withheld. In that case he should mention in the Form IB 92 USA the circumstances
that prevented him from claiming relief at source.
Qualifying U.S. exempt organizations can only ask for a full refund of
the tax withheld by using the Form IB 95 USA, which form also includes a
banker's affidavit.
Income Tax and Corporate Income Tax
A non-resident individual or corporate Shareholder will not be subject
to Netherlands income tax (as opposed to the dividends withholding tax discussed
above) with respect to dividends distributed by the Company on the Common Shares
or with respect to capital gains derived from the sale or disposition of Common
Shares in the Company, provided that:
(a) the non-resident Shareholder does not have an enterprise
or an interest in an enterprise that is, in whole or in part, carried
on through a permanent establishment or a permanent representative in
The
45
Netherlands and to which enterprise or part of an enterprise, as the
case may be, the Common Shares are attributable; and
(b) the non-resident Shareholder does not have a substantial
interest or a deemed substantial interest in the Company or, in the
event the Shareholder does have such an interest, it forms part of the
assets of an enterprise.
Generally, a Shareholder will not have a substantial interest if he,
his spouse, certain other relatives (including foster children) or certain
persons sharing his household, do not hold, alone or together, whether directly
or indirectly, the ownership of, or certain other rights over, shares
representing five per cent or more of the total issued and outstanding capital
(or the issued and outstanding capital of any class of shares) of the Company or
rights to acquire shares, whether or not currently issued, that represent at any
time (and from time to time) five percent or more of the total issued and
outstanding capital (or the issued and outstanding capital of any class of
shares) of the Company or the ownership of certain profit participating
certificates that relate to five percent or more of the annual profit of the
Company and/or to five percent or more of the liquidation proceeds of the
Company. A deemed substantial interest is present if (part of) a substantial
interest has been disposed of, or is deemed to have been disposed of, on a
non-recognition basis.
Net Wealth Tax
A non-resident individual Shareholder is not subject to Netherlands
net wealth tax with respect to the Shares, provided that the non-resident
Shareholder does not have an enterprise or an interest in an enterprise that is,
in whole or in part, carried on through a permanent establishment or a permanent
representative in The Netherlands and to which enterprise or part of an
enterprise, as the case may be, the Common Shares are attributable.
Corporations are not subject to Netherlands net wealth tax.
42
Gift and Inheritance Tax
A gift or inheritance of Common Shares from a non-resident Shareholder
will not be subject to a Netherlands gift and inheritance tax, unless:
(a) the non-resident Shareholder at the time of the gift has
or at the time of his death had an enterprise or an interest in an
enterprise that is or was, in whole or in part, carried on through a
permanent establishment or a permanent representative in The
Netherlands and to which enterprise or part of an enterprise, as the
case may be, the Common Shares are attributable; or
(b) in the case of a gift of Common Shares by an individual
Shareholder who at the time of the gift was neither resident nor
deemed to be resident in The Netherlands, the death of such individual
occurs within 180 days after the date of the gift, while such
individual is resident or deemed to be resident in The Netherlands.
UNITED STATES TAXATIONUnited States Taxation
The following discussion is a summary of certain U.S. federal income
tax consequences of the ownership of Common Shares by U.S. Holders, as defined
below. This summary applies only to a beneficial owner of Common Shares (a) who
owns, directly or indirectly, less than 10% of the voting stock of the Company,
(b) who is (i) a citizen or resident of the United States for U.S. federal
income tax purposes, (ii) a U.S. domestic corporation or (iii) otherwise subject
to U.S. federal income taxation on a net income basis in respect of the Common
Shares, (c) who holds the Common Shares as capital assets, (d) whose functional
currency is the U.S. dollar, (e) who is a resident of the United
46
States and not also a resident of The Netherlands for purposes of the
Convention, (f) who is entitled under the "limitation on benefits" provisions
contained in the Convention to the benefits of the Convention and (g) who does
not have a permanent establishment or fixed base in The Netherlands (a "U.S.
Holder"). Certain holders (including, but not limited to, United States
expatriates, tax-exempt organizations, persons subject to the alternative
minimum tax, securities broker-dealers and certain other financial institutions,
persons holding the Common Shares in a hedging transaction or as part of a
straddle or conversion transaction or holders whose functional currency is not
the U.S. dollar) may be subject to special rules not discussed below. Because
this is a general summary, prospective purchasers are advised to consult their
own tax advisors with respect to the U.S. federal, state, local and applicable
foreign tax consequences of the purchase, ownership and disposition of Common
Shares.
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), the Convention, judicial decisions, administrative pronouncements
and existing and proposed Treasury regulations as of the date hereof, all of
which are subject to change, possibly with retroactive effect.
DIVIDENDSDividends
For U.S. federal income tax purposes, the gross amount of
distributions made by the Company with respect to the Common Shares (including
the amount of any Netherlands taxes withheld therefrom) will generally be
includable in the gross income of a U.S. Holder in the year received as foreign
source dividend income to the extent that such distributions are paid out of the
Company's current or accumulated earnings and profits as determined under U.S.
federal income tax principles. To the extent, if any, that the amount of any
such distribution exceeds the Company's current or accumulated earnings and
profits, it will be treated first as a tax-free return of the U.S. Holder's tax
basis in the Common Shares (thereby increasing the amount of any gain or
decreasing the amount of any loss realized on the subsequent sale or disposition
of such Common Shares) and thereafter as capital gain. No dividends received
deduction will be allowed with respect to dividends paid by the Company. The
amount of any distribution paid in Dutch guilders will be equal to the U.S.
dollar value of such Dutch guilders on the date of distribution, regardless of
whether the payment is in fact converted into U.S. dollars at that time. Gain or
loss, if any, realized on the sale or other disposition of such Dutch guilders
will be U.S. source ordinary income or loss. The amount of any distribution of
property other than cash will be the fair market value of such property on the
date of distribution.
43
Subject to certain limitations, Netherlands taxes withheld from a
distribution at the rate provided in the Convention will be eligible for credit
against a U.S. Holder's U.S. federal income tax liability. Under current Dutch
law, the Company under certain circumstances may be permitted to deduct and
retain from such withholding a portion of the amount that would otherwise be
required to be remitted to the taxing authorities in The Netherlands. This
amount generally may not exceed 3% of the total dividend distributed by the
Company. To the extent that the Company has withheld an amount from dividends
paid to shareholders which it then is not required to remit to any taxing
authority in The Netherlands, such amount in all likelihood would not qualify as
a creditable tax for U.S. tax purposes. The Company will endeavor to provide to
U.S. Holders information concerning the extent to which it has applied the
reduction described above to dividends paid to U.S. Holders. The limitation on
foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by the
Company with respect to the Common Shares will generally constitute "passive
income" or, in the case of certain U.S. Holders, "financial services income."
The rules relating to the determination of the U.S. foreign tax credit are
complex and holders should consult their tax advisors to determine whether and
to what extent a credit would be available. U.S. Holders that do not elect to
claim a foreign tax credit may instead claim a deduction for all foreign taxes
paid in the taxable year.
SALE OR OTHER DISPOSITION OF COMMON SHARESSale or Other Disposition of Common Shares
Upon a sale or other disposition of Common Shares, a U.S. Holder will
recognize gain or loss for U.S. federal income tax purposes in an amount equal
to the difference between the amount realized and the U.S. Holder's tax basis
47
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. U.S. Holders should
consult their tax advisors regarding the source of loss recognized on the salegain or other disposition of Shares.loss. In the case of
a U.S. Holder who is an individual, any capital gain generally will be subject
to U.S. federal income tax at preferential rates if specified minimum holding
periods are met.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDINGInformation Reporting and Backup Withholding
Dividend payments with respect to Common Shares and proceeds from the
sale, exchange or redemption of Common Shares may be subject to information
reporting to the Internal Revenue Service ("IRS") and possible U.S. backup
withholding at a 31% rate. Backup withholding will not apply, however, to a
holder who furnishes a correct taxpayer identification number or certificate of
foreign status and makes any other required certification or who is otherwise
exempt from backup withholding. Persons required to establish their exempt
status generally must provide such certification on IRS Form W-9 (Request for
Taxpayer Identification Number and Certification) in the case of U.S. persons
and on IRS Form W-8 (Certificate of Foreign Status) in the case of non-U.S.
persons. Finalized Treasury regulations have generally expanded the
circumstances under which information reporting and backup withholding may apply
for payments made after December 31, 1999.2000. Holders of Common Shares should
consult their tax advisors regarding the application of the information
reporting and backup withholding rules, including the finalized Treasury
regulations.
Amounts withheld as backup withholding may be credited against a
holder's U.S. federal income tax liability, and a holder may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS and furnishing any required
information.
44
ITEMItem 8: SELECTED CONSOLIDATED FINANCIAL DATA
The table below sets forth selected consolidated financial data forSelected Consolidated Financial Data
Reference is made to the Company for eachinformation appearing under the caption
"Selected Consolidated Financial Data" on page 27 of the years in the five-year period ended December 31, 1997.
Such data have been derived from the consolidated financial statements of the
Company. Consolidated audited financial statements for each of the years in
the three-year period ended December 31, 1997, including the Notes thereto
(collectively, the "Consolidated Financial Statements"), are included
elsewhere in this annual report on Form 20-F.
The followingRegistrant's 1998
Annual Report, which information should be read in conjunction with "Itemis hereby incorporated by reference.
Item 9: Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements and the related notes
thereto included elsewhere in this annual report on Form 20-F.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993(1) 1994(1) 1995(1) 1996 1997
-------- -------- -------- -------- ---------
(IN MILLIONS EXCEPT PER SHARE AND RATIO DATA)
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net sales.................. $2,007.7 $2,602.2 $3,520.7 $4,078.3 $ 3,969.8
Other revenues............. 29.8 42.7 33.7 44.1 49.4
-------- -------- -------- -------- ---------
Net revenues............... 2,037.5 2,644.9 3,554.4 4,122.4 4,019.2
Cost of sales(2)........... (1,248.4) (1,528.7) (2,096.0) (2,414.7) (2,457.4)
-------- -------- -------- -------- ---------
Gross profit(2).......... 789.1 1,116.2 1,458.4 1,707.7 1,561.8
Operating expenses:
Selling, general &
administrative.......... (302.5) (339.9) (413.2) (421.1) (454.3)
Research and
development(3).......... (270.9) (338.3) (440.3) (532.3) (610.9)
Restructuring costs...... (49.9) (37.0) (13.0) -- --
Other income and
expenses(3)............. 49.7 32.0 59.1 45.1 23.2
-------- -------- -------- -------- ---------
Total operating
expenses.............. (573.6) (683.2) (807.4) (908.3) (1,042.0)
-------- -------- -------- -------- ---------
Operating income........... 215.5 433.0 651.0 799.4 519.8
Net interest expenses...... (37.8) (21.0) (16.8) (11.2) (2.6)
Gain on disposal of
investment................ -- -- -- 7.3 --
-------- -------- -------- -------- ---------
Income before income taxes
and minority interests.... 177.7 412.0 634.2 795.5 517.2
Income tax expense......... (17.6) (49.5) (108.3) (171.6) (113.0)
-------- -------- -------- -------- ---------
Income before minority
interests................. 160.1 362.5 525.9 623.9 404.2
Minority interests(4)...... -- -- 0.6 1.6 2.4
-------- -------- -------- -------- ---------
Net income................. $ 160.1 $ 362.5 $ 526.5 $ 625.5 $ 406.6
======== ======== ======== ======== =========
Earnings per share
(basic)(5)................ $ 1.92 $ 3.04 $ 4.03 $ 4.50 $ 2.92
======== ======== ======== ======== =========
Earnings per share
(diluted)(5).............. $ 1.92 $ 3.03 $ 4.01 $ 4.49 $ 2.91
======== ======== ======== ======== =========
Number of shares used in
calculating earnings per
share (basic)............. 83.5 119.4 130.6 138.7 139.1
-------- -------- -------- -------- ---------
Number of shares used in
calculating earnings per
share (diluted)........... 83.5 119.7 131.3 139.2 139.9
-------- -------- -------- -------- ---------
Ratio of earnings to fixed
charges(6)................ 4.6 10.9 13.2 18.6 13.4
45
YEAR ENDED DECEMBER 31,
------------------------------------------
1993(1) 1994(1) 1995(1) 1996 1997
------- ------- -------- -------- --------
(IN MILLIONS EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA
(END OF PERIOD):
Cash, cash equivalents and
marketable securities............. $ 327.4 $ 461.5 $ 758.4 $ 556.4 $ 702.2
Working capital(7)................. 390.0 291.1 417.4 611.8 443.5
Total assets....................... 2,240.9 3,224.7 4,486.0 5,005.5 5,445.7
Short-term debt (including current
portion of long-term debt)........ 231.1 322.5 492.8 428.2 424.6
Long-term debt (excluding current
portion)(1)....................... 374.8 277.2 200.7 194.9 356.4
Shareholders' equity(1)............ 1,004.0 1,680.0 2,661.7 3,260.0 3,307.4
CONSOLIDATED OPERATING DATA:
Capital expenditures(8)............ $ 445.9 $ 779.7 $1,001.9 $1,125.2 $1,035.4
Net cash provided by operating
activities........................ 460.9 728.1 825.1 980.7 983.8
Depreciation and amortization(8)... 229.4 288.0 392.4 535.9 608.1
- --------
(1) In October 1995, the Company completed a second public offering, with net
proceedsOperations
Reference is made to the Company of approximately $371.6 million. In December 1994,
the Company completed the Initial Public Offering, with net proceeds to
the Company of approximately $198.7 million. In 1993, the Company received
a $500 million capital contribution that was effected in two steps, $250
million in May and $250 million in September. The Company also received a
$100 million capital contribution in each of 1988, 1989 and 1991.
(2) Cost of sales is net of certain funds received through government
subsidies for industrialization costs (which include certain costs
incurred to bring prototype products to the production stage) included
therein. See Note 19 to the Consolidated Financial Statements. For a
discussion of certain significant charges reflected in cost of sales in
1995, 1996 and 1997, see "Item 9: Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
(3) Other income and expenses include, among other things, funds received
through government subsidies for research and development expenses, and
the cost of new plant start-ups, as well as foreign currency gains and
losses, and the costs of certain activities relating to intellectual
property. The Company's reported research and development expenses do not
include design center, process engineering, pre-production or
industrialization costs.
(4) In 1994, the Company created a joint venture with a subsidiary of the
Shenzhen Electronics Group ("SEG"). The Company owns a 60% interest in the
joint venture, with a subsidiary of SEG owning the remaining 40%. Minority
interests also include other minor investments made by the Company.
(5) Earnings per share amounts have been restated for 1993 to reflect a 40:1
stock split effected in connection with the Initial Public Offering.
Earnings per share have been restated to reflect the adoption in 1997 of
Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
See Note 2.15 and Note 12 to the Consolidated Financial Statements.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and minority interests,
plus fixed charges. Fixed charges consist of interest expenses.
(7) Working capital is calculated as current assets (excluding cash, cash
equivalents and marketable securities) less current liabilities (excluding
bank overdrafts, short-term debt and current portion of long-term debt).
(8) Capital expenditures are net of certain funds received through government
subsidies, the effect of which is to decrease depreciation.
46
ITEM 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
annual report on Form 20-F. The following discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended. The Company's actual results may differ significantly from those
projected in the forward-looking statements. Factors that might cause future
actual results to differ materially from the Company's recent results or those
projected in the forward-looking statements include, but are not limited to,
those discussed in "Cautionary Statement Regarding Forward-Looking
Statements",information appearing under the caption
"Risk Factors" in the Company's Prospectuses
dated June 5, 1998 and below. The Company assumes no obligation to update the
forward-looking statements or such factors.
OVERVIEW
The semiconductor industry slowdown experienced in 1996, as compared to
previous years, continued in 1997 and the Company experienced increased
competition and pricing pressure in its core product markets. According to
trade association data, worldwide sales of semiconductor products (the total
available market or "TAM") increased 4.0% in 1997 over 1996, only a modest
improvement over 1996 when the TAM decreased 8.6% compared to 1995. According
to trade association data, the estimated market for products produced by the
Company (the serviceable available market or "SAM") (which prior to 1995
consisted of the TAM without DRAMs, microprocessors and opto-electronic
products and commencing in 1995 and for all subsequent periods presented
includes microprocessors as a result of the Company's production of x86
products) increased approximately 9.9% in 1997 over 1996, compared to an
increase of 3.5% in 1996 over 1995.
The Company's net revenues for 1997 decreased 2.5% compared to net revenues
for 1996, due in part to declining prices resulting from production
overcapacity in the industry and strong competition in certain product
families, as well as to the impact of the appreciation of the U.S. dollar on
net revenues registered in European and Japanese currencies and a less
favorable product mix.
Despite difficult market conditions and a 2.5% net revenue decline in 1997,
from 1993 to 1997 the Company's net revenues increased from $2,037.5 million
to $4,019.2 million. Such revenue gains were achieved despite the Company's
absence during that period from the market for DRAMs (a commodity memory
product) and, until the second half of 1994, from the market for personal
computer microprocessors (such as the x86 family of products). According to
trade association data, the TAM increased from $77.3 billion in 1993 to $137.2
billion in 1997, while the SAM increased from $61.5 billion in 1993 to $112.9
billion in 1997. The Company's share of the TAM increased from 2.6% to 2.9%
during this period, while the Company's share of the SAM increased from 3.3%
to 3.6%. Revenue growth within the Company from 1993 through 1997 was
particularly significant for dedicated products, EPROMs and semicustom
devices.
The Company's absence from the DRAM market contributed to the Company's
outperformance of the semiconductor industry in 1996, when the Company's net
revenues increased by approximately 16%. The Company gained market share in
1995 and 1996 against both the TAM and the SAM, lost market share against both
the TAM and the SAM in 1997 and, based on preliminary trade association data
for the first quarter of 1998, gained market share against both the TAM and
the SAM in the first quarter of 1998 compared with the first quarter of 1997.
The Company attributes its lower market share in part to its marginal presence
in the x86 microprocessor market and in the market for datacom products, two
market segments that experienced sustained growth in 1997, and in part to
fierce competition and a market slowdown in sales of hard disk drives and set-
top boxes, two market segments in which the Company has strong market
positions. The Company believes that recent difficult market conditions have
led certain of its competitors to redirect their marketing focus and
manufacturing capacity toward products that compete with the Company's
products. The Company believes increased competition in its core product
markets is generating greater pricing pressure, increased competition for
market share in the SAM, and a generally more challenging market environment
for the Company.
47
The Company continues to focus on differentiated ICs and analog ICs.
Differentiated ICs (which the Company defines as being its dedicated products,
semicustom devices and microcontrollers) accounted for approximately 57% of
the Company's net revenues in 1997, compared to approximately 59% in 1996.
Such products foster close relationships with customers, resulting in early
knowledge of their evolving requirements and opportunities to access their
markets for other products, and are less vulnerable to competitive pressures
than standard commodity products. Analog ICs (including mixed signal ICs), the
majority of which are also differentiated ICs, accounted for approximately 49%
of the Company's net revenues in 1997, compared to approximately 46% in 1996
while discrete devices accounted for approximately 14% of the Company's net
revenues in both 1997 and 1996. In recent years, these families of products,
in particular analog ICs, have experienced less volatility in sales growth
rates and average selling prices than the overall semiconductor industry.
However, the difficult competitive situation in the semiconductor market in
1997 has led to price pressures also in these families.
The Company's gross profit margin increased from 38.7% in 1993 to 41.0% in
1995. Benefiting from a favorable industry environment in 1993, 1994 and 1995,
such increases in gross profit margins combined with significant reductions in
selling, general and administrative expenses as a percentage of net revenues
and lower interest expenses led to significantly increased profitability. In
1996, the gross profit margin improved to 41.4%, due primarily to a more
favorable product mix and improved manufacturing productivity despite an
unfavorable industry environment which increased pricing pressures. However,
the Company's gross profit margin declined to 38.9% in 1997 primarily as a
result of declining prices, strong competition and other factors previously
discussed.
There can be no assurance that the Company will experience revenue growth
at or above the growth rate for the TAM or the SAM, or that increased
competition in the Company's core product markets will not lead to further
price erosion, lower revenue growth rates and lower margins for the Company.
RECENT OFFERINGS
On June 10, 1998, the Company completed a global offering of 3,000,000
shares of capital stock and concurrently therewith ST Holding II completed a
global offering of 16,000,000 shares, both at $72.1875 per share (the "Share
Offering"). The net proceeds to the Company in connection with the Share
Offering were approximately $208 million. On June 10, 1998, the Company also
completed a public offering of $432 million aggregate initial principal amount
of zero-coupon convertible Liquid Yield Option(TM) Notes due 2008 (the
"LYONs") with yield to maturity of 1.75%. The net proceeds to the Company in
connection with the LYONs offering was approximately $423 million.
48
RESULTS OF OPERATIONS
The tables below set forth information on the Company's net revenues by
product group and by geographic region:
TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PERCENTAGES)
NET REVENUES BY PRODUCT
GROUP:
Dedicated
Products(1)(2)....... $ 755.6 $ 997.1 $1,344.4 $1,788.7 $1,696.3
Discrete and Standard
ICs(3)............... 514.6 636.3 838.0 784.1 846.8
Memory Products(2).... 440.0 560.7 653.3 736.8 708.6
Programmable
Products(1).......... 288.9 372.0 550.6 689.5 642.1
New Ventures Group and
Others(4)............ 38.4 78.8 168.1 123.3 125.4
-------- -------- -------- -------- --------
Total............... $2,037.5 $2,644.9 $3,554.4 $4,122.4 $4,019.2
======== ======== ======== ======== ========
NET REVENUES BY
GEOGRAPHIC REGION:(5)
Europe................ $ 949.7 $1,187.5 $1,593.8 $1,788.5 $1,753.3
Americas(6)........... 463.4 643.9 812.5 903.0 899.1
Asia Pacific.......... 463.2 617.6 916.7 1,125.7 1,065.8
Japan................. 102.8 134.7 155.4 228.2 214.5
Region Five(5)........ 58.4 61.2 76.0 77.0 86.5
-------- -------- -------- -------- --------
Total............... $2,037.5 $2,644.9 $3,554.4 $4,122.4 $4,019.2
======== ======== ======== ======== ========
NET REVENUES BY PRODUCT
GROUP: AS A PERCENTAGE OF NET REVENUES
Dedicated
Products(1)(2)....... 37.0% 37.7% 37.8% 43.4% 42.2%
Discrete and Standard
ICs(3)............... 25.3 24.1 23.6 19.0 21.1
Memory Products(2).... 21.6 21.2 18.4 17.9 17.6
Programmable
Products(1).......... 14.2 14.0 15.5 16.7 16.0
New Ventures Group and
Others(4)............ 1.9 3.0 4.7 3.0 3.1
-------- -------- -------- -------- --------
Total............... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
NET REVENUES BY
GEOGRAPHIC REGION:(5)
Europe................ 46.6% 44.9% 44.8% 43.4% 43.6%
Americas(6)........... 22.8 24.3 22.9 21.9 22.4
Asia Pacific.......... 22.7 23.4 25.8 27.3 26.5
Japan................. 5.0 5.1 4.4 5.5 5.3
Region Five(5)........ 2.9 2.3 2.1 1.9 2.2
-------- -------- -------- -------- --------
Total............... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
- --------
(1) In January 1997, analog array products were moved from the Programmable
Products Group to the Dedicated Products Group and image processing
products from the Dedicated Products Group to the Programmable Products
Group. Revenues for the Dedicated Products Group and the Programmable
Products Group have been restated in this "Item 9: Management's"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for prior
periods to reflect this change.
(2) 1996 revenues for the Dedicated Products Group include $5.6 million of
revenues from certain foundry activities which were moved from the Memory
Products Group in January 1996. Revenues for the Dedicated Products Group
and the Memory Products Group have been restated for prior periods to
reflect this change.
(3) Includes revenues from sales of RF products, which were moved to the
Discrete and Standard ICs product group in May 1994. Revenues for the
Discrete and Standard ICs group have been restated for prior years to
include RF product revenues.
49
(4) Includes revenues from sales of subsystems and other products and from the
New Ventures Group, which was created in May 1994 to act as a focal point
for the Company's new business opportunities.
(5) 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.
(6) Substantially allon pages 28 through 40 of the revenues derived from the Americas are derived
from the United States.
The following table sets forth certain financial data from the Company's
consolidated statements of income since 1993, expressed in each case as a
percentage of net revenues:
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
Net sales............................. 98.5% 98.4% 99.1% 98.9% 98.8%
Other revenues........................ 1.5 1.6 0.9 1.1 1.2
------ ------ ------ ------ ------
Net revenues.......................... 100.0 100.0 100.0 100.0 100.0
Cost of sales......................... (61.3) (57.8) (59.0) (58.6) (61.1)
------ ------ ------ ------ ------
Gross profit........................ 38.7 42.2 41.0 41.4 38.9
Operating expenses:
Selling, general and
administrative..................... (14.8) (12.9) (11.6) (10.2) (11.3)
Research and development............ (13.3) (12.8) (12.4) (12.9) (15.2)
Restructuring costs................. (2.4) (1.4) (0.4) -- --
Other income and expenses........... 2.4 1.3 1.7 1.1 0.5
------ ------ ------ ------ ------
Total operating expenses.......... (28.1) (25.8) (22.7) (22.0) (26.0)
------ ------ ------ ------ ------
Operating income...................... 10.6 16.4 18.3 19.4 12.9
Net interest expenses................. (1.9) (0.8) (0.5) (0.3) --
Gain on disposal of investment........ -- -- -- 0.2 --
------ ------ ------ ------ ------
Income before income taxes & minority
interests............................ 8.7 15.6 17.8 19.3 12.9
Income tax expense.................... (0.8) (1.9) (3.0) (4.2) (2.9)
------ ------ ------ ------ ------
Income before minority interests...... 7.9 13.7 14.8 15.1 10.0
Minority interests.................... -- -- -- 0.1 0.1
------ ------ ------ ------ ------
Net income............................ 7.9% 13.7% 14.8% 15.2% 10.1%
====== ====== ====== ====== ======
1997 VS. 1996
The difficult market environment during 1997 resulted in a decrease in the
Company's net revenues, gross profit, operating income and net income in 1997
compared to 1996. While unit volumes increased substantially in the 1997
period, average selling prices in 1997 declined compared to 1996.
Net revenues. Net sales decreased 2.7%, from $4,078.3 million in 1996 to
$3,969.8 million in 1997. This decrease originated from difficult market
conditions for certain product families forRegistrant's 1998 Annual Report, which supply exceeded demand and
produced strong negative pressures on the Company's selling prices, while in
other product families demand itself declined because of high inventories
accumulated by the Company's customers in previous periods. In general, as is
normal in a situation of excess capacity, memory and commodity products
experienced price declines. In particular, hard disk drives were affected by
decreasing prices due to increased competition both at the system and
semiconductor levels and set-top boxes experienced a slowdown in sales due to
inventory corrections and lower demand. The Company's unit volumes increased
substantially in 1997 compared to 1996, with commodity products (which are
typically more price sensitive than other products in the Company's product
portfolio) constituting a higher proportion of the overall product mix. The
impact of these market conditions was
50
particularly apparent in the Asia Pacific region and Japan. In addition, since
a significant part of the Company's net revenues was billed in European and
Japanese currencies, the strong appreciation of the U.S. dollar during 1997
resulted in a negative impact on total net revenues when translated from local
currencies into U.S. dollars. Other revenues increased from $44.1 million in
1996 to $49.4 million in 1997 due primarily to an increase in licensing
revenues. Net revenues decreased 2.5%, from $4,122.4 million in 1996 to
$4,019.2 million in 1997.
The Dedicated Products Group's net revenues fell 5.2% primarily as a result
of price pressure and a less favorable product mix in certain major products
including telecommunication, video and automotive products. Price and volume
declines in computer (hard disk drives) products also contributed to the
revenues decline. In January 1997, analog array products were moved from the
Programmable Products Group to the Dedicated Products Group and image
processing products from the Dedicated Products Group to the Programmable
Products Group. Revenues for the Dedicated Products Group and the Programmable
Products Group have been restated in this "Item 9: Management's Discussion and
Analysis of Financial Condition and Results of Operations" for prior periods
to reflect this change. The Discrete and Standard ICs Group's net revenues
increased by 8.0%, as significant volume increases were partly offset by price
declines in substantially all major products including standard commodities
and discrete and power devices. Net revenues of the Memory Products Group
declined by 3.8%, as the sales increases in smartcard ICs (used primarily in
European telephone and bank cards) were more than offset by price declines in
the major memory product families (such as EPROMs, flash memories and EEPROMs)
and volume declines in EPROMs. The Programmable Products Group's net revenues
decreased 6.9% as an improved product mix in digital semicustom devices and
higher volumes in microcontroller products were more than offset by declines
in sales of image processing products and price declines in certain major
products.
Gross profit. The Company's gross profit decreased 8.5%, from $1,707.7
million in 1996 to $1,561.8 million in 1997. As a percentage of net revenues,
gross profit decreased from 41.4% in 1996 to 38.9% in 1997, primarily as a
result of the reduction in average selling prices and a less favorable product
mix.
Cost of sales increased slightly from $2,414.7 million in 1996 to $2,457.4
million in 1997, primarily due to an increase in production volume related to
higher sales volume and higher depreciation charges linked to the higher level
of capital investment.
The exchange rate impact on gross profit in 1997 compared to 1996 was
marginal, as the negative impact of the appreciation of the U.S. dollar on net
revenues was only slightly higher than the positive impact on cost of sales.
See "--Impact of Changes in Exchange Rates." Cost of sales in 1997 and 1996
was net of $6.2 million and $4.6 million, respectively, of funds received
through government subsidies to offset industrialization costs (which include
certain costs incurred to bring prototype products to the production stage)
included in cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 7.9%, from $421.1 million in 1996 to $454.3
million in 1997, reflecting higher expenditure in the marketing organization
and for information technology. As a percentage of net revenues, selling,
general and administrative expenses increased from 10.2% in 1996 to 11.3% in
1997, due primarily to the increase in selling, general and administrative
expenses and the decrease in net revenues.
Research and development expenses. Research and development expenses
increased 14.8%, from $532.3 million in 1996 to $610.9 million in 1997. The
Company continued to invest heavily in research and development and plans to
continue increasing its research and development staff. The Company is
allocating significant financial resources to expand its market leadership in
key applications, reflecting the commitment to service and continuous
innovation. As a percentage of net revenues, research and development expenses
increased from 12.9% in 1996 to 15.2% in 1997. The Company's reported research
and development expenses do not include design center, process engineering,
pre-production or industrialization costs.
Other income and expenses. Other income and expenses decreased from income
of $45.1 million in 1996 to income of $23.2 million in 1997. Other income and
expenses include primarily funds received from
51
government agencies in connection with the Company's research and development
programs, the cost of new plant start-ups, as well as foreign currency gains
and losses, the costs of certain activities relating to intellectual property
and miscellaneous revenues and expenses. The decrease in other income and
expenses resulted primarily from higher start-up costs of new production
facilities and from a decrease in funds received from government agencies in
connection with the Company's research and development programs.
Operating income. The Company's operating income decreased 35.0%, from
$799.4 million in 1996 to $519.8 million in 1997, primarily as a result of the
decrease in net revenues and the increase in research and development
expenses, which more than offset the favorable exchange rate impact.
Net interest expenses. Net interest expenses decreased from $11.2 million
in 1996 to $2.6 million in 1997 reflecting primarily improved cash flow during
1997 and a slight reduction in interest rates.
Income tax expense. Provision for income tax was $113.0 million in 1997
compared to $171.6 million in 1996, primarily as a result of the substantial
decrease in income before income taxes and minority interests. The accrued
effective tax rate increased slightly from 21.6% in 1996 to 21.8% in 1997. The
still favorable 1997 rate was mainly due to the application of favorable tax
regimes in certain countries. As certain of these benefits may not be
available after 1997, the Company could experience an increase in the
effective tax rate in the coming years.
1996 VS. 1995
Following the growth that the worldwide semiconductor market experienced in
1994 and 1995, total industry sales declined in 1996 compared to 1995. See "--
Overview." However, the Company enjoyed significant growth in net revenues in
1996 despite lower average selling prices compared to 1995. Coupled with
improvements in manufacturing productivity, this revenue growth led to strong
increases in operating income and net income in 1996.
Net revenues. Net sales increased 15.8%, from $3,520.7 million in 1995 to
$4,078.3 million in 1996. The increase in net sales of $557.6 million was
primarily a result of an improved product mix, including sales of new
products, in each of the Company's principal product groups. The exchange rate
impact on net sales in 1996 was not significant. See "--Impact of Changes in
Exchange Rates." Other revenues (consisting primarily of co-development
contract fees, certain contract indemnity payments and patent royalty income)
increased from $33.7 million in 1995 to $44.1 million in 1996, primarily due
to an increase in licensing fees and co-development fees, partly offset by a
decrease in patent and royalty income. As a result, net revenues increased
16.0%, from $3,554.4 million in 1995 to $4,122.4 million in 1996.
The Dedicated Products Group's net revenues increased 33.0% primarily as a
result of an improved mix in computer, video/image processing and
telecommunications products. In 1996, revenues for the Dedicated Products
Group included $5.6 million of revenues from certain foundry activities which
were moved from the Memory Products Group in January 1996 and in January 1997,
analog array products were moved from the Programmable Products Group to the
Dedicated Products Group and image processing products from the Dedicated
Products Group to the Programmable Products Group. Revenues for the Dedicated
Products Group, Memory Products Group and the Programable Products Group have
been restated for prior periods in this "Item 9: Management's Discussion and
Analysis of Financial Condition and Results of Operations" to reflect this
change. Higher volumes in computer, audio, automotive and telecommunications
products also contributed to the increase in net revenues. The Discrete and
Standard ICs Group's net revenues declined 6.4% as volume increases in
transistors and an improved mix in discrete devices were not sufficient to
offset declining volumes in discrete devices, standard commodities and
standard logic devices. Net revenues of the Memory Products Group increased
12.8% due to higher volumes in smartcard ICs (primarily used in European
telephone and bank cards) and an improved mix in EPROMs. Increased volume and
an improved product mix in flash memories and EEPROMs also contributed to the
increase in net revenues. The Programmable Products Group's net revenues
increased 25.2% principally due to higher volumes and an improved product mix
in analog arrays and microcontroller products.
52
Gross Profit. The Company's gross profit increased 17.1%, from $1,458.4
million in 1995 to $1,707.7 million in 1996, primarily as a result of an
improved product mix, higher other revenues and improvements in manufacturing
performances. As a percentage of net revenues gross profit was 41.0% in 1995
and 41.4% in 1996.
Cost of sales increased from $2,096.0 million in 1995 to $2,414.7 million
in 1996, due primarily to higher depreciation resulting from increased capital
spending in recent periods and to higher variable costs associated with
increased volume. Increased cost of sales was also attributable to the new
plant in Phoenix, Arizona whose costs were not included in cost of sales until
the third quarter of 1995, and to upgrades of manufacturing facilities in
1996.
The exchange rate impact on gross profit in 1996 was not significant. See
"--Impact of Changes in Exchange Rates." Cost of sales in 1996 and 1995 was
net of $4.6 million and $11.8 million, respectively, of funds received to
offset industrialization costs (which include certain costs incurred to bring
prototype products to the production stage) included in cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 1.9%, from $413.2 million in 1995 to $421.1
million in 1996. This increase was due primarily to increases in general and
administrative activities and to a strengthening in the Company's marketing
efforts. The 1995 period included a $10 million provision related to specific
charges to cover the estimated financial impact related to legal proceedings
in one of the Company's subsidiaries. As a percentage of net revenues,
selling, general and administrative expenses decreased from 11.6% in 1995 to
10.2% in 1996, due primarily to higher net revenues.
Research and development expenses. Research and development expenses
continued to represent a substantial amount of the Company's net revenues,
increasing 20.9%, from $440.3 million in 1995 to $532.3 million in 1996.
Despite the growth in net revenues in 1996, research and development expenses
as a percentage of net revenues increased from 12.4% in 1995 to 12.9% in 1996.
The Company continued to invest heavily in both its research and development
staff and research and development activities. The Company's reported research
and development expenses do not include design center, process engineering,
pre-production or industrialization costs.
Restructuring costs. There were no restructuring costs in 1996. The $13.0
million in restructuring costs in 1995 included costs associated with certain
personnel lay-offs.
Other income and expenses. Other income and expenses decreased from income
of $59.1 million in 1995 to income of $45.1 million in 1996. The decrease in
other income and expenses resulted primarily from a decrease in funds received
from government agencies in connection with the Company's research and
development programs and higher start-up costs, partly offset by foreign
currency gains.
Operating income. The Company's operating income increased 22.8%, from
$651.0 million in 1995 to $799.4 million in 1996, primarily as a result of
increased net revenues and improved efficiency in manufacturing. The exchange
rate impact on operating income was marginal.
Net interest expenses. Net interest expenses decreased from $16.8 million
in 1995 to $11.2 million in 1996, primarily as a result of a capital increase
undertaken by the Company in October 1995, which allowed the Company to repay
a substantial majority of its outstanding debt.
Income tax expense. Provision for income tax was $171.6 million in 1996
compared to $108.3 million in 1995, primarily as a result of the substantial
increase in income before income taxes and minority interests. The accrued
effective tax rate increased from approximately 17% in 1995 to approximately
22% in 1996, since certain favorable tax benefits on capital investments were
no longer available in certain countries in 1996 compared to 1995. As such
benefits may not be available in future periods, the Company could experience
an increase in the effective tax rate in the coming years.
53
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain financial information for the years
1996 and 1997. 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 experiencedhereby incorporated by the Company in recent years, the
increasingly competitive nature of the markets in which the Company operates,
the changes in product mix and the currency effects of changes in the
composition of sales and production among different geographic regions, the
Company believes that period-to-period comparisons of its operating results
should not be relied upon as an indication of future performance.
QUARTER ENDED (UNAUDITED)
--------------------------------------------------------------------------------
MAR. 30, JUN. 29, SEP. 28, DEC. 31, MAR. 29, JUN. 28, SEP. 27, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- --------- -------- --------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PERCENTAGES AND PER SHARE DATA)
CONSOLIDATED
STATEMENT OF INCOME
DATA
Net revenues......... $1,027.7 $ 1,047.4 $ 988.4 $ 1,058.9 $ 944.9 $ 969.7 $1,000.1 $1,104.4
Cost of sales........ (586.4) (582.1) (589.2) (657.0) (583.8) (595.9) (608.2) (669.5)
-------- --------- ------- --------- ------- ------- -------- --------
Gross profit......... 441.3 465.3 399.2 401.9 361.1 373.8 391.9 434.9
-------- --------- ------- --------- ------- ------- -------- --------
Operating expenses:
Selling, general &
administrative...... (107.9) (102.8) (103.7) (106.7) (103.0) (113.3) (111.2) (126.7)
Research and
development......... (121.4) (136.0) (134.5) (140.4) (142.2) (151.5) (151.5) (165.7)
Other income and
expenses............ 8.7 (2.2) 6.4 32.1 (2.4) 6.9 (5.5) 24.3
-------- --------- ------- --------- ------- ------- -------- --------
Total operating
expenses............ (220.6) (241.0) (231.8) (215.0) (247.6) (257.9) (268.2) (268.1)
-------- --------- ------- --------- ------- ------- -------- --------
Operating income..... 220.7 224.3 167.4 186.9 113.5 115.9 123.7 166.8
Net interest
expenses............ (0.5) (1.6) (3.2) (5.9) (0.7) (0.7) (0.5) (0.8)
Gain on disposal of
investment.......... 7.3 -- -- -- -- -- -- --
-------- --------- ------- --------- ------- ------- -------- --------
Income before income
taxes & minority
interests........... 227.5 222.7 164.2 181.0 112.8 115.2 123.2 166.0
Income tax expense... (52.7) (46.9) (32.1) (39.8) (23.5) (23.4) (26.5) (39.7)
-------- --------- ------- --------- ------- ------- -------- --------
Income before
minority interests.. 174.8 175.8 132.1 141.2 89.3 91.8 96.7 126.3
Minority interests... 0.2 0.3 0.3 0.8 1.2 0.3 0.9 --
-------- --------- ------- --------- ------- ------- -------- --------
Net income........... $ 175.0 $ 176.1 $ 132.4 $ 142.0 $ 90.5 $ 92.1 $ 97.6 $ 126.3
======== ========= ======= ========= ======= ======= ======== ========
Earnings per share
(basic)............. $ 1.26 $ 1.27 $ 0.95 $ 1.02 $ 0.65 $ 0.66 $ 0.70 $ 0.91
======== ========= ======= ========= ======= ======= ======== ========
Earnings per share
(diluted)........... $ 1.26 $ 1.27 $ 0.95 $ 1.02 $ 0.65 $ 0.66 $ 0.70 $ 0.90
======== ========= ======= ========= ======= ======= ======== ========
Number of shares used
in calculating
earnings per share
(basic)............. 138.4 138.7 138.8 138.9 139.0 139.1 139.1 139.1
Number of shares used
in calculating
earnings per share
(diluted)........... 138.8 139.2 139.2 139.6 139.8 139.8 140.0 139.8
AS A PERCENTAGE OF NET REVENUES
----------------------------------------------------------------------------------
Net revenues......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........ (57.1) (55.6) (59.6) (62.0) (61.8) (61.5) (60.8) (60.6)
-------- --------- ------- --------- ------- ------- -------- --------
Gross profit......... 42.9 44.4 40.4 38.0 38.2 38.5 39.2 39.4
-------- --------- ------- --------- ------- ------- -------- --------
Operating expenses:
Selling, general &
administrative...... (10.5) (9.8) (10.5) (10.1) (10.9) (11.7) (11.1) (11.5)
Research and
development......... (11.8) (13.0) (13.6) (13.3) (15.0) (15.6) (15.1) (15.0)
Other income and
expenses............ 0.9 (0.2) 0.6 3.1 (0.3) 0.8 (0.6) 2.2
-------- --------- ------- --------- ------- ------- -------- --------
Total operating
expenses............ (21.4) (23.0) (23.5) (20.3) (26.2) (26.5) (26.8) (24.3)
-------- --------- ------- --------- ------- ------- -------- --------
Operating income..... 21.5 21.4 16.9 17.7 12.0 12.0 12.4 15.1
Net interest
expenses............ -- (0.1) (0.3) (0.6) (0.1) (0.1) (0.1) (0.1)
Gain on disposal of
investment.......... 0.6 -- -- -- -- -- -- --
-------- --------- ------- --------- ------- ------- -------- --------
Income before income
taxes & minority
interests........... 22.1 21.3 16.6 17.1 11.9 11.9 12.3 15.0
Income tax expense... (5.1) (4.5) (3.2) (3.8) (2.4) (2.4) (2.6) (3.6)
-------- --------- ------- --------- ------- ------- -------- --------
Income before
minority interests.. 17.0 16.8 13.4 13.3 9.5 9.5 9.7 11.4
Minority interests... -- -- -- 0.1 0.1 -- 0.1 --
-------- --------- ------- --------- ------- ------- -------- --------
Net income........... 17.0% 16.8% 13.4% 13.4% 9.6% 9.5% 9.8% 11.4%
======== ========= ======= ========= ======= ======= ======== ========
In 1997, approximately 44% of the Company's net revenues originated in
Europe, compared to approximately 43% in 1996. The Company's third quarter
revenues in Europe have averaged slightly less than average revenues during
other quarters due to production slowdowns by its European customers in July
and August. During the third quarter of 1997, the negative impact of third
quarter seasonality in Europe was offset by increased sales in other regions.
Quarterly results have also been and may be expected to continue to be
54
substantially affected by the cyclical nature of the semiconductor and
electronic systems industries, the timing and success of new product
introductions and the levels of provisions and other unusual charges incurred.
The Company's quarterly and annual operating results are also affected by a
wide variety of other factors that could materially and adversely affect
revenues and profitability or lead to significant variability of operating
results, including, among others, capital requirements and the availability of
funding, competition, new product development and technological change and
manufacturing. In addition, a number of other factors could lead to
fluctuations in operating results, including order cancellations or reduced
bookings by key customers or distributors, intellectual property developments,
international events, currency fluctuations, problems in obtaining adequate
raw materials on a timely basis, and the loss of key personnel. As only a
portion of the Company's expenses varies with its revenues, there can be no
assurance that the Company will be able to reduce costs promptly or adequately
in relation to revenue declines to compensate for the effect of any such
factors. As a result, unfavorable changes in the above or other factors have
in the past and may in the future adversely affect the Company's operating
results.
First quarter 1997 net revenues declined 10.8% compared to the fourth
quarter of 1996, and were 8.1% below first quarter 1996 net revenues, due to
difficult market conditions, lower demand for certain product families and an
adverse currency effect. Second quarter 1997 net revenues increased 2.6%
compared to the first quarter, but remained 7.4% below second quarter 1996 net
revenues. Third quarter 1997 revenues showed a 3.1% sequential improvement
over the second quarter of 1997 despite seasonal factors that generally reduce
sales during the summer months and were 1.2% above 1996 third quarter net
revenues. Fourth quarter 1997 net revenues registered a 10.4% sequential
improvement over the third quarter of 1997 and a 4.3% increase over the fourth
quarter of 1996. Fourth quarter 1997 performance was characterized by gains in
substantially all major product families. Sales of differentiated products
were up significantly in the fourth quarter of 1997 over the third quarter of
1997 as the weakness in the market for hard disk drives and set top boxes was
more than offset by increased sales of products such as graphics destined for
the PC market and specialized devices for automotive and telecom applications.
Gross profit as a percentage of net revenues in the fourth quarter of 1997
increased to 39.4% from 39.2% in the third quarter, 38.5% in the second
quarter and 38.2% in the first quarter of 1997. Excluding other revenues,
gross profit as a percentage of net revenues for the fourth quarter of 1997
and third quarter of 1997 would have been 38.3% and 38.0%, respectively,
comparable to the second quarter and reflecting a continued difficult pricing
environment. Fourth quarter 1997 gross profit included costs associated with
the ramping up of the 8-inch fab in Catania, Italy, whose costs were
previously considered as start-up costs and therefore included in other income
and expenses.
The Company anticipates that industry-wide excess capacity will extend
through the remainder of 1998. The economic situation in Asia has made
visibility on market requirements more difficult, and its full impact on the
semiconductor industry is not yet clear. However, the Company believes that
Asian market developments are creating additional pressures on semiconductor
prices in general and, to a lesser extent, on unit demand. In addition, to the
extent the Company's customers experience reduced demand for their products
that incorporate the Company's products due to the economic difficulties in
Asia, the Company's results of operations could be adversely affected. Towards
the end of 1998, the Company should begin to benefit from improved
manufacturing efficiency and new product sales.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on the
results of its operations during the periods presented.
IMPACT OF CHANGES IN EXCHANGE RATES
The Company's results of operations and financial condition can be
significantly affected by changes in exchange rates between the U.S. dollar
and other currencies, particularly the Italian lira, the French franc, the
German mark, the Japanese yen and other Asian currencies.
55
Revenues for certain products (primarily dedicated products sold in Europe
and Japan) that are quoted in currencies other than the U.S. dollar are
directly affected by fluctuations in the value of the U.S. dollar. Revenues
for all other products, which are quoted in U.S. dollars and translated into
local currencies for payment, tend not to be affected significantly by
fluctuations in exchange rates except to the extent that there is a lag
between changes in currency rates and adjustments in the local currency
equivalent price paid for such products.
Certain significant costs incurred by the Company, such as manufacturing
labor costs and depreciation charges, selling, general and administrative
expenses, and research and development expenses, are incurred in the
currencies of jurisdictions where the Company's operations are located.
Fluctuations in the value of these currencies, particularly the Italian lira
and the French franc, compared to the U.S. dollar can affect the Company's
costs and therefore its profitability.
The appreciation in the U.S. dollar in 1997 compared to 1996 against the
principal European and Asian currencies that have a material impact on the
Company resulted in a favorable impact on results of operations for the period
because the negative impact on net revenues was more than offset by the
positive impact on cost of sales and operating expenses resulting in a net
favorable impact on operating income. Net revenues in 1997 were materially
adversely affected by the depreciation of European currencies and the Japanese
yen against the U.S. dollar due to the significance of the Company's sales in
these currencies and the impact of translating such local currency revenues
into U.S. dollars. In 1996, the U.S. dollar on average appreciated slightly
against the principal European (except Italian) and Asian currencies which
have a material impact on the Company. The exchange rate impact on results of
operations in 1996 was not significant. The strong depreciation of the U.S.
dollar against such currencies in the first six months of 1995 resulted in a
negative impact on results of operations in 1995.
The Company's principal strategies to reduce the risks associated with
exchange rate fluctuations have been (i) to increase the proportion of sales
to customers denominated in U.S. dollars, (ii) to purchase raw materials and
services in transactions denominated in U.S. dollars (thereby reducing the
exchange rate risk for costs relative to revenues, which are principally
denominated or determined by reference to the U.S. dollar), and (iii) to
manage certain other costs, such as financial costs, to maintain an
appropriate balance between U.S. dollars and other currencies based upon the
currency environment at the time. From time to time, the Company purchases or
sells currencies forward to cover currency risk in obligations or receivables.
The Company has not experienced significant gains or losses as a result of
exchange coverage activities. Its management strategies to reduce exchange
rate risks have served to mitigate, but not eliminate, the positive or
negative impact of exchange rate fluctuations. See "Itemreference.
Item 9A: Quantitative and Qualitative Disclosures About Market Risk."
Assets and liabilities of subsidiariesRisk
The principal market risks to which the Company is exposed are for consolidation purposes,
translated into U.S. dollars at the period-end exchange rate. See Note 2.4 to
the Consolidated Financial Statements. Income and expenses are translated at
the average exchange rate for the period. Adjustments resulting from the
translation are recorded directly in shareholders' equity, and are shown as
"translation adjustment" 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.
The Company's outstanding indebtedness is denominated principally in
Italian lire, U.S. dollars, French francs, Maltese lire and Singapore dollars.
See Note 15 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash generated from operations totaled $983.8 million in
1997 compared to $980.7 million in 1996 and $825.1 million in 1995.
Significant amounts of net cash generated from operations in 1995, 1996 and
1997 coupled with capital increases undertaken by the Company in October 1995,
which resulted in net proceeds to the Company of $371.6 million, enabled the
Company to substantially reduce its indebtedness, finance capital expenditures
and improve its balance sheet over the last five years. The Company had a
negative net financial position (cash, cash equivalents and marketable
securities net of total debt) of $78.8 million at
56
December 31, 1997 compared to a negative net financial position of $66.7
million at December 31, 1996. At December 31, 1997, cash and cash equivalents
was $702.2 million, compared to $551.9 million at December 31, 1996 and $754.0
million at December 31, 1995. At December 31, 1997, the aggregate amount of
the Company's long-term credit facilities was approximately $415 million, all
of which was outstanding, and the aggregate amount of the Company's short-term
facilities was approximately $873 million, under which approximately $366
million of indebtedness was outstanding. At December 31, 1997, the Company had
approximately $58.6 million of long-term indebtedness that will become due
within one year and expects to fund such debt repayments from available cash.
See also "--Recent Events."
In 1997, the Company's capital expenditure payments totaled $1,035.4
million, compared to $1,125.2 million in 1996 and $1,001.9 million in 1995.
Capital expenditures for 1997 were devoted principally (i) to equip and
upgrade both the new 8-inch and existing 6-inch front-end facilities at the
Catania, Italy plant, (ii) to the expansion of the 8-inch front-end wafer
fabrication plant in Crolles, France, (iii) to the extension and conversion of
an existing facility in Agrate, Italy, (iv) to the upgrading of the front-end
facility and the construction of a new 8-inch wafer fabrication plant in
Rousset, France, (v) to the ramp-up of production at the Phoenix, Arizona 8-
inch front-end manufacturing facility, (vi) to the expansion of the back-end
facility in Muar, Malaysia, (vii) to the expansion of the 6-inch facility in
Carrollton, Texas, (viii) to the expansion of the back-end facilities in
Singapore, Shenzhen (China), Malta and Morocco and (ix) to the upgrade of the
wafer fabrication facility in Rancho Bernardo. Capital expenditures for 1996
were devoted principally (i) to equip and upgrade both the new 8-inch and
existing 6-inch front-end facilities at the Catania, Italy plant, (ii) to the
expansion of the 8-inch front-end wafer fabrication plant in Crolles, France,
(iii) to the extension and conversion of an existing facility in Agrate,
Italy, (iv) to the upgrading of the front-end facility and the construction of
a new 8-inch wafer fabrication plant in Rousset, France, (v) to the ramp-up of
production at the Phoenix, Arizona 8-inch front-end manufacturing facility,
(vi) to the upgrade of the wafer fabrication facility in Rancho Bernardo,
(vii) to the completion of the first phase of the back-end facility of
Shenzhen, China and (viii) to expand the back-end facilities in Malaysia,
Malta and Morocco.
The Company currently expects that capital spending for 1998 will continue
to be at levels at least as high as in 1996 and 1997, and possibly higher.
Although the Company has not yet finalized its budget planning for 1999, which
is subject to market conditions and approval by the Supervisory Board, capital
expenditures for 1999 could be significantly higher. The most significant of
the Company's 1998 capital expenditure projects are expected to be the
conversion of its facilities in Crolles, France to 0.25 micron and 0.18 micron
processes, the increase of capacity of the 8-inch facilities in Catania,
Italy, and Phoenix, Arizona, the completion of construction of its new 8-inch
front-end wafer fabrication facility in Rousset, France, the conversion from
6-inch to 8-inch and expansion at one of its front-end wafer fabrication
plants in Agrate, Italy, and the construction of a new 8-inch facility in
Singapore. The Company has also identified an additional 8-inch wafer
fabrication facility to be built in Italy that is planned to be operational by
the year 2001. The Company has decided to build a new 300 millimeter, 12-inch
wafer research fabrication and pilot line at Crolles (France) using 0.18
micron and below process technology. The pilot line will be operated in
partnership with Leti and CNET, which are already working with the Company in
Crolles. The Company has also announced plans for a new center for advanced
research and development and industrialization in the field of nonvolatile
memories in Agrate (Italy) to target 0.13 micron CMOS technology generation by
2003. The Company will continue to monitor its level of capital spending,
however, taking into consideration factors such as trends in the semiconductor
market, capacity utilization and announced additions.
In 1997, the Company's receivables from government agencies totaled $154.9
million compared to $217.3 million in 1996 and $184.7 million in 1995. The
decrease in 1997 was due primarily to cash received from certain government
contracts that was recognized in previous periods. See Note 7 to the
Consolidated Financial Statements. In 1997, the Company's advances from
government agencies totaled $10.1 million compared to $10.7 million in 1996
and $11.2 million in 1995. See Note 16 to the Consolidated Financial
Statements. The timing of receipt of funds under government contracts has been
delayed from time to time in the past, and while generally the Company has
received the amounts recorded in such receivables, there have been instances
in which such funds ultimately have not been paid.
57
The Company expects to have significant capital requirements in the coming
years and intends to continue to devote a substantial portion of its net
revenues to research and development. The Company plans to fund its capital
requirements from cash from operations, available funds, available support
from third parties (including state support, principally from the French and
Italian governments) and may make recourse to borrowings under available
credit lines and, to the extent necessary or attractive based on market
conditions prevailing at the time, the sale of debt or additional equity
securities. There can be no assurance that additional financing will be
available as necessary to fund the Company's working capital requirements,
research and development, industrialization costs or expansion plans, or that
any such financing, if available, will be on terms acceptable to the Company.
The Company believes that its available funds, available support from third
parties, and additional borrowings will be sufficient to meet its anticipated
needs for liquidity through at least 1998.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the limitations of the
programming code in many existing computer systems, whereby the computer
systems may not properly recognize date sensitive information as the
millennium (year 2000) approaches. Computer systems include, but are not
limited to, computer systems embedded in production equipment, products
containing computer systems, business data processing systems, production
management and planning systems and personal computers. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company is currently engaged in the ongoing process of
evaluating its information technology infrastructure for year 2000 compliance
and is working with suppliers and key customers to ensure that their systems
are year 2000 compliant. A Company-wide taskforce has been assembled to
identify, correct or replace, and test the Company's systems to ensure that
they do not malfunction as a result of the year 2000. While the total
estimated cost of these efforts is difficult to predict with accuracy, based
on a preliminary evaluation, the Company believes that there should not be a
material adverse impact on its operating results or financial condition.
However, year 2000 issues could have a significant impact on the Company's
operations and its financial results if modifications cannot be completed on a
timely basis, unforeseen needs or problems arise, or if there are unforeseen
compliance problems with the systems operated by its customers, suppliers,
vendors or subcontractors. In addition, while the Company has initiated
programs to determine whether its current products are year 2000 compliant,
the Company cannot be certain that all its products are year 2000 compliant.
Moreover, the change to the year 2000 may negatively impact the Company's
customers or the semiconductor industry as a whole, causing reduced demand and
market disruption in anticipation of, or following, the year 2000.
ITEM 9A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject in its operations to interest rate riskrates and foreign currency exchange risk.rates. The Company's exposure to
market risk for changes in interest rates relates primarily to the Company's
investment portfolio and long-term debt obligations.
The Company places its cash and cash equivalents with high credit
quality financial institutions. The Company controlsmanages the credit risks associated
with financial instruments through credit approvals, investment limits and
centralized monitoring procedures but does not normally require collateral or
other security from the parties to the financial instruments with off-balance
sheet risk. The Company is averse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. The Company primarily enters into debt obligations to support
general corporate and local purposes including capital expenditures and working
capital needs.
48
The Company enters into forward contracts and foreign currency options
to protect against potentially adverse changes inthe volatility of foreign currency exchange rates and to
cover a portion of both its probable anticipated, but not firmly committed,
transactions and transactions with firm foreign currency commitments. The risk
of loss associated with purchased options is limited to premium amounts paid for
the option contracts. The risk of loss associated with forward contracts is
equal to the exchange rate differential from the time the contract is made until
the time it is settled.
58
Forward contracts outstanding as of December 31, 1997 mature1998 have remaining
terms of one to 25 months, maturing mainly during first quarter 1998,1999, and amount
to $149.5$342.5 million forward sale of U.S. dollars, $17.3$20.1 million forward purchase
of U.S. dollars, $64.0$200.4 million forward sale of other foreign currencies, and
$74.4$71.8 million forward purchase of other foreign currencies. There were no
foreign currency options outstanding as of December 31, 1997. All forward contracts outstanding as of December 31, 1997 mature
during 1998. The principal
currencies covered are the German mark, the British
pound,Singapore dollar, the Japanese yen,
the French franc, the Swiss franc and the Italian lira.
The Company does not anticipate any material adverse effect on its
financial position, resultresults of operations or cash flow resulting from the use of
these instruments in the future. There can be no assurance that these strategies
will be effective or that transaction losses can be minimized or forecasted
accurately. The Company does not use financial instruments for speculative or
trading purposes.
The information below summarizes the Company's market risks associated
with cash equivalents, debt obligations, and other significant financial
instruments as of December 31, 1998. The information below should be read in
conjunction with Notes 14 and 23 to the Consolidated Financial Statements.
The table below presents principal amounts and related
weighted-average interest rates by year of maturity for the Company's investment
portfolio and debt obligations:
FAIR VALUE AT
DECEMBERFair value at
December 31,
1998
1999 2000 2001 2002 THEREAFTER TOTAL 1997
-------- ------- -------- ------- -------2003 Thereafter Total 1998
---- ---- ---- ---- ---- ---------- ------------ -------------
(IN THOUSANDS OF(in thousands of U.S. DOLLARS, EXCEPT PERCENTAGES)dollars, except percentages)
Assets:
ASSETS:
Cash equivalents:
Fixed rate............. $702,157equivalents............ $1,100,752 -- -- -- -- -- $702,157 $702,157$1,100,752 $1,100,752
Average interest rate.. 5.64%rate....... 6.63% -- -- -- -- -- 5.64%
LONG-TERM DEBT:6.63%
Long-term debt:
Fixed rate............. $58,614 $50,430 $107,553 $98,093 $72,609 $27,722 $415,021 $405,445rate.................. $45,245 $109,936 $102,460 $77,741 $9,200 $456,527 $801,109 $802,565
Average interest rate.. 5.36% 4.77% 4.90% 5.43% 5.43% 5.30% 5.19%rate....... 4.12% 4.84% 5.29% 5.45% 5.00% 1.91% 3.28%
Long-term debt by currency:
AMOUNT IN
THOUSANDS
OF AMOUNT IN
ORIGINAL THOUSANDS OF
CURRENCY U.S. DOLLARS
--------- ------------
Italian lira (in million lire)................... 427,050 $242,754
French franc..................................... 565,952 94,403
Maltese pound.................................... 17,680 45,105
U.S. dollar...................................... 20,000 20,000
Other currencies................................. -- 12,759
--------
Total in U.S. dollars............................ $415,021
========
Amount in Amount in
thousands of thousands of
original currency U.S. dollars
----------------- ------------
U.S. dollar............................. 455,885 $ 455,885
Italian lira (in million lira).......... 383,109 231,752
French franc............................ 552,347 98,628
Other currencies........................ -- 14,844
-----------
Total in U.S. dollars................... $ 801,109
===========
As of December 31, 1997, fixed-rate debt of $415.0 million was
outstanding, with a fair value of $405.4 million, at an average interest rate of
5.19%. Additionally, cash equivalents of $702.2 million were outstanding, at an
average interest rate of 5.64%.
49
The following table provides information about the Company's foreign
exchange forward contracts at December 31, 1997 (in thousands of U.S.
dollars):1998:
ESTIMATED
NOTIONAL AVERAGE CONTRACT FAIR VALUE
AMOUNT(1) EXCHANGE RATE INFair Value
Notional Average in thousands of
Amount(1) Contract Rate U.S. DOLLARS
--------- ----------------dollars
------------ ------------- ---------------
FOREIGN CURRENCY FORWARD EXCHANGE
CONTRACTS TO BUY (SELL)Foreign Currency Forward Exchange Contracts to buy (sell)
U.S. DOLLARS FOR FOREIGN
CURRENCIES:dollars for foreign currencies:
Deutsche mark..................... (20,000) 1.753mark........................................................... (14,000) 1.692 $ (431)
Spanish peseta.................... (1,000) 148.850 (19)(14,050)
Malaysian ringgit................. 2,302 3.861 19
Franch franc...................... (25,000) 5.811 (767)
Chinese yuan...................... 15,000 8.323 (39)
Korean wong....................... (10,000) 1.352 (1,898)ringgit....................................................... 4,672 3.796 4,667
French franc............................................................ (120,000) 5.610 (120,504)
Italian lira.............................................................. (115,000) 1,662.102 (115,440)
Singapore dollar.................. (93,500) 1.485 (10,705)
--------dollar........................................................ (78,000) 1.641 (77,391)
---------- ---------
Total net in U.S. dollars............................................... (322,328) $ (322,718)
========= =========
Foreign Currency Forward Exchange Contracts to buy (sell) German marks for
foreign currencies:
U.S. dollar.............................................................. (80,000) 1.702 $ (47,826)
Malaysian ringgit........................................................ 661 2.278 396
French franc............................................................. 6,910 1.016 4,213
------ ----------
Total net in German marks................................................ (72,429)
Total net in U.S. dollars................................................ (43,376) $ (43,217)
==========
Foreign Currency Forward Exchange Contracts to buy (sell) Japanese yen for
foreign currencies:
U.S. dollar............................................................. (150,000) 121.550 $ (1,313)
Italian lira............................................................ 200,000 14.407 1,775
Malaysian ringgit........................................................ 12,000 31.250 101
French franc............................................................ 650,000 21.693 5,736
Singapore dollar........................................................ (2,950,000) 71.686 (25,628)
----------- --------
Total net in U.S. dollars......... (132,198) $(13,840)
======== ========
59
ESTIMATED
NOTIONAL AVERAGE CONTRACT FAIR VALUE
AMOUNT(1) EXCHANGE RATE IN U.S. DOLLARS
---------- ---------------- ---------------
FOREIGN CURRENCY FORWARD EXCHANGE
CONTRACTS TO BUY (SELL)
GERMAN MARKS FOR FOREIGN
CURRENCIES:
U.S. dollar...................... (50,000) 1.781 $ 184
Malaysian ringgit................ 173 1.910 12
Franch franc..................... 5,000 3.347 (2)
Singapore dollar................. (840) 0.910 (13)
---------- -----Japanese yen............................................... (2,238,000)
Total net in German marks........ (45,667)US dollars................................................. (19,461) $ (19,329)
==========
Foreign Currency Forward Exchange Contracts to buy (sell) Swiss francs for
foreign currencies:
U.S. dollar............................................................. 55,001 1.356 $ 40,265
Italian lira............................................................ 1,500 1,218.500 1,107
French franc............................................................ 3,900 4.113 2,856
Singapore dollar........................................................ 277 1.227 199
--------- ---------
Total net in Swiss francs............................................... 60,678
Total net in U.S. dollars........ (25,484)dollars............................................... 44,355 $ 181
=====
FOREIGN CURRENCY FORWARD EXCHANGE
CONTRACTS TO BUY (SELL)
JAPANESE YEN FOR FOREIGN
CURRENCIES:44,427
=========
Foreign Currency Forward Exchange Contracts to buy (sell) Italian lira for
foreign currencies (in million lira):
U.S. dollar...................... (450,000) 125.590dollar.............................................................. (200,000) 1,738.979 $ 110
Italian lira..................... 400,000 13.216 (9)
French franc..................... 400,000 0.048 (144)(125,137)
Malaysian ringgit........................................................ 103 425.710 63
Singapore dollar................. (2,100,000) 0.013 (199)
---------- -----dollar......................................................... 934 1,002.000 559
--------- -----------
Total net in Japanese yen........ (1,750,000)Italian lira................................................ (198,963)
Total net in U.S. dollars........ (13,505) $(242)
=====
FOREIGN CURRENCY FORWARD EXCHANGE
CONTRACTS TO BUY (SELL)
SWISS FRANCS FOR FOREIGN
CURRENCIES:
U.S. dollar...................... 49,000 1.417 $(917)
Malaysian ringgit................ 2,435 2.590 55
French franc..................... 500 4.145 (2)
Singapore dollar................. 1,322 1.132 16
---------- -----
Total Swiss francs............... 53,257
Total net in U.S. dollars........ 36,628 $(848)
=====
- --------dollars............................................... (120,358) $ (124,515)
===========
(1) Amounts in thousands of original currency (Italian lira expressed in millions).
50
The Company also entered into additional forward sale contracts as of
December 31, 1998, for a countervalue of $15.9 million, and forward purchase contracts, for a
countervalue of $28.8$19.4 million denominated in various
currencies including pounds sterling, French francs, Italian lire, Singapore dollars, Spanish pesetas and
Dutch guilders,European Currency Units, which approximated the fair value of such contracts.
60
ITEMThe notional amount of cross-currency contracts outstanding at
December 31, 1997 was $305.2 million, which approximated the fair value of such
contracts. These contracts expired in 1998.
Item 10: DIRECTORS AND OFFICERS OF REGISTRANT
SUPERVISORY BOARDDirectors 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-halfone-third of
the outstanding share capital is present or represented.
Pursuant to various shareholders agreements, the membership of the
Supervisory Board of the Company must include three members designated by the
French shareholders from the Board of Directors of FT1CI (following the merger
of FT2CI and FT1CI, a corporation owned by CEA-Industrie and France Telecom),
and three members designated by the Italian shareholders (of whom I.R.I. has the
right to appoint two members and Ministero del Tesoro (following transfer of the
interest previously held by Comitato SIR on June 18, 1999) has the right to
appoint one member). See "Item 4: Control of Registrant--Shareholder
Agreements." The Supervisory Board of the Company currently includes two members
who are not affiliated with ST Holding and its direct and indirect shareholders.
The members of the Supervisory Board appoint a chairman and vice
chairman of the Supervisory Board from among the members of the Supervisory
Board (with approval of at least three-quarters of the members of the
Supervisory Board) and may appoint one or more members as a delegate supervisory
director to communicate on a regular basis with the Management Board.
Resolutions of the Supervisory Board require the approval of at least
three-quarters of its members. The Supervisory Board must meet upon request by
two or more of its members or by the Management Board. The Supervisory Board has
adopted internal regulations to clarify the manner by which it carries out the
supervisory duties imposed upon it by law, the Company's Articles of Association
and resolutions of the shareholders and the Supervisory Board itself. By such
resolution the Supervisory Board has authorized (i) the establishment of a
secretariat (headed by an individual approved by it and appointed for a one-
yearone-year
renewable term) whose functions are to: (a) assist the Chairman and Vice
Chairman of the Supervisory Board in the operations of the Board, (b) implement
and oversee the execution within the Company of decisions adopted by the
Supervisory Board, and (c) cooperate in and contribute to the execution of the
functions of the designated Secretary and Assistant Secretary of the Supervisory
Board; (ii) (a) the possibility of the appointment by the members of the
Supervisory Board of assistants and (b) the appointment by such board of two
controllers to exercise operational and financial control over the operations of
the Company who, with assistants, will also review operation reports and the
implementation of Supervisory Board decisions; and (iii) the establishment by
the Supervisory Board of advisory committees. In addition, the Supervisory Board
has established procedures for the preparation of Supervisory Board resolutions
and the setting of the Board's calendar.
51
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.
61
The shareholders agreement between the group of French shareholders
and the group of Italian shareholders, as shareholders of ST Holding, also
includes certain provisions requiring the approval of the Supervisory Board of
ST Holding for certain actions by ST Holding, the Company and its subsidiaries.
In addition, pursuant to the shareholders agreement among the group of French
shareholders and a decree issued by certain Ministries of The Republic of
France, the approval by members of the Supervisory Board appointed by the French
shareholders of certain actions to be taken by the Company or its subsidiaries
requires the approval of the Board of Directors of FT1CI and is subject to a
veto by certain Ministries of The Republic of France. These requirements for the
prior approval of various actions to be taken by the Company and its
subsidiaries may give rise to a conflict of interest between the interests of
the Company and the individual shareholders approving such actions, and may
result in a delay in the ability of the Management Board to respond as quickly
as may be necessary in the rapidly changing environment of the semiconductor
industry. Such approval process is subject to the provisions of Dutch law
requiring members of the Supervisory Board to act independently in the
supervision of the management of the Company.
The members of the Supervisory Board are:
NAME POSITION YEAR APPOINTED AGE
---- -------- -------------- ---
Bruno Steve Chairman 1989 56
Jean-Pierre Noblanc Vice Chairman 1994 59
Tom de Waard Member 1998 51
Remy Dullieux Member 1993 47
Riccardo Gallo Member 1997 54
Francis Gavois Member 1998 62
Alessandro Ovi Member 1994 54
Robert M. White Member 1996 59
Name Position Year Appointed Age
---- -------- -------------- ---
Jean-Pierre Noblanc Chairman 1994 60
Bruno Steve Vice Chairman 1989 57
Tom de Waard Member 1998 52
Remy Dullieux Member 1993 48
Riccardo Gallo Member 1997 55
Francis Gavois Member 1998 63
Alessandro Ovi Member 1994 55
Robert M. White Member 1996 60
Jean-Pierre Noblanc has been the Chairman of the Supervisory Board
since June 1996,May 31, 1999, and has been a member of the Company's Supervisory Board since 1989.1994.
He served as Vice Chairman of the Supervisory Board from 1989June 1996 to July 1990. From July 1990
to March 1993, Mr. Steve served as Chairman of the Supervisory Board. He has
been with I.R.I., Finmeccanica's parent company, Finmeccanica and other
affiliates of I.R.I. in various senior positions for over 17 years. Mr. Steve
is currently Chairman of MEI and a member of the board of statutory auditors
of Alitalia S.p.a. 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.
Jean-Pierre Noblanc has been a member of the Supervisory Board since 1994
and its Chairman until June 1996.31,
1999. Mr. Noblanc is presently General Manager of the Components Sector of CEA
Industrie. Prior to joining CEA Industrie, Mr. Noblanc served at CNET, the
Research Center of France Telecom, as Director of the Applied Research Center of
Bagneux and of the Microelectronics Center of Grenoble. Mr. Noblanc holds a
degree in engineering from the Ecole Superieure d'Electricite and a doctoral
degree in physical sciences from the University of Paris. Mr. Noblanc is an
Associate Member of the Committee on Applications of the French Academy of
Sciences and a director of Thomson S.A. Mr. Noblanc also serves on the board of
Pixtech Inc. and Picogiga S.A.
Bruno Steve has been a member of the Company's Supervisory Board since
1989 and its Chairman until May 31, 1999. He served as Vice Chairman of the
Supervisory Board from 1989 to July 1990. From July 1990 to March 1993, Mr.
Steve served as Chairman of the Supervisory Board. He has been with I.R.I.,
Finmeccanica's parent company, Finmeccanica and other affiliates of I.R.I. in
various senior positions for over 17 years. Mr. Steve is currently Chairman of
MEI, President of the board of statutory auditors of Alitalia S.p.a. and
Iritecna S.p.a. in liquidazione and member of statutory auditors of Alitalia
Express S.p.A., Stretto di Messina S.p.A. and Sigma S.p.A. He served as the
Chief
52
Operating Officer of Finmeccanica from 1988 to July 1997 and Chief Executive
Officer from May 1995 to July 1997. He was Senior Vice President of Planning,
Finance and Control of I.R.I. from 1984 to 1988. Prior to 1984, Mr. Steve served
in several key executive positions at Telecom Italia, I.R.I.'s holding company
for the telecommunications sector.
Tom de Waard was appointed to the Supervisory Board in 1998. Mr. de
Waard is a partner of Stibbe Simont Monahan Duhot, a leading Dutch law firm,
where he has held several positions since 1979 and has gained extensive
experience working with major international companies, particularly with respect
to corporate finance. He is a member of the Amsterdam bar and received his law
degree from Leiden University in 1979.
Remy Dullieux has been a member of the Supervisory Board since 1993.
He is a graduate of the Ecole Polytechnique. Since June 1996, Mr. Dullieux has
served as a France Telecom Executive Manager for the Northern and Eastern areas
of France. From 1991 to June 1996, Mr. Dullieux served as Group Executive Vice
62
President for Strategic Procurement and Development of France Telecom. From 1985
to 1988, Mr. Dullieux served as Regional Manager of Creteil.
Riccardo Gallo was appointed to the Supervisory Board in 1997. He is
Associate Professor of Industrial Economics at the Engineering Faculty of "La
Sapienza" University in Rome. He is also a member of the board of directors of
Comitato Sir. From 1982 to 1991, he served as Director General at the Italian
Ministry of the National Budget. In the early 1990s, he served as Vice Chairman
of I.R.I. In 1994, he was appointed by the Italian Minister of Industry as
Extraordinary Commissioner of Fidia, a research-oriented pharmaceutical company.
Francis Gavois was appointed to the Supervisory Board in 1998. Mr.
Gavois is the Chairman of the Supervisory Board of ODDO et Cie. He is also a
member of the Board of Directors of Plastic Omnium and the Supervisory Board of
the Consortium de Realisation (CDR). From 1984 to 1997, Mr. Gavois held several
positions, including Chairman of the Board of Directors and President of Banque
Francaise du Commerce Exterieur (BFCE). Prior to that time Mr. Gavois held
positions in the French government. He is a graduate of the Institut d'Etudes
Politiques de Paris and the Ecole Nationale d'Administration.
Alessandro Ovi has been a member of the Supervisory Board since 1994.
He received a doctoral degree in Nuclear Engineering from the Politecnico in
Milan and a masters degree in operations research from Massachusetts Institute
of Technology. He is currently the Chief Executive Officer of Tecnitel S.p.A., a
subsidiary of Telecom Italia Group. Prior to joining Tecnitel S.p.A., Mr. Ovi
was the Senior Vice President of International Affairs and Communications at
I.R.I. He currently serves on the boards of Alitalia, Telecom Italia,
Italtel (a Telecom Italia and
Siemens Company), MEI, Sirti, Zambon, Carnegie Mellon University and Corporation
Development Committee of the Massachusetts Institute of Technology.
Robert M. White was appointed to the Supervisory Board in June 1996.
Mr. White is a University Professor and Department Head at Carnegie Mellon
University and serves as a member of several corporate boards, including those
of Ontrack Data Systems, Inc., and Zilog, Inc. He is a member of the U.S.
National Academy of Engineering. From 1990 to 1993, Mr. White served as Under
Secretary of Commerce for Technology in the United States Government. Prior to
1990, Mr. White served in several key executive positions at Xerox Corporation,
Control Data Corporation and MCC. He received a doctoral degree in physics from
Stanford University and graduated with a degree in science from Massachusetts
Institute of Technology.
The Supervisory Board has established an Audit Committee comprised of
Messrs. Dullieux, Ovi and an independent director, Mr. White, and a Compensation
Committee comprised of the Chairman (Mr. Steve)Noblanc), the Vice Chairman (Mr. Noblanc)Steve)
and an independent director (Mr. White).
MANAGEMENT BOARD53
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:
63
(i) modification of its Articles of Association; (ii)
change in its authorized share capital, issue, acquisition or disposal of its
own shares, change in any shareholder rights or issue of any instruments
granting an interest in its capital or profits; (iii) liquidation or disposal of
all or a substantial and material part of its assets or any shares it holds in
any of its subsidiaries; (iv) entering into any merger, acquisition or joint
venture agreement (and, if substantial and material, any agreement relating to
intellectual property) or formation of a new company; (v) approval of such
company's draft consolidated balance sheets and financial statements or any
profit distribution by such company; (vi) entering into any agreement with any
of the direct or indirect French or Italian shareholders outside the normal
course of business; (vii) submission of documents reporting on (a) approved
policy, expected progress and results and (b) strategic long-term business plans
and consolidated annual budgets or any modifications to such; (viii) preparation
of long-term business plans and annual budgets; (ix) adoption and implementation
of such long-term business plans and annual budgets; (x) approval of all
operations outside the normal course of business, including operations already
provided for in the annual budget; and (xi) approval of the quarterly,
semi-annual and annual consolidated financial statements prepared in accordance
with internationally accepted accounting principles. Such resolution also
requires that the Management Board obtain prior approval from the Supervisory
Board for (i) the appointment of the members of the statutory management,
administration and control bodies of the Company's French and Italian
subsidiaries; and (ii) the nomination of the statutory management,
administration and control bodies of the Company and each of the Company's other
direct and indirect subsidiaries followed by confirmation to the Supervisory
Board of such nominees' appointments. The general meeting of shareholders may
also specify certain actions of the Management Board that require shareholder
approval. The Company's Articles of Association provide that the Management
Board must obtain shareholder approval prior to (i) the sale of all or an
important part of the Company's assets and concerns; and (ii) all mergers,
acquisitions or joint ventures which the Company wishes to enter into and which
the Supervisory Board considers to be of material significance. See "Item 1:
Description of Business" and "Item 13: Interest of Management in Certain
Transactions."
The Management Board shall consist of such number of members as
resolved by the general meeting of shareholders upon the proposal of the
Supervisory Board. The members of the Management Board are appointed for three
year terms upon proposal by the Supervisory Board at the general shareholders'
meeting by a majority of the votes cast at a meeting where at least one-halfone-third of
the outstanding share capital is present or represented. The Supervisory Board
appoints one of the members of the Management Board to be chairman of the
Management Board (upon approval of at least three-quarters of the members of the
Supervisory Board). Resolutions of the Management Board require the approval of
a majority of its members. Mr. Pasquale Pistorio, the Company's President and
Chief Executive Officer, is currently the sole member of the Management Board.
His term expires in 2002.
The general meeting of shareholders may suspend or dismiss one or more
members of the Management Board at a meeting at which at least one-half of the
outstanding share capital is present or represented. No quorum is required
54
if a suspension or dismissal is proposed by the Supervisory Board. The
Supervisory Board may suspend members of the Management Board, but a general
meeting of shareholders must be convened within three months after such
suspension to confirm or reject the suspension. The Supervisory Board shall
appoint one or more persons who shall, at any time, in the event of absence or
inability to act of all the members of the Management Board, be temporarily
responsible for the management of the Company. The Supervisory Board determines
the compensation and other terms and conditions of employment of the members of
the Management Board.
64
EXECUTIVE OFFICERSExecutive 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.Theresponsibility. The Company is organized in a matrix structure with
geographical regions interacting with product divisions, bringing all levels of
management closer to the customer and facilitating communication among research
and development, production, marketing and sales organizations.
55
The executive officers of the Company are:
YEARS IN
YEARS WITH SEMICONDUCTOR
NAME POSITION THE COMPANY(1) INDUSTRY AGEYears in
Years with Semiconductor
Name Position the Company(1) Industry Age
---- -------- -------------- --------------------- ---
Pasquale Pistorio President and Chief 18 34 62
Executive Officer 19 35 63
Georges Auguste Corporate Vice President, Total Quality and 12 25 50
Environmental Management
Laurent Bosson Corporate Vice 15 15 55
President, Central
Front-end 16 16 56
Manufacturing
Carlo Bozotti Corporate Vice 21 21 45
President, European and
Headquarters RegionMemory Products 22 22 46
Group
Salvatore Castorina Corporate Vice 16 32 61
President, Discrete and 17 33 62
Standard ICs Group
Murray Duffin Corporate Vice 11 38 61
President, Total
Quality and
Environmental
Management
Alain Dutheil Corporate Vice 15 28 53
President, Strategic Planning 16 29 54
and Human Resources
Ennio FilauroPietro Fox Corporate Vice 29 38 65
President, Memory
Products GroupEuropean Region 35 41 61
Philippe Geyres Corporate Vice 14 22 46
President, Programmable
ProductsConsumer and 15 23 47
Microcontroller Group
Maurizio Ghirga Corporate Vice 15 15 60
President, Chief Financial 16 16 61
Officer
Jean-Claude Marquet Corporate Vice 12 31 56
President, Asia Asia/Pacific 13 32 57
Region
Pier Angelo Martinotti Corporate Vice 17 30 57
President, New Ventures 18 31 58
Group
Joel Monnier Corporate Vice 15 24 52
President, Central Research 16 25 53
and Development
Piero Mosconi Corporate Vice 34 34 58
President, Treasurer 35 35 59
Richard Pieranunzi Corporate Vice 17 32 59
President, Americas Region 18 33 60
Aldo Romano Corporate Vice 32 32 57
President, Dedicated
ProductsTelecommunications, 33 33 58
Peripherals and Automotive Group
Giordano Seragnoli Corporate Vice 33 35 61
President, Back-end 34 36 62
Manufacturing and Subsystems Products Group
Keizo Shibata Corporate Vice 6 33 61
President, Japan Region 7 34 62
Enrico Villa Corporate Vice 30 30 57
President, Region Five
- --------President, Region Five 31 31 58
- --------------
(1) Including years with Thomson Semiconducteurs or SGS Microelettronica.
Pasquale Pistorio has more than 3435 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.
65Georges Auguste has served as Corporate Vice President, Total Quality
and Environmental Management since 1999. Mr Auguste received a degree in
engineering from the Ecole Superieure d'Electricite (SUPELEC ) in 1974 and
56
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, Central 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, Europe and
Headquarters RegionMemory Products
since 1994.August 1998. Mr. Bozotti joined SGS Microelettronica in 1977 after
graduating in Electronic Engineering from the University of Pavia. Mr. Bozotti
served as Product Manager for the Industrial, Computer Peripheral and Telecom
divisions and as Product Manager for the Monolithic Microsystems' Telecom
business unit from 1986 to 1987. He was appointed Director of Corporate
Strategic Marketing and Key Accounts for the Headquarters Region in 1988 and
became Vice President, Marketing and Sales, Americas Division in 1991. Mr.
Bozotti has served as Corporate Vice President, Memory Products since August
1998, after having served as Corporate Vice President, Europe and Headquarters
Region from 1994 to 1998.
Salvatore Castorina has served as Corporate Vice President, Discrete
and Standard ICs Group since 1989. Mr. Castorina received his engineering degree
in Electronics from the Polytechnical University of Turin and began his career
as a teacher of electrical and electronic technologies prior to joining
Thomson-CSF in Milan in 1965. In 1967, he joined Motorola Semiconductors and
held various positions in sales and marketing. In 1981, Mr. Castorina joined the
Company as General Manager of Transistors in Catania and became the General
Manager of the Company's Discrete Division in 1989.
Murray Duffin has served as Corporate Vice President, Total Quality and
Environmental Management since 1992. Mr. Duffin graduated from the University
of Manitoba in Electrical Engineering and later studied Semiconductor Physics
and Computer Logic at the University of California Los Angeles and received an
MBA from Arizona State University. Mr. Duffin started his career in 1959 as an
RF Applications Engineer and thereafter held numerous managerial positions
within most of the departments at TRW and Motorola Semiconductors prior to
joining the Company in 1986. From 1986 to 1992, Mr. Duffin was in charge of
the quality and service organization.
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.
Ennio FilauroPietro Fox has served as Corporate Vice President, General Manager
Memory Products GroupEurope Region since
1990. After graduating with a degreeOctober 1998. He graduated from the Istituto Industriale A. Rosse in Vicenza in
1957 and studied Electrical Engineering fromat the University of Palermo, Mr. Filauro began hisBurrough Polytechnic in London.
His professional career started in 1958 at Standard Telephones & Cables (the
English ITT affiliate) where he worked as an Applications Engineer in the
semiconductor field. In 1962, he returned to Italy to work as Product Marketing
Engineer for semiconductors at Raytheon-Elsi SpA. His career in 1958 as a memberthe Product
Marketing sector of SGS Fairchild SpA, the company that subsequently became
STMicroelectronics, began in 1964. In September 1971, he then became Marketing
Manager for North America and was appointed President of the Engineeringnewly created
SGS-Ates Semiconductor Corp. In March 1976, Mr. Fox moved to Germany and Quality Control Group of Raytheon
Italia. In 1968, Mr. Filauro joined SGS Microelettronica as head of Quality
Control Services at the research and development center in Castelletto, and
was subsequently responsible for the Central Production Direction of the
facilities in Rennes, Falkirk and Catania. From 1974 to 1979, Mr. Filauro
served as General Manager of the facility in Catania, and thereafter served as
Director of the Corporate Engineering Group in Agrate. He became
General Manager of SGS-Thomson Microelectronics GmbH in Munich. In 1997, Mr. Fox
gained increased responsibility in the VLSI DivisionEuropean Telecom field when he became
Vice President of SGS Microelettronica in 1985.the Telecom Business Unit for Europe.
57
Philippe Geyres has served as Corporate Vice President, General
Manager Consumer and Microcontroller Group (formerly Programmable Products
GroupGroup) 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
66
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 Asia/Pacific Region since July 1995. After graduating in Electrical and
Electronics Engineering from the Ecole Breguet Paris, Mr. Marquet began his
career in the French National Research Organisation and later joined Alcatel. In
1969, he joined Philips Components. He remained at Philips until 1978, when he
joined Ericsson, eventually becoming President of Ericsson's French operations.
In 1985, Mr. Marquet joined Thomson Semiconducteurs as Vice President Sales and
Marketing, France. Thereafter, Mr. Marquet served as Vice President Sales and
Marketing for France and Benelux, and Vice President Asia Pacific and Director
of Sales and Marketing for the region.
Pier Angelo Martinotti has served as Corporate Vice President, General
Manager New Ventures Group since 1994. A graduate in Electronic Engineering from
the Polytechnical University of Turin, Mr. Martinotti began his career at the
Company in 1965 as an Application and Marketing Engineer. In 1968, he joined
Motorola Semiconductors in the area of strategic marketing in Europe, and in
1975 became the Marketing (Sales) Director for Europe. From 1986 to 1990, Mr.
Martinotti was Chief Executive Officer of Innovative Silicon Technology, a
former subsidiary of the Company. Mr. Martinotti was appointed Director of
Corporate Strategic Planning in 1990.
Joel Monnier has served as Corporate Vice President, Director of
Central Research and Development since 1989. After graduating in Electrical
Engineering from the Institut National Polytechnique of Grenoble, Ecole
Nationale Superieure de Radio Electricite, Mr. Monnier obtained a doctoral
degree in microelectronics at LETI/CENG. He began his career in the
semiconductor industry in 1968 as a researcher with CENG, and subsequently
joined the research and development laboratories of Texas Instruments in
Villeneuve Loubet, France and Houston, Texas, eventually becoming Engineering
Manager and Operation Manager at Texas Instruments. Mr. Monnier joined
Thomson-CSF in 1983 as head of the research and manufacturing unit of Thomson
Semiconducteurs. In 1987, he was appointed Vice President and Corporate Director
of Manufacturing.
Piero Mosconi has served as Corporate Vice President, Treasurer since
1987. After graduating in accounting from Monza in 1960, Mr. Mosconi joined the
faculty at the University of Milan. Mr. Mosconi worked with an Italian bank
before joining the Foreign Subsidiaries Department at SGS Microelettronica in
1964 and becoming Corporate Director of Finance in 1980.
Richard Pieranunzi has served as Corporate Vice President, Americas
Region since August 1996. Mr. Pieranunzi received his BSEE from the University
of Rhode Island, and started his career in process engineering. Later, he joined
Motorola's international marketing organization, including in Europe where he
held management positions in sales and strategic marketing and applications. Mr.
Pieranunzi joined SGS Semiconducteurs in 1981 as Marketing and Sales Manager
and, upon the formation of the Company in 1987, he became Vice President
Marketing and Sales for the U.S. organization. For three years, Mr. Pieranunzi
headed the Company's Corporate Strategic Marketing and Corporate Key Account
programs.
58
Aldo Romano has served as Corporate Vice President, General Manager
Telecommunications, Peripherals and Automotive Group (formerly Dedicated
Products GroupGroup) 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.
67
Giordano Seragnoli has served as Corporate Vice President, General
Manager Subsystems Products Group since 1987 and since 1994, Director for
Worldwide Back-end Manufacturing. After graduating in Electrical Engineering
from the University of Bologna, Mr. Seragnoli joined the Thomson Group as RF
Application Designer in 1962 and joined SGS Microelettronica in 1965.
Thereafter, Mr. Seragnoli served in various capacities within the Company,
including Strategic Marketing Manager and Subsystems Division Manager,
Subsystems Division Manager (Agrate), Technical Facilities Manager, Subsystems
Division Manager and Back-End Manager.
Keizo Shibata has served as Corporate Vice President and President of
the Company's Japanese subsidiary since 1992. Mr. Shibata obtained bachelors and
masters degrees in Engineering from Osaka University and has 31 years of
experience in the semiconductor industry. Prior to joining the Company, Mr.
Shibata was employed with Toshiba Corporation since 1964 in various capacities.
From 1987 to 1988, Mr. Shibata served as Chairman of both World Semiconductor
Trade Statistics and the Trade Policy Committee of the Electric Industry
Association of Japan.
Enrico Villa has served as Corporate Vice President, Region Five since
January 1, 1998. Mr. Villa has served in various capacities within the Company
since 1968 after obtaining a degree in Business Administration from the
University of Genoa and has 30 years of experience in the semiconductor
industry. He is currently a member of the European Electronics Component
Association ("EECA") for which he is now Chairman of the European Semiconductor
Council as well as Chairman for Europe at the Joint Steering Committee of the
World Semiconductor Council.
As is common in the semiconductor industry, the Company's success
depends to a significant extent upon, among other factors, the continued service
of its key senior executives and research and development, engineering,
marketing, sales, manufacturing, support and other personnel, and on its ability
to continue to attract, retain and motivate qualified personnel. The competition
for such employees is intense, and the loss of the services of any of these key
personnel without adequate replacement or the inability to attract new qualified
personnel could have a material adverse effect on the Company. The Company does
not maintain insurance with respect to the loss of any of its key personnel.
ITEMItem 11: COMPENSATION OF DIRECTORS AND OFFICERSCompensation of Directors and Officers
The aggregate cash compensation payable for 19971998 to the members of the
Supervisory Board by the Company was approximately $307,000.$240,000. The amount of cash
compensation for 19971998 paid to the executive officers of the Company and members
of the Management Board as a group by the Company and its subsidiaries was
approximately $7$7.5 million.
In 1989, the Company established a Corporate Executive Incentive
Program (the "EIP") that entitles selected executives and members of the
Management Board to a yearly bonus based upon the individual performance of such
executives. The maximum bonus awarded under the EIP is based upon a percentage
of the executive's or member's salary and is adjusted to reflect the overall
performance of the Company. The participants in the EIP must satisfy certain
personal objectives that are focused on customer service, profit, cash flow and
market share.
The executive officers and the Management Board were also covered in
19971998 under certain group life and medical insurance programs provided by the
Company. The aggregate additional amount set aside by the Company in 19971998 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 $3.1$3.3 million.
ITEM59
Item 12: OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
STOCK OPTION PLANSOptions to Purchase Securities from Registrant or Subsidiaries
Stock Option Plans
The following description of the Company's stock options plans does
not include adjustments for the 2:1 stock split effected on June 16, 1999.
As of June 24, 1998,10, 1999, options to purchase up to an aggregate of 109,57018,000
Common Shares were outstanding under the Company's first stock option plan (the
"1989 Stock Option Plan"). Such options are fully vested and
68
are exercisable at
the original issue price, as adjusted to reflect the 40:1 stock split effected
in connection with the Initial Public Offering, of NLG 25 per share or at the price of NLG 17.50 per share. Of such
outstanding options, 31,0008,000 are held by executive officers of the Company as a
group. All options outstanding under the 1989 Stock Option Plan expire December
18, 1999.
On October 20, 1995, the Shareholdersshareholders of the Company approved
resolutions authorizing the Supervisory Board for a period of five years to
adopt and administer a new stock option plan which provides for the granting to
managers and professionals of the Company of options to purchase up to a maximum
of 5.5 million Common Shares (the "1995 Stock Option Plan"). The Company has
granted 1,845,500a total of 2,495,500 options pursuant to the 1995 Stock Option Plan of which Optionsas
follows:
o The Company granted options to purchase 1,200,000 Common
Shares havewith an exercise price per Common Share of $36.25. As$36.25,
half of June 24, 1998, 1,167,700 of these options were outstanding;
583,850 of such options will vestwhich vested and becomebecame exercisable on March 1, 1999
and 583,850half of such optionswhich will vest and become exercisable on March
1, 2000. All such options will expire on March 1, 2004. As of
June 10, 1999, 893,215 options were outstanding.
o The remainingCompany granted options to purchase 645,500 Common Shares
havewith an exercise price per Common Share of $85.375, out
of which as of June 24, 1998, 642,300 were outstanding. These options
will vest and become exercisable on September 12, 2001 and
will expire on September 12, 2005. As of June 10, 1999,
638,575 options were outstanding.
o The Company granted options to purchase 650,000 Common Shares
with an exercise price per Common Share of $72.1875, which
will vest and become exercisable on July 28, 2002 and will
expire on July 28, 2006. As of June 10, 1999, 648,265 options
were outstanding.
As of June 10, 1999, of the total options outstanding under the 1995 Stock
Option Plan, 626,050 options were held by executive officers as a group.
In June 1996, the general meeting of shareholders approved the
granting of options to members and professionals of the Supervisory Board to
purchase approximately 72,000 Common Shares of the Company over a period of
three years, beginning in 1996. On October 22, 1996,The following options to purchase an
aggregate of 33,000 Common Shares at an exercise price of $54.00 per Common
Share were granted by thehave been granted:
o The Company to members and professionals of the
Supervisory Board. As of June 24, 1998, 1,500 options granted to members and professionals of the
Supervisory Board had been exercised. Such options are
exercisable untilto purchase 33,000 Common Shares
with an exercise price per Common Share of $54.00, which
expire on October 22, 2004. On September 12, 1997, additionalAs of June 10, 1999, 23,000
options to purchase an aggregate of
15,000 Common Shares at an exercise price of $85.375 per Common Share were outstanding.
o The Company granted by the Company to members and professionals of the
Supervisory Board.
NoneBoard options to purchase 15,000 Common Shares
with an exercise price per Common Share of these options had been exercised as of June 24, 1998. Such options are
exercisable until$85.375, which
expire on September 12, 2005. EMPLOYEE STOCK PLANAs of June 10, 1999, 13,500
options were outstanding.
60
o The Company hasgranted to members and professionals of the
Supervisory Board options to purchase 15,000 Common Shares
with an exercise price per Common Share of $72.1875, which
expire on July 28, 2006. As of June 10, 1999, 15,000 options
were outstanding.
Employee Stock Plan
In 1998, the Company implemented an Employee Stock Plan under which
employees have subscribed for a total of 302,338288,299 Common Shares at a 12% discount
from the public offering price used in the Share Offering ($72.1875 per Common
Share). These Shares arewere subject to a six-month holding period expiringwhich expired on
December 10, 1998.
The subscription period ended on June 10, 1998 and payment
for the Shares is expected to occur prior to the expiryItem 13: Interest of the holding period.
ITEM 13: INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONSManagement in Certain Transactions
One of the Company's key customers is Thomson Multimedia. Thomson
Multimedia and Thomson-CSF one of thewere indirect shareholders of the Company until
October 1997 (see "Item 4: Control of Registrant"),and are both controlled by Thomson S.A. The Company sells a broad
range of products to Thomson Multimedia, including dedicated products,
microcontrollers and semicustom devices, for use in televisions, video cassettevideocassette
recorders and satellite receiver systems. The Company believes that all of the
products that it sells to Thomson Multimedia are sold on commercial terms no
less favorable to the Company than could be obtained with non-affiliated
parties. The Company has also formed a Groupement d'Interet Economique ("GIE")
with Thomson Multimedia to conduct joint research and development on advanced
television products, including digital television products. The Company and
Thomson Multimedia share equally the funding of the joint venture's designers,
engineers and managers.
The Company has formed a joint venture research and development center
with CNET in the form of a GIE. CNET is a research laboratory that is wholly
owned by France Telecom, one of the indirect shareholders of 69
the Company. See
"Item 1: Description of Business--Research and Development" and "Item 4: Control
of Registrant." The research center is housed at the Company's Crolles, France
manufacturing facility, and is developing submicron process technologies. The
joint venture between the Company and CNET was created in 1990 before France
Telecom became an indirect shareholder of the Company.
The Company has signed an agreement providing for a research and
development cooperation with GRESSI, the research and development GIE formed by
CNET and LETI, a research laboratory that is a department of CEA-Industrie,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 know-
howbasic 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 iswas based upon a multi-year plan through 1998, of which
the Company bearsbore half of the total cost. The cooperation with GRESSI was
superseded, as of January 1, 1999, by a tripartite cooperation arrangement
between the Company, CNET and LETI, within the framework of an extended GIE
named Centre Commun de Microelectronique de Crolles. This cooperation is
directed towards sub 0.18 micron technologies with a view to preparing the
technology to begin production of 12-inch wafers and associated wafer
fabrication processes. The tripartite cooperation is intended to last until the
end of 2002 and the related contractual arrangements are in the process of being
finalized.
The Company participates in certain programs sponsored by the French and
Italian governments for the funding of research and development and
industrialization through direct grants as well as low interest financing. See
"Item 1: Description of Business--State Support for the Semiconductor Industry."
The shareholders of ST Holding, the corporate parent of the Company's majority
shareholder, are controlled, directly or indirectly, by the governments of the
Republics of France and Italy. See "Item 4: Control of Registrant."
Sales to shareholders of the Company and their affiliates totalled $148.2$5.6
million in 1997.
From time to time, the Company may hold with its direct or indirect
shareholders, or their affiliates, certain available funds on a short-term
basis at market interest rates.
701998.
61
PART II
ITEMItem 14: DESCRIPTION OF SECURITIES TO BE REGISTEREDDescription of Securities to be Registered
Not applicable.
PART III
ITEMItem 15: DEFAULT UPON SENIOR SECURITIESDefault Upon Senior Securities
None.
Item 16: Changes in Securities and Changes in Security for
Registered Securities and Use of Proceeds
On May 31, 1999, the Company's shareholders approved a 2:1 stock split
and simultaneous redenomination of the par value of each Common Share to
Euro 3.12. The changes became effective June 16, 1999. Shareholders
authorized the creation of 180,000,000 Preference Shares which would entitle a
holder to full voting rights at any meeting of shareholders and to a
preferential right to dividends and designated the Supervisory Board as the
corporate body authorized to issue the Preference Shares. See "Item 4: Control
of Registrant -- Shareholder Agreements." After these changes in the Company's
authorized share capital, its share capital was Euro 1,809,600,000, consisting
of 400,000,000 Common Shares and 180,000,000 Preference Shares of Euro 3.12
nominal value each.
PART IV
Item 17: Financial Statements
Not applicable.
ITEM 16: CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES AND USE OF PROCEEDS
Not applicable.
PART IV
ITEM 17: FINANCIAL STATEMENTS
Not applicable.
ITEMItem 18: FINANCIAL STATEMENTSFinancial Statements
See "Item 19: Financial Statements and Exhibits" for a list of financial
statements filed pursuant to this Item 18.
ITEMItem 19: FINANCIAL STATEMENTS AND EXHIBITSFinancial Statements and Exhibits
With the exception of the items incorporated by reference elsewhere in
this annual report, the 1998 Annual Report is not deemed to be filed as part of
this annual report.
(a) Financial Statements
The financial statements, together with the report thereon of
PricewaterhouseCoopers NV dated January 25, 1999, appearing on pages
41-56 and 58 of the 1998 Annual Report are incorporated herein by
reference.
62
PAGE
----Reference Page
------------------------
1998 Annual
Report to
Form 20-F Shareholders
--------- ------------
Financial Statements:
Report of Independent Accountants for Years Ended
December 31, 1998, 1997 and 1996............................. 58
Consolidated Statement of Income for the Years Ended
December 31, 1998, 1997 and 1996................................................................ F-1
Auditor's Report on1996............................. -- 41
Consolidated Balance Sheet as of December 31, 1998 and 1997.. -- 42
Consolidated Statement of Cash Flows for the YearYears Ended
December 31, 1995 .................... F-2
Consolidated Statements of Income........................................ F-3
Consolidated Balance Sheet............................................... F-4
Consolidated Statements of Cash Flows.................................... F-51998, 1997 and 1996............................. -- 43
Consolidated Statement of Changes in Shareholders' Equity................ F-6Equity for the Years
Ended December 31, 1998, 1997 and 1996....................... -- 44
Notes to Consolidated Financial Statements............................... F-7Statements................... 45
Financial Statement Schedules:
For each of the three years in the period ended December 31, 1998
Schedule II Valuation and Qualifying Accounts............... S-1 --
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
Report of Independent Accountants on Financial Statement Schedule S-2 --
(b) Exhibits
The exhibits listed in the accompanying index are filed or incorporated by
reference3.(i) Articles of Association, as part of this annual report.
71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Supervisory Board and Shareholders of SGS-THOMSON Microelectronics N.V.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of SGS-THOMSON Microelectronics N.V. and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1997, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above. The
consolidated financial statements of SGS-THOMSON Microelectronics N.V. for the
year ended December 31, 1995 were audited by other independent accountants
whose report dated January 26, 1996 expressed an unqualified opinion on those
statements.
PRICE WATERHOUSE NEDERLAND BV
Amsterdam, The Netherlands
January 23, 1998
F-1
AUDITOR'S REPORT
To the Supervisory Board and the Shareholders of SGS-THOMSON Microelectronics
N.V.:
We have audited the accompanying consolidated balance sheets of SGS-THOMSON
Microelectronics N.V. (a Dutch corporation) and subsidiariesamended as of December
31, 1995 and 1994, and the related statements of income, shareholders'
investment and cash flows for each of the three years in the period ended
December 31, 1995. 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 in accordance with generally accepted auditing
standards in the United States. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SGS-
THOMSON Microelectronics N.V. and subsidiaries as of December 31, 1995 and
1994, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles, as applied in the United States.
Arthur Andersen & Co.
Amsterdam, The Netherlands
January 26, 1996
F-2
SGS-THOMSON MICROELECTRONICS N.V.
CONSOLIDATED STATEMENTS OF INCOME
In thousands of U.S. dollars (except per share amounts)
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
Net sales.............................. $ 3,520,670 $ 4,078,246 $ 3,969,773
Other revenues......................... 33,749 44,114 49,372
----------- ----------- -----------
NET REVENUES.......................... 3,554,419 4,122,360 4,019,145
Cost of sales.......................... (2,096,039) (2,414,706) (2,457,386)
----------- ----------- -----------
GROSS PROFIT.......................... 1,458,380 1,707,654 1,561,759
Selling, general and administrative.... (413,148) (421,012) (454,311)
Research and development............... (440,334) (532,294) (610,847)
Restructuring costs.................... (12,975) -- --
Other income and expenses.............. 59,107 45,074 23,218
----------- ----------- -----------
OPERATING INCOME...................... 651,030 799,422 519,819
Net interest expenses.................. (16,854) (11,169) (2,646)
Gain on disposal of investment......... -- 7,263 --
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS............................. 634,176 795,516 517,173
Income tax expense..................... (108,282) (171,638) (113,017)
----------- ----------- -----------
INCOME BEFORE MINORITY INTERESTS....... 525,894 623,878 404,156
Minority interests..................... 584 1,666 2,398
----------- ----------- -----------
NET INCOME............................. $ 526,478 $ 625,544 $ 406,554
=========== =========== ===========
EARNINGS PER SHARE (BASIC)............. $ 4.03 $ 4.50 $ 2.92
=========== =========== ===========
EARNINGS PER SHARE (DILUTED)........... $ 4.01 $ 4.49 $ 2.91
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
SGS-THOMSON MICROELECTRONICS N.V.
CONSOLIDATED BALANCE SHEET
In thousands of U.S. dollars
AS AT DECEMBER 31,
---------------------
1996 1997
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 551,896 $ 702,157
Marketable securities.............................. 4,508 --
Trade accounts and notes receivable................ 645,923 644,017
Inventories........................................ 521,402 593,520
Other receivables and assets....................... 418,051 413,914
---------- ----------
TOTAL CURRENT ASSETS.............................. 2,141,780 2,353,608
Intangible assets, net.............................. 17,350 26,423
Property, plant and equipment, net.................. 2,839,932 3,046,813
Investments and other non-current assets............ 6,450 18,895
---------- ----------
TOTAL ASSETS...................................... $5,005,512 $5,445,739
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdrafts.................................... $ 315,873 $ 365,944
Short-term debt and current portion of long-term
debt.............................................. 112,372 58,614
Trade accounts and notes payable................... 444,166 592,315
Other payables and accrued liabilities............. 318,556 320,427
Accrued and deferred income tax.................... 210,805 295,207
---------- ----------
TOTAL CURRENT LIABILITIES......................... 1,401,772 1,632,507
Long-term debt...................................... 194,910 356,407
Reserves for pension and termination indemnities.... 100,685 94,938
Other non-current liabilities....................... 38,224 38,636
---------- ----------
333,819 489,981
---------- ----------
TOTAL LIABILITIES................................. 1,735,591 2,122,488
MINORITY INTERESTS................................ 9,901 15,805
Capital stock....................................... 1,072,933 1,073,990
Capital surplus..................................... 930,330 930,945
Accumulated result.................................. 1,209,738 1,616,292
Translation adjustment.............................. 47,019 (313,781)
---------- ----------
SHAREHOLDERS' EQUITY.............................. 3,260,020 3,307,446
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $5,005,512 $5,445,739
========== ==========
Other commitments and contingencies: Note 25
The accompanying notes are an integral part of these financial statements.
F-4
SGS-THOMSON MICROELECTRONICS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of U.S. dollars
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 526,478 $ 625,544 $ 406,554
Add (deduct) non-cash items:
Depreciation and amortization........... 392,390 535,908 608,123
Gain on disposal of investment.......... -- (7,263) --
Other non-cash items.................... (8,707) 7,298 19,015
Minority interest in net income of
subsidiaries........................... (584) (1,666) (2,398)
Deferred income tax..................... (6,365) 58,515 (3,157)
Changes in assets and liabilities:
Trade receivables...................... (126,603) (71,774) (74,721)
Inventories............................ (91,412) (80,517) (149,642)
Trade payables......................... 17,005 (38,019) 73,790
Other assets and liabilities, net...... 122,927 (47,359) 106,227
---------- ---------- ----------
NET CASH FROM OPERATING ACTIVITIES........ 825,129 980,667 983,791
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchases of tangible
assets.................................. (1,001,936) (1,125,205) (1,035,434)
Proceeds from sales investment........... -- 8,420 --
Other investing activities............... 2,868 (5,297) (16,059)
Investment in marketable securities
(net)................................... 5 (196) 4,483
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES..... (999,063) (1,122,278) (1,047,010)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt.................................... 11,741 84,623 250,759
Repayment of long-term debt.............. (96,202) (54,085) (80,238)
Increase (decrease) in short-term
facilities.............................. 165,298 (106,239) 68,869
Capital increase......................... 391,321 16,671 9,669
---------- ---------- ----------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES............................... 472,158 (59,030) 249,059
---------- ---------- ----------
Effect of changes in exchange rates....... (1,412) (1,509) (35,579)
---------- ---------- ----------
NET CASH INCREASE (DECREASE).............. 296,812 (202,150) 150,261
Cash and cash equivalents at beginning of
the year................................. 457,234 754,046 551,896
---------- ---------- ----------
Cash and cash equivalents at end of the
year..................................... $ 754,046 $ 551,896 $ 702,157
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
SGS-THOMSON MICROELECTRONICS N.V.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
In thousands of U.S. dollars
CAPITAL CAPITAL ACCUMULATED TRANSLATION SHAREHOLDERS'
STOCK SURPLUS RESULT ADJUSTMENT EQUITY
---------- -------- ----------- ----------- -------------
Balance as of January 1,
1995................... $ 981,500 $625,906 $ 57,716 $ 14,917 $1,680,039
Capital increase....... 85,028 294,455 -- -- 379,483
Deferred compensation.. -- 1,704 (155) -- 1,549
Net income............. -- -- 526,478 -- 526,478
Translation
adjustment............ -- -- -- 74,166 74,166
---------- -------- ---------- --------- ----------
Balance as of December
31, 1995............... 1,066,528 922,065 584,039 89,083 2,661,715
Capital increase....... 6,405 8,847 -- -- 15,252
Deferred compensation.. -- (582) 155 -- (427)
Net income............. -- -- 625,544 -- 625,544
Translation
adjustment............ -- -- -- (42,064) (42,064)
---------- -------- ---------- --------- ----------
Balance as of December
31, 1996............... 1,072,933 930,330 1,209,738 47,019 3,260,020
Capital increase....... 1,057 615 -- -- 1,672
Net income............. -- -- 406,554 -- 406,554
Translation
adjustment............ -- -- -- (360,800) (360,800)
---------- -------- ---------- --------- ----------
Balance as of December
31, 1997............... $1,073,990 $930,945 $1,616,292 $(313,781) $3,307,446
========== ======== ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
F-6
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency--Thousands of U.S. dollars)
1.THE COMPANY
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 Finanziara Telefonica (S.T.E.T.), an Italian corporation) and the
non-military business of Thomson Semiconducteurs (then owned by Thomson-CSF, a
French corporation) whereby each company contributed their respective
semiconductor businesses in exchange for a 50% interest in the Company.
The Company is registered in The Netherlands with its statutory domicile in
Amsterdam.
As of December 31, 1997, the Company was 68.90% (December 31, 1996: 68.97%)
owned by SGS-THOMSON Microelectronics II B.V., and 31.10% by the public
(December 31, 1996: 31.03%).
At December 31, 1997, SGS-THOMSON Microelectronics II B.V. was 100% owned
by SGS-THOMSON Microelectronics Holding N.V. At December 31, 1997, SGS-THOMSON
Microelectronics 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 M.E.I. - Microelettronica Italiana s.r.l. ("M.E.I."), an
Italian holding company, whose Shareholders are Comitato per l'intervento
nella SIR ed in settori ad alta tecnologia ("Comitato SIR") (49.9%) and
Istituto per la Ricostruzione Industriale S.p.a. (I.R.I.) (50.1%)
At December 31, 1996, SGS-THOMSON Microelectronics Holding N.V. was owned
as follows:
-- 50% by FT2CI, a French holding company, whose shareholders in turn
were FT1CI (50.1%) and Thomson-CSF (49.9%).
-- 50%, (48.14% in 1995) by M.E.I.
During 1997, Thomson CSF sold its entire minority interest in FT2CI (49.9%)
to FT1CI.
The Company has been informed by CEA Industrie and France Telecom that
FT1CI and FT2CI have been merged at the end of 1997, with FT1CI the surviving
company in the merger. This transaction does not modify the equality in
ownership interest between the French Shareholders and the Italian
Shareholders.
2.SUMMARY OF ACCOUNTING POLICIES
2.1)PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles 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 the other interest holders is reflected
as minority interests. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The initial combination of the SGS Microelettronica and Thomson
Semiconducteurs civilian semiconductor businesses was accounted for as the
creation of a joint venture. Accordingly, the assets and liabilities of the
combined entities were recorded in the books of the joint venture at their
carrying amounts at the date of combination.
F-7
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
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. Management believes that the estimates are
reasonable.
2.3)INCOME RECOGNITION
SALES: Revenues on sales of semiconductor products are recognized upon
shipment of the products. A portion of the Company's sales are made to
distributors who participate in certain programs common to the semiconductor
industry whereby the distributors are allowed to return merchandise under
certain circumstances and may receive future price reductions. Provision is
made at the time of sale for estimated product returns and price protection
which may occur under programs the Company has with these customers.
SUBSIDIES: Government subsidies are recognized as the related costs are
incurred, commencing when the subsidies' contract is signed with the relevant
government department or agency. Government subsidies for research and
development are included in "other income and expenses". Government subsidies
for industrialization costs (certain costs incurred to bring protoype products
to the production stage) are offset against related expenses in "cost of
sales". Government subsidies for capital expenditures are deducted from the
cost of the related fixed assets.
2.4)FOREIGN CURRENCY
The United States dollar is the reporting currency for the Company because
the dollar is the currency of reference in terms of market pricing in the
worldwide semiconductor industry. Furthermore, there is no currency in which
the majority of transactions are denominated, and revenues from external sales
in U.S. dollars exceed revenues in any other currency.
The functional currency used by each significant subsidiary throughout the
group is generally the local currency. For consolidation purposes, assets and
liabilities of these subsidiaries are translated at current rates of exchange
at the balance sheet date. Income and expense items are translated at the
average exchange rate for the period. The effects of translating the financial
position and results of operations of local functional currency are included
in shareholders' equity.
Assets, liabilities, revenue, expenses, gains or losses arising from
foreign currency transactions are recorded in the functional currency of the
recording entity at the exchange rate in effect at the date of the
transaction. At each balance sheet date, recorded balances denominated in a
currency other than the recording entity's functional currency are translated
at the exchange rate prevailing at that date. The related exchange gains and
losses are recorded in the income statement.
The Company covers certain portions of its foreign currency exposure
primarily through the use of forward contracts and option contracts.
Generally, gains and losses associated with currency rate changes on forward
contracts are recorded currently in "other income and expenses", while the
interest element is recognized over the life of each contract and is included
in operations. The Company utilizes foreign exchange forward contracts and
foreign currency options to protect the Company from the effect of currency
fluctuations on its probable anticipated transactions.
F-8
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
2.5)INTANGIBLE ASSETS
Intangible assets include the cost of technologies and licenses purchased
from third parties, amortized over a period ranging from five to 18 years, and
goodwill acquired in business combinations amortized over its estimated useful
life, generally five to 15 years.
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("FAS 121") effective January 1, 1995. 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 flows 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. The fair value of an intangible
asset is determined through the use of a discounted cash flow analysis.
2.6)PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of government
subsidies. Major renewals and improvements are capitalized; minor
replacements, maintenance and repairs are charged to current operations.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Buildings......................................................... 33 years
Leasehold improvements............................................ 10 years
Machinery and equipment........................................... 6 years
Computer and R&D equipment........................................ 3-6 years
Other............................................................. 2-5 years
Assets subject to leasing agreements and classified as capital leases are
included in property, plant and equipment and depreciated over the shorter of
the estimated useful life or the lease term.
2.7)INVESTMENTS
The equity accounting method is used when the Company has both a 20% to 50%
equity interest and the ability to exercise significant influence over the
investee. Marketable debt and equity securities and other equity investments
are classified as "available for sale" securities and stated at fair value.
2.8)INVENTORIES
Inventories are stated at the lower of cost or market (net realizable
value). Cost is computed on a currently adjusted standard basis which
approximates actual cost on a current average basis.
2.9)RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred. Research
and development costs include costs incurred by the Company as well as the
Company's share of costs incurred by two French research and development
interest groups. For some of its research and development programs, the
Company receives grants from Governmental agencies; these grants are
recognized in the income statement in "other income and expenses".
F-9
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
2.10)START-UP COSTS
Start-up costs incurred to expand the Company's manufacturing facilities
are included in "other income and expenses" in the accompanying consolidated
statement of income.
2.11)PENSION AND TERMINATION INDEMNITIES
PENSION: Upon retirement, the Company's employees receive such benefits as
are provided by pension plan arrangements; these plans conform with local
regulations and practices of the countries in which the Company operates.
TERMINATION INDEMNITIES:
ITALY Italian law provides for an indemnity to be paid to personnel upon
termination of employment. The amount of indemnity is based upon the number of
years of service. The undiscounted value of the vested obligation at the
balance sheet date is recorded as a liability.
FRANCE In France, an indemnity is paid to personnel only upon retirement
from the Company. The French entity recognizes the related cost and liability
with the prior years' liability being amortized over the average remaining
service period until retirement age.
2.12)INCOME TAXES
The provision for current taxes represents the income taxes expected to be
payable for the current year. Deferred tax assets and liabilities are recorded
for all temporary differences arising between the tax and book basis of assets
and liabilities and for the benefits of tax credits and loss carryforwards.
Those deferred tax assets and liabilities are measured using the enacted tax
rates at which they are expected to be realized or paid. A valuation allowance
is provided where necessary to reduce deferred tax assets to the amount
expected to be "more likely than not" realized in the future. Tax rate changes
are reflected in income in the period such changes are enacted.
2.13)STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-
Based Compensation", which established a fair value-based method of accounting
for compensation costs related to stock option plans and other forms of stock
based compensation plans as an alternative to the intrinsic value-based method
of accounting as defined under Accounting Principles Board Opinion no. 25 (APB
25). As permitted by FAS 123, the Company decided not to elect the new method
of accounting, prescribed by FAS 123, and has provided pro forma disclosure as
if the fair value-based method prescribed by FAS 123 had been applied in
measuring compensation expense (note 11).
2.14)ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising
expenses for 1995, 1996 and 1997 were $10,133, $12,686 and $14,523,
respectively.
2.15)EARNINGS PER SHARE
In February 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards (FAS No. 128), "Earnings Per Share". This
statement specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock. The
Company has
F-10
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
adopted the new method of calculating earnings per share which is based upon
the basic and diluted per share calculation (note 12).
2.16)RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2.17)RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the United States Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (FAS No. 130). FAS No. 130 establishes standards for reporting
comprehensive income and its components and accumulated balances. Comprehensive
income is defined as the change in equity of a business during a period from
transactions and circumstances related to non-owner sources, and includes all
changes in equity except those resulting from investment by owners and
distributions to owners. Among other disclosures, FAS No. 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. FAS No. 130
is effective for financial statements for fiscal years beginning after December
15, 1997 and requires comparative information for earlier years to be restated.
Management has determined that in the Company's case, comprehensive income
consists of foreign currency translation adjustments.
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 No. 131). FAS No. 131
establishes standards for the way that public enterprises report information
about operating segments in financial statements. It also establishes standards
for disclosures regarding the products and services, geographic areas and major
customers. FAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. FAS No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997 and
requires comparative information for earlier years to be restated. Management
has not fully evaluated the impact, if any, that this standard may have on
future financial statement disclosures.
In February 1998, the United States Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132 "Employers'
Disclosures about Pension and Other Postretirement Benefits" (FAS 132). FAS 132
revises disclosure requirements for employers' pension and other retiree
benefits. The Company will adopt the provisions of SFAS No. 132 effective
December 31, 1998. FAS 132 will not affect the Company's financial position or
results of operations. The Company is currently evaluating the effect of
FAS 132 on the Company's pension disclosures.
F-11
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
3.CONSOLIDATED ENTITIES
The consolidated financial statements include the accounts of SGS-THOMSON
Microelectronics N.V. and the following entities as of December 31, 1997:
PERCENTAGE
OWNERSHIP
COMMON STOCK (DIRECT OR
LEGAL SEAT NAME (THOUSANDS) INDIRECT)
---------- ---- --------------- ----------
United Kingdom London SGS-THOMSON
Microelectronics LTD.... 9,900 GBP 100
London Thomson Components LTD.. 1,150 GBP 100
Bristol SGS-THOMSON E.E.I.G..... 0 GBP 100
Sweden Stockholm SGS-THOMSON
Microelectronics A.B.... 16,000 SEK 100
Germany Munich SGS-THOMSON
Microelectronics GmbH... 12,901 DEM 100
Switzerland Geneva SGS-THOMSON
Microelectronics S.A.... 500 CHF 100
Malta Malta SGS-THOMSON
Microelectronics LTD.... 21,590 MTP 100
Spain Madrid SGS-THOMSON
Microelectronics S.A.... 55,000 ESP 100
France Paris SGS-THOMSON
Microelectronics S.A.... 2,289,764 FRF 100
Paris SGS-THOMSON
Microelectronics
S.A.S................... 250 FRF 100
Italy SGS-THOMSON
Microelectronics
Milano S.r.l. ................. 502,000,000 ITL 100
Catania CORIMME................. 3,000,000 ITL 100
Singapore SGS-THOMSON
Microelectronics PTE
Singapore LTD..................... 179,997 SGD 100
Singapore SGS-THOMSON
Microelectronics ASIA
PACIFIC
PTE LTD................. 13,982 SGD 100
Malaysia SGS-THOMSON
Microelectronics SDN
Muar BHD..................... 196,805 MYR 100
SGS-THOMSON(Malaysia)
Muar SDN BHD................. 0.002 MYR 100
Japan SGS-THOMSON
Tokyo Microelectronics KK..... 68,000 JPY 100
Hong Kong SGS-THOMSON
Hong Kong Microelectronics LTD.... 780 HKD 100
Australia SGS-THOMSON
Microelectronics PTY
Sydney LTD..................... 185 AUD 100
United States SGS-THOMSON
Dallas Microelectronics Inc. .. 22,000 USD 100
SGS-THOMSON
Microelectronics (RB),
Rancho Bernardo Inc. ................... 1 USD 100
SGS-THOMSON
Microelectronics Leasing
Dallas Co. Inc. ............... 1 USD 100
Metaflow Technologies
La Jolla Inc..................... 56 USD 68
Brazil SGS-THOMSON
Sao Paulo Microelectronics Ltda... 15 BRL 100
Morocco SGS-THOMSON
Casablanca Microelectronics S.A. .. 66,000 MAD 100
Electronic Holding
Casablanca S.A. ................... 3,110 MAD 100
China Shenzhen STS
Microelectronics Co
Shenzhen LTD..................... 418,527 CNY 60
India SGS-THOMSON
Microelectronics PTE
New Delhi LTD..................... 62,000 INR 100
Finland SGS-THOMSON
Helsinki Microelectronics OY..... 2,000 FIM 100
4.CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of the following:
DECEMBER 31,
---------------
1996 1997
------- -------
Cash........................................................ 1,579 462
Bank accounts............................................... 548,777 653,436
Marketable securities (with maturity under 3 months)........ 1,540 48,259
------- -------
TOTAL..................................................... 551,896 702,157
======= =======
MARKETABLE SECURITIES (WITH MATURITY OVER 3 MONTHS)......... 4,508 --
======= =======
Marketable securities consist mainly of short term cash investments. There
was no significant difference between the book value of traded marketable
securities and their fair market value as of December 31, 1996 and 1997.
F-12
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
5.TRADE ACCOUNTS AND NOTES RECEIVABLE
Trade accounts and notes receivable consist of the following:
DECEMBER 31,
----------------
1996 1997
------- -------
Trade accounts and notes receivable....................... 664,075 659,245
Less valuation allowance.................................. (18,152) (15,228)
------- -------
TOTAL................................................... 645,923 644,017
======= =======
During 1995, 1996 and 1997 no customer represented individually over ten
percent of consolidated net revenues.
6.INVENTORIES
Inventories consist of the following:
DECEMBER 31,
---------------
1996 1997
------- -------
Raw materials.............................................. 121,485 114,712
Work-in-process............................................ 278,289 341,537
Finished products.......................................... 121,628 137,271
------- -------
TOTAL..................................................... 521,402 593,520
======= =======
7.OTHER RECEIVABLES AND ASSETS
DECEMBER 31,
---------------
1996 1997
------- -------
Receivables from government agencies*....................... 217,334 154,916
Taxes and other government receivables...................... 48,148 60,474
Down payment to suppliers................................... 1,617 814
Loans to employees.......................................... 3,821 3,197
Prepaid expenses............................................ 14,700 14,062
Sundry debtors.............................................. 23,342 55,475
Deferred tax................................................ 65,291 96,139
Other....................................................... 43,798 28,837
------- -------
TOTAL...................................................... 418,051 413,914
======= =======
* Related to research and development contracts, industrialization contracts
and capital expenditures.
8.INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
----------------
1996 1997
------- -------
Technologies and licenses, gross.......................... 56,648 72,189
Pension transition obligation............................. 2,423 --
Less accumulated amortization............................. (41,721) (45,766)
------- -------
TOTAL.................................................... 17,350 26,423
======= =======
F-13
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
9.PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31, 1996 GROSS DEPRECIATION NET
----------------- --------- ------------ ---------
Land and buildings......................... 456,973 (88,926) 368,047
Machinery and equipment.................... 4,147,941 (2,057,281) 2,090,660
Other tangible fixed assets................ 221,555 (144,943) 76,612
Construction in progress................... 304,613 -- 304,613
--------- ---------- ---------
TOTAL..................................... 5,131,082 (2,291,150) 2,839,932
DECEMBER 31, 1997 GROSS DEPRECIATION NET
----------------- --------- ------------ ---------
Land and buildings......................... 490,707 (102,409) 388,298
Machinery and equipment.................... 4,391,066 (2,138,115) 2,252,951
Other tangible fixed assets................ 307,844 (209,088) 98,756
Construction in progress................... 306,808 -- 306,808
--------- ---------- ---------
TOTAL..................................... 5,496,425 (2,449,612) 3,046,813
========= ========== =========
Included in the above categories are assets recorded under capitalized
leases with original costs totalling $8,906 in 1996 and $7,805 in 1997.
10.INVESTMENTS AND OTHER NON-CURRENT ASSETS
Investments and other non-current assets consist of the following:
DECEMBER 31,
------------
1996 1997
----- ------
Investments carried at fair value.............................. 1,176 10,334
Long-term deposits and receivables............................. 5,274 8,561
----- ------
TOTAL......................................................... 6,450 18,895
===== ======
Long-term deposits and receivables consist primarily of indemnities
receivable from third parties on the sale of businesses, which bear interest
or are discounted to reflect their present value.
11.SHAREHOLDERS' EQUITY
PUBLIC OFFERINGS OF SHARES
In December 1994, the Company increased its capital stock, with an initial
public offering, through the issuance of 9,606,240 new shares of capital
stock, which resulted in an increase in capital stock and capital surplus of
$75,049 and $123,772, respectively. In connection with a secondary offering of
capital stock in October 1995, the Company issued 8,960,000 new shares of
capital stock, which resulted in an increase in capital stock and capital
surplus of $79,356 and $292,075, respectively.
OUTSTANDING SHARES
The authorized share capital16, 1999, of the
Company
is NLG 2,750,000,000,
consisting of 200,000,000 shares, each with a nominal value of NLG 13.75. As
of December10 Option Agreement, signed May 31, 1995, 1996 and 1997, the number of shares of
F-14
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
capital stock outstanding at a par value of NLG 13.75 were 138,208,680 shares,
138,985,580 shares and 139,132,397 shares, respectively.
STOCK OPTION PLANS
In 1989, the Shareholders voted to adopt the 1989 Stock Option Plan (the
"1989 Plan") and approved the issuance of 1,634,400 options to 136 employees
to purchase capital stock at a price of NLG 25 per share. Under the 1989 Plan,
the options vest over four years and are exercisable for ten years. In 1994,
the minimum exercise price of the options was reduced to NLG 17.50. As a
result,1999 between the Company recorded a compensation charge of $18,125 in the fourth
quarter of 1994.
In 1995, the Shareholders voted to adopt the 1995 Stock Option Plan (the
"1995 Plan") whereby options for up to 5,500,000 shares may be granted in
installments over a five-year period. Under the 1995 Plan, the options may be
granted to purchase shares of capital stock at a price not lower than the
market price of the shares on the date of grant, and
generally vest over four
years and are exercisable over a period of eight years. In March 1996, the
Company granted 1,200,000 options to its employees at an exercise price of
$36.25 per share. In September 1997, the Company granted 645,500 options to
its employees at an exercise price of $85.375 per share.
In 1996, the Shareholders voted to adopt the Supervisory Board Option Plan
whereby members of the Supervisory Board may receive, during the three-year
period 1996-1998, 3,000 options for 1996 and 1,500 options for 1997 and 1998,
to purchase shares of capital stock at the closing market price of the shares
on the date of grant. In the same three-year period, professionals of the
Supervisory Board may receive 1,500 options for 1996 and 750 options for 1997
and 1998. Under the Plan, the options vest over one year and are exercisable
for a period expiring eight years from the date of grant. In October 1996,
options to purchase 33,000 shares were granted at an exercise price of $54.00
per share. In September 1997, options to purchase 15,000 shares were granted
at an exercise price of $85.375 per share.
A summary of stock option transactions for the plans follows:
PRICE PER SHARE
-----------------------
OPTIONS OUTSTANDING NUMBER OF SHARES RANGE AVERAGE
------------------- ---------------- -------------- --------
December 31, 1994................. 1,456,400 17.5-25 NLG 20.0 NLG
Options exercised................. (646,200) 17.5-25 NLG 19.6 NLG
---------
December 31, 1995................. 810,200 17.5-25 NLG 20 NLG
Options granted 1995 Plan......... 1,200,000 $36.25 $36.25
Supervisory Board Plan............ 33,000 $54.00 $54.00
Options cancelled................. (16,500) $36.25 $36.25
Options exercised................. (531,790) 17.5-25 NLG 20.1 NLG
---------
December 31, 1996................. 1,494,910 17.5-25 NLG 20.1 NLG
$ 36.25-$54.00 $36.73
Options granted 1995 Plan......... 645,500 $85.375 $85.375
Supervisory Board Plan............ 15,000 $85.375 $85.375
Options cancelled................. (18,000) $36.25-$85.375 $44.98
Options exercised................. (137,380) $ 8.67-$36.25 $10.36
---------
December 31, 1997................. 2,000,030 17.5-25 NLG 20.8 NLG
=========
$36.25-$85.375 $53.19
F-15
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
EMPLOYEE OFFERING PLAN
Pursuant to a resolution of the Supervisory BoardSTMicroelectronics Holding II B.V.
21 Subsidiaries of the Company in
November 1995,(see Note 3 to the Company offeredConsolidated Financial
Statements)
23 Consent of PricewaterhouseCoopers NV
Pages 27 to certain56 and 58 of its employees worldwide the right to acquire up to 1,000 shares of capital stock per employee, at a price
of $33.725 per share, representing a discount of five percent from the market
price. A total of 243,710 shares were sold to participating employees
worldwide1998 Annual Report, submitted as a result of the offering. Participating employees who purchased
shares in the offering and who held such shares for at least one year were
entitled to purchase, for a price of 13.75 NLG, one share for each ten shares
purchased in the offering.
FAIR VALUE OF STOCK-BASED COMPENSATION
As permitted under FAS No. 123, the Company has elected to continue to
follow APB 25, "Accounting for Stock Issued to Employees", and related
interpretations, in accounting for stock-based awards to employees. Under APB
25, the Company generally recognized no compensation expense with respect to
such awards.
Pro forma information regarding net income and earnings per share is
requiredReport
on Form 6-K by FAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under the fair
value method of FAS 123. The fair value of the Company's stock based awards to
employees was estimated using a Black-Scholes option pricing model. The Black-
Scholes option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of
highly subjective assumptions including the expected stock price volatility.
The Company's stock-based awards to employees have characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate.
The fair value of the Company's stock-based awards to employees was estimated
assuming no expected dividends and the following weighted-average assumptions:
1995 1996 1997
---- ---- ----
Expected life (years)........................................ 5 5 5
Expected stock price volatility.............................. 55% 55% 40%
Risk-free interest rate...................................... 5% 5% 6%
For pro forma purposes, the estimated fair value of the Company's stock-
based awards to employees is amortized over the options' vesting period. The
Company's pro forma information follows:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
Net Income
As reported........................................ 526,478 625,544 406,554
Pro forma.......................................... 526,478 621,449 399,509
Earnings per share
As reported........................................ 4.03 4.50 2.92
Pro forma.......................................... 4.03 4.48 2.87
The weighted average fair value at grant date of options granted during
1996 and 1997 was $19.50 and $38.50, respectively.
RETAINED EARNINGS
At December 31, 1997, the amount of retained earnings available to pay
dividends under Dutch law was approximately $2,233,000 (1996: $2,187,000).
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, 1997.
F-16
SGS-THOMSON MICROELECTRONICSSTMicroelectronics N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
12.EARNINGS PER SHARE
The Company has adopted a new method of calculating earnings per share as
required by Financial Accounting Standards (FAS) No. 128, "Earnings Per
Share".
For the years ended December 31, 1995, 1996, 1997 earning per share (EPS)
was calculated as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
Basic EPS: ----------- ----------- -----------
Net income............................ 526,478 625,544 406,554
Weighted average shares outstanding... 130,647,079 138,695,540 139,092,900
EPS (basic)........................... 4.03 4.50 2.92
Diluted EPS:
Net income............................ 526,478 625,544 406,554
Weighted average shares outstanding... 130,647,079 138,695,540 139,092,900
Dilutive effect of stock options...... 668,567 505,586 757,696
Number of shares used in calculating
EPS.................................. 131,315,646 139,201,126 139,850,596
EPS (diluted)......................... 4.01 4.49 2.91
13.RESERVES FOR PENSION AND TERMINATION INDEMNITIES
Reserves for pension and termination indemnities consist of the following:
DECEMBER 31,
--------------
1996 1997
------- ------
Italy(a)..................................................... 98,028 92,280
Other countries(b)........................................... 2,657 2,658
------- ------
TOTAL....................................................... 100,685 94,938
======= ======
(A)ITALY
The Italian plan is a defined benefit plan whereby an indemnity is paid to
personnel upon termination of employment. Each year, the liability is adjusted
to reflect current year compensation as well as a revaluation of prior years'
accruals based on an index. The plan is unfunded and all participants are
fully vested.
Changes in the undiscounted benefit consist of the following:
DECEMBER 31,
----------------
1996 1997
------- -------
Accrual at the beginning of the year...................... 86,733 98,028
Accrued benefits.......................................... 18,469 14,736
Payments.................................................. (10,213) (7,460)
Translation adjustment.................................... 3,039 (13,024)
------- -------
ACCRUAL AT THE END OF THE YEAR............................ 98,028 92,280
======= =======
F-17
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
(B)OTHER COUNTRIES (FRANCE, UNITED STATES, JAPAN, UNITED KINGDOM AND
GERMANY)
The Company has defined benefit pension plans in various countries.
The funded status of pension plans and termination indemnities is as
follows:
DECEMBER 31,
----------------
1996 1997
------- -------
Vested benefits......................................... (47,816) (62,687)
Non-vested benefits..................................... (10,480) (14,488)
------- -------
Projected benefit obligation............................ (58,296) (77,175)
Plan assets at fair value............................... 54,562 77,455
------- -------
Projected benefit obligation in excess of (less than)
plan assets............................................ (3,734) 280
Unrecognized transition obligation...................... (4,404) (3,649)
Unrecognized prior service cost......................... 6,869 7,381
Unrecognized net (gains) and losses..................... 514 (2,517)
------- -------
Net pension asset....................................... (755) 1,495
======= =======
The accumulated benefit obligation amounted to $76,237 as of December 31,
1997 ($57,205 as of December 31, 1996).
The periodic net pension and termination indemnities cost includes the
following:
DECEMBER 31,
-----------------------
1995 1996 1997
------ ------- ------
Service cost of benefits
earned during the year.. 3,613 4,764 5,804
Interest cost on
projected benefit
obligation.............. 3,016 3,960 5,076
Actual return on plan
assets.................. (3,716) (4,267) (5,114)
Net amortization and
deferral................ 418 (1,467) 1,003
------ ------- ------
TOTAL................... 3,331 2,990 6,769
====== ======= ======
The assumptions used in the determination of the net pension cost for the
pension plans were as follows:
ASSUMPTIONS 1995 1996 1997
----------- ------ ------- ------
Discount rate............ 7-8.5% 6.5-8.5% 3-7.5%
Salary increase rate..... 4-6.5% 4-6.5% 4-5.5%
Expected rate of return
of funds................ 8-10% 6.5-10% 6-9%
14.OTHER NON-CURRENT LIABILITIES
DECEMBER 31,
-------------
1996 1997
------ ------
Provision for claims and litigation and other risks........... 31,550 33,062
Other long-term payables...................................... 6,674 5,574
------ ------
TOTAL........................................................ 38,224 38,636
====== ======
F-18
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
15.LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
---------------
1996 1997
------- -------
Secured (mainly mortgages on land, buildings and liens on
equipment).............................................. 54,937 45,106
Unsecured................................................ 252,345 369,915
------- -------
TOTAL................................................... 307,282 415,021
======= =======
DECEMBER 31,
REPAYMENT SCHEDULE 1997
------------------ ------------
1998........................................................... 58,614
1999........................................................... 50,430
2000........................................................... 107,553
2001........................................................... 98,093
2002........................................................... 72,609
Thereafter..................................................... 27,722
-------
TOTAL......................................................... 415,021
=======
DECEMBER 31,
---------------
INTEREST RATES 1996 1997
-------------- ------- -------
Non-interest bearing*....................................... 5,871 4,092
From 1 to 3%................................................ 90,084 63,719
From 3 to 6%................................................ 83,402 275,163
From 6 to 10%............................................... 120,870 68,721
From 10 to 15%.............................................. 7,055 3,326
------- -------
TOTAL...................................................... 307,282 415,021
======= =======
* Non-interest bearing and certain low interest bearing borrowings relate to
borrowings under Italian and French governmental programs.
DECEMBER 31,
---------------
CURRENCIES 1996 1997
---------- ------- -------
U.S. dollar................................................. 6,950 20,000
Italian lira................................................ 170,590 242,754
French franc................................................ 15,767 94,403
Other....................................................... 113,975 57,864
------- -------
TOTAL...................................................... 307,282 415,021
======= =======
F-19
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
Long-term debt includes:
DECEMBER 31,
---------------
1996 1997
------- -------
SGS-THOMSON Microelectronics S.A. (France)
--4.9%Bank Loan due 2002.................................... -- 33,361
--4.884%Bank Loan due 2002.................................. -- 33,361
--4.18%Other Bank Loans..................................... 15,767 27,681
SGS-THOMSON Microelectronics LTD (Malta)
--6.185%Bank Loan due 1998.................................. -- 20,033
--7.05%Other Bank Loans..................................... 55,019 25,075
SGS-THOMSON Microelectronics s.r.l. (Italy)
--5.68%Bank Loan due 2002................................... -- 56,844
--2.15%Government Loan due 2000............................. 76,575 53,219
--6.13%Other Bank Loans..................................... 94,015 132,691
SGS-THOMSON Microelectronics (other countries)
--6.97%Other Bank Loans..................................... 65,906 32,756
------- -------
Total long-term debt........................................ 307,282 415,021
Total long-term debt, current portion....................... 112,372 58,614
------- -------
Total long-term debt, less current portion.................. 194,910 356,407
------- -------
16.OTHER PAYABLES AND ACCRUED LIABILITIES
DECEMBER 31,
---------------
1996 1997
------- -------
Taxes other than income taxes............................... 24,754 38,910
Salaries and wages.......................................... 95,553 85,809
Social charges.............................................. 49,882 52,893
Advances received on fundings............................... 10,724 10,124
Provision for asset writedowns.............................. 5,981 4,646
Litigation and other risks.................................. 5,000 18,000
Commercial rebates.......................................... 53,214 31,585
Royalties payable........................................... 19,612 20,769
Other....................................................... 53,836 57,691
------- -------
TOTAL...................................................... 318,556 320,427
======= =======
F-20
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
17.OTHER REVENUES
Other revenues consist of the following:
DECEMBER 31,
--------------------
1995 1996 1997
------ ------ ------
Royalties and indemnities received..................... 16,549 582 956
Licensing revenues..................................... -- 16,693 27,598
Miscellaneous sales.................................... 7,346 18,675 17,250
Other.................................................. 9,854 8,164 3,568
------ ------ ------
TOTAL................................................. 33,749 44,114 49,372
====== ====== ======
18.PERSONNEL
Labor costs consist of the following:
DECEMBER 31,
---------------------------
1995 1996 1997
------- --------- ---------
Salaries and wages.............................. 643,559 745,329 730,689
Social security contribution.................... 194,650 210,611 236,609
Other........................................... 48,251 53,838 57,929
------- --------- ---------
TOTAL........................................... 886,460 1,009,778 1,025,227
======= ========= =========
Labor costs are allocated to cost of sales, selling, general and
administrative expenses and research and development costs. At December 31,
1997 the Company employed 28,728 persons (1996: 25,893).
19.OTHER INCOME AND EXPENSES
Other income and expenses consist of the following:
DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
Research and development funding*................ 89,643 63,792 55,269
Patents income (expense), net.................... (8,055) (2,639) (660)
Exchange gain (loss), net........................ 5,082 11,822 15,158
Start-up costs................................... (26,489) (38,987) (47,867)
Other............................................ (1,074) 11,086 1,318
------- ------- -------
TOTAL........................................... 59,107 45,074 23,218
======= ======= =======
* Does not include certain other funding received for industrialization costs
(which include certain costs incurred to bring prototype products to the
production stage). Such funding and costs are netted in cost of sales in
the income statement ($11,825 for 1995, $4,613 for 1996 and $6,192 for
1997).
20.NET INTEREST EXPENSES
Net interest expenses consist of the following:
DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
Income........................................... 35,206 34,139 39,009
Expenses......................................... (52,060) (45,308) (41,655)
------- ------- -------
TOTAL........................................... (16,854) (11,169) (2,646)
======= ======= =======
F-21
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
Cash paid for interest was $51,156 for 1995, $40,064 for 1996 and $43,305
for 1997.
21.INCOME TAX
Income before income tax expense is comprised of the following components:
DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
Income from domestic operations.................... 4,662 31,284 (8,437)
Income from foreign operations..................... 630,098 765,898 528,008
------- ------- -------
TOTAL INCOME BEFORE INCOME TAX EXPENSE............. 634,760 797,182 519,571
======= ======= =======
SGS-THOMSON Microelectronics N.V. and its subsidiaries are individually
liable for income tax. Tax losses can only offset profits generated by the
taxable entity incurring such loss.
DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
Domestic...................................... -- (4,857) (8,377)
Foreign....................................... (114,647) (108,266) (107,797)
-------- -------- --------
Current....................................... (114,647) (113,123) (116,174)
Deferred...................................... 6,365 (58,515) 3,157
-------- -------- --------
INCOME TAX EXPENSE............................ (108,282) (171,638) (113,017)
======== ======== ========
The principal items accounting for the differences in income taxes computed
at The Netherlands statutory rate (35%) and the effective income tax rate
comprise the following:
DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
Income tax expense computed at statutory
rate........................................ (221,962) (279,013) (181,850)
Benefit (deductions) for financial reporting
for which no current tax benefit is
available................................... 50,601 14,894 (1,217)
Variation in valuation allowance............. 25,528 23,935 (294)
Other tax and credits........................ 32,252 7,855 (627)
Effect of tax rate differences............... 5,299 60,691 70,971
-------- -------- --------
INCOME TAX EXPENSE........................... (108,282) (171,638) (113,017)
======== ======== ========
Permanent differences reflect mainly the effects of the capital allowances
programs existing in certain Southeast Asian and Mediterranean countries, of
the special pioneer regimes existing in Asia Pacific regions and of the non-
deductible items.
Pioneer status currently applies to one of the Company's two Singapore
factories. Under this regime all the profits of the operation under pioneer
status--calculated in accordance with applicable taxation rules and after
deduction of capital allowances--are benefiting from certain tax privileges
since a half rate taxation basis is applied when compared to the second non-
pioneer factory. In calculating deferred taxes, the Company records a
liability or asset for a temporary difference that reverses after the tax
holiday period ends, using the applicable taxation rate.
F-22
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
Deferred tax assets and liabilities consist of the following:
DECEMBER 31,
----------------
1996 1997
------- -------
Tax loss carryforwards and capital allowances............. 14,976 71,967
Other assets.............................................. 122,942 142,362
------- -------
Total assets, gross....................................... 137,918 214,329
Valuation allowance....................................... (4,156) (4,450)
------- -------
DEFERRED TAX ASSETS, NET.................................. 133,762 209,879
======= =======
Fixed assets depreciation................................. 148,562 213,399
Other liabilities......................................... 59,220 50,857
------- -------
DEFERRED TAX LIABILITIES.................................. 207,782 264,256
======= =======
As a result of offsetting deferred tax assets against deferred tax
liabilities in each tax jurisdiction, the Company recorded a net deferred tax
asset of $65,291 in 1996 and $96,139 in 1997, and a net deferred tax liability
of $139,311 in 1996 and $150,516 in 1997. In 1996, the Company reduced its
valuation allowance by $23,935 and in 1997 increased it by $294.
As of December 31, 1997 the Company and its subsidiaries had net operating
loss carryforwards and capital allowance expiring in the following years:
DECEMBER 31,
1997
------------
1998........................................................... 18,649
1999........................................................... 7,006
2000........................................................... 5,912
2001........................................................... 6,705
2002 and thereafter............................................ 232,630
-------
TOTAL......................................................... 270,902
=======
The Company paid $52,545 cash for income taxes in 1995, $109,277 cash for
income taxes in 1996 and $37,207 cash for income taxes in 1997.
22.CREDIT FACILITIES
As of December 31, 1997, the aggregate amount of the Company's long-term
credit facilities was $415,021 (note 15) under which $415,021 of indebtedness
was outstanding, and additionally the aggregate amount of the Company's short-
term facilities was approximately $872,500 under which $365,944 of
indebtedness was outstanding.
F-23
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
23.LEASE COMMITMENTS
The Company leases land, building, plant and equipment under non-
cancellable lease agreements. As of December 31, 1997 the future minimum lease
payments to which the Company was committed under operating leases were as
follows:
YEAR
----
1998................................................................. 14,348
1999................................................................. 7,287
2000................................................................. 5,143
2001................................................................. 3,551
2002................................................................. 3,065
Thereafter........................................................... 17,342
------
TOTAL............................................................... 50,736
======
24.FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial instruments and derivatives are used exclusively for purposes
other than trading.
FORWARD EXCHANGE CONTRACTS AND CURRENCY OPTIONS
The Company enters into forward contracts and foreign currency options to
protect against potentially adverse changes in foreign currency exchange rates
and to cover a portion of both its probable anticipated, but not firmly
committed, transactions and transactions with firm foreign currency
commitments.
These transactions include international sales by various subsidiaries in
foreign currencies, foreign currency denominated purchases, intercompany
shipments to subsidiaries and other intercompany transactions.
Such contracts outstanding as of December 31, 1997 mature mainly during
first quarter 1998, and amount to $149,500 forward sale of US$, $17,302
forward purchase of US$, $63,968 forward sale of other foreign currencies, and
$74,449 forward purchases of other foreign currencies. There were no foreign
currency options outstanding as of December 31, 1996 or 1997. Forward
contracts generally mature in 10 months or less.
The principal currencies covered are the German mark, the British pound,
the Japanese yen, the French franc and the Italian lira.
The risk of loss associated with purchased options is limited to premium
amounts paid for the option contracts. The risk of loss associated with
forward contracts is equal to the exchange rate differential from the time the
contract is made until the time it is settled.
Realized and unrealized gains and losses on forward contracts are included
in "other income and expenses".
The discount or premium on forward contracts have been amortized over the
life of the forward contract and included in "net interest expenses".
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
financial instruments with off-balance sheet risks (primarily forward
contracts) and trade receivables.
F-24
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
The Company places its cash and cash equivalents with high credit quality
financial institutions.
The Company controls the credit risks associated with financial instruments
through credit approvals, investment limits and centralized monitoring
procedures but does not normally require collateral or other security from the
parties to the financial instruments with off-balance sheet risk. In the event
of a failure to honor one of the forward contracts by one of the banks with
which the Company has contracted, management believes any loss would be
limited to the exchange rate differential from the time the contract was made.
Concentrations of credit risk with respect to trade receivables are limited
because the Company conducts its operations with customers located throughout
the world. Management believes that receivables are well diversified, thereby
reducing potential credit risk to the Company.
The Company does not anticipate non-performance by counterparties which
could have a significant impact on its financial position or results of
operations.
Foreign currency agreements:
DECEMBER 31,
----------------
1996 1997
------- -------
Forward exchange contracts:
sales.................................................. 236,860 213,468
purchases.............................................. (70,939) (91,751)
Forward exchange contracts.................................. REMAINING
TERM
---------
1 to 10
months
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimates of fair value were obtained using prevailing financial market
information from various valuation techniques as of December 31, 1997. The
methodologies used to estimate fair values 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 these financial instruments were determined 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.
F-25
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
FORWARD EXCHANGE CONTRACTS AND CURRENCY OPTIONS
The fair value of these instruments is the estimated amount that the
Company would receive or pay to settle the related agreements as of December
31, 1996 and 1997 based upon quoted market rates and the creditworthiness of
the counterparties.
DECEMBER 31,
---------------------------------------
1996 1997
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
BALANCE SHEET
Marketable securities............. 6,048 6,048 48,259 48,259
Bank loans (including current
portion)......................... 286,860 270,218 415,021 405,445
OFF-BALANCE SHEET
Forward exchange contracts........ 2,900 (13,833)
25.OTHER COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in various litigations incidental to the normal
conduct of its operations. These litigations mainly include the risks
associated with external patents utilization, investigations, claims from
customers and tax disputes. Management estimates that these contingencies will
not have a material effect on the financial condition or results of operations
of the Company.
OTHER CONTINGENT LIABILITIES
The Company's position on certain tax regulations may differ from the tax
authorities' interpretation, which could result in a tax liability. However,
the Company believes that provisions carried as at December 31, 1997 are
adequate.
26.RELATED PARTY TRANSACTIONS
The main transactions with the shareholders, including THOMSON SA and
THOMSON CSF, and their affiliates were as follows:
DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
Sales............................................ 195,352 232,057 148,172
Research and development expenses................ (17,815) (13,262) (12,794)
Other purchases and expenses..................... (42,237) (48,155) (29,757)
Accounts receivable.............................. 47,154 31,580 17,244
Accounts payable................................. 11,393 10,519 9,745
F-26
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
27.SEGMENT INFORMATION
The Company, operating in a single industry segment, designs, develops,
manufactures and markets a wide variety of semiconductors. Net revenues,
earnings from operations, capital expenditures and identifiable assets
classified by the major geographic areas in which the Company operates are:
OTHER
CORPORATE
AND
AMERICAS ASIA PACIFIC EUROPE ELIMINATION TOTAL
--------- ------------ --------- ----------- ----------
1995
INCOME STATEMENT
Net revenues........... 846,406 1,080,428 1,627,585 -- 3,554,419
Intersegment sales..... 179,767 3,411,776 3,372,542 (6,964,085) --
--------- --------- --------- ---------- ----------
Total.................. 1,026,173 4,492,204 5,000,127 (6,964,085) 3,554,419
Operating profit....... 63,348 242,113 355,208 (9,639) 651,030
Depreciation........... (51,263) (90,450) (250,677) -- (392,390)
Research and
development expenses.. (48,607) (4,875) (386,852) -- (440,334)
CASH FLOW STATEMENT
Capital expenditures... 187,517 204,694 609,725 -- 1,001,936
BALANCE SHEET
Identifiable assets.... 574,730 845,536 2,336,956 728,784 4,486,006
OTHER INFORMATION
Number of employees.... 2,439 7,934 15,150 -- 25,523
Wages and salaries..... (139,640) (120,832) (625,988) -- (886,460)
1996
INCOME STATEMENT
Net revenues........... 934,224 1,363,771 1,824,365 -- 4,122,360
Intersegment sales..... 268,688 3,764,473 5,068,912 (9,102,073) --
--------- --------- --------- ---------- ----------
Total.................. 1,202,912 5,128,244 6,893,277 (9,102,073) 4,122,360
Operating profit....... 3,038 211,998 596,685 (12,299) 799,422
Depreciation........... (77,967) (105,363) (352,211) (367) (535,908)
Research and
development expenses.. (73,710) (7,816) (450,465) (303) (532,294)
CASH FLOW STATEMENT
Capital expenditures... 179,326 165,404 780,305 170 1,125,205
BALANCE SHEET
Identifiable assets.... 686,455 933,115 2,848,124 537,818 5,005,512
OTHER INFORMATION
Number of employees.... 2,555 7,570 15,768 -- 25,893
Wages and salaries..... (166,486) (133,471) (709,821) -- (1,009,778)
F-27
SGS-THOMSON MICROELECTRONICS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Currency--Thousands of U.S. dollars)
OTHER
CORPORATE
AND
AMERICAS ASIA PACIFIC EUROPE ELIMINATION TOTAL
--------- ------------ --------- ----------- ----------
1997
INCOME STATEMENT
Net revenues........... 935,010 1,283,869 1,800,266 -- 4,019,145
Intersegment sales..... 341,578 3,436,876 4,538,097 (8,316,551) --
--------- --------- --------- ---------- ----------
Total.................. 1,276,588 4,720,745 6,338,363 (8,316,551) 4,019,145
Operating profit....... 70 155,238 387,226 (22,715) 519,819
Depreciation........... (109,473) (111,446) (387,139) (65) (608,123)
Research and
development expenses.. (97,484) (8,329) (504,419) (615) (610,847)
CASH FLOW STATEMENT
Capital expenditures... 184,025 158,781 692,600 28 1,035,434
BALANCE SHEET
Identifiable assets.... 789,525 973,212 2,997,917 685,085 5,445,739
OTHER INFORMATION
Number of employees.... 2,741 8,451 17,536 -- 28,728
Wages and salaries..... (167,495) (141,310) (716,422) -- (1,025,227)
In the above information, sales include local sales and exports made by
operations within each area. Total sales by geographic area include sales to
unaffiliated customers and international transfers. To control costs, a
substantial portion of the Company's products are transported among the U.S.,
Asia and Europe while in the process of being manufactured and sold. Sales to
customers have little correlation with the location of manufacture. As a
global participant in the semiconductor industry, the Company's business is
subject to risks beyond its control, such as instability of foreign economies
and governments and changes in law and politics affecting trade and
investments.
28.SUBSEQUENT EVENTS (UNAUDITED)
On May 18, 1998, the Annual General Meeting of the Company voted to change
the name of the Company to STMicroelectronics NV.
On June 10, 1998, the Company completed a global offering of 3,000,000
shares of capital stock at $72.1875 per share. The net proceeds to the Company
in connection with the offering of capital stock were approximately $208
million. On June 10, 1998, the Company also completed a public offering of
$432 million aggregate initial principal amount of zero-coupon convertible
Liquid Yield Option (TM) Notes due 2008 (the "LYONs") with yield to maturity
of 1.75%. The net proceeds to the Company in connection with the LYONs
offering was approximately $423 million.
In addition, in connection with the offering of shares, the shares of the
Company were approved for quotation on the Italian Stock Exchange.
The Company has implemented an Employee Stock Plan whereby employees have
been given the opportunity to purchase shares of the Company's capital stock
at a 12% discount from the public offering price used in the Offering
completed June 10, 1998, subject to a six-month holding period expiring on
December 10, 1998. The subscription period ended on June 10, 1998 and payment
for the shares is expected to occur prior to the expiry of the holding period.
F-28
STMICROELECTRONICS N.V.
VALUATION AND QUALIFYING ACCOUNTS
(CURRENCY -- THOUSANDS OF U.S. DOLLARS)
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING TRANSLATION AND END OF
OF PERIOD ADJUSTMENT EXPENSES DEDUCTIONS PERIOD
---------- ----------- -------- ---------- ----------
VALUATION AND QUALIFYING
ACCOUNTS
DEDUCTED FROM THE
RELATED ASSET ACCOUNTS
1997
Inventories........... 45,176 -- 68,182 (45,176) 68,182
Accounts Receivable... 18,152 (1,902) 7 (1,029) 15,228
1996
Inventories........... 36,500 -- 45,176 (36,500) 45,176
Accounts Receivable... 17,881 (514) 1,114 (329) 18,152
1995
Inventories........... 29,982 -- 36,500 (29,982) 36,500
Accounts Receivable... 14,018 691 3,467 (295) 17,881
II-130, 1999.
63
CERTAIN TERMS
ASD......................... application-specific discrete technology
ASIC........................ application-specific IC
ASSP........................ application-specific standard product
ATM......................... asynchronous transfer mode
BCD......................... bipolar, CMOS and DMOS process technology
BiCMOS...................... bipolar and CMOS process technology
CAD......................... computer aided design
CIM......................... computer integrated manufacturing
CMOS........................ complementary metal oxide silicon
DMOS........................ diffused metal oxide silicon
DRAMS....................... dynamic random access memory
DSP......................... digital signal processor
EEPROM...................... electrically erasable programmable read-only memory
EPROM....................... erasable programmable read-only memory
HCMOS....................... high-speed complementary metal-oxide-silicon
IC.......................... integrated circuit
IGBT........................ insulated gate bipolar transistors
ISDN........................ integrated services digital network
Kbit........................ kilobit
Mbit........................ megabit
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........................ veryASD.......................application-specific discrete technology
ASIC......................application-specific IC
ASSP......................application-specific standard product
ATM.......................asynchronous transfer mode
BCD.......................bipolar, CMOS and DMOS process technology
BiCMOS....................bipolar and CMOS process technology
CAD.......................computer aided design
CIM.......................computer integrated manufacturing
CMOS......................complementary metal oxide silicon
DMOS......................diffused metal oxide silicon
DRAMS.....................dynamic random access memory
DSP.......................digital signal processor
EEPROM....................electrically erasable programmable read-only memory
EPROM.....................erasable programmable read-only memory
GPS.......................global positioning system
HCMOS.....................high-speed complementary metal-oxide-silicon
IC........................integrated circuit
IGBT......................insulated gate bipolar transistors
ISDN......................integrated services digital network
Kbit......................kilobit
Mbit......................megabit
MCUs......................microcontrollers units
MIPS......................million instructions per second
MOS.......................metal oxide silicon process technology
MOSFET....................metal oxide silicon field effect transistor
MPEG......................motion picture experts group
NVRAM.....................nonvolatile SRAM
OEM.......................original equipment manufacturer
OTP.......................one-time programmable
PROM......................programmable read-only memory
RAM.......................random access memory
RF........................radio frequency
RISC......................reduced instruction set computing
ROM.......................read-only memory
SAM.......................serviceable available market
SLIC......................subscriber line interface card
SPC.......................statistical process control
SRAM......................static random access memory
STB.......................set-top box
TAM.......................total available market
VLSI......................very large scale integration
II-264
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STMICROELECTRONICS N.V.
/s/ Pasquale Pistorio
Date: June 29, 199830, 1999
By: _________________________________/S/ PASQUALE PISTORIO
---------------------------------
Name: Pasquale Pistorio
Title: President and Chief Executive Officer
II-365
STMICROELECTRONICS N.V.
VALUATION AND QUALIFYING ACCOUNTS
(Currency - Thousands of U.S. dollars)
Valuation and qualifying accounts deducted Balance as Charged to Balance at
from the related asset accounts beginning Translation costs and end of
of period adjustment expenses Deductions period
---------- ----------- ---------- ------------ ----------
1998
Inventories.................................. 68,182 - 53,955 (68,182) 53,955
Accounts Receivable ......................... 15,228 89 (3,741) (1,082) 10,494
1997
Inventories.................................. 45,176 - 68,182 (45,176) 68,182
Accounts Receivable.......................... 18,152 (1,902) 7 (1,029) 15,228
1996
Inventories.................................. 36,500 - 45,176 (36,500) 45,176
Accounts Receivable.......................... 17,881 (514) 1,114 (329) 18,152
S-1
Report of Independent Accountants on
Financial Statement Schedule
To the Supervisory Board of STMicroelectronics NV
Our audits of the consolidated financial statements referred to in our
report dated January 25, 1999 appearing on page 58 of the 1998 Annual
Report to Shareholders of STMicroelectronics NV (which report and
consolidated financial statements are incorporated by reference in
this Annual Report on Form 20-F) also included an audit of the
financial statement schedule listed in Item 19 of this Form 20-F. In
our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers NV
Amsterdam, The Netherlands
January 25, 1999
S-2
INDEX TO EXHIBITS
NAME PAGE
---- ----
23(a) Consent of Arthur Andersen & Co.
23(b) Consent of Price Waterhouse Nederland BV.
Name Page
---------- ------
3.(i) Articles of Association, as amended as of June 16, 1999,
of the Company
10 Option Agreement, signed May 31, 1999 between the Company and
STMicroelectronics Holding II B.V............................
23 Consent of PricewaterhouseCoopers NV.........................