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o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2005 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Date of event requiring this shell company report |
Not Applicable (Translation of registrant’s name into English) | The Netherlands (Jurisdiction of incorporation or organization) |
Title of Each Class: | Name of Each Exchange on Which Registered: | |
Common shares, nominal value€1.04 per share | New York Stock Exchange |
Page | ||||||||
PRESENTATION OF FINANCIAL AND OTHER INFORMATION | 3 | |||||||
PART I | 5 | |||||||
Identity of Directors, Senior Management and Advisers | 5 | |||||||
Offer Statistics and Expected Timetable | 5 | |||||||
Key Information | 5 | |||||||
Information on the Company | 22 | |||||||
Operating and Financial Review and Prospects | 51 | |||||||
Directors, Senior Management and Employees | 87 | |||||||
Major Shareholders and Related-Party Transactions | 109 | |||||||
Financial Information | 116 | |||||||
Listing | 120 | |||||||
Additional Information | 126 | |||||||
Quantitative and Qualitative Disclosures About Market Risk | 143 | |||||||
Description of Securities Other Than Equity Securities | 145 | |||||||
PART II | 146 | |||||||
Defaults, Dividend Arrearages and Delinquencies | 146 | |||||||
Material Modifications to the Rights of Security Holders and Use of Proceeds | 146 | |||||||
Controls and Procedures | 146 | |||||||
Audit Committee Financial Expert | 146 | |||||||
Code of Ethics | 146 | |||||||
Principal Accountant Fees and Services | 146 | |||||||
Exemptions from the Listing Standards for Audit Committees | 147 | |||||||
Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 148 | |||||||
PART III | 149 | |||||||
Financial Statements | 149 | |||||||
Financial Statements | 149 | |||||||
Exhibits | 149 | |||||||
SIGNATURES | 152 | |||||||
EX-1 | ||||||||
EX-8.1 | ||||||||
EX-12.1 | ||||||||
EX-12.2 | ||||||||
EX-13.1 | ||||||||
EX-14.A |
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• | future developments of the world semiconductor market, in particular the future demand for semiconductor products in the key application markets and from key customers served by our products; | |
• | pricing pressures, losses or curtailments of purchases from key customers; | |
• | the financial impact of inadequate or excess inventories if actual demand differs from our anticipations; | |
• | changes in the exchange rates between the U.S. dollar and the euro and between the U.S. dollar and the currencies of the other major countries in which we have our operating infrastructure; | |
• | our ability to be successful in our strategic research and development initiatives to develop new products to meet anticipated market demand, as well as our ability to achieve our corporate performance roadmap by completing successfully and in a timely manner our other various announced initiatives to improve our overall efficiency and our financial performance; | |
• | the anticipated benefits of research and development alliances and cooperative activities and the continued pursuit of our various alliances, in the field of development of new advanced technologies or products; | |
• | the ability of our suppliers to meet our demands for products and to offer competitive pricing; | |
• | changes in the economic, social or political environment, as well as natural events such as severe weather, health risks, epidemics or earthquakes in the countries in which we and our key customers operate; | |
• | changes in our overall tax position as a result of changes in tax laws or the outcome of tax audits; |
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• | product liability or warranty claims for a product containing one of our parts; and | |
• | our ability to obtain required licenses on third-party intellectual property, the outcome of litigation and the results of actions by our competitors. |
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Item 1. | Identity of Directors, Senior Management and Advisers |
Item 2. | Offer Statistics and Expected Timetable |
Item 3. | Key Information |
Year Ended December 31, | |||||||||||||||||||||
2005(1) | 2004(1) | 2003(1) | 2002(1) | 2001(1) | |||||||||||||||||
(In millions except per share and ratio data) | |||||||||||||||||||||
Consolidated Statement of Income Data: | |||||||||||||||||||||
Net sales | $ | 8,876 | $ | 8,756 | $ | 7,234 | $ | 6,270 | $ | 6,304 | |||||||||||
Other revenues | 6 | 4 | 4 | 48 | 53 | ||||||||||||||||
Net revenues | 8,882 | 8,760 | 7,238 | 6,318 | 6,357 | ||||||||||||||||
Cost of sales | (5,845 | ) | (5,532 | ) | (4,672 | ) | (4,020 | ) | (4,047 | ) | |||||||||||
Gross profit | 3,037 | 3,228 | 2,566 | 2,298 | 2,310 | ||||||||||||||||
Operating expenses: | |||||||||||||||||||||
Selling, general and administrative | (1,026 | ) | (947 | ) | (785 | ) | (648 | ) | (641 | ) | |||||||||||
Research and development(2) | (1,630 | ) | (1,532 | ) | (1,238 | ) | (1,022 | ) | (978 | ) | |||||||||||
Other income and expenses, net(2) | (9 | ) | 10 | (4 | ) | 7 | (6 | ) | |||||||||||||
Impairment, restructuring charges and other related closure costs | (128 | ) | (76 | ) | (205 | ) | (34 | ) | (346 | ) | |||||||||||
Total operating expenses | (2,793 | ) | (2,545 | ) | (2,232 | ) | (1,697 | ) | (1,971 | ) | |||||||||||
Operating income | 244 | 683 | 334 | 601 | 339 | ||||||||||||||||
Interest income (expense), net | 34 | (3 | ) | (52 | ) | (68 | ) | (13 | ) | ||||||||||||
Loss on equity investments | (3 | ) | (4 | ) | (1 | ) | (11 | ) | (5 | ) | |||||||||||
Loss on extinguishment of convertible debt | — | (4 | ) | (39 | ) | — | — | ||||||||||||||
Income before income taxes and minority interests | 275 | 672 | 242 | 522 | 321 | ||||||||||||||||
Income tax benefit (expense) | (8 | ) | (68 | ) | 14 | (89 | ) | (61 | ) | ||||||||||||
Income before minority interests | 267 | 604 | 256 | 433 | 260 | ||||||||||||||||
Minority interests | (1 | ) | (3 | ) | (3 | ) | (4 | ) | (3 | ) | |||||||||||
Net income | $ | 266 | $ | 601 | $ | 253 | $ | 429 | $ | 257 | |||||||||||
Earnings per share (basic) | $ | 0.30 | $ | 0.67 | $ | 0.29 | $ | 0.48 | $ | 0.29 | |||||||||||
Earnings per share (diluted) | $ | 0.29 | $ | 0.65 | $ | 0.27 | $ | 0.48 | $ | 0.29 | |||||||||||
Number of shares used in calculating earnings per share (basic) | 892.8 | 891.2 | 888.2 | 887.6 | 893.3 | ||||||||||||||||
Number of shares used in calculating earnings per share (diluted) | 935.6 | 935.1 | 937.1 | 893.0 | 902.0 |
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Year Ended December 31, | ||||||||||||||||||||
2005(1) | 2004(1) | 2003(1) | 2002(1) | 2001(1) | ||||||||||||||||
(In millions except per share and ratio data) | ||||||||||||||||||||
Consolidated Balance Sheet Data (end of period): | ||||||||||||||||||||
Cash and cash equivalents(1) | $ | 2,027 | $ | 1,950 | $ | 2,998 | $ | 2,564 | $ | 2,444 | ||||||||||
Total assets | 12,439 | 13,800 | 13,477 | 12,004 | 10,798 | |||||||||||||||
Short-term debt (including current portion of long-term debt) | 1,533 | 191 | 151 | 165 | 130 | |||||||||||||||
Long-term debt (excluding current portion)(1) | 269 | 1,767 | 2,944 | 2,797 | 2,772 | |||||||||||||||
Shareholders’ equity(1) | 8,480 | 9,110 | 8,100 | 6,994 | 6,075 | |||||||||||||||
Capital stock(3) | 3,120 | 3,074 | 3,051 | 3,008 | 2,978 | |||||||||||||||
Other Data: | ||||||||||||||||||||
Dividends per share | $ | 0.12 | $ | 0.12 | $ | 0.08 | $ | 0.04 | $ | 0.04 | ||||||||||
Capital expenditures(4) | 1,441 | 2,050 | 1,221 | 995 | 1,700 | |||||||||||||||
Net cash provided by operating activities | 1,798 | 2,342 | 1,920 | 1,713 | 2,057 | |||||||||||||||
Depreciation and amortization(4) | 1,944 | 1,837 | 1,608 | 1,382 | 1,320 | |||||||||||||||
Net debt (cash) to total shareholders’ equity ratio(5) | (0.026 | ) | 0.001 | 0.012 | 0.057 | 0.075 |
(1) | On November 16, 2000, we issued $2,146 million initial aggregate principal amount of zero-coupon senior convertible bonds due 2010 (the “2010 Bonds”), for net proceeds of $1,458 million; in 2003, we repurchased on the market approximately $1,674 million aggregate principal amount at maturity of 2010 Bonds. During 2004, we completed the repurchase of our 2010 Bonds and repurchased on the market approximately $472 million aggregate principal amount at maturity for a total amount paid of $375 million. In 2001, we redeemed the remaining $52 million of our outstanding Liquid Yield Option Notes due 2008 (our “2008 LYONs”) and converted them into common shares in May and June 2001. In 2001, we repurchased 9,400,000 common shares for $233 million, and in 2002, we repurchased an additional 4,000,000 shares for $115 million. We reflected these purchases at cost as a reduction of shareholders’ equity. The repurchased shares have been designated to fund share compensation granted to employees under our 2001 employee stock plan and may be used for subsequent grants. In August 2003, we issued $1,332 million principal amount at maturity of our 2013 Bonds with a negative yield of 0.5% that resulted in a higher principal amount at issuance of $1,400 million and net proceeds of $1,386 million. During 2004, we repurchased all of our outstanding Liquid Yield Option Notes due 2009 (our “2009 LYONs”) for a total amount of cash paid of $813 million. |
(2) | “Other income and expenses, net” includes, among other things, funds received through government agencies for research and development expenses, the cost of new production facilitiesstart-ups, foreign currency gains and losses, gains on sales of marketable securities, the costs of certain activities relating to intellectual property and, for periods prior to 2002, goodwill amortization. Our reported research and development expenses are mainly in the areas of product design, technology and development, and do not include marketing design center costs, which are accounted for as selling expenses, or process engineering, pre-production and process-transfer costs, which are accounted for as cost of sales. |
(3) | Capital stock consists of common stock and capital surplus. |
(4) | Capital expenditures are net of certain funds received through government agencies, the effect of which is to decrease depreciation. |
(5) | Net debt (cash) to total shareholders’ equity ratio is a non-U.S. GAAP financial measure. The most directly comparable U.S. GAAP financial measure is considered to be “Debt-to-Equity Ratio”. However, this ratio measures gross debt relative to equity, and does not reflect the current cash position of the Company. We believe that our net debt (cash) to total shareholders’ equity ratio is useful to investors as a measure of our financial position and leverage. The ratio is computed on the basis of our net financial position divided by total shareholders’ equity. Our net financial position is the difference between our total cash position (cash and cash equivalents) net of total financial debt (bank overdrafts, current portion of long-term debt and long-term debt). For more information on our net financial position, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Capital Resources — Net financial position”. Our computation of net debt (cash) to total shareholders’ equity ratio may not be consistent with that of other companies, which could make comparability difficult. |
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The semiconductor industry is highly cyclical and periodic downturns in the semiconductor industry affect our business and results of operations. |
Increases in production capacity for semiconductor products may lead to overcapacity, which in turn may lead to plant closures, asset impairments, restructuring charges and inventory write-offs. |
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Competition in the semiconductor industry is intense, and we may not be able to compete successfully if our product design technologies, process technologies and products do not meet market requirements. |
• | price; | |
• | technical performance; | |
• | product features; | |
• | product system compatibility; | |
• | product design and technology; | |
• | timely introduction of new products; | |
• | product availability; | |
• | manufacturing yields; and | |
• | sales and technical support. |
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Semiconductor and other products we design and manufacture are characterized by rapidly changing technology, and our success depends on our ability to develop and manufacture complex products cost- effectively and to scale. |
The competitive environment of the semiconductor industry may lead to further measures to improve our competitive position and cost structure, which in turn may result in loss of revenues, asset impairments and/or capital losses. |
The competitive environment of the semiconductor industry may lead to conditions in which we may seek to acquire a competitor or become an acquisition target. |
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Our research and development efforts are increasingly expensive and dependent on alliances, and our business, results of operations and prospects could be materially adversely affected by the failure or termination of such alliances in developing new process technologies in line with market requirements. |
Loss of key employees could hurt our competitive position. |
In difficult market conditions, our high fixed costs adversely impact our results. |
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Our financial results can be adversely affected by fluctuations in exchange rates, principally in the value of the U.S. dollar. |
Because we have our own manufacturing facilities, our capital needs are high compared to competitors who do not produce their own products. |
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We may also need additional funding in the coming years to finance our investments, or purchase other companies or technologies developed by third parties. |
Our operating results may vary significantly from quarter to quarter and annually and may differ significantly from our expectations or guidance. |
• | performance of our key customers in the markets they serve; | |
• | order cancellations or reschedulings by customers; | |
• | excess inventory held by customers leading to reduced bookings or product returns by key customers; | |
• | manufacturing capacity and utilization rates; | |
• | restructuring and impairment charges; | |
• | fluctuations in currency exchange rates, particularly between the U.S. dollar and other currencies in jurisdictions where we have activities; | |
• | intellectual property developments; | |
• | changes in distribution and sales arrangements; | |
• | failure to win new design projects; | |
• | manufacturing performance and yields; | |
• | product liability or warranty claims; | |
• | litigation; | |
• | acquisitions or divestitures; | |
• | problems in obtaining adequate raw materials or production equipment on a timely basis; and | |
• | property damage or business interruption losses resulting from a catastrophic event not covered by insurance. |
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Our business is dependent in large part on continued growth in the industries and segments into which our products are sold and in our ability to attract and retain new customers. A market decline in any of these industries or our inability to attract new customers could have a material adverse effect on our results of operations. |
• | spending levels of telecommunications equipment and/or automotive providers; | |
• | development of new consumer products or applications requiring high semiconductor content; | |
• | evolving industry standards; | |
• | the rate of adoption of new or alternative technologies; and | |
• | demand for automobiles, consumer confidence and general economic conditions. |
Our operating results can also vary significantly due to impairment of goodwill and other intangible assets incurred in the course of acquisitions, as well as to impairment of tangible assets due to changes in the business environment. |
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Disruptions in our relationships with any one of our key customers could adversely affect our results of operations. |
Because we depend on a limited number of suppliers for raw materials and certain equipment, we may experience supply disruptions if suppliers interrupt supply or increase prices. |
Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities, disruptions or inefficient implementation of production changes that can significantly increase our costs and delay product shipments to our customers. |
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We may be faced with product liability or warranty claims. |
If our outside foundry suppliers fail to perform, this could adversely affect our ability to exploit growth opportunities. |
We depend on patents to protect our rights to our technology. |
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Some of our production processes and materials are environmentally sensitive, which could lead to increased costs due to environmental regulations or to damage to the environment. |
We operate in many jurisdictions with highly complex and varied tax regimes. Changes in tax rules or the outcome of tax assessments and audits could cause a material adverse effect on our results. |
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We are required to prepare consolidated financial statements using both International Financial Reporting Standards (“IFRS”) beginning with our 2005 results in addition to our consolidated financial statements prepared pursuant to Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) and dual reporting may impair the clarity of our financial reporting. |
Certain accounting principles of U.S. GAAP are in flux and may lead to significant changes in the way we account for our convertible debt instruments. These changes may lead to significant changes in our financial statements. |
Changes in the accounting treatment of stock options and other share-based compensation could adversely affect our results of operations. |
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Our common share price, operating results, net income, net income per share and net financial position may be negatively affected by potential acquisitions. |
• | the diversion of management’s attention; | |
• | the integration of acquired company operations and personnel; | |
• | 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; | |
• | the risk that the financial and accounting systems utilized by the business acquired will not meet our standards; | |
• | the risk that the businesses acquired will not maintain the quality of products and services that we have historically provided; | |
• | whether we are able to attract and retain qualified management for the acquired business; | |
• | whether we are able to retain customers of the acquired entity; and | |
• | the risk of goodwill and other intangible asset impairment, due to the inability of the business to meet management’s expectations at the time of the acquisition. |
Reduction in the amount of state funding available to us or demands for repayment may increase our costs and impact our results of operations. |
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The interests of our controlling shareholders, which are in turn controlled respectively by the French and Italian governments, may conflict with investors’ interests. |
Our shareholder structure and our preference shares may deter a change of control. |
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Our direct or indirect shareholders may sell our existing common shares or issue financial instruments exchangeable into our common shares at any time while at the same time seeking to retain their rights regarding our preference shares. In addition, substantial sales by us of new common shares or convertible bonds could cause our common share price to drop significantly. |
Because we are a Dutch company subject to the corporate law of the Netherlands, U.S. investors might have more difficulty protecting their interests in a court of law or otherwise than if we were a U.S. company. |
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Removal of our common shares from the CAC 40 on Euronext Paris, the S&P/ MIB on the Borsa Italiana or the Philadelphia Stock Exchange Semiconductor Sector Index could cause the market price of our common shares to drop significantly. |
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Item 4. | Information on the Company |
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• | the Application Specific Product Group (“ASG”) segment, comprised of three product lines — our Home, Personal and Communication Products (“HPC”), our Computer Peripherals Products (“CPG”) and our Automotive Products (“APG”). Our HPC products are comprised of the telecommunications and the audio divisions from the former Telecommunications, Peripherals and Automotive Groups combined with the consumer group from the former Consumer Microcontroller Groups. Our CPG products cover computer peripherals products, specifically disk drives and printers, and our APG products now comprise all of our major complex products related to automotive applications formerly within the automotive group of Telecommunications, Peripherals and Automotive Groups and in other product groups (notably from the former Discrete and Standard ICs Group and the Microcontroller Group); | |
• | the Memory Products Group (“MPG”) segment, comprised of our memories and Smart card businesses; and | |
• | the Micro, Linear and Discrete Product Group (“MLD”) segment, comprised of the greater part of our former Discrete and Standard ICs Group and our standard microcontroller and industrial devices (including the programmable systems memories (“PSM”) division previously forming part of MPG). |
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Year Ended December 31, | |||||||||||||
2005 | 2004 | 2003 | |||||||||||
(In millions, except percentages) | |||||||||||||
Net Revenues by Product Segment | |||||||||||||
Application Specific Product Group Segment (ASG) | $ | 4,991 | $ | 4,902 | $ | 4,405 | |||||||
Memory Products Group Segment (MPG) | 1,948 | 1,887 | 1,294 | ||||||||||
Micro, Linear and Discrete Product Group Segment (MLD) | 1,882 | 1,902 | 1,469 | ||||||||||
Others(1) | 61 | 69 | 70 | ||||||||||
Total | $ | 8,882 | $ | 8,760 | $ | 7,238 | |||||||
Net Revenues by Location of Order Shipment(2) | |||||||||||||
Europe(3) | $ | 2,789 | $ | 2,827 | $ | 2,306 | |||||||
North America | 1,141 | 1,211 | 985 | ||||||||||
Asia Pacific | 4,063 | 3,711 | 3,190 | ||||||||||
Japan | 307 | 403 | 337 | ||||||||||
Emerging Markets(3)(4) | 582 | 608 | 420 | ||||||||||
Total | $ | 8,882 | $ | 8,760 | $ | 7,238 | |||||||
Net Revenues by Product Segment | |||||||||||||
Application Specific Product Group Segment (ASG) | 56.2 | % | 56.0 | % | 60.9 | % | |||||||
Memory Products Group Segment (MPG) | 21.9 | 21.5 | 17.9 | ||||||||||
Micro, Linear and Discrete Product Group Segment (MLD) | 21.2 | 21.7 | 20.3 | ||||||||||
Others(1) | 0.7 | 0.8 | 0.9 | ||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||||||
Net Revenues by Location of Order Shipment(2) | |||||||||||||
Europe(3) | 31.4 | % | 32.3 | % | 31.9 | % | |||||||
North America | 12.8 | 13.8 | 13.6 | ||||||||||
Asia Pacific | 45.7 | 42.4 | 44.1 | ||||||||||
Japan | 3.5 | 4.6 | 4.6 | ||||||||||
Emerging Markets(3)(4) | 6.6 | 6.9 | 5.8 | ||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||||||
(1) | Includes revenues from sales of subsystems and other revenues not allocated to product segments. |
(2) | Net revenues by location of order shipment are classified by location of customer invoiced. For example, products ordered by companies to be invoiced to Asia Pacific affiliates are classified as Asia Pacific revenues. |
(3) | Since January 1, 2005, the region “Europe” includes the former East European countries that joined the EU in 2004. These countries were part of the Emerging Markets region in the previous periods. Net revenues for Europe and Emerging Markets for prior periods were restated to include such countries in the Europe region for such periods. |
(4) | Emerging Markets in 2005 included markets such as India, Latin America, the Middle East and Africa, Europe (non-EU and non-EFTA) and Russia. |
• | the changing long-term structural growth of the overall market for semiconductor products; | |
• | the strong development of new emerging applications in areas such as wireless communications, solid state storage, digital TV and video products and games; |
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• | the increasing importance of the Asia Pacific region and emerging countries, particularly China, which represents the fastest growing regional market; | |
• | the importance of convergence between wireless consumer and computer applications, which drives customer demand for new system-level, turnkey solutions; and | |
• | the evolution of the customer base from original equipment manufacturers (“OEM”) to a mix of OEM, electronic manufacturing service providers (“EMS”) and original design manufacturers (“ODM”). |
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• | Application Specific Product Group segment; | |
• | Memory Products Group segment; and | |
• | Micro, Linear and Discrete Product Group segment. |
Home, Personal and Communication Products |
(a) Cellular Communications Division. We focus our product offerings on cellular phones serving several major OEMs, with differentiated ICs. In this market, we are strategically positioned in energy management, audio coding and decoding function (“CODEC”) and radio frequency ICs. In February 2005, we decided to stop work on a reference design chipset for the GSM/ GPRS market. Research and development engineers dedicated to this program were redeployed to other wireless projects. We ship mobile phone energy-management devices in volume to two of the world’s top five OEMs. We are transitioning from ICs to modules in the field of radio frequency and energy management for 3G telephones, which results in a higher content of semiconductors expressed in U.S. dollars. In addition, we are currently developing ASIC solutions for use in 3G basebands for the OEM marketplace. | |
(b) Application Processor Division. We offer a family of products addressing the market for multimedia application processor chips, known as the “Nomadik” family of products. These products are designed for 2.5/3G mobile phones, portable wireless products and other applications, and the chips are being sampled by a wide range of potential customers. We have several design wins in 2.5/3G mobile phones for tier-one European and Asian customers for smart phones and feature phones. | |
(c) Imaging Division. Our Imaging Division focuses on the wireless handset image sensor market. We are in production of CMOS, camera modules and processors for video graphic arrays (“VGA”), 1 and 2 mega pixels. We have cumulatively shipped over 100 million CMOS camera phone solutions since entering this market in 2003. According to Prismark, we were the number one camera module manufacturer for 2005. | |
(d) Connectivity Division. To respond to the market need for increased functionality of handsets, we created the Connectivity Division to address wireless LAN, Bluetooth and connectivity requirements. Our product offerings include Wireless LAN and Bluetooth chips designed for low power consumption and a small form factor. We have multiple design wins and volume production for several customers in Asia and Europe for our bluetooth and wireless products. In particular, we have started to manufacture in volume our |
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single-chip STLC2500A Bluetooth IC for multiple cellular phones and our single-chip Enhanced-Data-Rate STLC2500C with V2.0 capability has been adopted in more than 15 mobile-phone designs by several customers, including a tier-one cellphone manufacturer. Additionally, volume production has started on our compact STLC4370 IEEE802.11g wireless local area network (“WLAN”) module IC, which is being used in a new cellular phone from a tier-one manufacturer. |
(a) Home Video Division. This division aims at retail and satellite set-top box products and digital television offerings. We continued to expand our product offerings and customer base by introducing solutions for the set-top box market with features such as web-browsing, digital video recording and time-shifting capabilities. We reinforced the market leadership of our OMEGA family of set-top box back-end decoders with the introduction of the STi710x series of products, the latest member of our OMEGA family of set-top box decoder solutions. This family of single chip SoC device addresses the high definition market, performs at an advanced speed and has enhanced graphics and security features as well as integrated DVR capability, while retaining compatibility with our earlier products. We continue to strengthen our product offerings by addressing software solutions supporting multiple codes, including DVB-MHP (Java) and Microsoft Windows Media based systems. |
(b) Cable and IP Division. We offer products designed specifically for the cable and IP set-top box markets that take advantage of our significant expertise, product know-how and years of experience in supplying operator supported video markets. Our latest products in standard definition and high definition are designed to serve the evolving requirements in the growing global cable segment and the emerging IP set-top box market and we have multiple design wins in these areas. | |
(c) Home Display Peripherals Division. This division offers products aimed at the analog TV market, switches and sound processors as well as CRT monitors. | |
(d) Audio Division. We design and manufacture a wide variety of components for use in audio applications. Our audio products include audio power amplifiers, audio processors and graphic-equalizer ICs. We recently introduced a family of class ‘D’ audio amplifier offerings that improve sound quality while reducing power consumption, size and cost aimed primarily at home, desktop and mobile applications. |
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(a) Wireless Infrastructure Division. We formed the Wireless Communications Infrastructure division to develop dedicated infrastructure chip solutions that will be focused on primarily the new third-generation telecom standards, but supporting existing standards as well. We have already developed all of the technologies required for the wireless infrastructure ASIC market due to our many years of experience in the fields of digital baseband chip, radio frequency and mixed signal products. |
(b) Wireline Infrastructure Division. Our wireline telecommunications products, both ASIC and ASSP, are used in telephone sets, modems, subscriber line interface cards (“SLICs”) for digital central office switching equipment and the high-speed electronic and optical communications networks. In January 2005, we announced that we would scale back our presence in the CPE ADSL modem market. This initiative resulted in an impairment charge of $61 million and was recorded in the first quarter of 2005. | |
(c) Display Division. We offer products for the monitor and television peripheral market, as well as plasma display drivers and small-scale displays. Our display drivers address a number of display solutions, including thin film transistors, liquid crystal displays and organic light emitting diodes. |
Computer Peripherals Products |
Automotive Products |
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Memory Products Group Segment |
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Micro, Linear and Discrete Product Group Segment |
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Telecommunications | ||||||||
Customers: | 2Wire | Finisar | Nokia | Sagem | ||||
Alcatel | Huawei | Nortel Networks | Siemens | |||||
Cellon | LG Electronics | Philips | Sony Ericsson | |||||
Cisco | Motorola | Sanyo | TCL Corporation | |||||
Portable multimedia Telephone terminals (wireline and | ||||||||
Applications: | Camera modules/ mobile imaging Central office switching systems Data transport (routing, switching for electronic and optical networks) Digital cellular telephones Internet access (XDSL) | wireless) Wireless connectivit WLAN, FM radio) Wireless infrastruct | y (Bluetooth, ure | |||||
Computer Peripherals | ||||||||
Customers: | Agilent | Delta | Lexmark | Samsung | ||||
BenQ | Hewlett-Packard | Logitech | Seagate | |||||
Creative Technology | Intel | Maxtor | Western Digital | |||||
Dell | Lenovo-IBM | Microsoft | Xerox | |||||
Applications: | Data storage Monitors and displays | Power management Printers Webcams | ||||||
Automotive | ||||||||
Customers: | Alpine | Denso | Marelli | Sirius | ||||
Bosch | Harman | Motorola | Valeo | |||||
Conti | Hella | Pioneer | Visteon | |||||
Delphi | Lear | Siemens | XM Satellite | |||||
Applications: | Airbags Anti-lock braking systems Body and chassis electronics Engine management systems (ignition and injection) | Global positioning systems Multimedia Radio/ satellite radio Telematics Vehicle stability control | ||||||
Consumer | ||||||||
Customers: | Bose Corporation | LG Electronics | Pace | Skardin | ||||
Echostar | Matsushita | Philips | Sony | |||||
Humax | Microsoft | Samsung | Thomson | |||||
Kenwood | Motorola | Scientific Atlanta | Tomen Vestel | |||||
Applications: | Audio processing (CD, DVD, Hi-Fi) | DVDs Imaging | ||||||
Analog/ digital TVs | Set-top boxes | |||||||
Digital cameras | VCRs | |||||||
Digital music players | ||||||||
Industrial/ Other Applications | ||||||||
Customers: | American Power Conversion | Delta | Gillette | Philips | ||||
Astec | Echelon | Hewlett-Packard | Siemens | |||||
Autostrade | Enel | Nagra | Toppan | |||||
Axalto | Gemplus | Oberthur | Taiwan Liton | |||||
Applications: | Battery chargers Smart card ICs Industrial automation/ control systems Intelligent power switches | Lighting systems (lamp ballasts) Motor controllers Power supplies Switch mode power supplies |
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Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(In millions, except percentages) | ||||||||||||
Expenditures | $ | 1,630 | $ | 1,532 | $ | 1,238 | ||||||
As a percentage of net revenues | 18.3 | % | 17.5 | % | 17.1 | % |
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• | Soft Computing, in which a variety of problem-solving techniques such as fuzzy logic, neural networks and genetic algorithms are applied to situations where the knowledge is inexact or the computational resources required to obtain a complete solution would be excessive using traditional computing architectures. Potential applications include more effective automotive engine control, emerging fuel cell technology and future quantum computing techniques that will offer much greater computational speeds than are currently achievable; | |
• | Nano-Organics, which encompasses a variety of emerging technologies that deal with structures smaller than the deep sub-micron scale containing as little as a few hundred or thousand atoms. Examples include carbon nanotubes, which have potential applications in displays and memories, and all applications that involve electronic properties of large molecules such as proteins; and | |
• | Micro-Machining, in which the ability to precisely control the mechanical attributes of silicon structures is exploited. There are many potential applications, including highly sensitive pressure and acceleration sensors, miniature microphones, microfluidic devices and optical devices. In addition, along with its optical properties, the mechanical properties of silicon represent one of the most important links between conventional SoC technology and all the emerging technologies such as bioelectronics that can benefit our semiconductor expertise. |
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• | Two in the area of consumer: set-top boxes, ranging from digital terrestrial, to cable, and satellite to Internet Protocol based devices, and Integrated Digital TV, which will include the expected promising new wave of High-Definition sets; | |
• | One in the area of computer peripherals: the SPEAr family of re-configurable SoC ICs for printers and related applications; and | |
• | Two in the area of wireless: Application Processors, namely our Nomadik platform that is bringing multimedia to the next-generation mobile devices and Wireless Infrastructure for 3-G base-stations. |
Location | Products | Technologies | ||
Front-end facilities | ||||
Crolles1, France | Application specific products | Fab: 200-mm CMOS and BiCMOS, research and development on VLSI sub-micron technologies | ||
Crolles2, France(1) | Dedicated products and leading edge logic products | Fab: 300-mm research and development on deep sub-micron (90-nm and below) CMOS and system-on-chip (“SoC”) technology development | ||
Phoenix, Arizona | Dedicated products and microcontrollers | Fab: 200-mm CMOS, BiCMOS, BCD |
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Location | Products | Technologies | ||
Agrate, Italy | Nonvolatile memories, microcontrollers and dedicated products | Fab 1: 150-mm BCD, nonvolatile memories, MEMS. (converting to 200-mm) Fab 2: 200-mm Flash, embedded Flash, research and development on nonvolatile memories and BCD technologies | ||
Rousset, France | Microcontrollers, nonvolatile memories and Smart card ICs and dedicated products | Fab 1: 150-mm CMOS, Smart card (phase-out planned in 2006) Fab 2: 200-mm CMOS, Smart card, embedded Flash | ||
Catania, Italy | Power transistors, Smart Power ICs and nonvolatile memories | Fabs 1/2: 150-mm Power metal-on silicon oxide semiconductor process technology (“MOS”), VIPpowertm, MO-3 and Pilot Line RF Fab 3: 200-mm Flash, Smart card, EEPROM 300-mm building constructed but not fully facilitized and equipped. | ||
Castelletto, Italy | Smart power BCD | Fab: 150-mm BCD and MEMS pilot line (closure planned for the end of Q2 2006) | ||
Tours, France | Protection thyristors, diodes and application-specific discrete-power transistors | Fab: 125-mm,150-mm and 200-mm pilot line discrete | ||
Ang Mo Kio, Singapore | Dedicated products, microcontrollers, power transistors, commodity products, nonvolatile memories, and dedicated products | Fab 1: 125-mm, power MOS, bipolar transistor, bipolar ICs, standard linear Fab 2: 150-mm bipolar, power MOS and BCD, EEPROM, Smart card, Micros Fab 3: 200-mm BiCMOS, Flash Memories | ||
Carrollton, Texas | Memories and Application specific products | Fab: 150-mm BiCMOS, BCD and CMOS | ||
Back-end facilities | ||||
Muar, Malaysia | Dedicated and standard products, microcontrollers | |||
Kirkop, Malta | Application specific products | |||
Toa Payoh, Singapore | Nonvolatile memories and power ICs | |||
Ain Sebaa, Morocco | Discrete and standard products | |||
Bouskoura, Morocco | Nonvolatile memories, discrete and standard products, micromodules, RF and subsystems | |||
Shenzhen, China(2) | Nonvolatile memories, discrete and standard products |
(1) | Operated jointly with Philips and Freescale. |
(2) | Jointly operated with SHIC, a subsidiary of Shenzhen Electronics Group. |
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The Semiconductor Market |
Worldwide Semiconductor Sales(1) | Compound Annual Growth Rates(2) | ||||||||||||||||||||||||||||||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 1997 | 1987 | 04-05 | 03-04 | 02-03 | 87-05 | 87-97 | 97-02 | ||||||||||||||||||||||||||||||||||||||
(In billions) | (Expressed as percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
Integrated Circuits and Sensors | $ | 197.3 | $ | 183.5 | $ | 143.5 | $ | 121.6 | $ | 119.5 | $ | 25.4 | 7.5 | % | 27.9 | % | 18.1 | % | 12.1 | % | 16.8 | % | 0.3 | % | |||||||||||||||||||||||||
Analog, Sensors and Actuators | 36.5 | 36.1 | 30.4 | 25.0 | 20.0 | 6.0 | 0.9 | 19.0 | 21.6 | 10.5 | 12.8 | 4.6 | |||||||||||||||||||||||||||||||||||||
Digital Logic | 112.4 | 100.3 | 80.7 | 69.6 | 70.2 | 14.0 | 12.1 | 24.3 | 15.9 | 12.3 | 17.5 | 0.2 | |||||||||||||||||||||||||||||||||||||
Memory: | |||||||||||||||||||||||||||||||||||||||||||||||||
DRAM | 25.6 | 26.8 | 16.7 | 15.3 | 19.8 | 2.4 | (4.7 | ) | 60.9 | 9.4 | 14.1 | 23.5 | (5.1 | ) | |||||||||||||||||||||||||||||||||||
Others | 22.9 | 20.3 | 15.8 | 11.8 | 9.5 | 3.0 | 13.0 | 28.3 | 34.2 | 12.0 | 12.2 | 4.4 | |||||||||||||||||||||||||||||||||||||
Total Memory | 48.5 | 47.1 | 32.5 | 27.0 | 29.3 | 5.4 | 2.9 | 45.0 | 20.2 | 13.0 | 18.4 | (1.6 | ) | ||||||||||||||||||||||||||||||||||||
Total Digital | 160.9 | 147.4 | 113.2 | 96.6 | 99.6 | 19.4 | 9.1 | 30.3 | 17.1 | 12.5 | 17.8 | (0.6 | ) | ||||||||||||||||||||||||||||||||||||
Discrete | 15.2 | 15.8 | 13.3 | 12.3 | 13.2 | 5.8 | (3.3 | ) | 18.1 | 8.1 | 5.5 | 8.5 | 0.3 | ||||||||||||||||||||||||||||||||||||
Optoelectronics | 14.9 | 13.7 | 9.5 | 6.8 | 4.5 | 1.3 | 8.6 | 43.8 | 40.6 | 14.5 | 13.2 | 8.5 | |||||||||||||||||||||||||||||||||||||
TAM | $ | 227.5 | $ | 213.0 | $ | 166.4 | $ | 140.7 | $ | 137.2 | $ | 32.5 | 6.8 | % | 28.0 | % | 18.3 | %(3) | 11.4 | % | 15.5 | % | 0.5 | % | |||||||||||||||||||||||||
Europe | 39.3 | 39.4 | 32.3 | 27.8 | 29.1 | 6.2 | (0.4 | ) | 22.0 | 16.3 | 10.8 | 16.7 | (0.9 | ) | |||||||||||||||||||||||||||||||||||
Americas | 40.7 | 39.1 | 32.3 | 31.3 | 45.8 | 10.3 | 4.3 | 20.8 | 3.4 | 7.9 | 16.1 | (7.4 | ) | ||||||||||||||||||||||||||||||||||||
Asia Pacific | 103.4 | 88.8 | 62.8 | 51.2 | 30.2 | 3.3 | 16.5 | 41.3 | 22.8 | 21.1 | 24.8 | 11.1 | |||||||||||||||||||||||||||||||||||||
Japan | 44.1 | 45.8 | 38.9 | 30.5 | 32.1 | 12.7 | (3.7 | ) | 17.5 | 27.7 | 7.2 | 9.7 | (1.0 | ) | |||||||||||||||||||||||||||||||||||
TAM | $ | 227.5 | $ | 213.0 | $ | 166.4 | $ | 140.7 | $ | 137.2 | $ | 32.5 | 6.8 | % | 28.0 | % | 18.3 | %(3) | 11.4 | % | 15.5 | % | 0.5 | % | |||||||||||||||||||||||||
(1) | Source: WSTS. |
(2) | Calculated using end points of the periods specified. |
(3) | Calculated on a comparable basis, that is, without information with respect to actuators, which was not included in the indicator before 2003, the TAM increased 16.8%. |
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Semiconductor Classifications |
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Item 5. | Operating and Financial Review and Prospects |
Critical Accounting Policies Using Significant Estimates |
• | Revenue recognition. Our policy is to recognize revenues from sales of products to our customers when all of the following conditions have been met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the selling price is fixed or determinable; and (d) collectibility is reasonably assured. This usually occurs at the time of shipment. |
Consistent with standard business practice in the semiconductor industry, price protection is granted to distribution customers on their existing inventory of our products to compensate them for declines in market prices. The ultimate decision to authorize a distributor refund remains fully within our control. We accrue a provision for price protection based on a rolling historical price trend computed on a monthly basis as a percentage of gross distributor sales. This historical price trend represents differences in recent months between the invoiced price and the final price to the distributor, adjusted if required, to accommodate a significant move in the current market price. The short outstanding inventory time period, visibility into the standard inventory product pricing (as opposed to certain customized products) and long distributor pricing history have enabled us to reliably estimate price protection provisions at period-end. We record the accrued amounts as a deduction of revenue at the time of the sale. If market conditions differ from our assumptions, this could have an impact on future periods; in particular, if market conditions were to deteriorate, net revenues could be reduced due to higher product returns and price reductions at the time these adjustments occur. | |
Our customers occasionally return our products from time to time for technical reasons. Our standard terms and conditions of sale provide that if we determine that products are non-conforming, we will repair or replace the non-conforming products, or issue a credit or rebate of the purchase price. Quality returns |
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are not related to any technological obsolescence issues and are identified shortly after sale in customer quality control testing. Quality returns are always associated with end-user customers, not with distribution channels. We provide for such returns when they are considered as probable and can be reasonably estimated. We record the accrued amounts as a reduction of revenue. | |
Our insurance policies relating to product liability only cover physical and other direct damages caused by defective products. We do not carry insurance against immaterial, non-consequential damages. We record a provision for warranty costs as a charge against cost of sales based on historical trends of warranty costs incurred as a percentage of sales which we have determined to be a reasonable estimate of the probable losses to be incurred for warranty claims in a period. Any potential warranty claims are subject to our determination that we are at fault and liable for damages, and such claims usually must be submitted within a short period following the date of sale. This warranty is given in lieu of all other warranties, conditions or terms expressed or implied by statute or common law. Our contractual terms and conditions limit our liability to the sales value of the products, which gave rise to the claims. | |
We maintain an allowance for doubtful accounts for potential estimated losses resulting from our customers’ inability to make required payments. We base our estimates on historical collection trends and record a provision accordingly. Furthermore, we are required to evaluate our customers’ credit ratings from time to time and take an additional provision for any specific account that we estimate as doubtful. In 2005, we recorded specific provisions of $7 million related to bankrupt customers, in addition to our standard provision of 1% of total receivables based on the estimated historical collection trends. Although we have determined that our most significant customers are creditworthy, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. |
• | Goodwill and purchased intangible assets. The purchase method of accounting for acquisitions requires extensive use of estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including in-process research and development, which is expensed immediately. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are instead subject to annual impairment tests. The amounts and useful lives assigned to other intangible assets impact future amortization. If the assumptions and estimates used to allocate the purchase price are not correct or if business conditions change, purchase price adjustments or future asset impairment charges could be required. At December 31, 2005, the value of goodwill amounted to $221 million. | |
• | Impairment of goodwill. Goodwill recognized in business combinations is not amortized and is instead subject to an impairment test to be performed on an annual basis, or more frequently if indicators of impairment exist, in order to assess the recoverability of its carrying value. Goodwill subject to potential impairment is tested at a reporting unit level, which represents a component of an operating segment for which discrete financial information is available and is subject to regular review by segment management. This impairment test determines whether the fair value of each reporting unit for which goodwill is allocated is lower than the total carrying amount of relevant net assets allocated to such reporting unit, including its allocated goodwill. If lower, the implied fair value of the reporting unit goodwill is then compared to the carrying value of the goodwill and an impairment charge is recognized for any excess. In determining the fair value of a reporting unit, we usually estimate the expected discounted future cash flows associated with the reporting unit. Significant management judgments and estimates are used in forecasting the future discounted cash flows including: the applicable industry’s sales volume forecast and selling price evolution; the reporting unit’s market penetration; the market acceptance of certain new technologies; and relevant cost structure, the discount rates applied using a weighted average cost of capital and the perpetuity rates used in calculating cash flow terminal values. Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market evolution, our sales expectations and our costs evaluation and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect, and future adverse changes in market conditions or operating results of acquired businesses not in line with our estimates may require impairment of certain goodwill. In 2005, we had an impairment of goodwill of $39 million related to the elimination of the Customer Premises Equipment (“CPE”) product lines. | |
• | Intangible assets subject to amortization. Intangible assets subject to amortization include the cost of technologies and licenses purchased from third parties, internally developed software which is capitalized and purchased software. Intangible assets subject to amortization are reflected net of any impairment losses. These are amortized over a period ranging from three to seven years. The carrying value of intangible assets subject to amortization is evaluated whenever changes in circumstances indicate that the |
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carrying amount may not be recoverable. In determining recoverability, we initially assess whether the carrying value exceeds the undiscounted cash flows associated with the intangible assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. An impairment loss is recognized for the excess of the carrying amount over the fair value. We normally estimate the fair value based on the projected discounted future cash flows associated with the intangible assets. Significant management judgments and estimates are required and used in the forecasts of future operating results that are used in the discounted cash flow method of valuation, including: the applicable industry’s sales volume forecast and selling price evolution; our market penetration; the market acceptance of certain new technologies; and costs evaluation. Our evaluations are based on financial plans updated with the latest available projections of the semiconductor market evolution and our sales expectations and are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect and that future adverse changes in market conditions or operating results of businesses acquired may not be in line with our estimates and may therefore require impairment of certain intangible assets. In 2005, we registered an impairment charge of $25 million. At December 31, 2005, the value of intangible assets subject to amortization amounted to $224 million. | ||
• | Property, plant and equipment. Our business requires substantial investments in technologically advanced manufacturing facilities, which may become significantly underutilized or obsolete as a result of rapid changes in demand and ongoing technological evolution. We estimate the useful life for the majority of our manufacturing equipment, which is the largest component of our long-lived assets, to be six years. This estimate is based on our experience with using equipment over time. Depreciation expense is a major element of our manufacturing cost structure. We begin to depreciate new equipment when it is put into use. |
We evaluate each period whether there is reason to suspect that tangible assets or groups of assets might not be recoverable. Factors we consider important which could trigger an impairment review include: significant negative industry trends, significant underutilization of the assets or available evidence of obsolescence of an asset and strategic management decisions impacting production or an indication that its economic performance is, or will be, worse than expected. Since a significant portion of our tangible assets are carried by our European affiliates and their cost of operations are mainly denominated in euros, while revenues primarily are denominated in U.S. dollars, the exchange rate dynamic may trigger impairment charges. In determining the recoverability of assets to be held and used, we initially assess whether the carrying value exceeds the undiscounted cash flows associated with the tangible assets or group of assets. If exceeded, we then evaluate whether an impairment charge is required by determining if the asset’s carrying value also exceeds its fair value. We normally estimate this fair value based on independent market appraisals or the sum of discounted future cash flows, using market assumptions such as the utilization of our fabrication facilities and the ability to upgrade such facilities, change in the selling price and the adoption of new technologies. We also evaluate the continued validity of an asset’s useful life when impairment indicators are identified. Assets classified as held for disposal are reflected at the lower of their carrying amount or fair value less selling costs and are not depreciated during the selling period. Selling costs include incremental direct costs to transact the sale that we would not have incurred except for the decision to sell. | |
Our evaluations are based on financial plans updated with the latest projections of the semiconductor market and of our sales expectations, from which we derive the future production needs and loading of our manufacturing facilities, and which are consistent with the plans and estimates that we use to manage our business. These plans are highly variable due to the high volatility of the semiconductor business and therefore are subject to continuous modifications. If the future evolution differs from the basis of our plans, both in terms of market evolution and production allocation to our manufacturing plants, this could require a further review of the carrying amount of our tangible assets resulting in a potential impairment loss. In 2005, we registered an impairment charge of $3 million related to the optimization of our Electrical Wafer Sorting (EWS) activities (wafer test). |
• | Inventory. Inventory is stated at the lower of cost or net realizable value. Cost is based on the weighted average cost by adjusting standard cost to approximate actual manufacturing costs on a quarterly basis; the cost is therefore dependent on our manufacturing performance. In the case of underutilization of our manufacturing facilities, we estimate the costs associated with the excess capacity; these costs are not included in the valuation of inventories but are charged directly to cost of sales. Net realizable value is the estimated selling price in the ordinary course of business less applicable variable selling expenses. |
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The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. Provisions for obsolescence are estimated for excess uncommitted inventories based on the previous quarter sales, order backlog and production plans. To the extent that future negative market conditions generate order backlog cancellations and declining sales, or if future conditions are less favorable than the projected revenue assumptions, we could be required to record additional inventory provisions, which would have a negative impact on our gross margin. |
• | Share-based compensation. We have in the past accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees”, and as such generally recognized no compensation cost for employee stock options. In December 2004, the FASB issued revised FAS No. 123,Share-Based Payment, or FAS 123R, which requires companies to expense employee share- based compensation for financial reporting purposes. Pro forma disclosure of the income statement effects of share-based compensation is no longer an alternative. We adopted FAS 123R early in the fourth quarter of 2005 to account for charges related to non-vested stock awards distributed to our employees. As a result, we are now required to value the current and any future employee share-based compensation pursuant to an option pricing model, and then amortize that value against our reported earnings over the vesting period in effect for those awards. Due to this change in accounting treatment of employee stock and other forms of share-based compensation, the share-based compensation expense is charged directly against our earnings. In order to assess the fair value of this share-based compensation through a financial evaluation model, we are required to make significant estimates since, pursuant to our plan, awarding shares is contingent on the achievement of certain financial objectives, including market performance and financial results. We are required to estimate certain items, including the probability of meeting the market performance, the forfeitures and the service period of our employees. As a result, we recorded in the fourth quarter of 2005 a total charge of $9 million and we are expecting to incur additional charges related to this plan during 2006. The impact is further detailed in Note 15.6 to our Consolidated Financial Statements “Non-vested share awards”. | |
• | Restructuring charges. We have undertaken, and we may continue to undertake, significant restructuring initiatives, which have required us, or may require us in the future, to develop formalized plans for our existing activities or to dispose of our activities. We recognize the fair value of a liability for costs associated with an exit or disposal activity when a probable liability exists and it can be reasonably estimated. We record estimated charges for non-voluntary termination benefit arrangements such as severance and outplacement costs meeting the criteria for a liability as described above. Given the significance of and the timing of the execution of such activities, the process is complex and involves periodic reviews of estimates made at the time the original decisions were taken. As we operate in a highly cyclical industry, we continue to evaluate business conditions. If broader or new initiatives, which could include production curtailment or closure of other manufacturing facilities, were to be taken, we may be required to incur additional charges as well as to change estimates of amounts previously recorded. The potential impact of these changes could be material and have a material adverse effect on our results of operations or financial condition. In 2005, the amount of restructuring charges and other related closure costs amounted to $61 million before taxes. See Note 18 to our Consolidated Financial Statements. | |
• | Income taxes. We are required to make estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments also occur in the calculation of certain tax assets and liabilities and provisions. |
We are required to assess the likelihood of recovery of our deferred tax assets. If recovery is not likely, we are required to record a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable, which would increase our provision for income taxes. As of December 31, 2005, we believed that all of the deferred tax assets, net of valuation allowances, as recorded on our balance sheet, would ultimately be recovered. However, should there be a change in our ability to recover our deferred tax assets or in our estimates of the valuation allowance, or in the tax rates applicable in the various jurisdictions, this could have an impact on our future tax provision in the periods in which these changes could occur. | |
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We record provisions for anticipated tax audit issues based on our estimate that probable additional taxes will be due. We reverse provisions and recognize a tax benefit during the period if we ultimately determine that the liability is no longer necessary. We record an additional charge |
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in our provision for taxes in the period in which we determine that the recorded provision is less than we expect the ultimate assessment to be. |
• | Patent and other intellectual property litigation or claims. As is the case with many companies in the semiconductor industry, we have from time to time received, and may in the future receive, communications alleging possible infringement of patents and other intellectual property rights of others. Furthermore, we may become involved in costly litigation brought against us regarding patents, mask works, copyrights, trademarks or trade secrets. In the event that the outcome of any litigation would be unfavorable to us, we may be required to take a license to the underlying intellectual property right upon economically unfavorable terms and conditions, and possibly pay damages for prior use, and/or face an injunction, all of which singly or in the aggregate could have a material adverse effect on our results of operations and ability to compete. See “Item 3. Key Information — Risk Factors — Risks Related to Our Operations — We depend on patents to protect our rights to our technology”. |
We record a provision when it is probable that a liability has been incurred and when the amount of the loss can be reasonably estimated. We regularly evaluate losses and claims with the support of our outside attorneys to determine whether they need to be adjusted based on the current information available to us. Legal costs associated with claims are expensed as incurred. We are in discussion with several parties with respect to claims against us relating to possible infringements of patents and similar intellectual property rights of others. | |
We are currently a party to several legal proceedings including legal proceedings with SanDisk Corporation (“SanDisk”) and Tessera, Inc. See “Item 8. Financial Information — Legal Proceedings”. As of the end of 2005, based on our assessment there was no impact on our financial statements relating to the SanDisk litigation. However, if we are unsuccessful in resolving these proceedings, or if the outcome of any other litigation or claim were to be unfavorable to us, we may incur monetary damages, or an injunction or exclusion order. |
• | Pension and Post Retirement Benefits. Our results of operations and our balance sheet include the impact of pension and post retirement benefits that are measured using actuarial valuations. These valuations are based on key assumptions, including discount rates, expected long-term rates of return on funds and salary increase rates. These assumptions are updated on an annual basis at the beginning of each fiscal year or more frequently upon the occurrence of significant events. Any changes in the above assumptions can have an impact on our valuations. As of December 31, 2005, we have a total benefit obligation estimated at $323 million, and total plan assets estimated at $194 million resulting in an unfunded status of $129 million, of which $56 million was registered in our balance sheet at December 31, 2005. | |
• | Other claims. We are subject to the possibility of loss contingencies arising in the ordinary course of business. These include, but are not limited to: warranty costs on our products not covered by insurance, breach of contract claims, tax claims and provisions for specifically identified income tax exposures as well as claims for environmental damages. In determining loss contingencies, we consider the likelihood of a loss of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly reevaluate any losses and claims and determine whether they need to be readjusted based on the current information available to us. In the event of litigation that is adversely determined with respect to our interests, or in the event we need to change our evaluation of a potential third-party claim based on new evidence or communications, this could have a material adverse effect on our results of operations or financial condition at the time it were to materialize. |
Fiscal Year 2005 |
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2005 Business Overview |
• | the Application Specific Product Groups (“ASG”) segment, comprised of three product lines — our Home, Personal and Communication Products (“HPC”), our Computer Peripherals Products (“CPG”) and our Automotive Products (“APG”). Our new HPC Sector is comprised of the telecommunications, audio and digital consumer groups. Our CPG products cover computer peripherals products, specifically disk drives and printers, and our APG products now comprise all of our major complex products related to automotive applications. | |
• | the Memory Product Group (“MPG”) segment, comprised of our memories and Smart card businesses; and | |
• | the Micro, Linear and Discrete Product Group (“MLD”) segment, comprised of discrete and standard products plus standard microcontroller and industrial devices (including the programmable systems memories (“PSM”) division). |
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• | higher sales volume and a more favorable product mix in our revenues, which contributed to an increase in our net revenues over 2004; | |
• | continuous improvement of our manufacturing performances; | |
• | net interest income; and | |
• | lower income tax expense. |
• | negative pricing trends due to a persisting overcapacity in the industry, which translated into our average selling prices declining by approximately 8%, as a pure pricing effect; | |
• | the impact of the effective U.S. dollar exchange rate against the euro and other currencies, which translated into an increase of our cost of sales and in our operating expenses being significantly higher than the favorable impact on our revenues; | |
• | higher impairment, restructuring charges and other related closure costs due to the new restructuring and reorganization activities initiated in 2005; and | |
• | the one-time compensation packages and special bonuses to our former CEO and to a limited number of retired senior executives, the new pension scheme charges for executive management and the share-based compensation charges for non-vested shares granted to employees and members and professionals of our Supervisory Board for a total of $37 million. |
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Business Outlook |
Other Developments in 2005 |
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Recent Developments |
Segment Information |
• | Application Specific Product Groups (“ASG”) segment, comprised of three product lines — Home, Personal and Communication Products (“HPC”), Computer Peripherals Products (“CPG”) and new Automotive Products (“APG”); | |
• | Memory Product Group (“MPG”) segment; and | |
• | Micro, Linear and Discrete Product Group (“MLD”) segment. |
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Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(In millions) | ||||||||||||
Net revenues by product segment: | ||||||||||||
Application Specific Product Group Segment (ASG) | $ | 4,991 | $ | 4,902 | $ | 4,405 | ||||||
Memory Product Group Segment (MPG) | 1,948 | 1,887 | 1,294 | |||||||||
Micro, Linear and Discrete Product Group Segment (MLD) | 1,882 | 1,902 | 1,469 | |||||||||
Others(1) | 61 | 69 | 70 | |||||||||
Total consolidated net revenues | $ | 8,882 | $ | 8,760 | $ | 7,238 | ||||||
(1) | Includes revenues from sales of subsystems mainly and other products not allocated to product segments. |
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(In millions) | ||||||||||||
Operating income (loss) by product segment: | ||||||||||||
Application Specific Product Group Segment (ASG) | $ | 355 | $ | 530 | $ | 582 | ||||||
Memory Product Group Segment (MPG) | (118 | ) | 42 | (65 | ) | |||||||
Micro, Linear and Discrete Product Group Segment (MLD) | 271 | 413 | 192 | |||||||||
Total operating income of product segments | 508 | 985 | 709 | |||||||||
Others(1) | (264 | ) | (302 | ) | (375 | ) | ||||||
Total consolidated operating income | $ | 244 | $ | 683 | $ | 334 | ||||||
(1) | Operating income (loss) of “Others” includes items or parts of them, which are not allocated to product segments such as impairment, restructuring charges and other related closure costs,start-up costs, and other unallocated expenses, such as: strategic or special research and development programs, certain corporate-level operating expenses, certain patent claims and litigations, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products segment. Certain costs, mainly R&D, formerly in the “Others” category, are now being allocated to the segments; comparable amounts reported in this category have been reclassified accordingly in the above table. |
Year Ended | ||||||||||||
December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(As a percentage of | ||||||||||||
total net revenues) | ||||||||||||
Operating income (loss) by product segment: | ||||||||||||
Application Specific Product Group Segment (ASG)(1) | 7.1 | % | 10.8 | % | 13.2 | % | ||||||
Memory Product Group Segment (MPG)(1) | (6.1 | ) | 2.2 | (5.0 | ) | |||||||
Micro, Linear and Discrete Product Group Segment (MLD)(1) | 14.4 | 21.7 | 13.1 | |||||||||
Others(2) | (3.0 | ) | (3.5 | ) | (5.2 | ) | ||||||
Total consolidated operating income(3) | 2.7 | % | 7.8 | % | 4.6 | % |
(1) | As a percentage of net revenues per product segment. |
(2) | As a percentage of total net revenues. Operating income (loss) of “Others” includes items or parts of them, which are not allocated to product segments such as impairment, restructuring charges and other related closure costs,start-up costs, and other unallocated expenses, such as: strategic or special research and development programs, certain corporate-level operating expenses, certain patent claims and litigations, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products segment. Certain costs, mainly R&D, formerly in the “Others” category, are now being allocated to the product segments; comparable amounts reported in this category have been reclassified accordingly in the above table. |
(3) | As a percentage of total net revenues. |
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Year Ended December 31, | |||||||||||||
2005 | 2004 | 2003 | |||||||||||
(In millions) | |||||||||||||
Reconciliation to consolidated operating income: | |||||||||||||
Total operating income of product segments | $ | 508 | $ | 985 | $ | 709 | |||||||
Operating Income of others(1) | |||||||||||||
Strategic and other research and development programs | (49 | ) | (91 | ) | (52 | ) | |||||||
Start-up costs | (56 | ) | (63 | ) | (54 | ) | |||||||
Impairment, restructuring charges and other related closure costs | (128 | ) | (76 | ) | (205 | ) | |||||||
Subsystems | 1 | (1 | ) | 2 | |||||||||
One-time compensation and special contributions(2) | (22 | ) | — | — | |||||||||
Patent claim costs | — | (4 | ) | (10 | ) | ||||||||
Other non-allocated provisions(3) | (10 | ) | (67 | ) | (56 | ) | |||||||
Total operating income (loss) of others | (264 | ) | (302 | ) | (375 | ) | |||||||
Total consolidated operating income | $ | 244 | $ | 683 | $ | 334 | |||||||
(1) | Operating income (loss) of “Others” includes items or parts of them, which are not allocated to product segments such as impairment, restructuring charges and other related closure costs,start-up costs, and other unallocated expenses, such as: strategic or special research and development programs, certain corporate-level operating expenses, certain patent claims and litigations, and other costs that are not allocated to the product segments, as well as operating earnings or losses of the Subsystems and Other Products segment. Certain costs, mainly R&D, formerly in the “Others” category, are now being allocated to the segments; comparable amounts reported in this category have been reclassified accordingly in the above table. |
(2) | One-time compensation and special contributions to our former CEO and other executives not allocated to product segments. |
(3) | Includes unallocated expenses such as certain corporate level operating expenses and other costs. |
Net Revenues by Location of Order Shipment and by Market Segment |
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(In millions) | ||||||||||||
Net Revenues by Location of Order Shipment:(1) | ||||||||||||
Europe(2) | $ | 2,789 | $ | 2,827 | $ | 2,306 | ||||||
North America | 1,141 | 1,211 | 985 | |||||||||
Asia/ Pacific | 4,063 | 3,711 | 3,190 | |||||||||
Japan | 307 | 403 | 337 | |||||||||
Emerging Markets(2)(3) | 582 | 608 | 420 | |||||||||
Total | $ | 8,882 | $ | 8,760 | $ | 7,238 | ||||||
Net Revenues by Location of Order Shipment:(1) | ||||||||||||
Europe(2) | 31.4 | % | 32.3 | % | 31.9 | % | ||||||
North America | 12.8 | 13.8 | 13.6 | |||||||||
Asia/Pacific | 45.7 | 42.4 | 44.1 | |||||||||
Japan | 3.5 | 4.6 | 4.6 | |||||||||
Emerging Markets(2)(3) | 6.6 | 6.9 | 5.8 | |||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
(1) | Net revenues by location of order shipment region are classified by location of customer invoiced. For example, products ordered byU.S.-based companies to be invoiced to Asia/ Pacific affiliates are classified as Asia/ Pacific revenues. |
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(2) | Since January 1, 2005, the region “Europe” includes the former East European countries that joined the EU in 2004. These countries were part of the Emerging Markets region in the previous periods. Net revenues for Europe and Emerging Markets for prior periods were restated to include such countries in the Europe region for such periods. |
(3) | Emerging Markets in 2005 included markets such as India, Latin America, the Middle East and Africa, Europe (non-EU and non-EFTA) and Russia. |
Year Ended | ||||||||||||
December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(As a percentage of | ||||||||||||
net revenues) | ||||||||||||
Net Revenues by Market Segment: | ||||||||||||
Automotive | 16 | % | 15 | % | 14 | % | ||||||
Consumer | 18 | 21 | 20 | |||||||||
Computer | 17 | 16 | 18 | |||||||||
Telecom | 35 | 32 | 33 | |||||||||
Industrial and Other | 14 | 16 | 15 | |||||||||
Total | 100 | % | 100 | % | 100 | % | ||||||
Year Ended December 31, | |||||||||||||
2005 | 2004 | 2003 | |||||||||||
(As a percentage of | |||||||||||||
net revenues) | |||||||||||||
Net sales | 99.9 | % | 100.0 | % | 99.9 | % | |||||||
Other revenues | 0.1 | — | 0.1 | ||||||||||
Net revenues | 100.0 | 100.0 | 100.0 | ||||||||||
Cost of sales | (65.8 | ) | (63.2 | ) | (64.5 | ) | |||||||
Gross profit | 34.2 | 36.8 | 35.5 | ||||||||||
Selling, general and administrative | (11.6 | ) | (10.8 | ) | (10.9 | ) | |||||||
Research and development | (18.3 | ) | (17.5 | ) | (17.1 | ) | |||||||
Other income and expenses, net | (0.1 | ) | 0.2 | (0.1 | ) | ||||||||
Impairment, restructuring charges and other related closure costs | (1.5 | ) | (0.9 | ) | (2.8 | ) | |||||||
Total operating expenses | (31.5 | ) | (29.0 | ) | (30.9 | ) | |||||||
Operating income | 2.7 | 7.8 | 4.6 | ||||||||||
Interest income (expense), net | 0.4 | — | (0.7 | ) | |||||||||
Loss on equity investment | — | — | — | ||||||||||
Loss on extinguishment of convertible debt | — | (0.1 | ) | (0.6 | ) | ||||||||
Income before income taxes and minority interests | 3.1 | 7.7 | 3.3 | ||||||||||
Income tax benefit (expense) | (0.1 | ) | (0.8 | ) | 0.2 | ||||||||
Income before minority interests | 3.0 | 6.9 | 3.5 | ||||||||||
Minority interests | — | — | — | ||||||||||
Net income | 3.0 | % | 6.9 | % | 3.5 | % | |||||||
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Net revenues |
2005 | 2004 | % Variation | ||||||||||
(In millions) | ||||||||||||
Net sales | $ | 8,876 | $ | 8,756 | 1.4 | % | ||||||
Other revenues | $ | 6 | $ | 4 | — | |||||||
Net revenues | $ | 8,882 | $ | 8,760 | 1.4 | % | ||||||
Gross profit |
2005 | 2004 | % Variation | ||||||||||
(In millions) | ||||||||||||
Cost of sales | $ | (5,845 | ) | $ | (5,532 | ) | (5.7 | )% | ||||
Gross profit | $ | 3,037 | $ | 3,228 | (5.9 | )% | ||||||
Gross margin (as a percentage of net revenues) | 34.2 | % | 36.8 | % | — |
Selling, general and administrative expenses |
2005 | 2004 | % Variation | ||||||||||
(In millions) | ||||||||||||
Selling, general and administrative expenses | $ | (1,026 | ) | $ | (947 | ) | (8.4 | )% | ||||
As a percentage of net revenues | (11.6 | )% | (10.8 | )% | — |
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Research and development expenses |
2005 | 2004 | % Variation | ||||||||||
(In millions) | ||||||||||||
Research and development expenses | $ | (1,630 | ) | $ | (1,532 | ) | (6.3 | )% | ||||
As a percentage of net revenues | (18.3 | )% | (17.5 | )% | — |
Other income and expenses, net |
2005 | 2004 | |||||||
in millions) | ||||||||
Research and development funding | $ | 76 | $ | 84 | ||||
Start-up costs | (56 | ) | (63 | ) | ||||
Exchange gain (loss), net | (16 | ) | 33 | |||||
Patent claim costs | (22 | ) | (37 | ) | ||||
Gain on sale of non-current assets, net | 12 | 6 | ||||||
Other, net | (3 | ) | (13 | ) | ||||
Other income and expenses, net | $ | (9 | ) | $ | 10 | |||
As a percentage of net revenues | (0.1 | )% | 0.2 | % |
Impairment, restructuring charges and other related closure costs |
2005 | 2004 | |||||||
(In millions) | ||||||||
Impairment, restructuring charges and other related closure costs | $ | (128 | ) | $ | (76 | ) | ||
As a percentage of net revenues | (1.5 | )% | (0.9 | )% |
• | Our new head count restructuring plan announced in May 2005, which resulted in total charges of $41 million mainly for employee termination benefits; the total cost of this restructuring plan is estimated to be in a range of between $100 and $130 million and its completion is expected by the second half of 2006; | |
• | Our restructuring and reorganization activities initiated in the first quarter of 2005, which generated a total charge of impairment on goodwill and other intangible assets of $63 million and $10 million for restructuring and other related closure costs; this restructuring plan was fully completed in 2005; |
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• | Our ongoing 2003 restructuring plan and related manufacturing initiatives generated restructuring charges of approximately $13 million. As of December 31, 2005, we have incurred $294 million of the total expected approximate $350 million in pre-tax charges in connection with this restructuring plan, which was announced in October 2003. We expect to incur the balance in the coming quarters, which is later than anticipated to accommodate unforeseen qualification requirements of our customers, and to complete the plan in the second half of 2006; and | |
• | Our impairment review of goodwill and intangible assets that resulted in a charge of $1 million. |
Operating income |
2005 | 2004 | % Variation | ||||||||||
(In millions) | ||||||||||||
Operating income | $ | 244 | $ | 683 | (64.3 | %) | ||||||
As a percentage of net revenues | 2.7 | % | 7.8 | % |
Interest income (expense), net |
2005 | 2004 | |||||||
(In millions) | ||||||||
Interest income (expense), net | $ | 34 | $ | (3 | ) |
Loss on equity investments |
2005 | 2004 | |||||||
(In millions) | ||||||||
Loss on equity investments | $ | (3 | ) | $ | (4 | ) |
Loss on extinguishment of convertible debt |
2005 | 2004 | |||||||
(In millions) | ||||||||
Loss on extinguishment of convertible debt | — | $ | (4 | ) |
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Income tax benefit (expense) |
2005 | 2004 | |||||||
(In millions) | ||||||||
Income tax expense | $ | (8 | ) | $ | (68 | ) |
Net income |
2005 | 2004 | % Variation | ||||||||||
(In millions) | ||||||||||||
Net income | $ | 266 | $ | 601 | (55.7 | %) | ||||||
As a percentage of net revenues | 3.0 | % | 6.9 | % |
Net revenues |
2004 | 2003 | % Variation | ||||||||||
(In millions) | ||||||||||||
Net sales | $ | 8,756 | $ | 7,234 | 21.0 | % | ||||||
Other revenues | $ | 4 | $ | 4 | — | |||||||
Net revenues | $ | 8,760 | $ | 7,238 | 21.0 | % |
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Gross profit |
2004 | 2003 | % Variation | ||||||||||
(In millions) | ||||||||||||
Cost of sales | $ | (5,532 | ) | $ | (4,672 | ) | (18.4 | %) | ||||
Gross profit | $ | 3,228 | $ | 2,566 | 25.8 | % | ||||||
Gross margin | 36.8 | % | 35.5 | % | — |
Selling, general and administrative expenses |
2004 | 2003 | % Variation | ||||||||||
(In millions) | ||||||||||||
Selling, general and administrative expenses | $ | (947 | ) | $ | (785 | ) | (20.6 | %) | ||||
As a percentage of net revenues | (10.8 | )% | (10.9 | )% | — |
Research and development expenses |
2004 | 2003 | % Variation | ||||||||||
(In millions) | ||||||||||||
Research and development expenses | $ | (1,532 | ) | $ | (1,238 | ) | (23.8 | %) | ||||
As a percentage of net revenues | (17.5 | )% | (17.1 | )% | — |
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Other income and expenses, net |
2004 | 2003 | |||||||
(In millions) | ||||||||
Research and development funding | $ | 84 | $ | 76 | ||||
Start-up costs | (63 | ) | (55 | ) | ||||
Exchange gain, net | 33 | 5 | ||||||
Patent claim costs | (37 | ) | (29 | ) | ||||
Gain on sale of non-current assets | 6 | 17 | ||||||
Other, net | (13 | ) | (18 | ) | ||||
Other income and expenses, net | $ | 10 | $ | (4 | ) | |||
As a percentage of net revenues | 0.2 | % | (0.1 | %) |
Impairment, restructuring charges and other related closure costs |
2004 | 2003 | |||||||
(In millions) | ||||||||
Impairment, restructuring charges and other related closure costs | $ | (76 | ) | $ | (205 | ) | ||
As a percentage of net revenues | (0.9 | )% | (2.8 | )% |
Operating income |
2004 | 2003 | % Variation | ||||||||||
(In millions) | ||||||||||||
Operating income | $ | 683 | $ | 334 | 104.3 | % | ||||||
As a percentage of net revenues | 7.8 | % | 4.6 | % | — |
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Interest expense, net |
2004 | 2003 | |||||||
(In millions) | ||||||||
Interest expense, net | $ | (3 | ) | $ | (52 | ) |
Loss on equity investments |
2004 | 2003 | |||||||
(In millions) | ||||||||
Loss on equity investments | $ | (4 | ) | $ | (1 | ) |
Loss on extinguishment of convertible debt |
2004 | 2003 | |||||||
(In millions) | ||||||||
Loss on extinguishment of convertible debt | $ | (4 | ) | $ | (39 | ) |
Income tax benefit (expense) |
2004 | 2003 | |||||||
(In millions) | ||||||||
Income tax benefit (expense) | $ | (68 | ) | $ | 14 |
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Net income |
2004 | 2003 | % Variation | ||||||||||
(In millions) | ||||||||||||
Net income | $ | 601 | $ | 253 | 137.3 | % | ||||||
As a percentage of net revenues | 6.9 | % | 3.5 | % | — |
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Net revenues |
Quarter ended | % Variation | |||||||||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | Sequential | Year-over-year | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Net sales | $ | 2,388 | $ | 2,246 | $ | 2,326 | 6.3 | % | 2.6 | % | ||||||||||
Other revenues | 1 | 1 | 2 | — | — | |||||||||||||||
Net revenues | $ | 2,389 | $ | 2,247 | $ | 2,328 | 6.3 | % | 2.6 | % | ||||||||||
Year-over-year comparison |
Sequential comparison |
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Gross profit |
Quarter Ended | % Variation | |||||||||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | Sequential | Year-over-year | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Cost of sales | $ | (1,517 | ) | $ | (1,481 | ) | $ | (1,476 | ) | (2.4 | )% | (2.8 | )% | |||||||
Gross profit | $ | 872 | $ | 766 | $ | 852 | 13.8 | % | 2.3 | % | ||||||||||
Gross margin | 36.5 | % | 34.1 | % | 36.6 | % |
Selling, general and administrative expenses |
Quarter Ended | % Variation | |||||||||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | Sequential | Year-over-year | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Selling, general and administrative expenses | $ | (259 | ) | $ | (248 | ) | $ | (245 | ) | (4.6 | )% | (6.0 | )% | |||||||
As percentage of net revenues | (10.9 | )% | (11.0 | )% | (10.5 | )% |
Research and development expenses |
Quarter Ended | % Variation | |||||||||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | Sequential | Year-over-year | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Research and development expenses | $ | (402 | ) | $ | (401 | ) | $ | (402 | ) | (0.1 | )% | 0.1 | % | |||||||
As percentage of net revenues | (16.8 | )% | (17.9 | )% | (17.3 | )% |
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Other income and expenses, net |
Quarter Ended | ||||||||||||
Dec 31, 2005 | Oct. 1, 2005 | Dec 31, 2004 | ||||||||||
(In millions) | ||||||||||||
Research and development funding | $ | 29 | $ | 20 | $ | 47 | ||||||
Start-up costs | (10 | ) | (12 | ) | (18 | ) | ||||||
Exchange gain (loss) net | (20 | ) | (5 | ) | 14 | |||||||
Patent claim costs | (6 | ) | (6 | ) | (16 | ) | ||||||
Gain on sale of non-current assets | 8 | (2 | ) | — | ||||||||
Other, net | 1 | 2 | (4 | ) | ||||||||
Other income and expenses, net | 2 | (3 | ) | 23 | ||||||||
As a percentage of net revenues | 0.1 | % | (0.1 | )% | 1.0 | % |
Impairment, restructuring charges and other related closure costs |
Quarter Ended | ||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | ||||||||||
(In millions) | ||||||||||||
Impairment, restructuring charges and other related closure costs | $ | (16 | ) | $ | (12 | ) | $ | (18 | ) | |||
As a percentage of net revenues | (0.7 | )% | (0.5 | )% | (0.8 | )% |
• | Our new headcount restructuring plan announced in May 2005, which resulted in charges of $17 million mainly for employee termination benefits; | |
• | Our restructuring and reorganization activities initiated in the first quarter of 2005, which generated an additional charge of $1 million; and | |
• | Our ongoing 2003 restructuring plan and related manufacturing initiatives, which generated a positive impact of approximately $2 million as a result of a reversal of a provision pursuant to our decision made in the fourth quarter 2005 to keep a back-end production line in France. |
Operating income |
Quarter Ended | ||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | ||||||||||
(In millions) | ||||||||||||
Operating income | $ | 197 | $ | 102 | $ | 210 | ||||||
In percentage of net revenues | 8.2 | % | 4.5 | % | 9.0 | % |
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Interest income, net |
Quarter Ended | ||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | ||||||||||
(In millions) | ||||||||||||
Interest income, net | $ | 11 | $ | 8 | $ | 5 |
Loss on equity investments |
Quarter Ended | ||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | ||||||||||
(In millions) | ||||||||||||
Loss on equity investments | — | $ | (2 | ) | $ | (2 | ) |
Income tax benefit (expense) |
Quarter Ended | ||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | ||||||||||
(In millions) | ||||||||||||
Income tax expense | $ | (25 | ) | $ | (18 | ) | $ | (26 | ) |
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Net income |
Quarter Ended | ||||||||||||
Dec 31, 2005 | Oct 1, 2005 | Dec 31, 2004 | ||||||||||
(In millions) | ||||||||||||
Net income | $ | 183 | $ | 89 | $ | 187 | ||||||
As percentage of net revenues | 7.7 | % | 3.9 | % | 8.0 | % |
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Liquidity |
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• | the capacity expansion of our 200-mm and 150-mm front-end facilities in Singapore; | |
• | the conversion to 200-mm of our front-end facility in Agrate (Italy); | |
• | the capacity expansion of our back-end plants in Muar (Malaysia), Shenzhen (China), Toa Payoh (Singapore) and Malta; | |
• | the expansion of our 200-mm front-end facility in Phoenix (Arizona); | |
• | the capacity expansion of our 200-mm front-end facility in Rousset (France); | |
• | the completion of building and continuation of facilities for our 300-mm front-end plant in Catania (Italy); | |
• | the expansion of an 150-mm front-end and a 200-mm pilot line in Tours (France); and | |
• | the expansion of the 300-mm front-end joint project with Philips Semiconductor International B.V. and Freescale Semiconductor Inc., in Crolles2 (France). |
• | the expansion of our 200-mm and 150-mm front-end facilities in Singapore; | |
• | the expansion of our 200-mm front-end facility in Rousset (France); | |
• | the facilitization of our 300-mm facility in Catania (Italy); | |
• | the upgrading of our front-end and research and development pilot line in Agrate (Italy); | |
• | the upgrading of our 200-mm front-end facility in Catania (Italy); | |
• | the expansion and upgrading of our front-end facilities 200-mm in Phoenix and 150-mm in Carrollton (United States); and | |
• | the capacity expansion in our back-end plants of Muar (Malaysia), Toa Payoh (Singapore), Shenzhen (China) and Malta. |
• | the expansion of our 200-mm and 150-mm front-end facilities in Singapore; | |
• | the upgrading of our 200-mm front-end plant in Agrate (Italy); | |
• | the expansion of our 200-mm front-end facility in Rousset (France); | |
• | the expansion of our 300-mm facility in Crolles2 (France); | |
• | the facilitization of our 300-mm facility in Catania (Italy); and | |
• | the expansion of our back-end facilities in Muar (Malaysia). |
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Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(In millions) | ||||||||||||
Net cash from operating activities | 1,798 | $ | 2,342 | $ | 1,920 | |||||||
Net cash used in investing activities | (1,528 | ) | (2,134 | ) | (1,439 | ) | ||||||
Payment for purchase and proceeds from sale of marketable securities, net | — | — | (4 | ) | ||||||||
Net operating cash flow | $ | 270 | $ | 208 | $ | 477 | ||||||
Capital Resources |
Net financial position |
Year Ended December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
(In millions) | ||||||||||||
Cash and cash equivalents | $ | 2,027 | $ | 1,950 | $ | 2,998 | ||||||
Marketable securities | — | — | — | |||||||||
Total cash position | 2,027 | 1,950 | 2,998 | |||||||||
Bank overdrafts | (11 | ) | (58 | ) | (45 | ) | ||||||
Current portion of long-term debt | (1,522 | ) | (133 | ) | (106 | ) | ||||||
Long-term debt | (269 | ) | (1,767 | ) | (2,944 | ) | ||||||
Total financial debt | (1,802 | ) | (1,958 | ) | (3,095 | ) | ||||||
Net financial position | $ | 225 | $ | (8 | ) | $ | (97 | ) | ||||
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Payments Due by Period | ||||||||||||||||||||||||||||
Total | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Long-term debt (including current portion) | 1,791 | 1,522 | 119 | 58 | 30 | 22 | 40 |
Moody’s | Standard & | |||||||
Investors Service | Poor’s | |||||||
Zero Coupon Senior Convertible Bonds due 2013 | A3 | A- |
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Contractual Obligations, Commercial Commitments and Contingencies |
Total | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | |||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||
Capital leases(3) | $ | 26 | $ | 5 | $ | 5 | $ | 5 | $ | 5 | $ | 5 | $ | 1 | |||||||||||||||
Operating leases(2) | 271 | 50 | 37 | 32 | 28 | 22 | 102 | ||||||||||||||||||||||
Purchase obligations(2) | 1,053 | 940 | 79 | 34 | — | — | — | ||||||||||||||||||||||
of which: | |||||||||||||||||||||||||||||
Equipment purchase | 576 | 576 | — | — | — | — | — | ||||||||||||||||||||||
Foundry purchase | 260 | 260 | — | — | — | — | — | ||||||||||||||||||||||
Software, technology licenses and design | 217 | 104 | 79 | 34 | — | — | — | ||||||||||||||||||||||
Joint Venture Agreement with Hynix Semiconductor Inc.(2)(5) | 212 | 212 | — | — | — | — | — | ||||||||||||||||||||||
Other Obligations(2) | 112 | 59 | 44 | 3 | 2 | 1 | 3 | ||||||||||||||||||||||
Long-term debt obligations (including | |||||||||||||||||||||||||||||
current portion)(3)(4) | 1,791 | 1,522 | 119 | 58 | 30 | 22 | 40 | ||||||||||||||||||||||
Pension obligations(3) | 270 | 29 | 20 | 22 | 26 | 28 | 145 | ||||||||||||||||||||||
Other non-current liabilities(3) | 16 | 3 | 2 | 3 | 2 | 3 | 3 | ||||||||||||||||||||||
Total | $ | 3,751 | $ | 2,820 | $ | 306 | $ | 157 | $ | 93 | $ | 81 | $ | 294 |
(1) | Contingent liabilities which cannot be quantified are excluded from the table above. |
(2) | Items not reflected on the Consolidated Balance Sheet at December 31, 2005. |
(3) | Items reflected on the Consolidated Balance Sheet at December 31, 2005. |
(4) | See Note 14 to our Consolidated Financial Statements at December 31, 2005 for additional information related to long-term debt and redeemable convertible securities, in particular, in respect to the noteholders’ option to put our convertible bonds for earlier redemption in August 2006. |
(5) | These amounts correspond to our capital commitments to the joint venture, but not the additional $250 million in loans that we have committed to provide. |
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Financial Outlook |
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Year Ended December 31, 2005 | ||||||||||||||||
Total Impairment, | ||||||||||||||||
Restructuring | ||||||||||||||||
Charges and | ||||||||||||||||
Restructuring | Other Related | Other Related | ||||||||||||||
Impairment | Charges | Closure Costs | Closure Costs | |||||||||||||
(In millions of U.S. dollars) | ||||||||||||||||
150-mm fab plan | — | (4 | ) | (9 | ) | (13 | ) | |||||||||
Restructuring initiatives decided in the first quarter 2005 | (63 | ) | (9 | ) | (1 | ) | (73 | ) | ||||||||
Restructuring plan decided in the second quarter 2005 | (3 | ) | (37 | ) | (1 | ) | (41 | ) | ||||||||
Other | (1 | ) | — | — | (1 | ) | ||||||||||
Total | (67 | ) | (50 | ) | (11 | ) | (128 | ) | ||||||||
SuperH, Inc. |
UPEK Inc. |
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Hynix ST Joint Venture |
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Item 6. | Directors, Senior Management and Employees |
Supervisory Board |
Name(1) | Position | Year Appointed(2) | Term Expires | Age | ||||||||||||
Gérald Arbola | Chairman | 2004 | 2008 | 57 | ||||||||||||
Bruno Steve | Vice Chairman | 1989 | 2008 | 64 | ||||||||||||
Matteo del Fante | Member | 2005 | 2008 | 39 | ||||||||||||
Tom de Waard | Member | 1998 | 2008 | 59 | ||||||||||||
Douglas Dunn | Member | 2001 | 2006 | 61 | ||||||||||||
Francis Gavois | Member | 1998 | 2006 | 70 | ||||||||||||
Didier Lombard | Member | 2004 | 2008 | 64 | ||||||||||||
Antonino Turicchi | Member | 2005 | 2008 | 40 | ||||||||||||
Robert M. White | Member | 1996 | 2006 | 67 |
(1) | Messrs. Riccardo Gallo and Alessandro Ovi, who were Supervisory Board Members throughout fiscal year 2004, were replaced by Messrs. Antonino Turicchi and Matteo del Fante at the annual general meeting on March 18, 2005. |
(2) | As a member of the Supervisory Board. |
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Biographies |
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Corporate Governance at ST |
• | Our corporate organization under Dutch law that entrusts our management to a Managing Board acting under the supervision and control of a Supervisory Board totally independent from the Managing Board. Members of our Managing Board and of our Supervisory Board are appointed and dismissed by our shareholders. | |
• | Our early adoption of policies on important issues such as “business ethics” and “conflicts of interest” and our strict policies, implemented since our 1994 initial public offering, to comply with applicable regulatory requirements concerning financial reporting, insider trading and public disclosures. | |
• | Our compliance with United States, French and Italian securities laws, because our shares are listed in these jurisdictions, and with Dutch securities laws, because we are a company incorporated under the laws of the Netherlands, as well as our compliance with the corporate, social and financial laws applicable to our subsidiaries in the countries in which we do business. | |
• | Our broad-based activities in the field of corporate social responsibility, encompassing environmental, social, health, safety, educational and other related issues. |
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Supervisory Board Committees |
Audit | Compensation | Strategic | ||||||||||||||
Number of Meetings Attended in 2005(1) | Full Board | Committee | Committee | Committee | ||||||||||||
Bruno Steve | 7 | — | 5 | 4 | ||||||||||||
Gérald Arbola | 7 | — | 5 | 4 | ||||||||||||
Tom de Waard | 7 | 11 | 5 | — | ||||||||||||
Douglas Dunn | 7 | 9 | — | — | ||||||||||||
Francis Gavois(2)(3) | 7 | 11 | — | — | ||||||||||||
Antonino Turicchi | 5 | — | 3 | 3 | ||||||||||||
Didier Lombard | 7 | — | 3 | 4 | ||||||||||||
Matteo del Fante(2)(3) | 5 | 7 | — | — | ||||||||||||
Robert M. White | 7 | 11 | — | 4 | ||||||||||||
Riccardo Gallo(2) | 2 | 4 | — | — | ||||||||||||
Alessandro Ovi(2) | 2 | — | — | 1 |
(1) | Includes meetings attended by way of conference call. |
(2) | Messrs. Riccardo Gallo and Alessandro Ovi, who were Supervisory Board Members throughout fiscal year 2004, were replaced by Messrs. Antonino Turicchi and Matteo del Fante at the annual general meeting on March 18, 2005. |
(3) | Appointed as non-voting observer to Audit Committee. |
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Managing Board |
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Executive Officers |
Years in | ||||||||||||||
Years with | Semi-conductor | |||||||||||||
Name | Position | Company | Industry | Age | ||||||||||
Executive Committee | ||||||||||||||
Carlo Bozotti | President and Chief Executive Officer | 29 | 29 | 53 | ||||||||||
Alain Dutheil | Chief Operating Officer | 23 | 36 | 60 | ||||||||||
Laurent Bosson | Executive Vice President, Front-end Technology and Manufacturing | 23 | 23 | 63 | ||||||||||
Andrea Cuomo | Executive Vice President, Advanced System Technology and Chief Strategic Officer (and for other staff functions) | 23 | 23 | 51 | ||||||||||
Carlo Ferro | Executive Vice President, Chief Financial Officer (and for Infrastructure and Services organization) | 6 | 6 | 45 | ||||||||||
Philippe Geyres | Executive Vice President, HPC (and for the other product segments) | 22 | 29 | 53 | ||||||||||
Enrico Villa | Executive Vice President, Europe Region (and for Sales and Marketing organizations) | 39 | 39 | 64 | ||||||||||
Executive Staff | ||||||||||||||
Georges Auguste | Corporate Vice President, Total Quality and Environmental Management | 19 | 32 | 56 | ||||||||||
Gian Luca Bertino | Corporate Vice President, CPG | 9 | 20 | 46 | ||||||||||
Patrice Chastagner | Corporate Vice President, Human Resources | 20 | 20 | 58 | ||||||||||
Ugo Carena | Corporate Vice President, APG | 9 | 28 | 62 | ||||||||||
Marco Luciano Cassis | Corporate Vice President, STMicroelectronics Japan | 18 | 18 | 42 | ||||||||||
François Guibert | Corporate Vice President, Emerging Markets Region | 25 | 28 | 52 | ||||||||||
Reza Kazerounian | Corporate Vice President, North America Region | 6 | 21 | 48 | ||||||||||
Otto Kosgalwies | Corporate Vice President, Infrastructure and Services | 22 | 22 | 50 | ||||||||||
Robert Krysiak | Corporate Vice President and General Manager of our new “Greater China” sales region | 17 | 23 | 51 | ||||||||||
Mario Licciardello | Corporate Vice President, MPG | 41 | 41 | 64 | ||||||||||
Jean-Claude Marquet | Corporate Vice President, Asia Pacific Region | 20 | 39 | 63 | ||||||||||
Piero Mosconi(1) | Corporate Vice President, Treasurer | 42 | 42 | 66 | ||||||||||
Carlo Ottaviani | Corporate Vice President, Communications | 41 | 41 | 62 |
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Years in | ||||||||||||||
Years with | Semi-conductor | |||||||||||||
Name | Position | Company | Industry | Age | ||||||||||
Carmelo Papa | Corporate Vice President, MLD (since January 2006 Micro, Power, Analog) | 23 | 23 | 56 | ||||||||||
Giordano Seragnoli | Corporate Vice President, Back-end Manufacturing and Subsystems Products Group | 41 | 43 | 69 |
(1) | Mr. Piero Mosconi retired in December 2005. |
Biographies |
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Supervisory Board Member | Directors’ Fees | |||
Bruno Steve | $ | 205,000 | ||
Gérald Arbola | 205,000 | |||
Tom de Waard(1) | 213,500 | |||
Douglas Dunn | 111,000 | |||
Antonino Turicchi(2) | 110,000 | |||
Francis Gavois | 120,500 | |||
Didier Lombard | 120,000 | |||
Matteo del Fante(2) | 111,500 | |||
Robert M. White | 125,500 | |||
Riccardo Gallo(2) | 9,000 | |||
Alessandro Ovi(2) | 6,000 | |||
Total | $ | 1,336,500 | ||
(1) | Compensation, including attendance fees of $2,000 per meeting of the Supervisory Board or committee thereof, was paid to Clifford Chance LLP. |
(2) | Messrs. Riccardo Gallo and Alessandro Ovi, who were Supervisory Board Members throughout fiscal year 2004, were replaced by Messrs. Antonino Turicchi and Matteo del Fante at the annual general meeting on March 18, 2005. |
Sole Member of Our Managing Board and President | ||||||||||||||||
and CEO | Salary | Bonus(1) | Non-cash Benefits | Total | ||||||||||||
Carlo Bozotti | $ | 695,585 | $ | 73,758 | $ | 64,855(2 | ) | $ | 834,198 |
(1) | The bonus paid to the sole member of our Managing Board and President and CEO during the 2005 financial year was approved by the Compensation Committee and approved by the Supervisory Board in respect of the 2004 financial year, based on fulfillment of a number of pre-defined objectives for 2004. |
(2) | Including employer social contributions, company car allowance and miscellaneous allowances. |
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Former Sole Member of Our Managing Board and | ||||||||||||||||
President and CEO | Salary | Bonus(1) | Non-cash Benefits | Total | ||||||||||||
Pasquale Pistorio | $ | 372,501 | $ | 6,000,000 | $ | 2,836(2 | ) | $ | 6,375,337 |
(1) | The bonus paid to the former sole member of our Managing Board and President and CEO during the 2005 financial year was approved by the Compensation Committee and approved by the Supervisory Board in respect of the 2004 financial year and in recognition of Mr. Pistorio’s career with the Company, based on fulfillment of a number of pre-defined objectives for 2004. |
(2) | Including employer social contributions and miscellaneous allowances. |
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• | approved the terms and conditions of the 2005 Supervisory Board Stock-Based Compensation Plan for members and professionals; | |
• | amended our 2001 Employee Stock Option Plan with the aim of enhancing our ability to retain key employees and motivate them to shareholder value creation; | |
• | approved the vesting conditions, linked to our future performance and their continued service with us, to apply to non-vested stock awards granted to employees in 2005, the maximum number of which is four million, in addition to the up to 100,000 stock awards granted to our President and CEO, which were approved by separate resolution; and | |
• | accelerated the vesting of all of our outstanding stock options in July 2005 aimed at facilitating the transition to a new stock compensation policy with no charge to our interim consolidated statements of income. |
2005 | 2004 | |||||||||||||||
Number of | ||||||||||||||||
Non-vested Shares | Acquisition | Number of | ||||||||||||||
Granted(1) | Price | Stock Options | Grant Price | |||||||||||||
€ | Granted(2) | U.S.$ | ||||||||||||||
Gérald Arbola | 6,000 | 1.04 | 12,000 | 22.71 | ||||||||||||
Bruno Steve | 6,000 | 1.04 | 12,000 | 22.71 | ||||||||||||
Tom de Waard | 6,000 | 1.04 | 12,000 | 22.71 | ||||||||||||
Matteo Del Fante(3)(4) | 6,000 | 1.04 | — | — | ||||||||||||
Douglas Dunn | 6,000 | 1.04 | 12,000 | 22.71 | ||||||||||||
Francis Gavois | 6,000 | 1.04 | 12,000 | 22.71 | ||||||||||||
Didier Lombard | 6,000 | 1.04 | 12,000 | 22.71 | ||||||||||||
Antonino Turicchi(3)(4) | 6,000 | 1.04 | — | — | ||||||||||||
Robert M. White | 6,000 | 1.04 | 12,000 | 22.71 | ||||||||||||
Riccardo Gallo(3) | — | — | 12,000 | 22.71 | ||||||||||||
Alessandro Ovi(3) | — | — | 12,000 | 22.71 |
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(1) | Pursuant to the 2005 Stock-Based Compensation Plan for Supervisory Board Members and Professionals of the Supervisory Board. |
(2) | Pursuant to the 2002 Stock Option Plan for Supervisory Board Members and Professionals of the Supervisory Board. |
(3) | Messrs. Riccardo Gallo and Alessandro Ovi, who were Supervisory Board Members throughout fiscal year 2004, were replaced by Messrs. Antonino Turicchi and Matteo del Fante at the annual general meeting on March 18, 2005. |
(4) | Messrs. Antonino Turicchi and Matteo del Fante declined their grants of restricted shares. |
Stock Option Plans |
Employee and Managing Board Stock Option Plans |
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Tranche 2 | Tranche 3 | Tranche 4 | Special grant | Tranche 5 | Special grant | Tranche 6 | Special grant | Tranche 7 | ||||||||||
Date of Supervisory Board Meeting | Sept 12, 1997 | July 28, 1998 | Sept 16, 1999 | Jan 24, 2000 | June 16, 2000 | Sept 18, 2000 | Dec 11, 2000 | Dec 18, 2000 | March 1, 2001 | |||||||||
Total Number of Shares which may be purchased | 3,873,000 | 3,900,000 | 8,878,200 | 150,000 | 5,331,250 | 70,000 | 2,019,640 | 26,501 | 113,350 | |||||||||
Vesting Date | Sept 12, 2000 | July 28, 2001 | Sept 16, 2002 | Jan 24, 2003 | June 16, 2002 | Sept 18, 2002 | Dec 11, 2002 | Dec 18, 2002 | March 1, 2003 | |||||||||
Expiration Date | Sept 12, 2005 | July 28, 2006 | Sept 16, 2007 | Jan 24, 2008 | June 16, 2008 | Sept 18, 2008 | Dec 11, 2008 | Dec 18, 2008 | March 1, 2009 | |||||||||
Exercise Price | $14.23 | $12.03 | $24.88 | $55.25 | $62.01 | $52.88 | $50.69 | $44.00 | $31.65 | |||||||||
Terms of Exercise | 50% on Sept 12, 2000 | 50% on July 28, 2001 | 50% on Sept 16, 2002 | 50% on Jan 24, 2003 | 32% on June 16, 2002 | 32% on Sept 18, 2002 | 32% on Dec 11, 2002 | 32% on Dec 18, 2002 | 32% on March 1, 2003 | |||||||||
50% on Sept 12, 2001 | 50% on July 28, 2002 | 50% on Sept 16, 2003 | 50% on Jan 24, 2004 | 32% on June 16, 2003 | 32% on Sept 18, 2003 | 32% on Dec 11, 2003 | 32% on Dec 18, 2003 | 32% on March 1, 2004 | ||||||||||
36% on June 16, 2004 | 36% on Sept 18, 2004 | 36% on Dec 11, 2004 | 36% on Dec 18, 2004 | 36% on March 1, 2005 | ||||||||||||||
Number of Shares to be acquired with Outstanding Options as of Dec 31, 2005 | — | 2,287,131 | 7,819,020 | — | 4,672,795 | 40,435 | 1,632,060 | 22,120 | 50,470 | |||||||||
Held by Managing Board/ Executive Officers | — | 420,840 | 1,352,400 | — | 549,000 | — | — | — | — |
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Tranche 1 | Tranche 2 | Tranche 3 | Tranche 4 | Tranche 5 | Tranche 6 | Tranche 7 | ||||||||||||||||||||||
Date of the grant | April 27, 2001 | Sept 4, 2001 | Nov 1, 2001 | Jan 2, 2002 | Jan 25, 2002 | April 25, 2002 | June 26, 2002 | |||||||||||||||||||||
Total Number of Shares which may be purchased | 9,521,100 | 16,000 | 61,900 | 29,400 | 3,656,103 | 9,708,390 | 318,600 | |||||||||||||||||||||
Vesting Date | April 27, 2003 | Sept 4, 2003 | Nov 1, 2003 | Jan 2, 2004 | Jan 25, 2003 | April 25, 2004 | June 26, 2004 | |||||||||||||||||||||
Expiration Date | April 27, 2011 | Sept 4, 2011 | Nov 1, 2011 | Jan 2, 2012 | Jan 25, 2012 | April 25, 2012 | June 26, 2012 | |||||||||||||||||||||
Exercise Price | $39.00 | $29.70 | $29.61 | $33.70 | $31.09 | $31.11 | $22.30 | |||||||||||||||||||||
32% on | 32% on | 32% on | 32% on | 50% on | 32% on | 32% on | ||||||||||||||||||||||
April 27, 2003 | Sept 4, 2003 | Nov 1, 2003 | Jan 2, 2004 | Jan 25, 2003 | April 25, 2004 | June 26, 2004 | ||||||||||||||||||||||
Terms of Exercise | 32% on | 32% on | 32% on | 32% on | 50% on | 32% on | 32% on | |||||||||||||||||||||
April 27, 2004 | Sept 4, 2004 | Nov 1, 2004 | Jan 2, 2005 | Jan 25, 2004 | April 25, 2005 | June 26, 2005 | ||||||||||||||||||||||
36% on | 36% on | 36% on | 36% on | 36% on | 36% on | |||||||||||||||||||||||
April 27, 2005 | Sept 4, 2005 | Nov 1, 2005 | Jan 2, 2006 | April 25, 2006 | June 26, 2006 | |||||||||||||||||||||||
Number of Shares to be acquired with Outstanding Options as of December 31, 2005 | 8,397,130 | 16,000 | 51,040 | 24,800 | 3,125,799 | 8,840,539 | 148,806 | |||||||||||||||||||||
Held by Managing Board/ Executive Officers | 771,000 | — | — | — | 274,500 | 801,000 | — |
Tranche 8 | Tranche 9 | Tranche 10 | Tranche 11 | Tranche 12 | Tranche 13 | Tranche 14 | Tranche 15 | Tranche 16 | Tranche 17 | |||||||||||
Date of the grant | Aug 1, 2002 | Dec 17, 2002 | March 14, 2003 | June 3, 2003 | Oct 24, 2003 | Jan 2, 2004 | April 26, 2004 | Sept 1, 2004 | Jan 31, 2005 | March 17, 2005 | ||||||||||
Total Number of Shares which may be purchased | 24,500 | 14,400 | 11,533,960 | 306,850 | 135,500 | 86,400 | 12,103,490 | 175,390 | 29,200 | 13,000 | ||||||||||
Vesting Date | Aug 1, 2004 | Dec 17, 2004 | March 14, 2005 | June 3, 2005 | Oct 24, 2005 | Jan 2, 2006 | April 26, 2006 | Sept 1, 2006 | Jan 31, 2007 | March 17, 2007 | ||||||||||
Expiration Date | Aug 1, 2012 | Dec 17, 2012 | March 14, 2013 | June 3, 2013 | Oct 24, 2013 | Jan 2, 2014 | April 26, 2014 | Sept 1, 2014 | Jan 31, 2015 | March 17, 2015 | ||||||||||
Exercise Price | $20.02 | $21.59 | $19.18 | $22.83 | $25.90 | $27.21 | $22.71 | $17.08 | $16.73 | $17.31 | ||||||||||
32% on Aug 1, 2004 | �� | 32% on Dec 17, 2004 | 32% on March 14, 2005 | 32% on June 3, 2005 | 32% on Oct 24, 2005 | 32% on Jan 2, 2006 | 32% on April 26, 2006 | 32% on Sept 1, 2006 | 32% on Jan 31, 2007 | 32% on March 17, 2007 | ||||||||||
Terms of Exercise | 32% on Aug 1, 2005 | 32% on Dec 17, 2005 | 32% on March 14, 2006 | 32% on June 3, 2006 | 32% on Oct 24, 2006 | 32% on Jan 2, 2007 | 32% on April 26, 2007 | 32% on Sept 1, 2007 | 32% on Jan 31, 2008 | 32% on March 17, 2008 | ||||||||||
36% on Aug 1, 2006 | 36% on Dec 17, 2006 | 36% on March 14, 2007 | 36% on June 3, 2007 | 36% on Oct 24, 2007 | 36% on Jan 2, 2008 | 36% on March 14, 2008 | 36% on Sept 1, 2008 | 36% on Jan 31, 2009 | 36% on March 17, 2009 | |||||||||||
Number of Shares to be acquired with Outstanding Options as of Dec 31, 2005 | 18,900 | 14,400 | 10,673,083 | 219,954 | 128,950 | 41,000 | 11,383,755 | 159,180 | 29,200 | 13,000 | ||||||||||
Held by Managing Board/ Executive Officers | — | — | 1,077,00 | — | 31,000 | — | 1,190,000 | — | — | — |
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Supervisory Board Stock Option Plans |
Date of Annual | June 24, 1996 | May 31, 1999 | March 27, 2002 | |||||||||||
General Meeting of | ||||||||||||||
Shareholders | Tranche 3 | Tranche 1 | Tranche 2 | Tranche 3 | Tranche 1 | Tranche 2 | Tranche 3 | |||||||
Date of the grant | July 28, 1998 | September 16, 1999 | June 16, 2000 | April 27, 2001 | April 25, 2002 | March 14, 2003 | April 26, 2004 | |||||||
Total Number of Shares which may be purchased | 103,500 | 207,000 | 103,500 | 112,500 | 132,000 | 132,000 | 132,000 | |||||||
Vesting Date | July 28, 1999 | September 16, 2000 | June 16, 2001 | April 27, 2002 | May 25, 2002 | April 14, 2003 | April 26, 2004 | |||||||
Expiration Date | July 28, 2006 | September 16, 2007 | June 16, 2008 | April 27, 2011 | April 25, 2012 | March 14, 2013 | April 26, 2014 | |||||||
Exercise Price | $12.03 | $24.88 | $62.01 | $39.00 | $31.11 | $19.18 | $22.71 | |||||||
Terms of Exercise | All exercisable after 1 year | All exercisable after 1 year | All exercisable after 1 year | All exercisable after 1 year | All exercisable after 1 year | All exercisable after 1 year | All exercisable after 1 year | |||||||
Number of Shares to be acquired with Outstanding Options as of December 31, 2005 | 36,000 | 153,000 | 90,000 | 99,000 | 120,000 | 120,000 | 132,000 |
• | a maximum number of 6,000 newly issued shares per year for each member of the Supervisory Board and 3,000 newly issued shares per year for each professional of the Supervisory Board; and | |
• | at a price per share of€1.04 per share, the nominal value of ST shares. |
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Employees | Supervisory Board | |||||||||||||||||||||||
1995 Plan | 2001 Plan | 1996 | 1999 | 2002 | Total | |||||||||||||||||||
Remaining amount authorized to be granted | 0 | 12,265,817 | 0 | 0 | 0 | 12,265,817 | ||||||||||||||||||
Amount exercised | 12,255,102 | 9,650 | 293,500 | 18,000 | 0 | 12,576,252 | ||||||||||||||||||
Amount cancelled | 2,782,808 | 4,438,997 | 72,000 | 63,000 | 24,000 | 7,380,805 | ||||||||||||||||||
Amount outstanding | 16,524,031 | 43,285,536 | 35,000 | 342,000 | 372,000 | 60,558,567 |
Employees |
At December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
France | 10,330 | 9,990 | 9,900 | |||||||||
Italy | 10,500 | 10,940 | 10,400 | |||||||||
Rest of Europe | 1,550 | 1,660 | 1,600 | |||||||||
United States | 3,120 | 3,180 | 3,000 | |||||||||
Malta and Morocco | 6,900 | 7,200 | 7,000 | |||||||||
Asia | 17,600 | 16,530 | 13,800 | |||||||||
Total | 50,000 | 49,500 | 45,700 | |||||||||
At December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Research and Development | 9,700 | 9,800 | 8,800 | |||||||||
Marketing and Sales | 2,880 | 2,850 | 2,700 | |||||||||
Manufacturing | 32,400 | 32,150 | 29,800 | |||||||||
Administration and General Services | 2,550 | 2,400 | 2,250 | |||||||||
Divisional Functions | 2,470 | 2,300 | 2,150 | |||||||||
Total | 50,000 | 49,500 | 45,700 | |||||||||
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Item 7. | Major Shareholders and Related-Party Transactions |
Common Shares Owned | ||||||||
Shareholders(1) | Number | % | ||||||
STMicroelectronics Holding II B.V. (“ST Holding II”) | 250,704,754 | 27.6% | ||||||
Public | 580,787,153 | 63.9% | ||||||
Brandes Investment Partners | 62,932,372 | 7% | ||||||
Treasury shares | 13,400,000 | 1.5% |
(1) | At the end of 2004, Capital Group International, Inc. owned more than 5% of our share capital. As of December 31, 2005, Capital Group International, Inc. had reduced its participation in our share capital below the 5% threshold and is, consequently, no longer one of our major shareholders. |
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Common Shares Owned | ||||||||
Number | % | |||||||
December 31, 2005 | 250,704,754 | 27.6 | ||||||
December 31, 2004 | 278,483,280 | 30.8 | ||||||
December 31, 2003 | 311,483,280 | 34.5 |
(1) | CDP owns 30% of ST Holding, while Finmeccanica owns 20% of ST Holding. |
(2) | Not a legal entity, purely for illustrative purposes. |
(3) | FT1CI owns 50% of ST Holding and indirectly holds 99,318,236 of our common shares. |
(4) | CDP and Finmeccanica own 50% of ST Holding and indirectly hold 91,644,941 and 59,741,577 of our common shares, respectively. |
(5) | The 70.9% includes the 7% shareholding of Brandes Investment Partners. |
(6) | ST Holding II owns 27.6% of our shares, the Public owns 70.9% of our shares and we hold the remaining 1.5% as Treasury Shares. |
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Shareholders’ Agreements |
STH Shareholders’ Agreement |
Restructuring of the Holding Companies |
Standstill |
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Corporate Governance |
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(i) As long as any of the shareholders indirectly owns at least equal to the lesser of 3% of our issued and outstanding share capital or 10% of the remaining STH shareholders’ stake in us at such time, with respect to the holding company, any changes to the articles of association, any issue, acquisition or disposal of shares in the holding company or change in the rights of its shares, its liquidation or dissolution and any legal merger, de-merger, acquisition or joint venture agreement to which the holding company is proposed to be a party. However, the minority shareholder may not prevent the other shareholder from increasing the capital of the holding company in order to finance the acquisition of additional shares in our company as a defense against a hostile takeover bid for STMicroelectronics N.V. | |
(ii) As long as any of the shareholders indirectly owns at least 33% of the holding company, certain changes to our articles of association (including any alteration in our authorized share capital, or any issue of share capital and/or financial instrument giving the right to subscribe for our common shares, changes to the rights attached to our shares, changes to the preemptive rights, issues relating to the form, rights and transfer mechanics of the shares, the composition and operation of the Managing and Supervisory Boards, matters subject to the Supervisory Board’s approval, the Supervisory Board’s voting procedures, extraordinary meetings of shareholders and quorums for voting at shareholders meetings). | |
(iii) Any decision to vote our shares held by the holding company at any general meeting of our shareholders with respect to any substantial and material merger decision. In the event of a failure by the shareholders to reach a common decision on the relevant merger proposal, our shares attributable to the minority shareholder and held by the holding company will be counted as present for purposes of a quorum of shareholders at one of our shareholders meetings, but will not be voted (i.e., will be abstained from the vote in a way that they will not be counted as a negative vote or as a positive vote). | |
(iv) In addition, the minority shareholder will have the right to designate at least one member of the list of candidates for our Supervisory Board to be proposed by the holding company if that shareholder indirectly owns at least 3% of our total issued and outstanding share capital, with the majority STH shareholder retaining the right to appoint that number of members to our Supervisory Board that is at least proportional to such majority STH shareholder’s voting stake. |
Disposals of our Common Shares |
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Re-adjusting and Re-balancing options |
Change of Control Provision |
Non-competition |
Deadlock |
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Preference Shares |
Other Shareholders’ Agreements |
Italian Shareholders’ Pact |
Statutory Considerations |
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Item 8. | Financial Information |
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• | Property damage and business interruption; | |
• | General liability and product liability; | |
• | Directors and officers liability; and | |
• | Transportation risks. |
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• | On March 18, 2005, our shareholders approved the payment of a cash dividend with respect to the year ended December 31, 2004 of $0.12 per share payable to Dutch Registry Shareholders of record on May 23, 2005 and New York registry shareholders as of May 25, 2005. This dividend was approximately 18% of our earnings in 2004. | |
• | On April 23, 2004, our shareholders approved the payment of a cash dividend with respect to the year ended December 31, 2003 of $0.12 per share payable to Dutch Registry shareholders of record on May 21, 2004 and New York registry shareholders as of May 26, 2004. This dividend was approximately 42% of our earnings for 2003. | |
• | In 2003, we paid a cash dividend with respect to the year ended December 31, 2002 of $0.08 per share. This dividend was approximately 17% of our earnings for 2002. |
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• | In 2002, we paid a cash dividend with respect to the year ended December 31, 2001 of $0.04 per share. This dividend was approximately 14% of our earnings for 2001. | |
• | In 2001, we paid a cash dividend with respect to the year ended December 31, 2000 of $0.04 per share. This dividend was approximately 2% of our earnings for 2000. |
Item 9. | Listing |
Our Common Shares |
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Average Daily Trading | |||||||||||||||||
Volumes | |||||||||||||||||
Price Ranges | |||||||||||||||||
Number of | |||||||||||||||||
Calendar Period | Shares | Capital | High | Low | |||||||||||||
(€) | (€) | (€) | |||||||||||||||
Annual Information for the Past Five Years | |||||||||||||||||
2001 | 52.45 | 18.88 | |||||||||||||||
2002 | 39.70 | 11.10 | |||||||||||||||
2003 | 24.74 | 15.20 | |||||||||||||||
2004 | 23.81 | 13.25 | |||||||||||||||
2005 | 15.81 | 10.83 | |||||||||||||||
Quarterly Information for the Past Two Years | |||||||||||||||||
2004 | |||||||||||||||||
First quarter | 23.81 | 18.12 | |||||||||||||||
Second quarter | 20.50 | 16.92 | |||||||||||||||
Third quarter | 18.32 | 13.25 | |||||||||||||||
Fourth quarter | 16.36 | 13.76 | |||||||||||||||
2005 | |||||||||||||||||
First quarter | 14.47 | 12.38 | |||||||||||||||
Second quarter | 13.71 | 10.83 | |||||||||||||||
Third quarter | 15.17 | 12.58 | |||||||||||||||
Fourth quarter | 15.81 | 13.21 | |||||||||||||||
Monthly Information for the Past 18 Months | |||||||||||||||||
2004 | |||||||||||||||||
September | 6,269,593 | 89,874,616 | 15.26 | 13.25 | |||||||||||||
October | 5,754,106 | 81,909,699 | 14.82 | 13.76 | |||||||||||||
November | 5,761,598 | 88,377,152 | 16.36 | 14.35 | |||||||||||||
December | 4,558,003 | 66,824,882 | 15.63 | 14.09 | |||||||||||||
2005 | |||||||||||||||||
January | 6,129,044 | 81,632,737 | 14.47 | 12.38 | |||||||||||||
February | 6,725,241 | 88,867,335 | 13.67 | 12.57 | |||||||||||||
March | 4,696,705 | 62,203,161 | 13.94 | 12.77 | |||||||||||||
April | 6,533,316 | 79,177,257 | 13.01 | 10.83 | |||||||||||||
May | 6,231,000 | 72,049,053 | 12.75 | 10.87 | |||||||||||||
June | 6,216,894 | 81,634,035 | 13.71 | 12.47 | |||||||||||||
July | 6,528,148 | 92,771,511 | 15.17 | 12.58 | |||||||||||||
August | 3,780,604 | 51,998,427 | 14.51 | 13.17 | |||||||||||||
September | 4,864,941 | 67,454,878 | 14.52 | 13.01 | |||||||||||||
October | 5,057,766 | 70,267,543 | 14.82 | 13.21 | |||||||||||||
November | 4,984,709 | 72,487,638 | 15.19 | 13.40 | |||||||||||||
December | 3,947,090 | 61,022,011 | 15.81 | 15.02 | |||||||||||||
2006 | |||||||||||||||||
January | 6,316,739 | 99,311,771 | 16.56 | 15.03 | |||||||||||||
February (through February 24, 2006) | 5,354,222 | 79,445,946 | 15.43 | 14.22 |
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Average Daily Trading | |||||||||||||||||
Volumes | |||||||||||||||||
Price Ranges | |||||||||||||||||
Number of | |||||||||||||||||
Calendar Period | Shares | Capital | High | Low | |||||||||||||
(€) | (€) | (€) | |||||||||||||||
Annual Information for the past five years | |||||||||||||||||
2001 | 52.35 | 18.89 | |||||||||||||||
2002 | 39.65 | 11.09 | |||||||||||||||
2003 | 24.75 | 15.21 | |||||||||||||||
2004 | 23.81 | 13.25 | |||||||||||||||
2005 | 15.82 | 10.82 | |||||||||||||||
Quarterly Information for the past two years | |||||||||||||||||
2004 | |||||||||||||||||
First quarter | 23.81 | 18.11 | |||||||||||||||
Second quarter | 20.49 | 16.92 | |||||||||||||||
Third quarter | 18.32 | 13.25 | |||||||||||||||
Fourth quarter | 16.36 | 13.76 | |||||||||||||||
2005 | |||||||||||||||||
First quarter | 14.48 | 12.37 | |||||||||||||||
Second quarter | 13.71 | 10.82 | |||||||||||||||
Third quarter | 15.18 | 12.59 | |||||||||||||||
Fourth quarter | 15.82 | 13.21 | |||||||||||||||
Monthly Information for the past 18 months | |||||||||||||||||
2004 | |||||||||||||||||
September | 21,017,508 | 301,222,925 | 15.24 | 13.25 | |||||||||||||
October | 17,188,824 | 244,665,721 | 14.82 | 13.76 | |||||||||||||
November | 20,580,173 | 315,679,274 | 16.36 | 14.35 | |||||||||||||
December | 13,637,919 | 200,313,754 | 15.59 | 14.09 | |||||||||||||
2005 | |||||||||||||||||
January | 18,697,793 | 248,979,812 | 14.48 | 12.37 | |||||||||||||
February | 24,831,743 | 327,903,166 | 13.66 | 12.56 | |||||||||||||
March | 16,635,361 | 220,368,627 | 13.95 | 12.78 | |||||||||||||
April | 16,799,805 | 203,613,637 | 13.02 | 10.82 | |||||||||||||
May | 17,032,815 | 196,848,243 | 12.74 | 10.87 | |||||||||||||
June | 15,437,703 | 202,774,229 | 13.71 | 12.46 | |||||||||||||
July | 20,733,076 | 294,782,875 | 15.18 | 12.59 | |||||||||||||
August | 10,019,202 | 138,044,565 | 14.52 | 13.17 | |||||||||||||
September | 13,187,754 | 183,520,785 | 14.52 | 13.00 | |||||||||||||
October | 13,057,791 | 181,424,948 | 14.79 | 13.21 | |||||||||||||
November | 11,546,608 | 167,933,867 | 15.20 | 13.42 | |||||||||||||
December | 9,162,791 | 141,711,726 | 15.82 | 15.00 | |||||||||||||
2006 | |||||||||||||||||
January | 13,055,279 | 205,085,378 | 16.55 | 15.05 | |||||||||||||
February (through February 24, 2006) | 10,273,881 | 152,423,299 | 15.43 | 14.21 |
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Average Daily Trading | |||||||||||||||||
Volumes | |||||||||||||||||
Price Ranges | |||||||||||||||||
Number of | |||||||||||||||||
Calendar Period | Shares | Capital | High | Low | |||||||||||||
(U.S.$) | (U.S.$) | (U.S.$) | |||||||||||||||
Annual Information for the past five years | |||||||||||||||||
2001 | 48.70 | 17.89 | |||||||||||||||
2002 | 35.81 | 11.00 | |||||||||||||||
2003 | 28.67 | 16.67 | |||||||||||||||
2004 | 29.90 | 16.36 | |||||||||||||||
2005 | 19.47 | 13.96 | |||||||||||||||
Quarterly Information for the past two years | |||||||||||||||||
2004 | |||||||||||||||||
First quarter | 29.90 | 22.27 | |||||||||||||||
Second quarter | 24.82 | 20.32 | |||||||||||||||
Third quarter | 22.14 | 16.36 | |||||||||||||||
Fourth quarter | 21.16 | 17.01 | |||||||||||||||
2005 | |||||||||||||||||
First quarter | 19.47 | 16.13 | |||||||||||||||
Second quarter | 16.85 | 13.96 | |||||||||||||||
Third quarter | 18.34 | 15.58 | |||||||||||||||
Fourth quarter | 18.86 | 15.98 | |||||||||||||||
Monthly Information for the past 18 months | |||||||||||||||||
2004 | |||||||||||||||||
September | 1,829,333 | 32,106,623 | 18.79 | 16.36 | |||||||||||||
October | 1,924,786 | 34,330,483 | 18.58 | 17.01 | |||||||||||||
November | 1,803,624 | 35,926,386 | 21.16 | 18.37 | |||||||||||||
December | 1,189,882 | 23,369,282 | 20.68 | 18.78 | |||||||||||||
2005 | |||||||||||||||||
January | 1,662,825 | 29,019,622 | 19.63 | 16.13 | |||||||||||||
February | 1,278,100 | 22,037,000 | 18.25 | 16.26 | |||||||||||||
March | 1,123,545 | 19,554,177 | 18.38 | 16.49 | |||||||||||||
April | 1,410,381 | 22,106,312 | 16.65 | 14.00 | |||||||||||||
May | 1,086,629 | 15,950,627 | 15.74 | 13.96 | |||||||||||||
June | 905,845 | 14,456,380 | 16.50 | 15.33 | |||||||||||||
July | 1,379,140 | 23,816,369 | 18.34 | 15.58 | |||||||||||||
August | 693,352 | 11,726,662 | 17.76 | 16.21 | |||||||||||||
September | 914,219 | 15,613,946 | 17.77 | 16.27 | |||||||||||||
October | 1,100,181 | 18,353,219 | 17.63 | 15.98 | |||||||||||||
November | 909,276 | 15,600,448 | 17.75 | 16.15 | |||||||||||||
December | 715,167 | 13,095,423 | 18.86 | 17.86 | |||||||||||||
2006 | |||||||||||||||||
January 2006 | 1,121,390 | 21,417,428 | 19.90 | 18.23 | |||||||||||||
February (through February 24, 2006) | 739,224 | 13,122,704 | 18.58 | 16.91 |
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Euronext |
General |
Euronext Paris |
• | Compartment A comprises the companies with market capitalizations above€1 billion; | |
• | Compartment B comprises the companies with market capitalizations from€150 million and up to and including€1 billion; and | |
• | Compartment C comprises the companies with capitalizations below€150 million. |
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Securities Trading in Italy |
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Item 10. | Additional Information |
Applicablenon-U.S. Regulations |
Applicable Dutch Legislation |
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• | file our annual accounts and the auditors’ report with the Registry of the Chamber of Commerce of Amsterdam with a copy to the Dutch Authority for the Financial Markets (Autoriteit Financiële Marktenor the “AFM”); | |
• | file our half-yearly accounts; and | |
• | publish any new information concerning our business that was not published in the Netherlands and could have a significant impact on our share price if it becomes public. The information is published as a press release with a copy to the AFM. |
Applicable French Legislation |
• | we are required to inform our shareholders of (a) the convening of general meetings of shareholders as well as the means provided to them to exercise their vote; (b) the payment of dividends; and (c) offering of new shares, subscription offerings, allocation of shares, waivers, and offerings to convert shares; | |
• | we are also required to: (a) inform the public of any modification of the distribution of share capital in relation to information published earlier; (b) distribute through the intermediary of the French press any information related to our activity and the results for the first six months of each financial year within a four-month period as from the close of such financial year; (c) publish annual consolidated accounts and our management report within a six-month period as from the close of the financial year; and (d) inform the public of any changes to the rights attached to the different classes of shares; |
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• | we are required to inform the AMF of any plans to modify our articles of association(statuts); and | |
• | furthermore, we must ensure that information diffused in France is identical and simultaneously communicated to that which is communicated abroad. |
Applicable Italian Legislation |
Articles of Association |
Purposes of the Company (Article 2) |
Company and Trade Registry |
Supervisory Board and Managing Board |
• | Power to vote on proposals, arrangements or contracts in which such member is directly interested; | |
• | Power, in the absence of an independent quorum, to vote on compensation to themselves or any members of the Supervisory Board; or | |
• | Borrowing powers exercisable by the directors and how such borrowing powers can be varied. |
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Compensation of our Managing Board (Article 12) |
Compensation of our Supervisory Board (Article 23) |
Information from our Managing Board to our Supervisory Board (Article 18) |
a) our operational and financial objectives; | |
b) our strategy designed to achieve the objectives; and | |
c) the parameters to be applied in relation to our strategy, inter alia, regarding financial ratios. |
Adoption of Annual Accounts and Discharge of Management Liability (Article 25) |
Distribution of Profits (Articles 25, 35, 36, 37, 38, 39, and 40) |
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Shareholders Meetings and Voting Rights |
Notice Convening the General Meeting of Shareholders (Articles 26, 27, 28 and 29) |
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Voting Rights (Articles 30, 31 and 33) |
Authority of the General Meeting of Shareholders (Articles 12, 16, 19, 25, 28 and 41) |
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Quorum and Majority (Articles 4, 13 and 32) |
Disclosure of Holdings |
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Share Capital as of December 31, 2005 |
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Non-issued Authorized Share Capital as of December 31, 2005 |
Other Securities Giving Access to Our Share Capital as of December 31, 2005 |
Securities Not Representing Our Share Capital |
Preemptive Rights and Preference Shares (Article 4) |
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Changes to Our Share Capital and Stock Option Grants |
Cumulative | Nominal Value | Amount of | ||||||||||||||||||||||||||||||
Nominal | Amount of | Cumulative | of Increase/ | Issue | Cumulative — | |||||||||||||||||||||||||||
Number of | Value | Capital | Number of | Reduction in | Premium | Issue Premium | ||||||||||||||||||||||||||
Year | Transaction | Shares | (Euro) | (Euro) | Shares | Capital | (Euro) | (Euro) | ||||||||||||||||||||||||
May 5, 2000 | Exercise of options | 467,725 | 3.12 | 905,660,699 | 290,275,865 | 1,459,302 | 7,164,432 | 1,191,934,282 | ||||||||||||||||||||||||
May 5, 2000 | LYONs conversion | 5,365,888 | 3.12 | 922,402,269 | 295,641,753 | 16,741,571 | 234,054,348 | 1,425,988,630 | ||||||||||||||||||||||||
May 5, 2000 | 3:1 Stock Split | 591,283,506 | 1.04 | 922,402,269 | 886,925,259 | 1,425,988,630 | ||||||||||||||||||||||||||
July 1, 2000 | Exercise of options | 248,275 | 1.04 | 922,660,475 | 887,173,534 | 258,206 | 2,018,275 | 1,428,006,905 | ||||||||||||||||||||||||
July 1, 2000 | LYONs conversion | 346,518 | 1.04 | 923,020,854 | 887,520,052 | 360,379 | 5,653,989 | 1,433,660,894 | ||||||||||||||||||||||||
December 31, 2000 | Exercise of options | 896,674 | 1.04 | 923,953,395 | 888,416,726 | 932,541 | 27,418,268 | 1,461,079,162 | ||||||||||||||||||||||||
December 31, 2000 | LYONs conversion | 1,464,561 | 1.04 | 925,476,538 | 889,881,287 | 1,523,143 | 23,332,858 | 1,484,412,020 | ||||||||||||||||||||||||
March 31, 2001 | Exercise of options | 277,695 | 1.04 | 925,765,341 | 890,158,982 | 288,803 | 2,319,055 | 1,486,731,074 | ||||||||||||||||||||||||
March 31, 2001 | LYONs conversion | 151,251 | 1.04 | 925,922,642 | 890,310,233 | 157,301 | 2,453,756 | 1,489,184,830 | ||||||||||||||||||||||||
December 31, 2001 | Exercise of options | 2,062,234 | 1.04 | 928,067,365 | 892,372,467 | 2,144,723 | 44,383,800 | 1,533,568,630 | ||||||||||||||||||||||||
December 31, 2001 | LYONs conversion | 6,726,714 | 1.04 | 935,063,148 | 899,099,181 | 6,995,782 | 114,600,190 | 1,648,168,820 | ||||||||||||||||||||||||
March 30, 2002 | Exercise of options | 140,455 | 1.04 | 935,209,221 | 899,239,636 | 146,073 | 1,081,691 | 1,649,250,511 | ||||||||||||||||||||||||
September 28, 2002 | LYONs conversion | 945 | 1.04 | 935,210,204 | 899,240,581 | 983 | 30,482 | 1,649,280,993 | ||||||||||||||||||||||||
September 28, 2002 | Exercise of options and employee stock purchases | 601,284 | 1.04 | 935,835,540 | 899,841,865 | 625,335 | 10,830,842 | 1,660,111,835 | ||||||||||||||||||||||||
December 31, 2002 | Exercise of options and employee stock purchases | 1,081,689 | 1.04 | 936,960,496 | 900,923,554 | 1,124,957 | 15,671,916 | 1,675,783,751 | ||||||||||||||||||||||||
March 29, 2003 | Exercise of options | 91,146 | 1.04 | 937,055,288 | 901,014,700 | 94,792 | 404,011 | 1,676,187,762 | ||||||||||||||||||||||||
June 28, 2003 | Exercise of options and employee stock purchases | 217,490 | 1.04 | 937,281,478 | 901,232,190 | 226,190 | 2,075,922 | 1,678,263,684 | ||||||||||||||||||||||||
September 27, 2003 | Exercise of options | 903,283 | 1.04 | 938,220,892 | 902,135,473 | 939,414 | 10,857,587 | 1,689,121,271 | ||||||||||||||||||||||||
December 31, 2003 | Exercise of options | 634,261 | 1.04 | 938,880,523 | 902,769,734 | 659,631 | 4,458,391 | 1,693,579,662 | ||||||||||||||||||||||||
March 27, 2004 | Exercise of options | 1,964,551 | 1.04 | 940,923,656 | 904,734,285 | 2,043,133 | 9,048,811 | 1,702,628,473 | ||||||||||||||||||||||||
June 26, 2004 | Exercise of options | 84,740 | 1.04 | 941,011,786 | 904,819,025 | 88,130 | 1,640,712 | 1,704,269,185 | ||||||||||||||||||||||||
September 25, 2004 | Exercise of options | 65,990 | 1.04 | 941,080,416 | 904,885,015 | 68,630 | 605,542 | 1,704,874,727 | ||||||||||||||||||||||||
September 25, 2004 | Bonds conversion | 101 | 1.04 | 941,080,521 | 904,885,116 | 105 | 7,006 | 1,704,881,733 | ||||||||||||||||||||||||
December 31, 2004 | Exercise of options | 422,120 | 1.04 | 941,519,525 | 905,307,236 | 439,005 | 4,021,536 | 1,708,903,269 | ||||||||||||||||||||||||
December 31, 2004 | LYONs conversion | 1,761 | 1.04 | 941,521,357 | 905,308,997 | 1,831 | 46,225 | 1,708,949,494 | ||||||||||||||||||||||||
April 2, 2005 | Exercise of options | 63,270 | 1.04 | 941,587,158 | 905,372,267 | 65,801 | 571,525 | 1,709,521,019 | ||||||||||||||||||||||||
April 2, 2005 | LYONs conversion | 59 | 1.04 | 941,587,219 | 905,372,326 | 61 | 1,448 | 1,709,522,467 | ||||||||||||||||||||||||
June 2, 2005 | Exercise of options | 145,454 | 1.04 | 941,738,491 | 905,517,780 | 151,272 | 1,436,236 | 1,710,958,703 | ||||||||||||||||||||||||
October 1, 2005 | Exercise of options | 2,079,369 | 1.04 | 943,901,035 | 907,597,149 | 2,162,544 | 21,629,617 | 1,732,651,320 | ||||||||||||||||||||||||
December 31, 2005 | Exercise of options | 227,130 | 1.04 | 944,137,250 | 907,824,279 | 236,215 | 2,062,234 | 1,734,713,554 |
Liquidation Rights (Articles 42 and 43) |
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Acquisition of Shares in Our Own Share Capital (Article 5) |
Changes to Our Share Capital, Stock Option Grants and Other Matters |
Nominal | ||||||||||||||||||||||||||||||||
Cumulative | Value of | Amount of | ||||||||||||||||||||||||||||||
Nominal | Amount of | Cumulative | Increase/ | Issue | Cumulative | |||||||||||||||||||||||||||
Number of | Value | Capital | Number of | Reduction | Premium | Issue Premium | ||||||||||||||||||||||||||
Year | Transaction | Shares | (Euro) | (Euro) | Shares | in Capital | (Euro) | (Euro) | ||||||||||||||||||||||||
December 31, 2004 | LYONs conversion | 1,761 | 1.04 | 941,521,357 | 905,308,997 | 1,831 | 46,225 | 1,708,949,494 | ||||||||||||||||||||||||
December 31, 2005 | Conversion of bonds | 59 | 1.04 | 941,521,418 | 905,309,056 | 61 | 1,448 | 1,708,950,942 | ||||||||||||||||||||||||
December 31, 2005 | Exercise of options | 2,515,223 | 1.04 | 944,137,250 | 907,824,279 | 2,615,832 | 25,762,612 | 1,734,713,554 |
Employees | Supervisory Board | |||||||||||||||||||||||
1995 Plan | 2001 Plan | 1996 | 1999 | 2002 | Total | |||||||||||||||||||
Remaining amount authorized to be granted | — | 12,265,817 | — | — | — | 12,265,817 | ||||||||||||||||||
Amount exercised | 12,255,102 | 9,650 | 293,500 | 18,000 | — | 12,576,252 | ||||||||||||||||||
Amount cancelled | 2,782,808 | 4,438,997 | 72,000 | 63,000 | 24,000 | 7,380,805 | ||||||||||||||||||
Amount outstanding | 16,524,031 | 43,285,536 | 35,000 | 342,000 | 372,000 | 60,558,567 |
• | amended our 2001 Employee Stock Option Plan with the aim of enhancing our ability to retain key employees and motivate them to shareholder value creation; |
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• | approved the vesting conditions, linked to our future performance and their continued service with us, to apply to non-vested stock awards granted to employees in 2005, the maximum number of which will be 4.1 million; and | |
• | accelerated the vesting of all of our outstanding stock options in July 2005 with no charge to our interim consolidated statements of income. |
Dutch Taxation |
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Taxes on income and capital gains |
a. you are neither resident, nor deemed to be resident, in the Netherlands for purposes of Dutch income tax or corporation tax, as the case may be, and, if you are an individual, you have not elected to be treated as a resident of the Netherlands for Dutch income tax purposes; | |
b. your common shares and income or capital gains derived therefrom have no connection with your past, present or future employment, if any; and | |
c. your common shares do not form part of a substantial interest or a deemed substantial interest in us within the meaning of Chapter 4 of the Dutch Income Tax Act 2001(Wet inkomstenbelasting 2001), unless such interest forms part of the assets of an enterprise. |
1. Such person alone or, if he is an individual, together with his partner(partner), if any, has, directly or indirectly, the ownership of shares in us representing 5% or more of our total issued and outstanding capital (or the issued and outstanding capital of any class of our shares), or rights to acquire, directly or indirectly, shares, whether or not already issued, that represent 5% or more of our total issued and outstanding capital (or the issued and outstanding capital of any class of our shares), or the ownership of profit participating certificates(winstbewijzen) that relate to 5% or more of our annual profit or to 5% or more of our liquidation proceeds. | |
2. Such person’s shares, profit participating certificates or rights to acquire shares or profit participating certificates in us have been acquired by him or are deemed to have been acquired by him under a non-recognition provision. | |
3. Such person’s partner or any of his relatives by blood or by marriage in the direct line (including foster-children) or of those of his partner has a substantial interest (as described under 1. and 2. above) in us. |
1. If you derive profits from an enterprise, whether as an entrepreneur(ondernemer) or pursuant to a co-entitlement to the net value of such enterprise, other than as an entrepreneur or a shareholder, in the case of an individual, or other than as a holder of securities, in other cases, which enterprise is either managed in the Netherlands or carried on, in whole or in part, through a permanent establishment or a permanent representative in the Netherlands, as the case may be, your common shares are not attributable to such enterprise or, in case the common shares are attributable to such enterprise, the benefits therefrom are exempt under the participation exemption as laid down in the Dutch Corporation Tax Act 1969(Wet op de vennootschapsbelasting 1969). | |
2. You do not derive benefits from common shares that are taxable as benefits from miscellaneous activities(resultaat uit overage werkzaamheden) in the Netherlands. |
• | distributions in cash or in kind, deemed and constructive distributions and repayments of capital not recognized as paid-in for Dutch dividend withholding tax purposes; |
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• | liquidation proceeds and proceeds of redemption of shares in excess of the average capital recognized as paid-in for Dutch dividend withholding tax purposes; | |
• | the par value of shares issued by us to a shareholder or an increase of the par value of shares, as the case may be, to the extent that it does not appear that a contribution, recognized for Dutch dividend withholding tax purposes, has been made or will be made; and | |
• | partial repayment of capital, recognized as paid-in for Dutch dividend withholding tax purposes, if and to the extent that there are net profits(zuivere winst), unless (a) our general shareholders meeting has resolved in advance to make such repayment and (b) the par value of the shares concerned has been reduced by an equal amount by way of an amendment to our articles of association. |
• | Your investment activities go beyond the activities of an active portfolio investor, for instance in the case of the use of insider knowledge(voorkennis) or comparable forms of special knowledge; or | |
• | you make or are deemed to make common shares available, legally or in fact, directly or indirectly, to a related party as described in articles 3.91 and 3.92 of the Dutch Income Tax Act 2001 under circumstances described there. |
Dividend withholding tax |
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• | 3% of the dividends paid by us in respect of which Dutch dividend withholding tax is withheld, and | |
• | 3% of the qualifying profit distributions grossed up by the foreign tax withheld on such distributions received from foreign subsidiaries and branches prior to the distribution of the dividend by us during the current calendar and the two preceding calendar years (to the extent such distributions have not been taken into account previously when applying this test). |
Gift and inheritance taxes |
• | the donor or the deceased was resident or deemed to be resident in the Netherlands for purposes of gift or inheritance tax (as the case may be); or | |
• | the common shares are or were attributable to an enterprise or part of an enterprise that the donor or deceased carried on through a permanent establishment or a permanent representative in the Netherlands at the time of the gift or of the death of the deceased; or | |
• | the donor made a gift of common shares, then became a resident or deemed resident of the Netherlands, and died as a resident or deemed resident of the Netherlands within 180 days after the date of the gift. |
Other taxes and duties |
• | that is, for U.S. federal income tax purposes, (a) a citizen or individual resident of the United States (b) a U.S. domestic corporation or a domestic entity taxable as a corporation, (c) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (d) a trust if a court within the United States can exercise primary supervision over the administration of the trust and one or more U.S. persons are authorized to control all substantial decisions of the trust; | |
• | that owns, directly, indirectly or by attribution, less than 10% of our voting power or outstanding share capital; | |
• | that holds the common shares as capital assets; | |
• | whose functional currency for U.S. federal income tax purposes is the U.S. dollar; | |
• | that is a resident of the United States and not also a resident of the Netherlands for purposes of the U.S./ NL Income Tax Treaty; |
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• | that is entitled, under the “limitation on benefits” provisions contained in the U.S./ NL Income Tax Treaty, to the benefits of the U.S./ NL Income Tax Treaty; and | |
• | that does not have a permanent establishment or fixed base in the Netherlands. |
Dividends |
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Sale, Exchange or Other Disposition of Common Shares |
Passive Foreign Investment Company Status |
U.S. Information Reporting and Backup Withholding |
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Item 11. | Quantitative and Qualitative Disclosures About Market Risk |
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Fair Value at | ||||||||||||||||||||||||||||||||
Total | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | December 31, 2005 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Cash equivalents | 2,027 | 2,027 | ||||||||||||||||||||||||||||||
Average interest rate | 4.1 | % | ||||||||||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||||||||||
Fixed rate | 1,791 | 1,522 | 119 | 58 | 30 | 22 | 40 | 1,742 | ||||||||||||||||||||||||
Average interest rate | 0.25 | % | (0.19 | )% | 3.14 | % | 3.58 | % | 2.49 | % | 2.09 | % | 1.16 | % |
Amounts in Millions | |||||
of U.S. Dollars | |||||
Long-term debt by currency as of December 31, 2005: | |||||
U.S. dollar | 1,454 | ||||
Euro | 206 | ||||
Singapore dollar | 120 | ||||
Other currencies | 11 | ||||
Total in U.S. dollars | 1,791 | ||||
Amounts in Millions | |||||
of U.S. Dollars | |||||
Long-term debt by currency as of December 31, 2004: | |||||
U.S. dollar | 1,404 | ||||
Euro | 324 | ||||
Singapore dollar | 153 | ||||
Other currencies | 19 | ||||
Total in U.S. dollars | 1,900 | ||||
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Notional Amount | Average Rate | Fair Value | ||||||||||||||||||||||
Buy | USD | Sell | JPY | 71 | 116.6 | 0 | ||||||||||||||||||
Sell | USD | Buy | JPY | 48 | 116.3 | 0 | ||||||||||||||||||
Buy | USD | Sell | CAD | 72 | 1.17 | 0 | ||||||||||||||||||
Sell | USD | Buy | SGD | 37 | 1.66 | 0 | ||||||||||||||||||
Sell | USD | Buy | INR | 3 | 45.9 | 0 | ||||||||||||||||||
Sell | USD | Buy | SEK | 12 | 8.0 | 0 | ||||||||||||||||||
Buy | GBP | Sell | USD | 33 | 1.73 | 0 | ||||||||||||||||||
Buy | EUR | Sell | USD | 1,771 | 1.20 | (27 | ) | |||||||||||||||||
Sell | EUR | Buy | USD | 130 | 1.18 | 0 | ||||||||||||||||||
Sell | EUR | Buy | CHF | 4 | 1.55 | 0 | ||||||||||||||||||
Sell | EUR | Buy | JPY | 25 | 139.8 | 0 | ||||||||||||||||||
2,206 | (27 | ) | ||||||||||||||||||||||
Notional Amount | Average Rate | Fair Value | ||||||||||||||||||||||
Buy | USD | Sell | JPY | 76 | 104.9 | (2 | ) | |||||||||||||||||
Sell | USD | Buy | JPY | 30 | 102.4 | 0 | ||||||||||||||||||
Buy | EUR | Sell | USD | 4,803 | 1.37 | 187 | ||||||||||||||||||
Sell | EUR | Buy | USD | 2,388 | 1.37 | (91 | ) | |||||||||||||||||
Buy | USD | Sell | SGD | 1,120 | 1.64 | (14 | ) | |||||||||||||||||
Buy | USD | Sell | CAD | 70 | 1.20 | (1 | ) | |||||||||||||||||
Sell | USD | Buy | INR | 9 | 43.5 | 0 | ||||||||||||||||||
Sell | USD | Buy | SEK | 27 | 6.6 | 0 | ||||||||||||||||||
Buy | MTL | Sell | USD | 197 | 3.14 | 11 | ||||||||||||||||||
Buy | GBP | Sell | USD | 42 | 1.93 | 1 | ||||||||||||||||||
Sell | EUR | Buy | JPY | 37 | 140.9 | 0 | ||||||||||||||||||
Buy | EUR | Sell | MYR | 7 | 5.26 | 0 | ||||||||||||||||||
Buy | EUR | Sell | SGD | 6 | 2.22 | 0 | ||||||||||||||||||
Buy | JPY | Sell | SGD | 39 | 0.02 | 0 | ||||||||||||||||||
Buy | JPY | Sell | MYR | 1 | 0.04 | 0 | ||||||||||||||||||
8,852 | (91 | ) | ||||||||||||||||||||||
Item 12. | Description of Securities Other Than Equity Securities |
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Item 13. | Defaults, Dividend Arrearages and Delinquencies |
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
Item 15. | Controls and Procedures |
Item 16A. | Audit Committee Financial Expert |
Item 16B. | Code of Ethics |
Item 16C. | Principal Accountant Fees and Services |
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Percentage of | Percentage of | |||||||||||||||
2005 | Total Fees | 2004 | Total Fees | |||||||||||||
Audit Fees | ||||||||||||||||
Statutory audit, certification, audit of individual and consolidated financial statements | $ | 2,494,626 | 94 | % | $ | 2,079,857 | 93 | % | ||||||||
Audit-related fees | 138,312 | 5 | % | 125,282 | 6 | % | ||||||||||
Non-audit Fees | ||||||||||||||||
Tax compliance fees | 24,028 | 1 | % | 25,668 | 1 | % | ||||||||||
Other fees | — | — | — | |||||||||||||
Total | $ | 2,656,966 | 100 | % | $ | 2,230,807 | 100 | % | ||||||||
Audit Committee Pre-approval Policies and Procedures |
Item 16D. | Exemptions from the Listing Standards for Audit Committees |
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Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
Maximum Number | ||||||||||||||||
Total Number of | of Securities that | |||||||||||||||
Total Number of | Securities Purchased | May yet be | ||||||||||||||
Securities | Average Price Paid | as Part of Publicly | Purchased Under | |||||||||||||
Period | Purchased | Per Security | Announced Programs | the Programs | ||||||||||||
2005-01-01 to 2005-01-31 | — | — | — | — | ||||||||||||
2005-02-01 to 2005-02-28 | — | — | — | — | ||||||||||||
2005-03-01 to 2005-03-31 | — | — | — | — | ||||||||||||
2005-04-01 to 2005-04-30 | — | — | — | — | ||||||||||||
2005-05-01 to 2005-05-31 | — | — | — | — | ||||||||||||
2005-06-01 to 2005-06-30 | — | — | — | — | ||||||||||||
2005-07-01 to 2005-07-31 | — | — | — | — | ||||||||||||
2005-08-01 to 2005-08-31 | — | — | — | — | ||||||||||||
2005-09-01 to 2005-09-30 | — | — | — | — | ||||||||||||
2005-10-01 to 2005-10-31 | — | — | — | — | ||||||||||||
2005-11-01 to 2005-11-30 | — | — | — | — | ||||||||||||
2005-12-01 to 2005-12-31 | — | — | — | — |
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Item 17. | Financial Statements |
Item 18. | Financial Statements |
Page | ||||
Financial Statements: | ||||
Report of Independent Registered Public Accounting Firm for Years Ended December 31, 2005, 2004 and 2003 | F-2 | |||
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003 | F-3 | |||
Consolidated Balance Sheets as at December 31, 2005 and 2004 | F-4 | |||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 | F-5 | |||
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003 | F-6 | |||
Notes to Consolidated Financial Statements | F-7 | |||
Financial Statement Schedule: | ||||
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule | S-1 | |||
For each of the three years in the period ended December 31, Schedule II Valuation and Qualifying Accounts | S-2 |
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ADSL | assymetrical digital subscriber line | |
ASD | application-specific discrete technology | |
ASIC | application-specific integrated circuit | |
ASSP | application-specific standard product | |
BCD | bipolar, CMOS and DMOS process technology | |
BiCMOS | bipolar and CMOS process technology | |
CAD | computer aided design | |
CMOS | complementary metal-on silicon oxide semiconductor | |
CODEC | audio coding and decoding functions | |
CPE | customer premises equipment | |
DMOS | diffused metal-on silicon oxide semiconductor | |
DRAMs | dynamic random access memory | |
DSL | digital subscriber line | |
DSP | digital signal processor | |
EMAS | Eco-Management and Audit Scheme, the voluntary European Community scheme for companies performing industrial activities for the evaluation and improvement of environmental performance | |
EEPROM | electrically erasable programmable read-only memory | |
EPROM | erasable programmable read-only memory | |
EWS | electrical wafer sorting | |
G-bit | gigabit | |
GPRS | global packet radio service | |
GPS | global positioning system | |
GSM | global system for mobile communications | |
GSM/ GPRS | European standard for mobile phones | |
HCMOS | high-speed complementary metal-on silicon oxide semiconductor | |
IC | integrated circuit | |
IGBT | insulated gate bipolar transistors | |
IPAD | integrated passive and active devices | |
ISO | International Organization for Standardization | |
K-bit | kilobit | |
LAN | local area network | |
M-bit | megabit | |
MEMS | micro-electro-mechanical system | |
MOS | metal-on silicon oxide semiconductor process technology | |
MOSFET | metal-on silicon oxide semiconductor field effect transistor | |
MPEG | motion picture experts group | |
ODM | original design manufacturer | |
OEM | original equipment manufacturer |
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OMAPI | open mobile application processor interfaces, the name of the joint open standard for wireless application processor interfaces being developed with Texas Instruments to promote faster and broader deployment of multimedia-enhanced mobile devices and applications | |
OTP | one-time programmable | |
PDA | personal digital assistant | |
PFC | power factor corrector | |
PROM | programmable read-only memory | |
PSM | programmable system memories | |
RAM | random access memory | |
RF | radio frequency | |
RISC | reduced instruction set computing | |
ROM | read-only memory | |
SAM | serviceable available market | |
SCR | silicon controlled rectifier | |
SLIC | subscriber line interface card | |
SMPS | switch-mode power supply | |
SoC | system-on-chip | |
SRAM | static random access memory | |
SNVM | serial nonvolatile memories | |
TAM | total available market | |
USB | universal serial bus | |
VIPpowertm | vertical integration power | |
VLSI | very large scale integration | |
XDSL | digital subscriber line |
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STMICROELECTRONICS N.V. |
By: | /s/ Carlo Bozotti |
Carlo Bozotti | |
President and Chief Executive Officer |
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Page | ||||
Financial Statements: | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 |
F-1
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Twelve months ended | ||||||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
(audited) | (audited) | (audited) | ||||||||||
Net sales | 8,876 | 8,756 | 7,234 | |||||||||
Other revenues | 6 | 4 | 4 | |||||||||
Net revenues | 8,882 | 8,760 | 7,238 | |||||||||
Cost of sales | (5,845 | ) | (5,532 | ) | (4,672 | ) | ||||||
Gross profit | 3,037 | 3,228 | 2,566 | |||||||||
Selling, general and administrative | (1,026 | ) | (947 | ) | (785 | ) | ||||||
Research and development | (1,630 | ) | (1,532 | ) | (1,238 | ) | ||||||
Other income and expenses, net | (9 | ) | 10 | (4 | ) | |||||||
Impairment, restructuring charges and other related closure costs | (128 | ) | (76 | ) | (205 | ) | ||||||
Operating income | 244 | 683 | 334 | |||||||||
Interest income (expense), net | 34 | (3 | ) | (52 | ) | |||||||
Loss on equity investments | (3 | ) | (4 | ) | (1 | ) | ||||||
Loss on extinguishment of convertible debt | 0 | (4 | ) | (39 | ) | |||||||
Income before income taxes and minority interests | 275 | 672 | 242 | |||||||||
Income tax benefit (expense) | (8 | ) | (68 | ) | 14 | |||||||
Income before minority interests | 267 | 604 | 256 | |||||||||
Minority interests | (1 | ) | (3 | ) | (3 | ) | ||||||
Net income | 266 | 601 | 253 | |||||||||
Earnings per share (Basic) | 0.30 | 0.67 | 0.29 | |||||||||
Earnings per share (Diluted) | 0.29 | 0.65 | 0.27 | |||||||||
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As at | ||||||||
December 31, | December 31, | |||||||
2005 | 2004 | |||||||
(audited) | (audited) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | 2,027 | 1,950 | ||||||
Marketable securities | 0 | 0 | ||||||
Trade accounts receivable, net | 1,490 | 1,408 | ||||||
Inventories, net | 1,411 | 1,344 | ||||||
Deferred tax assets | 152 | 140 | ||||||
Other receivables and assets | 531 | 785 | ||||||
Total current assets | 5,611 | 5,627 | ||||||
Goodwill | 221 | 264 | ||||||
Other intangible assets, net | 224 | 291 | ||||||
Property, plant and equipment, net | 6,175 | 7,442 | ||||||
Long-term deferred tax assets | 55 | 59 | ||||||
Investments and other non-current assets | 153 | 117 | ||||||
6,828 | 8,173 | |||||||
Total assets | 12,439 | 13,800 | ||||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Bank overdrafts | 11 | 58 | ||||||
Current portion of long-term debt | 1,522 | 133 | ||||||
Trade accounts payable | 965 | 1,352 | ||||||
Other payables and accrued liabilities | 642 | 776 | ||||||
Deferred tax liabilities | 7 | 17 | ||||||
Accrued income tax | 152 | 176 | ||||||
Total current liabilities | 3,299 | 2,512 | ||||||
Long-term debt | 269 | 1,767 | ||||||
Reserve for pension and termination indemnities | 270 | 285 | ||||||
Long-term deferred tax liabilities | 55 | 63 | ||||||
Other non-current liabilities | 16 | 15 | ||||||
610 | 2,130 | |||||||
Total liabilities | 3,909 | 4,642 | ||||||
Commitment and contingencies | ||||||||
Minority interests | 50 | 48 | ||||||
Common stock (preferred stock: 540,000,000 shares authorized, not issued; common stock: Euro 1.04 nominal value, 1,200,000,000 shares authorized, 907,824,279 shares issued, 894,424,279 shares outstanding) | 1,153 | 1,150 | ||||||
Capital surplus | 1,967 | 1,924 | ||||||
Accumulated result | 5,427 | 5,268 | ||||||
Accumulated other comprehensive income | 281 | 1,116 | ||||||
Treasury stock | (348 | ) | (348 | ) | ||||
Shareholders’ equity | 8,480 | 9,110 | ||||||
Total liabilities and shareholders’ equity | 12,439 | 13,800 | ||||||
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Twelve Months Ended | ||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||||
(audited) | (audited) | (audited) | ||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income | 266 | 601 | 253 | |||||||||||
Items to reconcile net income and cash flows from operating activities: | ||||||||||||||
Depreciation and amortization | 1,944 | 1,837 | 1,608 | |||||||||||
Amortization of discount on convertible debt | 5 | 28 | 68 | |||||||||||
Loss on extinguishment of convertible debt | — | 4 | 39 | |||||||||||
Gain on the sale of marketable securities | — | — | (4 | ) | ||||||||||
Other non-cash items | 10 | 5 | (53 | ) | ||||||||||
Minority interest in net income of subsidiaries | 1 | 3 | 3 | |||||||||||
Deferred income tax | (31 | ) | (6 | ) | (131 | ) | ||||||||
Loss on equity investments | 3 | 4 | 1 | |||||||||||
Impairment, restructuring charges and other related closure costs, net of cash payments | 72 | 8 | 197 | |||||||||||
Changes in assets and liabilities: | ||||||||||||||
Trade receivables, net | (117 | ) | (119 | ) | (109 | ) | ||||||||
Inventories, net | (174 | ) | (144 | ) | (75 | ) | ||||||||
Trade payables | (71 | ) | 128 | (8 | ) | |||||||||
Other assets and liabilities, net | (110 | ) | (7 | ) | 131 | |||||||||
Net cash from operating activities | 1,798 | 2,342 | 1,920 | |||||||||||
Cash flows from investing activities: | ||||||||||||||
Payment for purchases of tangible assets | (1,441 | ) | (2,050 | ) | (1,221 | ) | ||||||||
Proceeds from sale of marketable securities | — | — | 4 | |||||||||||
Investment in intangible and financial assets | (49 | ) | (79 | ) | (31 | ) | ||||||||
Capital contributions to equity investments | (38 | ) | (2 | ) | (3 | ) | ||||||||
Payment for acquisitions, net of cash received | — | (3 | ) | (188 | ) | |||||||||
Net cash used in investing activities | (1,528 | ) | (2,134 | ) | (1,439 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||
Proceeds from issuance of long-term debt | 50 | 91 | 1,398 | |||||||||||
Repayment of long-term debt | (110 | ) | (1,288 | ) | (1,432 | ) | ||||||||
Increase (decrease) in short-term facilities | (47 | ) | 10 | 25 | ||||||||||
Capital increase | 35 | 23 | 22 | |||||||||||
Dividends paid | (107 | ) | (107 | ) | (71 | ) | ||||||||
Other financing activities | 1 | — | (1 | ) | ||||||||||
Net cash used in financing activities | (178 | ) | (1,271 | ) | (59 | ) | ||||||||
Effect of changes in exchange rates | (15 | ) | 15 | 14 | ||||||||||
Net cash increase (decrease) | 77 | (1,048 | ) | 436 | ||||||||||
Cash and cash equivalents at beginning of the period | 1,950 | 2,998 | 2,562 | |||||||||||
Cash and cash equivalents at end of the period | 2,027 | 1,950 | 2,998 | |||||||||||
Supplemental cash information: | ||||||||||||||
Interest paid | 17 | 16 | 19 | |||||||||||
Income tax paid | 90 | 84 | 102 |
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Accumulated | |||||||||||||||||||||||||
Other | |||||||||||||||||||||||||
Common | Capital | Treasury | Accumulated | Comprehensive | Shareholders’ | ||||||||||||||||||||
Stock | Surplus | Stock | Result | income (loss) | Equity | ||||||||||||||||||||
Balance as of December 31, 2002 (audited) | 1,144 | 1,864 | (348 | ) | 4,592 | (258 | ) | 6,994 | |||||||||||||||||
Capital increase | 2 | 41 | 43 | ||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||
Net Income | 253 | 253 | |||||||||||||||||||||||
Other comprehensive income, net of tax | 881 | 881 | |||||||||||||||||||||||
Comprehensive income | 1,134 | ||||||||||||||||||||||||
Dividends, $0.08 per share | (71 | ) | (71 | ) | |||||||||||||||||||||
Balance as of December 31, 2003 (audited) | 1,146 | 1,905 | (348 | ) | 4,774 | 623 | 8,100 | ||||||||||||||||||
Capital increase | 4 | 19 | 23 | ||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||
Net Income | 601 | 601 | |||||||||||||||||||||||
Other comprehensive income, net of tax | 493 | 493 | |||||||||||||||||||||||
Comprehensive income | 1,094 | ||||||||||||||||||||||||
Dividends, $0.12 per share | (107 | ) | (107 | ) | |||||||||||||||||||||
Balance as of December 31, 2004 (audited) | 1,150 | 1,924 | (348 | ) | 5,268 | 1,116 | 9,110 | ||||||||||||||||||
Capital increase | 3 | 32 | 35 | ||||||||||||||||||||||
Stock-based compensation expense | 11 | 11 | |||||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||
Net income | 266 | 266 | |||||||||||||||||||||||
Other comprehensive loss, net of tax | (835 | ) | (835 | ) | |||||||||||||||||||||
Comprehensive income (loss) | (569 | ) | |||||||||||||||||||||||
Dividends, $0.12 per share | (107 | ) | (107 | ) | |||||||||||||||||||||
Balance as of December 31, 2005 (audited) | 1,153 | 1,967 | (348 | ) | 5,427 | 281 | 8,480 | ||||||||||||||||||
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F-9
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F-10
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F-11
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Technologies & licenses | 3-7 years | |||
Purchased software | 3-4 years | |||
Internally developed software | 4 years |
Buildings | 33 years | |||
Facilities & leasehold improvements | 5-10 years | |||
Machinery and equipment | 3-6 years | |||
Computer and R&D equipment | 3-6 years | |||
Other | 2-5 years |
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F-13
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F-14
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Year ended | Year ended | Year ended | |||||||||||
December 31, | December 31, | December 31, | |||||||||||
2005 | 2004 | 2003 | |||||||||||
Net income, as reported | 266 | 601 | 253 | ||||||||||
of which compensation expense on nonvested shares, net of tax effect | (7 | ) | — | — | |||||||||
Deduct: Total stock-option employee compensation expense determined under FAS 123, net of related tax effects | (244 | ) | (166 | ) | (186 | ) | |||||||
Net income, pro forma | 22 | 435 | 67 | ||||||||||
Earnings per share: | |||||||||||||
Basic, as reported | 0.30 | 0.67 | 0.29 | ||||||||||
Basic, pro forma | 0.02 | 0.49 | 0.08 | ||||||||||
Diluted, as reported | 0.29 | 0.65 | 0.27 | ||||||||||
Diluted, pro forma | 0.02 | 0.47 | 0.07 |
F-15
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Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Expected life (years) | 6.1 | 6.1 | 5.9 | |||||||||
Historical Company share price volatility | 52.9% | 56.4% | 59.6% | |||||||||
Risk-free interest rate | 3.84% | 3.6% | 2.7% | |||||||||
Dividend yield | 0.69% | 0.56% | 0.35% |
F-16
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F-17
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F-18
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December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Trade accounts receivable | 1,517 | 1,429 | ||||||
Less valuation allowance | (27 | ) | (21 | ) | ||||
Total | 1,490 | 1,408 | ||||||
December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Raw materials | 60 | 70 | ||||||
Work-in-process | 880 | 874 | ||||||
Finished products | 471 | 400 | ||||||
Total | 1,411 | 1,344 | ||||||
December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Receivables from government agencies | 168 | 212 | ||||||
Taxes and other government receivables | 189 | 143 | ||||||
Advances to suppliers | 2 | 3 | ||||||
Advances to employees | 10 | 16 | ||||||
Prepaid expenses | 48 | 88 | ||||||
Sundry debtors within cooperation agreements | 67 | 85 | ||||||
Foreign exchange forward contracts | 3 | 200 | ||||||
Other | 44 | 38 | ||||||
Total | 531 | 785 | ||||||
F-19
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Application | |||||||||||||||||
Specific | Memory | ||||||||||||||||
Products | Products | Other | Total | ||||||||||||||
December 31, 2003 | 176 | 85 | 6 | 267 | |||||||||||||
TouchChip sale | (3 | ) | (3 | ) | |||||||||||||
Foreign currency translation | (3 | ) | 3 | — | |||||||||||||
December 31, 2004 | 173 | 88 | 3 | 264 | |||||||||||||
“CPE” goodwill impairment | (39 | ) | (39 | ) | |||||||||||||
Foreign currency translation | — | (3 | ) | (1 | ) | (4 | ) | ||||||||||
December 31, 2005 | 134 | 85 | 2 | 221 | |||||||||||||
Accumulated | ||||||||||||
December 31, 2005 | Gross Cost | Amortization | Net Cost | |||||||||
Technologies & licenses | 309 | (199 | ) | 110 | ||||||||
Purchased software | 162 | (114 | ) | 48 | ||||||||
Internally developed software | 114 | (48 | ) | 66 | ||||||||
Total | 585 | (361 | ) | 224 | ||||||||
Gross | Accumulated | Net | ||||||||||
December 31, 2004 | Cost | Amortization | Cost | |||||||||
Technologies & licenses | 409 | (233 | ) | 176 | ||||||||
Purchased software | 148 | (100 | ) | 48 | ||||||||
Internally developed software | 104 | (37 | ) | 67 | ||||||||
Total | 661 | (370 | ) | 291 | ||||||||
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Year | ||||
2006 | 107 | |||
2007 | 68 | |||
2008 | 33 | |||
2009 | 11 | |||
2010 | 4 | |||
Thereafter | 1 | |||
Total | 224 | |||
Gross | Accumulated | Net | ||||||||||
December 31, 2005 | Cost | Depreciation | Cost | |||||||||
Land | 84 | — | 84 | |||||||||
Buildings | 1,071 | (267 | ) | 804 | ||||||||
Capital leases | 55 | (29 | ) | 26 | ||||||||
Facilities & leasehold improvements | 2,715 | (1,294 | ) | 1,421 | ||||||||
Machinery and equipment | 12,473 | (9,063 | ) | 3,410 | ||||||||
Computer and R&D equipment | 492 | (381 | ) | 111 | ||||||||
Other tangible assets | 131 | (103 | ) | 28 | ||||||||
Construction in progress | 291 | — | 291 | |||||||||
Total | 17,312 | (11,137 | ) | 6,175 | ||||||||
Gross | Accumulated | Net | ||||||||||
December 31, 2004 | Cost | Depreciation | Cost | |||||||||
Land | 93 | — | 93 | |||||||||
Buildings | 1,021 | (250 | ) | 771 | ||||||||
Capital leases | 66 | (31 | ) | 35 | ||||||||
Facilities & leasehold improvements | 2,763 | (1,187 | ) | 1,576 | ||||||||
Machinery and equipment | 12,898 | (8,581 | ) | 4,317 | ||||||||
Computer and R&D equipment | 516 | (382 | ) | 134 | ||||||||
Other tangible assets | 125 | (108 | ) | 17 | ||||||||
Construction in progress | 499 | — | 499 | |||||||||
Total | 17,981 | (10,539 | ) | 7,442 | ||||||||
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December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Equity-method investments (see note 3) | 35 | 6 | ||||||
Cost investments | 36 | 34 | ||||||
Long-term receivables related to funding | 33 | 33 | ||||||
Debt issuance costs, net | 3 | 8 | ||||||
Deposits and other long-term receivables | 46 | 36 | ||||||
Total | 153 | 117 | ||||||
December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Taxes other than income taxes | 77 | 68 | ||||||
Salaries and wages | 248 | 261 | ||||||
Social charges | 110 | 120 | ||||||
Advances received on government fundings | 24 | 25 | ||||||
Foreign exchange forward contracts | 31 | 109 | ||||||
Current portion of provision for restructuring | 40 | 39 | ||||||
Pension and termination benefits | 21 | 11 | ||||||
Other | 91 | 143 | ||||||
Total | 642 | 776 | ||||||
F-22
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December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | 286 | 249 | ||||||
Service cost | 18 | 18 | ||||||
Interest cost | 14 | 13 | ||||||
Benefits paid | (10 | ) | (6 | ) | ||||
Actuarial losses | 34 | — | ||||||
Foreign currency translation adjustments | (24 | ) | 15 | |||||
Other | 5 | (3 | ) | |||||
Benefit obligation at end of year | 323 | 286 | ||||||
Change in plan assets: | ||||||||
Plan assets at fair value at beginning of year | 181 | 150 | ||||||
Actual return on plan assets | 11 | 11 | ||||||
Employer and participant contributions | 16 | 19 | ||||||
Benefits paid | (10 | ) | (6 | ) | ||||
Actuarial gain (losses) | 10 | (2 | ) | |||||
Foreign currency translation adjustments | (14 | ) | 9 | |||||
Plan assets at fair value at end of year | 194 | 181 | ||||||
Funded status | (129 | ) | (105 | ) | ||||
Unrecognized prior service cost | (3 | ) | (3 | ) | ||||
Unrecognized transition obligation | (1 | ) | (1 | ) | ||||
Unrecognized actuarial loss | 77 | 60 | ||||||
Net amount recognized | (56 | ) | (49 | ) | ||||
Net amount recognized in the balance sheet consisted of the following: | ||||||||
Prepaid benefit cost | 2 | 2 | ||||||
Accrued benefit liability | (93 | ) | (93 | ) | ||||
Intangible asset | 1 | 1 | ||||||
Accumulated other comprehensive income | 34 | 41 | ||||||
Net amount recognized | (56 | ) | (49 | ) | ||||
Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Service cost | 18 | 18 | 14 | |||||||||
Interest cost | 14 | 13 | 10 | |||||||||
Expected return on plan assets | (11 | ) | (11 | ) | (7 | ) | ||||||
Amortization of unrecognized transition obligation | — | — | — | |||||||||
Amortization of net loss | 3 | 8 | 2 | |||||||||
Amortization of prior service cost | — | 1 | 1 | |||||||||
Net periodic benefit cost | 24 | 29 | 20 | |||||||||
F-23
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December 31, | December 31, | December 31, | ||||||||||
Assumptions | 2005 | 2004 | 2003 | |||||||||
Discount rate | 4.54% | 5.02% | 5.25% | |||||||||
Salary increase rate | 3.75% | 3.34% | 3.34% | |||||||||
Expected long-term rate of return on funds for the pension expense of the year | 6.34% | 6.44% | 6.75% |
Percentage of | ||||||||||||
Plan Assets at | ||||||||||||
December | ||||||||||||
Target allocation | ||||||||||||
Asset Category | 2005 | 2005 | 2004 | |||||||||
Equity securities | 57% | 61% | 57% | |||||||||
Fixed income securities | 39% | 37% | 39% | |||||||||
Real estate | 2% | 2% | 2% | |||||||||
Other | 2% | — | 2% | |||||||||
Total | 100% | 100% | 100% | |||||||||
Estimated future | ||||
Years | benefit payments | |||
2006 | 9 | |||
2007 | 8 | |||
2008 | 10 | |||
2009 | 10 | |||
2010 | 7 | |||
From 2011 to 2015 | 66 |
— | For Italian termination indemnity plan (“TFR”), the Company calculates the vested benefits to which Italian employees are entitled if they separate immediately as of December 2005, in compliance with the Emerging Issues Task Force Issue No. 88-1,Determination of Vested Benefit Obligation for a Defined |
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Benefit Pension Plan (“EITF 88-1”). The benefits accrued on apro-rata basis during the employees’ employment period are based on the individuals’ salaries, adjusted for inflation. Movements in the reserve were as follows: |
Balance as of December 31, 2002 | 129 | |||
Provision for the year | 29 | |||
Indemnities paid during the year | (19 | ) | ||
Foreign currency translation adjustments | 31 | |||
Balance as of December 31, 2003 | 170 | |||
Provision for the year | 33 | |||
Indemnities paid during the year | (25 | ) | ||
Foreign currency translation adjustments | 14 | |||
Balance as of December 31, 2004 | 192 | |||
Provision for the year | 34 | |||
Indemnities paid during the year | (18 | ) | ||
Foreign currency translation adjustments | (26 | ) | ||
Balance as of December 31, 2005 | 182 |
— | The Company has certain defined contribution plans, which accrued benefits for employees on a pro-rata basis during their employment period based on their individual salaries. The Company accrued benefits related to defined contribution pension plans of $21 million and $11 million, as of December 31, 2005 and 2004, respectively. The annual cost of these plans amounted to approximately $42 million, $29 million and $25 million in 2005, 2004 and 2003, respectively. The benefits accrued to the employees on a pro-rata basis, during their employment period are based on the individuals’ salaries. |
December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Bank loans: | ||||||||
2.62% (weighted average), due 2006, floating interest rate at Libor + 0.30 | 45 | 105 | ||||||
2.53% (weighted average), due 2007, fixed interest rate | 120 | 153 | ||||||
4.77% (weighted average rate), due 2007, variable interest rate | 36 | 44 | ||||||
5.08% due 2008, floating interest rate at Libor + 0.40 | 25 | — | ||||||
5.11% due 2010, floating interest rate at Libor + 0.40 | 25 | — | ||||||
Funding program loans: | ||||||||
5.35% (weighted average), due 2006, fixed interest rate | 4 | 13 | ||||||
1.07% (weighted average), due 2009, fixed interest rate | 72 | 102 | ||||||
3.10% (weighted average), due 2012, fixed interest rate | 12 | 14 | ||||||
0.83% (weighted average), due 2017, fixed interest rate | 47 | 55 | ||||||
Capital leases: | ||||||||
4.78%, due 2011, fixed interest rate | 26 | 35 | ||||||
Convertible debt: | ||||||||
-0.50% convertible bonds due 2013 | 1,379 | 1,379 | ||||||
Total long-term debt | 1,791 | 1,900 | ||||||
Less current portion | (1,522 | ) | (133 | ) | ||||
Total long-term debt, less current portion | 269 | 1,767 | ||||||
F-25
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December 31, | December 31, | |||||||
2005 | 2004 | |||||||
U.S. dollar | 1,454 | 1,404 | ||||||
Euro | 206 | 324 | ||||||
Singapore dollar | 120 | 153 | ||||||
Other | 11 | 19 | ||||||
Total | 1,791 | 1,900 | ||||||
December 31, | ||||
2005 | ||||
2006 | 1,522 | |||
2007 | 119 | |||
2008 | 58 | |||
2009 | 30 | |||
2010 | 22 | |||
Thereafter | 40 | |||
Total | 1,791 | |||
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F-27
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Price Per Share | |||||||||||||
Weighted | |||||||||||||
Number of Shares | Range | Average | |||||||||||
Outstanding at December 31, 2002 | 46,817,761 | $ | 6.04-$62.01 | $ | 32.01 | ||||||||
Options granted: | |||||||||||||
2001 Plan | 11,976,310 | $ | 19.18-$25.90 | $ | 19.35 | ||||||||
Supervisory Board Plan | 132,000 | $ | 19.18 | $ | 19.18 | ||||||||
Options forfeited | (898,456 | ) | $ | 6.04-$62.01 | $ | 37.09 | |||||||
Options exercised | (1,258,318 | ) | $ | 6.04-$24.88 | $ | 10.04 | |||||||
Outstanding at December 31, 2003 | 56,769,297 | $ | 6.04-$62.01 | $ | 29.71 | ||||||||
Options granted: | |||||||||||||
2001 Plan | 12,365,280 | $ | 17.08-$27.21 | $ | 22.66 | ||||||||
Supervisory Board Plan | 132,000 | $ | 22.71 | $ | 22.71 | ||||||||
Options forfeited | (1,304,969 | ) | $ | 6.04-$62.01 | $ | 29.20 | |||||||
Options exercised | (2,537,401 | ) | $ | 6.04-$24.88 | $ | 8.93 | |||||||
Outstanding at December 31, 2004 | 65,424,207 | $ | 12.03-$62.01 | $ | 29.18 | ||||||||
Options granted: | |||||||||||||
2001 Plan | 42,200 | $ | 16.73-$17.31 | $ | 16.91 | ||||||||
Supervisory Board Plan | — | — | — | ||||||||||
Options forfeited | (2,364,862 | ) | $ | 12.03-$62.01 | $ | 29.65 | |||||||
Options exercised | (2,542,978 | ) | $ | 12.03-$14.23 | $ | 13.88 | |||||||
Outstanding at December 31, 2005 | 60,558,567 | $ | 12.03-$62.01 | $ | 29.80 | ||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Options exercisable | 60,558,567 | 32,212,680 | 23,338,811 | |||||||||
Weighted average exercise price | $ | 29.80 | $ | 33.84 | $ | 28.87 | ||||||
Weighted | ||||||||||||||
Weighted | average | |||||||||||||
Option price | average | remaining | ||||||||||||
Number of shares | range | exercise price | contractual life | |||||||||||
2,523,511 | $ | 12.03-$17.31 | $ | 12.43 | 1.2 | |||||||||
30,682,918 | $ | 19.18-$24.88 | $ | 22.03 | 6.2 | |||||||||
236,990 | $ | 25.90-$29.70 | $ | 27.18 | �� | 7.3 | ||||||||
20,679,858 | $ | 31.09-$44.00 | $ | 34.37 | 5.9 | |||||||||
6,435,290 | $ | 50.69-$62.01 | $ | 59.08 | 2.6 |
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Number of shares | Price per share | Discount from | ||||||||||||||||||
offered per | the market | Number of | ||||||||||||||||||
employee | In U.S. Dollars | In Euro | price | shares issued | ||||||||||||||||
June 2003 | 309 | 17.91 | 15.51 | 15% | 587,862 |
Nonvested Shares | Number of Shares | Price | |||||||
Outstanding at December 31, 2004 | — | — | |||||||
Awards granted: | |||||||||
Amended 2001 Plan | 3,940,065 | $ | 0 | ||||||
Supervisory Board Plan | 66,000 | € | 1.04 | ||||||
Awards cancelled: | |||||||||
Amended 2001 Plan | (25,845 | ) | $ | 0 | |||||
Supervisory Board Plan | (15,000 | ) | € | 1.04 | |||||
Awards exercised | — | — | |||||||
Outstanding at December 31, 2005 | 3,965,220 | $ | 0-€1.04 | ||||||
2005 grant | ||||
Historical share price volatility | 27.74% | |||
Historical volatility of reference index | 25.5% | |||
Three-year average dividend yield | 0.55% | |||
Risk-free interest rates used | 4.21%-4.33% |
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Selling, general and administrative | $ | 6 million | ||
Research and development | $ | 3 million | ||
Total stock-based compensation expense | $ | 9 million | ||
Twelve months ended | |||||||||
December 31, 2005 | |||||||||
Pro forma | |||||||||
As reported | (applying APB 25) | ||||||||
Operating income | 244 | 242 | |||||||
of which compensation expense before tax effect | (9 | ) | (11 | ) | |||||
Income before income taxes and minority interests | 275 | 273 | |||||||
Net income | 266 | 265 | |||||||
of which tax benefit related to compensation expense | 2 | 3 | |||||||
Earnings per share (Basic) | 0.30 | 0.30 | |||||||
Earnings per share (Diluted) | 0.29 | 0.29 | |||||||
Net cash from operating activities | 1,798 | 1,798 | |||||||
Net cash used in financing activities | (178 | ) | (178 | ) |
F-30
Table of Contents
Unrealized | ||||||||||||||||||||
Foreign | gain (loss) on | Unrealized | Minimum | Accumulated other | ||||||||||||||||
currency | available-for-sale | gain (loss) on | pension liability | comprehensive | ||||||||||||||||
translation | securities, | derivatives, | adjustment, | income (loss), | ||||||||||||||||
income (loss) | net of tax | net of tax | net of tax | net of tax | ||||||||||||||||
Balance as of December 31, 2002 | (226 | ) | 1 | — | (33 | ) | (258 | ) | ||||||||||||
Other comprehensive income (loss) | 883 | 2 | — | (4 | ) | 881 | ||||||||||||||
Balance as of December 31, 2003 | 657 | 3 | — | (37 | ) | 623 | ||||||||||||||
Other comprehensive income (loss) | 441 | (3 | ) | 59 | (4 | ) | 493 | |||||||||||||
Balance as of December 31, 2004 | 1,098 | 0 | 59 | (41 | ) | 1,116 | ||||||||||||||
Other comprehensive income (loss) | (770 | ) | — | (72 | ) | 7 | (835 | ) | ||||||||||||
Balance as of December 31, 2005 | 328 | 0 | (13 | ) | (34 | ) | 281 | |||||||||||||
Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Basic EPS | ||||||||||||
Net income | 266 | 601 | 253 | |||||||||
Weighted average shares outstanding | 892,760,520 | 891,192,542 | 888,152,244 | |||||||||
Basic EPS | 0.30 | 0.67 | 0.29 | |||||||||
Diluted EPS | ||||||||||||
Net income | 266 | 601 | 253 | |||||||||
Convertible debt interest, net of tax | 5 | 4 | 2 | |||||||||
Net income adjusted | 271 | 605 | 255 | |||||||||
Weighted average shares outstanding | 892,760,520 | 891,192,542 | 888,152,244 | |||||||||
Dilutive effect of stock options | 854,523 | 2,038,369 | 7,059,127 | |||||||||
Dilutive effect of nonvested shares | 116,233 | — | — | |||||||||
Dilutive effect of convertible debt | 41,880,104 | 41,880,160 | 41,880,160 | |||||||||
Number of shares used in calculating diluted EPS | 935,611,380 | 935,111,071 | 937,091,531 | |||||||||
Diluted EPS | 0.29 | 0.65 | 0.27 |
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Table of Contents
Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Research and development funding | 76 | 84 | 76 | |||||||||
Start-up costs | (56 | ) | (63 | ) | (55 | ) | ||||||
Exchange gain (loss), net | (16 | ) | 33 | 5 | ||||||||
Patent litigation costs | (14 | ) | (31 | ) | (24 | ) | ||||||
Patent pre-litigation costs | (8 | ) | (6 | ) | (5 | ) | ||||||
Gain on sale of non-current assets | 12 | 6 | 17 | |||||||||
Other, net | (3 | ) | (13 | ) | (18 | ) | ||||||
Total other income and expenses, net | (9 | ) | 10 | (4 | ) | |||||||
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Table of Contents
Total impairment, | ||||||||||||||||
restructuring charges | ||||||||||||||||
Restructuring | Other related | and other related | ||||||||||||||
Year ended December 31, 2005 | Impairment | charges | closure costs | closure costs | ||||||||||||
150mm fab plan | — | (4 | ) | (9 | ) | (13 | ) | |||||||||
2005 restructuring initiatives | (66 | ) | (46 | ) | (2 | ) | (114 | ) | ||||||||
Other | (1 | ) | — | — | (1 | ) | ||||||||||
Total | (67 | ) | (50 | ) | (11 | ) | (128 | ) | ||||||||
Total impairment, | ||||||||||||||||
restructuring charges | ||||||||||||||||
Restructuring | Other related | and other related | ||||||||||||||
Year ended December 31, 2004 | Impairment | charges | closure costs | closure costs | ||||||||||||
150mm fab plan | — | (29 | ) | (35 | ) | (64 | ) | |||||||||
Intangible assets and investments | (8 | ) | — | — | (8 | ) | ||||||||||
Other | — | (4 | ) | — | (4 | ) | ||||||||||
Total | (8 | ) | (33 | ) | (35 | ) | (76 | ) | ||||||||
Total impairment, | ||||||||||||||||
restructuring charges | ||||||||||||||||
Restructuring | Other related | and other related | ||||||||||||||
Year ended December 31, 2003 | Impairment | charges | closure costs | closure costs | ||||||||||||
150mm fab plan | (155 | ) | (34 | ) | (1 | ) | (190 | ) | ||||||||
Intangible assets and investments | (6 | ) | — | — | (6 | ) | ||||||||||
Other | — | (9 | ) | — | (9 | ) | ||||||||||
Total | (161 | ) | (43 | ) | (1 | ) | (205 | ) | ||||||||
• | $39 million impairment of goodwill pursuant to the decision of the Company to reduce its Access technology products for Customer Premises Equipment (“CPE”) modem products. The Company reports CPE business as part of the Access reporting unit, included in the Application Specific Products Group (“ASG”). Following the decision to discontinue a portion of this reporting unit, the Company, in compliance with FAS 142,Goodwill and Other Intangible Assets, reassessed the allocation of goodwill between the Access reporting unit and the business to be disposed of according to their relative fair values using market comparables; | |
• | $22 million of purchased technologies were identified without an alternative use following the discontinuation of CPE product lines; | |
• | $6 million for technologies and other intangible assets pursuant to the decision of the Company to close its research and development design center in Karlsruhe (Germany), the discontinuation of a development project in Singapore, the optimization of its EWS (wafer testing) in the United States and other intangibles determined to be obsolete. |
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Table of Contents
— | $133 million on certain property and equipment used in its 150mm fab operations, based on the discounted expected future cash flows of the assets and market quotations for the facilities in Castelletto (Italy); | |
— | $7 million fair market adjustment on the Rancho Bernardo, California facility, based on market quotations under the held-for-sale model. This impairment charge was unrelated to the Company’s plan to restructure its 150mm fab facilities, but was the consequence of a deterioration in real estate market conditions for this type of facility. The facility was sold in 2004 for approximately its carrying value; | |
— | $15 million on the planned closure of a back-end building facility based on a market quotation; | |
— | $3 million related to certain purchased technologies identified to be obsolete; and | |
— | $3 million for contractually committed future capital contributions to SuperH Inc., the joint venture formed with Renesas Technology Corp. |
150mm fab plan | Total | |||||||||||||||||||||||
2005 | restructuring & | |||||||||||||||||||||||
Other related | restructuring | other related | ||||||||||||||||||||||
Restructuring | closure costs | Total | initiatives | Other | closure costs | |||||||||||||||||||
Provision as at December 31, 2002 | — | — | — | — | — | — | ||||||||||||||||||
Charges incurred in 2003 | 34 | 1 | 35 | 9 | 44 | |||||||||||||||||||
Amounts paid | (2 | ) | — | (2 | ) | (6 | ) | (8 | ) | |||||||||||||||
Currency translation effect | 2 | — | 2 | — | 2 | |||||||||||||||||||
Provision as at December 31, 2003 | 34 | 1 | 35 | — | 3 | 38 | ||||||||||||||||||
Charges incurred in 2004 | 32 | 32 | 64 | 4 | 68 | |||||||||||||||||||
Amounts paid | (32 | ) | (32 | ) | (64 | ) | (4 | ) | (68 | ) | ||||||||||||||
Currency translation effect | 2 | — | 2 | — | 2 | |||||||||||||||||||
Provision as at December 31, 2004 | 36 | 1 | 37 | — | 3 | 40 | ||||||||||||||||||
Charges incurred in 2005 | 10 | 9 | 19 | 48 | — | 67 | ||||||||||||||||||
Reversal of provision | (6 | ) | (6 | ) | (6 | ) | ||||||||||||||||||
Amounts paid | (23 | ) | (10 | ) | (33 | ) | (21 | ) | (2 | ) | (56 | ) | ||||||||||||
Currency translation effect | (4 | ) | — | (4 | ) | — | — | (4 | ) | |||||||||||||||
Provision as at December 31, 2005 | 13 | — | 13 | 27 | 1 | 41 | ||||||||||||||||||
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• | Pursuant to the decision of reducing its Access technology products for Customer Premises Equipment (“CPE”) modem products, the Company committed to an exit plan in Zaventem (Belgium) and recorded $4 million of workforce termination benefits. | |
• | In order to streamline its research and development sites, the Company decided to cease its activities in two locations, Karlsruhe (Germany) and Malvern (USA). The Company incurred, in 2005, $1 million restructuring charges corresponding to employee termination costs and $1 million of unused lease charges relating to the closure of these two sites. | |
• | In addition, charges totaling $2 million were paid in 2005 by the Company for voluntary termination benefits for certain employees. The Company also incurred a $2 million charge in 2005 related to additional restructuring initiatives, mainly in the United States and Mexico. | |
• | The Company defined a plan of reorganization and optimization of its activities. This plan focuses on workforce reduction, mainly in Europe, but will, whenever possible, encourage voluntary redundancy such as early retirement measures and other special termination arrangements with the employees. The plan also includes the non-renewal of some temporary positions. For the year ended December 31, 2005, the Company recorded a total restructuring charge for its new restructuring plan amounting to $38 million, mainly related to termination incentives for two of the Company’s subsidiaries in Europe, who accepted special termination arrangements. |
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Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Income | 53 | 41 | 37 | |||||||||
Expense | (19 | ) | (44 | ) | (89 | ) | ||||||
Total | 34 | (3 | ) | (52 | ) | |||||||
Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Income (loss) recorded in The Netherlands | (60 | ) | 12 | 15 | ||||||||
Income from foreign operations | 335 | 660 | 227 | |||||||||
Income before income tax expense | 275 | 672 | 242 | |||||||||
Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
The Netherlands taxes — current | (6 | ) | (6 | ) | (4 | ) | ||||||
Foreign taxes — current | (33 | ) | (52 | ) | (81 | ) | ||||||
Current taxes | (39 | ) | (58 | ) | (85 | ) | ||||||
Foreign deferred taxes | 31 | (10 | ) | 99 | ||||||||
Income tax benefit (expense) | (8 | ) | (68 | ) | 14 | |||||||
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Year ended | Year ended | Year ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Income tax expense computed at statutory rate | (95 | ) | (232 | ) | (83 | ) | ||||||
Permanent and other differences | (26 | ) | (11 | ) | (3 | ) | ||||||
Change in valuation allowances | — | — | (1 | ) | ||||||||
Impact of final tax assessments relating to prior years | 28 | 3 | 6 | |||||||||
Effects of change in enacted tax on deferred taxes | — | 18 | — | |||||||||
Current year credits | 20 | 28 | 12 | |||||||||
Other tax and credits | (2 | ) | (3 | ) | (5 | ) | ||||||
Benefits from tax holidays | 48 | 77 | 67 | |||||||||
Earnings of subsidiaries taxed at different rates | 19 | 52 | 21 | |||||||||
Income tax benefit (expense) | (8 | ) | (68 | ) | 14 | |||||||
December 31, | December 31, | |||||||
2005 | 2004 | |||||||
Tax loss carryforwards and investment credits | 150 | 162 | ||||||
Inventory valuation | 28 | 16 | ||||||
Impairment and restructuring charges | 24 | 35 | ||||||
Fixed asset depreciation in arrears | 73 | 72 | ||||||
Receivables for government funding | 66 | 69 | ||||||
Tax allowances granted on past capital investments | 761 | 765 | ||||||
Pension service costs | 13 | 13 | ||||||
Commercial accruals | 11 | 15 | ||||||
Other temporary differences | 45 | 45 | ||||||
Total deferred tax assets | 1,171 | 1,192 | ||||||
Valuation allowances | (854 | ) | (855 | ) | ||||
Deferred tax assets, net | 317 | 337 | ||||||
Accelerated fixed asset depreciation | (116 | ) | (147 | ) | ||||
Acquired intangible assets | (7 | ) | (6 | ) | ||||
Advances of government funding | (31 | ) | (37 | ) | ||||
Other temporary differences | (18 | ) | (28 | ) | ||||
Deferred tax liabilities | (172 | ) | (218 | ) | ||||
Net deferred income tax asset | 145 | 119 | ||||||
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Year | ||||
2006 | 21 | |||
2007 | 1 | |||
2008 | 1 | |||
2009 | 1 | |||
Thereafter | 126 | |||
Total | 150 | |||
Total | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | |||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||
Operating leases | $ | 271 | $ | 50 | $ | 37 | $ | 32 | $ | 28 | $ | 22 | $ | 102 | |||||||||||||||
Purchase obligations | 1,053 | 940 | 79 | 34 | — | — | — | ||||||||||||||||||||||
Of which: | |||||||||||||||||||||||||||||
Equipment purchase | 576 | 576 | — | — | — | — | — | ||||||||||||||||||||||
Foundry purchase | 260 | 260 | — | — | — | — | — | ||||||||||||||||||||||
Software, technology licenses and design | 217 | 104 | 79 | 34 | — | — | — | ||||||||||||||||||||||
Hynix ST Joint Venture | 212 | 212 | — | — | — | — | — | ||||||||||||||||||||||
Other obligations | $ | 112 | $ | 59 | $ | 44 | $ | 3 | $ | 2 | $ | 1 | $ | 3 | |||||||||||||||
Total | 1,648 | 1,261 | 160 | 69 | 30 | 23 | 105 | ||||||||||||||||||||||
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2005 | 2004 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Long-term debt | ||||||||||||||||
— Bank loans (including current portion) | 412 | 400 | 521 | 505 | ||||||||||||
— Convertible debt | 1,379 | 1,342 | 1,379 | 1,326 | ||||||||||||
Other receivables and assets | ||||||||||||||||
— Foreign exchange forward contracts | 3 | 3 | 200 | 200 | ||||||||||||
Other payables and accrued liabilities | ||||||||||||||||
— Foreign exchange forward contracts | 31 | 31 | 109 | 109 |
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December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Sales & other services | 158 | 9 | 10 | |||||||||
Research and development expenses | (48 | ) | (46 | ) | (34 | ) | ||||||
Other purchases | (16 | ) | (23 | ) | (9 | ) | ||||||
Other income and expenses | (12 | ) | (25 | ) | (8 | ) | ||||||
Accounts receivable | 29 | 6 | 2 | |||||||||
Accounts payable | 12 | 18 | 22 | |||||||||
Other assets | 11 | 2 | — |
• | Application Specific Product Groups (“ASG”) segment, comprised of three product lines — Home, Personal and Communication (“HPC”), Computer Peripherals (“CPG”) and new Automotive Product (“APG”); | |
• | Memory Products Group (“MPG”) segment; and | |
• | Micro, Linear and Discrete Group (“MLD”) segment. |
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December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Application Specific Product Groups | 4,991 | 4,902 | 4,405 | |||||||||
Memory Products Group | 1,948 | 1,887 | 1,294 | |||||||||
Micro, Linear and Discrete Group | 1,882 | 1,902 | 1,469 | |||||||||
Others(1) | 61 | 69 | 70 | |||||||||
Total consolidated net revenues | 8,882 | 8,760 | 7,238 | |||||||||
(1) | Includes revenues from sales of subsystems mainly and other products not allocated to product groups. |
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Application Specific Product Groups | 355 | 530 | 582 | |||||||||
Memory Product Group | (118 | ) | 42 | (65 | ) | |||||||
Micro, Linear and Discrete Group | 271 | 413 | 192 | |||||||||
Total operating income of product groups | 508 | 985 | 709 | |||||||||
Others(1) | (264 | ) | (302 | ) | (375 | ) | ||||||
Total consolidated operating income | 244 | 683 | 334 | |||||||||
(1) | Operating income (loss) of “Others” includes items such as impairment, restructuring charges and other related closure costs, start-up costs, and other unallocated expenses, such as: strategic or special research and development programs, certain corporate-level operating expenses, certain patent claims and litigations, and other costs that are not allocated to the product groups, as well as operating earnings or losses of the Subsystems and Other Products Group. Certain costs, mainly R&D, formerly in the “Others” category, are now being allocated to the groups; comparable amounts reported in this category have been reclassified accordingly in the above table. |
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December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
Total operating income of product groups | 508 | 985 | 709 | |||||||||
Strategic R&D and other R&D programs | (49 | ) | (91 | ) | (52 | ) | ||||||
Start-up costs | (56 | ) | (63 | ) | (54 | ) | ||||||
Impairment & restructuring charges | (128 | ) | (76 | ) | (205 | ) | ||||||
Subsystems | 1 | (1 | ) | 2 | ||||||||
One-time compensation and special contributions(1) | (22 | ) | — | — | ||||||||
Patents claim costs | — | (4 | ) | (10 | ) | |||||||
Other non-allocated provisions(2) | (10 | ) | (67 | ) | (56 | ) | ||||||
Total operating loss Others(3) | (264 | ) | (302 | ) | (375 | ) | ||||||
Total consolidated operating income | 244 | 683 | 334 | |||||||||
(1) | One-time compensation and special contributions to the Company’s former CEO and other executives not allocated to product groups. |
(2) | Includes unallocated expenses such as certain corporate level operating expenses and other costs. . |
(3) | Operating income (loss) of “Others” includes items such as impairment, restructuring charges and other related closure costs, start-up costs, and other unallocated expenses, such as: strategic or special research and development programs, certain corporate-level operating expenses, certain patent claims and litigations, and other costs that are not allocated to the product groups, as well as operating earnings or losses of the Subsystems and Other Products Group. Certain costs, mainly R&D, formerly in the “Others” category, are now being allocated to the groups in 2005; comparable amounts reported in this category have been reclassified accordingly in the above table. |
December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
The Netherlands | 2,864 | 2,702 | 2,084 | |||||||||
France | 268 | 359 | 364 | |||||||||
Italy | 203 | 254 | 219 | |||||||||
USA | 1,066 | 1,262 | 992 | |||||||||
Singapore | 4,041 | 3,671 | 3,192 | |||||||||
Japan | 306 | 403 | 337 | |||||||||
Other countries | 134 | 109 | 50 | |||||||||
Total | 8,882 | 8,760 | 7,238 | |||||||||
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December 31, | December 31, | December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
The Netherlands | 333 | 438 | 478 | |||||||||
France | 1,618 | 2,206 | 2,205 | |||||||||
Italy | 1,698 | 2,216 | 2,102 | |||||||||
Other European countries | 176 | 209 | 219 | |||||||||
USA | 458 | 414 | 413 | |||||||||
Singapore | 1,684 | 1,828 | 1,149 | |||||||||
Malaysia | 321 | 367 | 389 | |||||||||
Other countries | 332 | 319 | 257 | |||||||||
Total | 6,620 | 7,997 | 7,212 | |||||||||
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Balance at | Charged to | |||||||||||||||||||
Valuation and qualifying accounts | beginning | Translation | costs and | Balance at | ||||||||||||||||
deducted from the related asset accounts | of period | adjustment | expenses | Deductions | end of period | |||||||||||||||
(Currency — millions of U.S. dollars) | ||||||||||||||||||||
2005 | ||||||||||||||||||||
Inventories | 47 | 73 | (69 | ) | 51 | |||||||||||||||
Accounts Receivable | 21 | (1 | ) | 10 | (3 | ) | 27 | |||||||||||||
Deferred Tax Assets | 855 | (110 | ) | 109 | 854 | |||||||||||||||
2004 | ||||||||||||||||||||
Inventories | 30 | 85 | (68 | ) | 47 | |||||||||||||||
Accounts Receivable | 16 | 1 | 6 | (2 | ) | 21 | ||||||||||||||
Deferred Tax Assets | 709 | 62 | 84 | 855 | ||||||||||||||||
2003 | ||||||||||||||||||||
Inventories | 42 | — | 32 | (44 | ) | 30 | ||||||||||||||
Accounts Receivable | 23 | (1 | ) | (9 | ) | 3 | 16 | |||||||||||||
Deferred Tax Assets | 26 | 4 | 679 | 709 |
S-2