As filed with the Securities and Exchange Commission on June 30, 1999 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F |_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the fiscal year ended: December 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from to Commission file number: 1-13546 STMicroelectronics N.V. (Exact name of Registrant as specified in its charter) Not Applicable The Netherlands (Translation of Registrant's (Jurisdiction of incorporation name into English) or organization) Technoparc du Pays de Gex -- B.P. 112 Route de Pre-Bois 165, rue Edouard Branly ICC Bloc A 01637 Saint Genis Pouilly 1215 Geneva 15 France Switzerland (Addresses of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class: which registered: Common Shares, nominal value Euro 3.12 per share New York Stock Exchange Liquid Yield OptionTM Notes due June 10, 2008 New York Stock Exchange Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 142,478,106 Common Shares Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No __ Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 __ Item 18 |X| - --------------------------------------------------------------------------------
TABLE OF CONTENTS PART I Cautionary Statement Regarding Forward-Looking Statements..................... 3 Presentation of Financial Information......................................... 3 Item 1. Description of Business............................................. 4 Item 2. Description of Property.............................................31 Item 3. Legal Proceedings...................................................34 Item 4. Control of Registrant...............................................36 Item 5. Nature of Trading Market............................................40 Item 6. Exchange Controls and Other Limitations Affecting Security Holders..44 Item 7. Taxation............................................................44 Item 8. Selected Consolidated Financial Data................................48 Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................48 Item 9A. Quantitative and Qualitative Disclosures About Market Risk..........48 Item 10. Directors and Officers of Registrant................................51 Item 11. Compensation of Directors and Officers..............................59 Item 12. Options to Purchase Securities from Registrant or Subsidiaries......60 Item 13. Interest of Management in Certain Transactions......................61 PART II Item 14. Description of Securities to be Registered *........................62 PART III Item 15. Defaults Upon Senior Securities *...................................62 Item 16. Changes in Securities and Changes in Security for Registered Securities * PART IV Item 17. Financial Statements *..............................................62 Item 18. Financial Statements................................................62 Item 19. Financial Statements and Exhibits...................................62 Certain Terms ................................................................64 * Omitted because item is not applicable. 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain of the statements contained in this annual report that are not historical facts, including without limitation, certain statements made in the sections hereof entitled "Item 1: Description of Business" and "Item 9: Management's Discussion and Analysis of Financial Condition and Results of Operations," are statements of future expectations and other forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended) that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those in such statements due to, among other factors, (i) the highly cyclical nature of the semiconductor industry, (ii) competition, (iii) increased industry capacity, (iv) variability of operating results, (v) capital requirements, (vi) new product developments and technological change, (vii) manufacturing risks, (viii) the loss of key personnel, (ix) economic downturn in any of our major markets, (x) possible acquisitions, (xi) control of the Company and potential conflicts of interest, (xii) key customers and strategic relationships, (xiii) intellectual property issues, (xiv) certain legal proceedings, (xv) the uncertainties of state support for research and development and other funding, (xvi) international operations, (xvii) currency fluctuations, (xviii) dependence on certain sources of supply, (xix) environmental regulations and (xx) year 2000 compliance. See "Risk Factors" included in the Company's Prospectuses dated June 5, 1998. PRESENTATION OF FINANCIAL AND OTHER INFORMATION References in this annual report to published industry data are references to data published by Dataquest, Inc. ("Dataquest") and references to trade association data are references to World Semiconductor Trade Statistics ("WSTS"). Except as otherwise disclosed herein, all references to the Company's market positions in this annual report are based on 1998 revenues according to published industry data. Certain terms used in this annual report are defined in "Certain Terms." In this annual report, references to the "EU" are to the European Union, references to the "Euro" and the "euro" are to the euro currency of the EU, references to the "United States" are to the United States of America and references to "$" or to "U.S. dollars" are to United States dollars. 3
PART I Item 1: Description of Business The Company STMicroelectronics N.V. (the "Company") is a global independent limited liability semiconductor company that designs, develops, manufactures and markets a broad range of semiconductor integrated circuits and discrete devices used in a wide variety of microelectronic applications, including automotive products, computer peripherals, telecommunications systems, consumer products, industrial automation and control systems. According to published industry data, in 1998 STMicroelectronics ranked ninth among worldwide suppliers of semiconductor devices. On the basis of 1998 revenues, STMicroelectronics was the world's leading supplier of MPEG 2 decoder ICs, smartcard MCUs, special automotive ICs and EPROM memories, the second leading supplier of EEPROM memories and the third leading supplier of analog monolithic and mixed-signal ICs and EEPROM memories. The Company currently offers more than 3,000 main types of products to approximately 800 direct customers. Major customers include Alcatel, Bosch, Chrysler, Ericsson, Ford, Gemplus, Hewlett-Packard, IBM, Matsushita, Motorola, Nokia, Nortel Networks, Philips, Pioneer, Samsung, Schlumberger, Seagate Technology, Siemens, Sony, Thomson Multimedia and Western Digital. The Company also sells its products through distributors. The Company offers a diversified product portfolio and develops products for a wide range of market applications to reduce its dependence on any single product, industry or application market. Within its diversified portfolio, the Company has focused on developing products that exploit its technological strengths in creating customized, system-level solutions with substantial analog and mixed-signal content. Products include differentiated ICs (which the Company defines as being its dedicated products, semicustom devices and microcontrollers) and analog ICs (including mixed-signal ICs), the majority of which are also differentiated ICs. As a leading provider of differentiated ICs, the Company has developed close relationships with customers, resulting in early knowledge of their evolving requirements and opportunities to access their markets for other products. Differentiated ICs, which are less vulnerable to competitive pressures than standard commodity products, accounted for approximately 62% of the Company's net revenues in 1998 compared to approximately 57% in 1997. The Company also targets applications that require substantial analog and mixed-signal content and can exploit the Company's system level expertise. Analog ICs accounted for approximately 51% of the Company's 1998 net revenues compared to approximately 49% in 1997, while discrete devices accounted for approximately 13% of the Company's net revenues in 1998 compared to approximately 14% in 1997. In recent years differentiated ICs, in particular analog ICs, have experienced less volatility in sales growth rates and average selling prices than the overall semiconductor industry. STMicroelectronics' products are manufactured and designed using a broad range of manufacturing processes and proprietary design methods. STMicroelectronics uses all of the prevalent function-oriented process technologies, including CMOS, bipolar and nonvolatile memory technologies. In addition, by combining basic processes, the Company has developed advanced systems-oriented technologies that enable it to produce differentiated and application- specific products, including BiCMOS technologies (bipolar and CMOS) for mixed-signal applications, BCD technologies (bipolar, CMOS and DMOS) for intelligent power applications and embedded memory technologies. This broad technology portfolio, a cornerstone of the Company's strategy for many years, enables the Company to meet the increasing demand for "system-on-a-chip" solutions. To complement this depth and diversity of process and design technology, the Company also possesses a broad intellectual property portfolio that it has used to enter into cross-licensing agreements with many major semiconductor manufacturers. In September 1997, STMicroelectronics was awarded the 1997 European Quality Award for Business Excellence in the category of large businesses by the European Foundation for Quality Management (the "EFQM"). In presenting STMicroelectronics with the award, the EFQM committee cited the Company's commitment to the principles 4
of Total Quality Management ("TQM") in its business practices. TQM defines a common set of objectives and performance measurements for employees in all geographic regions, at every stage of product design development and production for all product lines. See "Item 2: Description of Property--Manufacturing." The Company introduced in 1998 several new products and plans to further develop and produce superintegrated, system-level silicon solutions for a set of targeted applications such as computer peripherals (including hard disk drives, inkjet printers and monitors), digital consumer devices (including set-top boxes, DVDs and digital television), wireless telecommunications products (digital cellular handsets, digital cordless and pagers), digital networks (ADSL, already in high volume production, and ATM, currently under development) as well as automotive electronics (including injection control, safety, and car multimedia navigation). In addition to the many dedicated and semicustom ICs developed using power analog, digital and mixed signal technologies, the Company has focused its research and manufacturing efforts on developing an advanced range of the key technological building blocks required by the targeted applications. These building blocks include (i) MPEG 2 ICs, (ii) a family of 16 bit (ST10) and 32 bit (ST20) microcontrollers, (iii) a family of DSP cores for embedded applications based on the current D950 solution and the ST100 (currently under development), (iv) microprocessor architecture (x86 equivalent) aimed at integrated applications and (v) the ability to integrate nonvolatile memory (particularly EEPROM and flash) functionality. Applying its broad range of technologies and its expertise in diverse application domains, the Company is currently embedding dedicated, semicustom circuits and these advanced building blocks on the same chip. Superintegrated products developed to date include the STi5500 Omega chip (a platform for digital consumer applications such as set-top boxes), which has achieved significant design wins. At the beginning of 1999, the Company implemented organizational changes to better orient its product groups to end use applications. As a result, the former Dedicated Products Group ("DPG") has become the Telecommunications, Peripherals and Automotive Groups ("TPA"), while the former Programmable Products Group has become the Consumer and Microcontroller Groups ("CMG"). Consequently, the Company's products are now organized into the following principal groups: o Telecommunications, Peripherals and Automotive, o Consumer and Microcontroller, o Memory Products, o Discrete and Standard ICs. As part of its activities outside the above principal product groups, the Company also has a New Ventures Group, which identifies and develops new business opportunities to complement the Company's existing businesses, and a Subsystems Product Group, which produces subsystems for industrial and other applications. The Telecommunications, Peripherals and Automotive Groups (formerly the Dedicated Products Group) produce application-specific semiconductor products using advanced bipolar, CMOS, BiCMOS, mixed-signal and power technologies. The Groups' products are used in all major end-user applications, including emerging applications such as mobile communications networks, asynchronous transfer mode communications systems, global positioning systems, flat panel displays, hard disk drives and printers. The breadth of the Groups' customer and application base provides it with a source of stability in the cyclical semiconductor market, while their position as a strategic supplier of application-specific products provides it with opportunities to supply customers' requirements for other products, including discrete devices, microcontrollers and memories. 5
The Consumer and Microcontroller Groups (formerly the Programmable Products Group) produce microcontrollers, graphic controllers and MPEG decoder ICs and image processing semicustom devices for digital set-top boxes, DVDs, digital cameras, TVs, monitors and other products particularly targeted at high growth digital applications. The Memory Products Group produces a broad range of memory products, including EPROMs, chips for smartcards, EEPROMs, flash memories and specialty nonvolatile SRAMs. According to published industry data, the Company was the leading supplier of EPROMs in 1998, accounting for approximately 38% of worldwide EPROM sales, as well as the leading supplier of microcontroller-based smartcard ICs and the second leading supplier of EEPROMs. The Company has developed proprietary know-how for flash memory devices and has started mass production for this market. The Group does not produce DRAMs, a commodity memory product. The Discrete and Standard ICs Group produces discrete power devices, power transistors, standard linear and logic ICs and radio frequency ("RF") products. The Group's discrete and standard products are manufactured using mature technological processes that are less capital intensive than the Company's other principal products. The Group has a diverse customer base and broad product portfolio. One of the significant new product introductions of 1998 by the New Ventures Group was the STPC Industrial, a superintegrated PC-on-a-chip that offers full PC functionality for applications such as information kiosks, point-of-sale terminals, Internet-surfing boxes, security access systems and industrial PCs. The Company has substantially increased its front-end manufacturing capacity in recent years through the addition of new 8-inch submicron fabrication plants designed to meet the growing demand for its products. Volume production of 8-inch wafers is now underway in Crolles, France which is already operating at close to full capacity, and production is ramping up in Phoenix, Arizona and Catania, Italy. The buildings for new 8-inch submicron fabrication plants have been completed at existing sites in Rousset (France) and Agrate (Italy) and construction of a new submicron facility is underway in Singapore. An additional 8-inch submicron fabrication plant in Italy is planned to become operational by the year 2001. The Company has decided to build a new 300 millimeter, 12-inch wafer research fabrication and pilot line at Crolles (France) using 0.18 micron and below process technology. The pilot line will be operated in partnership with LETI and CNET, which are already working with the Company in Crolles. The Company has also announced plans for a new center for advanced research and development and industrialization in the field of nonvolatile memories in Agrate (Italy) to target 0.13 micron CMOS technology generation by 2003. STMicroelectronics is international in scope. The Company operates front-end and/or back-end manufacturing facilities in Europe, the United States, the Mediterranean and Asia Pacific regions, and conducts research and development primarily in France and Italy and design, marketing and sales activities in each of the electronics industry's major economic regions: Europe, the United States, the Asia Pacific region and Japan. In 1998, approximately 41.6% of the Company's net revenues originated in Europe (compared to 43.6% in 1997), approximately 22.1% in the Americas (compared to 22.4% in 1997), approximately 29.4% in the Asia Pacific region (compared to 26.5% in 1997), approximately 4.3% in Japan (compared to 5.3% in 1997) and approximately 2.6% in Region Five (including emerging markets such as South America, Africa, Eastern Europe and the Middle East) (compared to 2.2% in 1997). See "--Sales, Marketing and Distribution." In 1998, more than 30% of the 6-inch equivalent wafers manufactured by the Company were manufactured outside Europe and approximately 56% of the Company's employees were located outside Europe. STMicroelectronics believes that strategic alliances are critical to success in the semiconductor industry, and has entered into strategic alliances with customers, other semiconductor manufacturers and major suppliers of design software. The Company has entered into several strategic customer alliances, including alliances with Alcatel, Bosch, Daewoo Electronics, Hewlett-Packard, Marelli, Nokia, Nortel Networks, Pioneer, Seagate Technology, Thomson Multimedia and Western Digital, among others. Customer alliances provide the Company with valuable systems and 6
application know-how and access to markets for key products, while allowing the Company's customers to share some of the risks of product development with the Company and gain access to the Company's process technologies and manufacturing infrastructure. Alliances with other semiconductor manufacturers, such as the cooperation with Philips Semiconductors in Crolles, France, for the development of advanced CMOS logic manufacturing processes, the agreement with Mitsubishi for CMOS flash memory processes using 0.20 through 0.18 micron and the agreement with Hitachi on SuperH microprocessors, permit costly research and development and manufacturing resources to be shared to mutual advantage for joint technology development. Other agreements include the cooperation with Nortel Networks for the development of 0.5/0.35 micron BiCMOS technology. The Company has established joint development programs with leading suppliers such as Air Liquide, Applied Materials, ASM Lithography, Canon, Hewlett-Packard, KLA- Tencor, LAM, MEMC, Schlumberger, Teradyne and Wacker and with CAD tool producers including Cadence and Synopsys. It is a participant in Sematech I 300I for the development of 300 millimeter wafer manufacturing processes. STMicroelectronics is active in joint European research efforts such as the new MEDEA program (which succeeded JESSI in 1997), and also cooperates with major research institutions and universities. In March 1998, STMicroelectronics with its partners Philips Semiconductors and CNET completed the first phase of the development of HCMOS-8, the next generation CMOS process, at Crolles, France. This process is targeted at high-performance and low-power applications and will have a 0.15 micron effective gate length (equivalent to 0.18 micron drawn). Prototyping in this process began in the second half of 1998. At the same time, STMicroelectronics has started production of its 0.20 micron effective gate length (0.25 micron drawn) CMOS technology, known as HCMOS- 7. This process is used to produce "system-on-chip" products incorporating tens of millions of transistors combined with embedded memory for telecom, digital consumer and PC applications. Industry Background Semiconductors are the basic building blocks used to create an increasing variety of electronic products and systems. Since the invention of the transistor in 1948, continuous improvements in semiconductor process and design technologies have led to smaller, more complex and more reliable devices at a lower cost per function. As performance has increased and size and cost have decreased, semiconductors have expanded beyond their original primary applications (military applications and computer systems), to applications such as telecommunications systems, automotive products, consumer goods and industrial automation and control systems. In addition, system users and designers have demanded systems with more functionality, higher levels of performance, greater reliability and shorter design cycle times, all in smaller packages at lower costs. These demands have resulted in increased semiconductor content as a percentage of system cost. Calculated on the basis of the total available market (the "TAM"), which includes all semiconductor products, as a percentage of worldwide revenues from production of electronic equipment according to published industry data, semiconductor pervasiveness has increased from approximately 9% in 1991 to approximately 13% in 1998. The demand for electronic systems has also expanded geographically with the emergence of new markets, particularly in the Asia Pacific region. Semiconductor sales have increased significantly over the long term but have experienced significant cyclical variations in growth rates. According to trade association data the TAM increased from $17.8 billion in 1983 to $125.6 billion in 1998 (growing at a compound annual rate of approximately 14%). At the same time the serviceable available market (the "SAM"), which prior to 1995 consisted of the TAM without DRAMS, microprocessors and opto-electronic products and commencing in 1995 and for all subsequent periods presented, includes microprocessors as a result of the Company's production of x86 products, increased from approximately $15.0 billion in 1983 to $107.0 billion in 1998 (growing at a compound annual rate of approximately 14%). In 1998, the TAM decreased by 8.4 %. Based on trade association data for the first quarter of 1999, the TAM increased in the first quarter of 1999 by 6.8% compared to the first quarter of 1998. The SAM decreased 5.2% in 1998 compared to 1997; however, based on trade association data for the first quarter of 1999, the SAM increased by 3.5% compared to the first quarter of 1998. In 1998, approximately 7
33% of all semiconductors were shipped to the Americas, 21% to Japan, 23% to Europe, and 23% to the Asia Pacific region. Although cyclical changes in production capacity in the semiconductor industry and demand for electronic systems have resulted in pronounced cyclical changes in the level of semiconductor sales and fluctuations in prices and margins for semiconductor products from time to time, the semiconductor industry has experienced substantial growth over the long term. Factors that are contributing to long-term growth include the development of new semiconductor applications, increased semiconductor content as a percentage of total system cost, emerging strategic partnerships and growth in the electronic systems industry in the Asia Pacific region. Semiconductor Classifications The process technologies, levels of integration, design specificity, functional technologies and applications for different semiconductor products vary significantly. As differences in these characteristics have increased, the semiconductor market has become highly diversified as well as subject to constant and rapid change. Semiconductor product markets may be classified according to each of these characteristics. Semiconductors can be manufactured using different process technologies, each of which is particularly suited to different applications. Since the mid-1970s, the two dominant processes have been bipolar (the original technology used to produce integrated circuits) and CMOS (complementary metal-oxide-silicon). Bipolar devices typically operate at higher speeds than CMOS devices, but CMOS devices consume less power and permit more transistors to be integrated on a single IC. While bipolar semiconductors were once used extensively in large computer systems, CMOS has become the prevalent technology, particularly for devices used in personal computer systems. In connection with the development of new semiconductor applications and the demands of system designers for more integrated semiconductors, advanced technologies have been developed during the last decade that are particularly suited to more systems-oriented semiconductor applications. For mixed-signal applications, BiCMOS technologies have been developed to combine the high speed and high voltage characteristics of bipolar technologies with the low power consumption and high integration of CMOS technologies. For intelligent power applications, BCD technologies have been developed that combine bipolar, CMOS and DMOS technologies. Such systems-oriented technologies require more process steps and mask levels, and are more complex than the basic function-oriented technologies. The use of systems- oriented technologies requires knowledge of system design and performance characteristics (in particular, analog and mixed-signal systems and power systems) as well as expertise and experience with several semiconductor process technologies. Semiconductors are often classified as either discrete devices (such as individual diodes, thyristors, transistors as well as opto-electronic products) or integrated circuits (in which thousands of functions are combined on a single "chip" of silicon to form a more complex circuit). Compared to the market for ICs, there is typically less differentiation among discrete products supplied by different semiconductor manufacturers. Also, discrete markets have generally grown at slower, but more stable, rates than IC markets. Semiconductors may also be classified as either standard components or application-specific ICs ("ASICs"). Standard components are used by a large group of systems designers for a broad range of applications, while ASICs are designed to perform specific functions in specific applications. Generally, there are three types of ASICs: full-custom devices, semicustom devices and application-specific standard products ("ASSPs"). Full custom devices are typically designed to meet the particular requirements of one specific customer. Semicustom devices are more standardized ICs that can be customized with efficient CAD tools within a short design cycle time to perform specific functions. ASSPs are standardized ASICs that are designed to perform specific functions in a specific application, but are not proprietary to a single customer. 8
The two basic functional technologies for semiconductor products are analog and digital. Analog (or linear) devices monitor, condition, amplify or transform analog signals, which are signals that vary continuously over a wide range of values. Analog circuits are critical as an interface between electronic systems and a variety of real world phenomena such as sound, light, temperature, pressure, weight or speed. Electronics systems continuously translate analog signals into digital data, and vice versa. The analog semiconductor market consists of a large and growing group of specific markets that serve numerous and widely differing applications, including applications for automotive systems, instrumentation, computer peripheral equipment, industrial controls, communications devices, video products and medical systems. Because of the varied applications for analog circuits, manufacturers typically offer a greater variety of devices to a more diverse group of customers. Compared to the market for commodity digital devices such as standard memory and logic devices, the analog market is characterized by longer product life cycles, products that are less vulnerable to technological obsolescence, and lower capital requirements due to the use of mature manufacturing technologies. Such characteristics have resulted in growth rates that have been less volatile than growth rates for the overall semiconductor industry. Digital devices perform binary arithmetic functions on data represented by a series of on/off states. Historically, the digital IC market has been primarily focused on the fast growing markets for computing and information technology systems. Increasing demands for high-throughput computing and networking and the proliferation of more powerful personal computers and workstations in recent years have led to dramatic increases in digital device density and integration. As a result, significant advances in electronic system integration have occurred in the design and manufacture of digital devices. There are two major types of digital ICs: memory products and logic devices. Memory products, which are used in electronic systems to store data and program instructions, are generally classified as either volatile memories (which lose their data content when power supplies are switched off) or nonvolatile memories (which retain their data content without the need for constant power supply). Volatile memories are used to store data in virtually all computer systems, from large and mid-range computers to personal computers and workstations. Memory products are typically standard, general purpose ICs that can be manufactured in high volumes using basic CMOS processes, and they are generally differentiated by cost and physical and performance characteristics, including data capacity, die size, power consumption and access speed. The primary volatile memory devices are DRAMs, which accounted for 60.9% of semiconductor memory sales in 1998, and SRAMs (static RAMs). DRAMs are volatile memories that lose their data content when power supplies are switched off, whereas SRAMs are volatile memories that allow the storage of data in the memory array but without the need for clock or refresh logic circuitry. SRAMs are roughly four times as complex as DRAMs (four transistors per bit of memory compared to one transistor) and are significantly more expensive than DRAMs per unit of storage. DRAMs are used in a computer's main memory to temporarily store data retrieved from low cost external mass memory devices such as hard disk drives. SRAMs are principally used as caches and buffers between a computer's microprocessor and its DRAM-based main memory. Nonvolatile memories are typically used to store program instructions that control the operation of microprocessors and electronic systems. Among such nonvolatile memories, read-only memories ("ROMs") are permanently programmed when they are manufactured while programmable ROMs (PROMs) can be programmed by system designers or end-users after they are manufactured. Erasable PROMs (EPROMs) may be erased and reprogrammed several times, but to do so EPROMs must be physically removed from electronic systems, exposed to ultraviolet light, reprogrammed using an external power supply and then returned to the systems. Electrically erasable PROMs (EEPROMs) can be erased byte by byte and reprogrammed "in-system" without the need for removal. Using EEPROMs, a system designer or user can program or reprogram systems at any time. "Flash" memories are products 9
that represent an intermediate solution for system designers between EPROMs and EEPROMs based on their cost and functionality. Flash memories are typically less expensive than EEPROMs, but can also be erased and rewritten. The entire contents of a flash memory or large blocks of data (not individual bytes) can be erased with a "flash" of current. Because flash memories can be erased and reprogrammed electrically and in-system, they are more flexible than EPROMs and, therefore, may replace EPROMs in many of their current applications. Flash memories may also be used for solid state mass storage of data, a potentially high volume application, and in other applications including, in particular, mobile telephone systems. Logic devices process digital data to control the operation of electronic systems. The largest segment of the logic market, standard logic devices, includes microprocessors, microcontrollers and digital signal processors. Microprocessors are the central processing units of computer systems. Microcontrollers are complete computer systems contained on single integrated circuits that are programmed to specific customer requirements. They contain microprocessor cores as well as logic circuitry and memory capacity. Microcontrollers control the operation of electronic and electromechanical systems by processing input data from electronic sensors and generating electronic control signals, and are used in a wide variety of consumer products (alarm systems, household appliance controls and video products), automotive systems (engine control and dashboard instrumentation), computer peripheral equipment (disk drives, facsimile machines, printers and optical scanners), industrial applications (motor drives and process controllers), and telecommunications systems (telephones, answering machines and digital cellular phones). Digital signal processors ("DSPs") are parallel processors used for high complexity, high speed real-time computations in a wide variety of applications, including answering machines, modems, digital cellular telephone systems, audio processors and data compression systems. Standard devices are intended to be utilized by a large group of systems designers for a broad range of applications. Consequently, standard devices usually contain more functions than are actually required and, therefore, may not be cost-effective for certain specific applications. In addition to standard logic devices, a broad range of full-custom, semicustom and ASSP logic devices has been developed for a wide variety of applications. These devices are typically designed to meet particular customer requirements. Compared to memory markets, logic device markets are much more differentiated and dependent upon intellectual property and advanced product design skills. Analog/digital (or "mixed-signal") ICs combine analog and digital devices on a single chip to process both analog signals and digital data. Historically, analog and digital devices have been developed separately as they are fundamentally different and it has been technically difficult to combine analog and digital devices on a single IC. System manufacturers have generally addressed mixed-signal requirements using printed circuit boards containing many separate analog and digital circuits acquired from multiple suppliers. However, system designers are increasingly demanding system level integration in which complete electronic systems containing both analog and digital functions are integrated on a single IC. Mixed-signal ICs are typically characterized as analog ICs due to their similar market characteristics, including longer product life cycles, diverse applications and customers and more stable growth through economic cycles as compared to digital devices. However, certain parts of the mixed-signal market are becoming higher volume markets as the increasing use of mixed-signal devices has enhanced the options of system designers and contributed to the development of new applications, including multimedia, video conferencing, automotive, mass storage and personal communications. 10
The Semiconductor Market The following table sets forth information with respect to worldwide semiconductor sales by type of semiconductor and geographic region: <TABLE> <CAPTION> Worldwide Semiconductor Sales(1) Compound Annual Growth Rates(2) ------------------------------------------ -------------------------------------- 1983 1988 1993 1996 1997 1998 83-88 88-93 93-95 97-98 93-98 ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- ----- (in billions $) (expressed as percentages) --------------- -------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Integrated Circuits. $13.3 $35.9 $66.0 $114.9 $119.5 $109.1 22.0% 13.0% 38.2% (8.8)% 10.6% Analog (linear and mixed-signal)... 2.8 7.2 10.7 17.0 19.7 19.1 20.8 8.2 24.6 (3.4) 12.3 Digital Logic...... 6.7 17.8 34.1 61.9 70.4 67.0 21.6 13.9 28.1 (4.9) 14.5 Memory: DRAM.......... 1.7 6.3 13.1 25.1 19.7 14.0 30.0 15.8 76.5 (29.2) 1.3 Others........ 2.0 4.6 8.1 10.9 9.6 9.0 18.1 12.0 24.7 (5.8) 2.0 ----- ----- ----- ------ ------ --- ----- ----- ------ ------ ----- Total Memory.... 3.7 10.9 21.2 36.0 29.3 23.0 24.1 14.2 58.7 (21.6) 1.6 Total digital....... 10.4 28.7 55.3 97.9 99.6 90.0 22.5 14.0 40.7 (9.8) 10.2 Discrete............. 3.7 7.0 8.6 12.9 13.1 11.9 13.6 4.2 27.6 (9.4) 6.7 Opto-electronics.... 0.7 2.1 2.6 4.1 4.5 4.6 24.6 4.4 28.6 2.5 11.7 ----- ----- ----- ------ ------ ------ ----- ----- ------ ------ ----- TAM............. 17.8 45.0 77.3 132.0 137.2 125.6 20.4 11.4 36.7 (8.4) 10.2 ===== ===== ===== ====== ====== ====== ===== ===== ====== ====== ===== Europe............... 3.3 8.1 14.6 27.6 29.1 29.4 19.7 12.5 39.0 1.1 15.0 Americas............ 7.8 13.4 24.7 42.7 45.9 41.4 11.4 13.0 37.9 (9.6) 10.9 Asia Pacific........ 1.2 5.4 14.2 27.5 30.1 28.9 35.1 21.3 44.1 (4.4) 15.3 Japan................ 5.5 18.1 23.8 34.2 32.1 25.9 26.9 5.6 29.2 (19.2) 1.7 ------ ----- ----- ------ ------ ---- ----- ----- ------ ------ ----- TAM............. $ 17.8 $45.0 $77.3 $132.0 $137.2 $125.6 20.4% 11.4% 36.7% (8.4)% 10.2% ===== ===== ===== ====== ====== ====== ===== ===== ====== ====== ===== - -------------- <FN> (1) Source: WSTS. (2) Calculated using end points of the periods specified. </FN> </TABLE> During the 1960s and 1970s, the development of semiconductor process technologies was critical to the success of participants in the industry. As process technologies matured, manufacturing sciences became important; in the 1980s, the emphasis shifted to increasing production volumes and yields and lowering production costs. The large capital expenditures and other resources required during this period to develop advanced manufacturing capabilities resulted in a stratification of the industry between broad range suppliers operating multiple front-end and back-end manufacturing facilities and specialty niche players operating small wafer fabs or subcontracting wafer production. With the continuing development of new semiconductor applications and increasing demands of system designers for more integrated systems-oriented products, semiconductor manufacturers must continually improve their core technology and manufacturing competencies. In addition, the increasing diversity and complexity of semiconductor products, the demands of technological change, and the costs associated with keeping pace with industry developments have contributed to the growth of cooperative product design and development and manufacturing alliances with customers as well as among semiconductor suppliers. Alliances with customers provide the manufacturer with valuable systems and application know-how and access to markets for key products, while allowing the manufacturer's customers to share some of the risks and benefits of product development. Customers also gain access to the manufacturer's process technologies and manufacturing infrastructure. Alliances with other semiconductor manufacturers permit costly 11
research and development and manufacturing resources to be shared to mutual advantage for joint technology development. The Company believes that major new growth segments in the semiconductor market are developing, in particular for digital multimedia, networking and wireless communications applications. New applications have emerged, such as set-top boxes, digital television, digital video discs, digital mobile computing and communications, smartcards, automotive multimedia, digital still imaging and mass storage, that are requiring new and rapidly evolving semiconductor technologies. The Company believes many of these new products will require a high level of semiconductor integration, combining various technologies such as bipolar, analog, CMOS, power and nonvolatile memory, on a single chip. To compete as a broad line semiconductor manufacturer, management believes that it is important to have: (i) a broad and diverse customer base; (ii) a diversified product portfolio (including analog, digital mixed-signal and power products) and experience in several application markets; (iii) a broad range of process technologies (including basic function-oriented and advanced systems-oriented technologies); (iv) design extension and CAD tools in both analog and digital technologies; (v) an efficient, quality, global manufacturing infrastructure; (vi) global marketing and technical support; and (vii) a worldwide network of strategic alliances with customers and other semiconductor manufacturers. The Company also believes that its independence from any single system group manufacturer is an advantage for STMicroelectronics in working closely with customers in different market segments. Strategy In 1996 the Company achieved its Vision 2000 objective, originally adopted in 1993, to become one of the world's top ten semiconductor suppliers and to achieve operating results better than the average of the top ten semiconductor suppliers. In 1998, according to published industry data, STMicroelectronics ranked ninth among worldwide suppliers of semiconductor devices. Management's objective is to consolidate and improve its ranking within the top ten semiconductor suppliers while sustaining or improving its operating results relative to its peer group. The key elements of the Company's strategy are set forth below. Broad Range Supplier. The Company offers a diversified product portfolio and develops products for a wide range of market applications to reduce its dependence on any single product, industry or application market. Within its diversified portfolio, the Company has focused on developing products that exploit its technological strengths in creating customized, system-level solutions with substantial analog and mixed-signal content. Products include differentiated ICs (which the Company defines as being its dedicated products, semicustom devices and microcontrollers) and analog ICs (including mixed-signal ICs), the majority of which are also differentiated ICs. As a leading provider of differentiated ICs, the Company has developed close relationships with customers, resulting in early knowledge of their evolving requirements and opportunities to access their markets for other products. Differentiated ICs, which are less vulnerable to competitive pressures than standard commodity products, accounted for approximately 62% of the Company's net revenues in 1998 compared to approximately 57% in 1997. The Company also targets applications that require substantial analog and mixed-signal content and can exploit the Company's system level expertise. Analog ICs accounted for approximately 51% of the Company's 1998 net revenues compared to approximately 49% in 1997, while discrete devices accounted for approximately 13% of the Company's net revenues in 1998 compared to approximately 14% in 1997. In recent years differentiated ICs, in particular analog ICs, have experienced less volatility in sales growth rates and average selling prices than the overall semiconductor industry. However, as a broad range supplier, the Company can also benefit from selling standard products. Consistent with this view, the Company has established the Gold Standard program to promote the sale of certain standard products meeting specified quality, cost and lead-time criteria. The related initiatives include worldwide advertising, promotional task forces in all regions, special distribution initiatives and worldwide training of sales and marketing personnel. 12
Total standard products (including all nonvolatile memories, discrete devices, and all standard logical and linear ICs) represented approximately 38% of the Company's sales in 1998 and, in management's view, increased sales of these products represent an opportunity to improve cash flow because the manufacture of standard products requires little capital investment. Leader in a Broad Range of Process and Design Technologies. The Company intends to continue to exploit its expertise and experience with a wide range of process and design technologies to develop its capabilities. The Company is committed to continuing to increase research and development expenditures in the future as well as continuing to develop alliances with other semiconductor companies and suppliers of software development tools. Technological advances in the areas of transistor performance and interconnection technologies are being developed through the Company's logic products and semicustom devices. In 1998 the Company pursued the development of the advanced process steps necessary for its 0.18 micron seven metal layer process that can operate at high clock speeds (frequency of 500 MHZ at 1.8V) and capable of densities of up to 50,000 gates per square millimeter. The Company continually works with key suppliers to develop advanced and standardized design methodologies for its CMOS processes as well as libraries of macrofunctions and megafunctions for many of its products, and is focusing on improving its concurrent engineering practices to better coordinate design activities and reduce overall time-to-market. It is also working closely with many of its key suppliers to develop easy-to-use design tools for specific applications. Alliances with other semiconductor manufacturers are generally designed both to permit costly research and development and manufacturing resources to be shared to mutual advantage for joint technology development and to reduce time to market. Diversified Customer Base with Focus on Strategic Alliances. The Company works with its key customers to identify evolving needs and new applications and to develop innovative products and product features. The Company also seeks to use its access to key customers as a supplier of application-specific products to establish itself as a supplier across a broad range of products. Alliances with customers allow the Company and its customers to share some of the risks of product development and the customers to gain access to the Company's process technologies and manufacturing infrastructure. The Company has targeted alliances with customers in each of its key application markets of telecommunications, automotive, consumer and computer. It has established alliances with, among others, Alcatel, Bosch, Daewoo Electronics, Hewlett-Packard, Marelli, Nokia, Nortel Networks, Pioneer, Seagate Technology, Thomson Multimedia and Western Digital. In establishing these alliances, the Company has also aimed to cover its key geographical markets. Integrated Presence in Key Regional Markets. The Company has consistently sought to develop a competitive advantage by building an integrated presence in each of the world's three major economic zones: Europe, Asia and North America. An integrated presence means having manufacturing, design, sales and marketing capabilities in each region, in order to ensure that the Company is well positioned to anticipate and meet its customers' business requirements in local markets. Therefore, the Company has established front-end manufacturing facilities in the United States (in Phoenix, Carrollton and Rancho Bernardo), in Europe (Agrate, Casteletto, Catania, Crolles, Rennes, Rousset and Tours) and in Asia (Singapore); the more labor-intensive back-end facilities have been located in Malaysia, Malta, Morocco, Singapore and China, enabling the Company to take advantage of favorable production costs (particularly labor costs). With major design centers and local sales and marketing groups within close proximity of key customers in each region, the Company believes it can maintain strong relationships with its customers. STMicroelectronics intends to continue to build its integrated local presence in each region where it competes in its efforts to better serve its customers and to develop an early presence in potential high growth markets such as China, where the Company has both a back-end facility and a design center, and India, where the Company has a design center. Balanced Sales by Application and Region in High Growth Market Segments. The Company has developed a strong product portfolio across major application markets including computer peripherals, wireless communications, digital consumer electronics, smartcards, automotive and power management. While the Company is consolidating its 13
position in its established high volume businesses, including switching, engine management, car safety, traditional analog TV, VCR, computer peripherals, power and industrial and consumer appliances, it has also been investing research and development and design resources to develop the next generation of high growth applications, such as smartcards, portable computing, digital consumer (DVD, new generations of set-top boxes, digital TV), wireless communications (digital cellular phones), high speed modems (xDSL), new automotive products (car multimedia) and new generations of mass storage devices. The Company also maintains a geographically diverse customer base across a broad range of market applications. To date, the Company's growth has been attributable primarily to internal growth. However, in 1998, the Company announced the acquisition from Adaptec of Peripheral Technology Solutions Group which is specialized in the design of products for the hard disk drive market, as well as the purchase of Vision Group, a leading designer and supplier of CMOS sensors. These purchases and acquisitions were completed in 1999. Furthermore, the Company may, from time to time, consider making selected acquisitions that the Company believes would complement or expand its existing business. Announcements concerning potential acquisitions could be made at any time. Acquisitions involve a number of risks that could adversely affect the Company's operating results, including: (i) the diversion of management's attention; (ii) the assimilation of the operations and personnel of the acquired companies; (iii) the assumption of potential liabilities, disclosed or undisclosed, associated with the business acquired, which liabilities may exceed the amount of indemnification available from the seller; (iv) the risk that the financial and accounting systems utilized by the business acquired will not meet the Company's standards; (v) the risk that the businesses acquired will not maintain the quality of products and services that the Company has historically provided; (vi) the inability to attract and retain qualified management for the acquired business; and (vii) the inability of the Company to retain customers of the acquired entity. There can be no assurance that (a) the Company will be able to consummate future acquisitions on satisfactory terms, if at all, (b) adequate financing will be available for future acquisitions on terms acceptable to the Company, if at all, or (c) any operations acquired will be successfully integrated or that such operations will ultimately have a positive impact on the Company. See "Item 9: Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Customers and Applications STMicroelectronics designs, develops, manufactures and markets over 3,000 main types of products that it sells to approximately 800 direct customers. The Company also sells its products through distributors. To many of its key customers the Company provides a wide range of products, including dedicated products, discrete devices, memory products and programmable products. The Company's position as a strategic supplier of application-specific products to certain customers fosters close relationships that provide it with opportunities to supply such customers' requirements for other products, including discrete devices, programmable products and memory products. The following table sets forth certain of the Company's significant customers and certain applications for its products: 14
Telecommunications - -------------------------------------------------------------------------------- Customers: Alcatel Lucent Technologies Nortel Network Samsung Bosch Motorola Philips Siemens Ericsson Nokia Sagem Telital Applications: Answering machines Modems Central office switching systems PBX systems Digital cellular telephones Telephone sets (corded and cordless) xDSL chip set - -------------------------------------------------------------------------------- Computer Systems Customers: ACER Creative Technology NEC 3D Labs Adaptec Epson Olivetti Western Digital ATI Technologies Hewlett-Packard Quantum Xerox Bull IBM Samsung Compaq Maxtor Seagate Technology Applications: Data storage Photocopiers Monitors and displays Printers Graphics chip sets - -------------------------------------------------------------------------------- Automotive Customers: Bosch Delphi Marelli Siemens Chrysler Ford Motorola Valeo Daimler-Benz Kenwood Pioneer Applications: Alternator regulators Ignition circuits Airbags Injection circuits Antiskid braking systems Multiplex wiring kits Automotive entertainment systems Transmission control systems Body and chassis electronics Global positioning systems Engine management systems - -------------------------------------------------------------------------------- Consumer Products Customers: Bose Corporation Kenwood Philips Sony Daewoo Matsushita Pioneer Thomson Multimedia General Instrument NEC Samsung Lucky Goldstar Nokia Networks Scientific Atlanta Grundig Pace Sharp Applications: Audio power amplifiers Digitial TVs Audio processors Digital video disks Cable television systems Set-top boxes Compact disk players TV sets and monitors Digital cameras Video cassette recorders - -------------------------------------------------------------------------------- (continued) 15
- -------------------------------------------------------------------------------- Industrial and Other Applications Customers: Astec Giescke & Devrient Philips Siemens Delta Liton Schlumberger De La Rue Mannesman Schneider Emerson Orga Gemplus Applications: Battery chargers Motor controllers Smartcards ICs Power supplies Industrial automation and control Switch mode power supplies systems Intelligent power switches Lighting systems (lamp ballasts) - -------------------------------------------------------------------------------- In 1998, no single customer accounted for more than 10% of the Company's net revenues, and sales to the Company's top ten customers accounted for approximately 43% of the Company's net sales in 1998 (39% in 1997). The Company has several large customers, certain of whom have entered into strategic alliances with the Company. Many of the Company's key customers operate in cyclical businesses and have in the past, and may in the future, vary order levels significantly from period to period. In addition, approximately 18% of the Company's net revenues in 1998 were made through distributors, compared to approximately 22% in 1997. There can be no assurance that such customers or distributors, or any other customers, will continue to place orders with the Company in the future at the same levels as in prior periods. The loss of one or more of the Company's customers or distributors, reduced bookings or product returns by its key customers or distributors, could adversely affect the Company's operating results. In addition, in a declining market the Company has been in the past and may in the future be driven to lower prices in response to competitive pressures. Despite price reductions, however, in an industry downturn order cancellations may be expected, particularly by distributors and for commodity products. Products and Technology STMicroelectronics designs, develops, manufactures and markets a broad range of products used in a wide variety of microelectronic applications, including telecommunications systems, computer systems, consumer goods, automotive products and industrial automation and control systems. The Company's products include standard commodity components, full custom devices, semicustom devices and ASSPs for analog, digital and mixed-signal applications. Historically, the Company has not produced DRAMs or x86 microprocessors. In 1998, the Company had four principal products groups: Dedicated Products, Programmable Products, Memory Products and Discrete and Standard ICs. Certain information with respect to revenues for these product groups for 1998 is shown in the table below. For a breakdown of the Company's net revenues by Group and geography for the last three years, see "Item 9: Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." Revenues for future periods will be calculated according to the new groups described below. 16
<TABLE> <CAPTION> 1998 Group Revenues by Region ------------------------------------------------------------------ (percentage of Group net revenues) Total Total (% of total North (in millions) net revenues) Europe America Asia Pacific (1) Region Five Japan --------------- ------------- -------- --------- ---------------- ------------- ------ <S> <C> <C> <C> <C> <C> <C> <C> Dedicated Products Group...................... $ 1,865.6 43.9% 36% 21% 37% 2% 4% Programmable Products................... 783.4 18.4% 37% 33% 24% 3% 3% Memory Products............ 659.6 15.5% 54% 16% 18% 2% 10% Discrete and Standard ICs........................ 828.7 19.5% 44% 21% 30% 4% 1% <FN> - --------------- (1) Many of the products sold in the Asia Pacific region are sold to U.S.-based original equipment manufacturers located in the region. </FN> </TABLE> At the beginning of 1999, the Company implemented organizational changes to better orient its products groups to end use applications. Its products are now organized into the following principal product groups: Telecommunications, Peripherals and Automotive (formerly Dedicated Products), Consumer and Microcontroller (formerly Programmable Products), Memory Products and Discrete and Standard ICs. As part of its activities outside the principal product groups, the Company also has a New Ventures Group, which identifies and develops new business opportunities to complement the Company's existing businesses, and a Subsystem Product Group, which produces subsystems for industrial and other applications. Telecommunications, Peripherals and Automotive Groups The Dedicated Products Groups was reorganized into the Telecommunications Group, which has two applications divisions, and the Automotive and Peripherals Group, which has four divisions. The video products which formed part of the former Dedicated Products Group are today encompassed within the Consumer and Microcontroller Groups. The Groups also have two support divisions (i) digital signal processing and microcontrollers cores and (ii) digital and mixed analog/digital semi-custom. The Telecommunications, Peripherals and Automative Groups are responsible for the design, development and manufacture of application-specific products using advanced bipolar, CMOS, BiCMOS mixed-signal and power technologies as well as mixed analog/digital semicustom devices. The Groups offer complete system solutions to customers in several application markets. All of the Groups' products are ASSPs, full-custom or semicustom devices that may also include DSP and micro-controllers cores. The Telecommunications, Peripherals and Automotive Groups work closely with customers to develop application-specific products using STMicroelectronics' technologies and manufacturing capabilities. The breadth of the Groups' customer and application base provides it with a source of stability in the cyclical semiconductor market. In addition, the Company's position as a strategic supplier of application-specific products fosters close relationships that provides them with opportunities to supply such customers' requirements for other products, including discrete devices, microcontrollers and memory products. The Telecommunications, Peripherals and Automotive Groups particularly emphasize dedicated ICs for automotive, computer peripherals and industrial application segments, as well as for communication, computing and networking application segments. 17
The Telecommunications Group has two divisions: (i) Wireline Telecommunications Products. The Company's telecommunications products are used primarily in telephone sets, modems and subscriber line interface cards (SLICs) for digital central office switching equipment. The Company is targeting applications in high speed communications networks and telephone sets and asynchronous transfer mode ("ATM") communication systems. During 1998, significant developments in the Company's telecommunications product area included the introduction of the ToscaTM two-chip set for Asymmetric Digital Subscriber Loop (ADSL) and the delivery of more than 300,000 full-rate ADSL chip sets to the leading equipment manufacturer. The Company also formed a partnership with Telia Research AB to develop a Very high bit-rate Digital Subscriber Loop (VDSL) system to support broadband communications facilities for interactive multimedia Internet access, video-on-demand, and other advanced services. The Company furthermore announced the Pegas.usBTM chip set, the first host signal processing modem to take advantage of the Universal Serial Bus for connection to personal computers, as well as a super- integrated IC that includes a digital signal processor (DSP) plus all of the analog functions needed for phone, fax, modem and answering machine functions. (ii) Wirelesss Telecommunications Products. In wireless telecommunications, the Company focuses its product offerings on cellular phones, pagers and wireless local loop applications, serving the major OEMs in each of these areas with differentiated ICs. In cellular phones, the Company is supplying products for both the analog and digital market segments (including GSM and CDMA) and reinforcing its leading position in energy management (50 million units shipped in 1998), audio CODEC (30 million units shipped in 1998), and RF/IF ICs (30 million units shipped in 1998). The Company has gained experience and know-how with the major silicon components of cellular phone applications, and is developing system and software capabilities to provide full solutions for specifically targeted applications, particularly in the baseband processor, where in 1998 the Company shipped approximately 7 million D950 and pursued the development of its new ST100 DSP cross core currently under development. The Peripherals and Automotive Group has four divisions: (i) Data Storage. STMicroelectronics produces ICs for several data storage applications, in particular disk drives with advanced solutions for read and write digital channels, controllers, host interfaces, digital power processing and micromachinery. The group is working actively on super-integrating these macro-functions. In 1998, the Company announced the acquisition from Adaptec of Peripheral Technology Solutions Group which is specialized in the design of products for the hard disk drive market. The acquisition was completed in 1999. The acquisition complements the Company's activities with respect to (i) product line, giving the Company access to leading disk controller products and know-how, (ii) design teams, contributing Adaptec's designers with CMOS read channel product design expertise, (iii) geography, providing the Company a base in Silicon Valley, and (iv) customer base, adding customers in Asia Pacific and Japan. In 1998, the Company also signed a cooperation agreement with IBM to accelerate the development of advanced system-on-a-chip products, particularly ICs for data storage applications and PC-compatible information appliances. (ii) Printers. STMicroelectronics is focusing on inkjet printer components and is an important supplier of pen chips, motor drivers, head drivers and image processors. The Company is an important partner of Hewlett-Packard for technology development and manufacturing. Since the beginning of the cooperation with Hewlett-Packard, the Company has supplied more than 400,000 wafers for pen chip applications. 18
(iii) Audio and Automotive Products. STMicroelectronics' audio products include audio power amplifiers, audio processors and graphic equalizer ICs. The Company has sold more than 1.2 billion audio power amplifier ICs since 1972. The Company's automotive products include alternator regulators, airbag controls, antiskid braking systems, ignition circuits, injection circuits, multiplex wiring kits and products for body and chassis electronics, engine management and instrumentation systems. The Company is currently developing solutions for global positioning systems (GPS) and multi-media in the car. In 1998, the Company signed a strategic alliance for car entertainment systems with Pioneer Electronics of Japan. Due to its super-integration know-how, the Company has successfully expanded its presence beyond Europe to the United States and Japan, further accessing key customers such as Mitsubishi and Denso. In 1998, the Company announced the launch of two devices (ST20 GPG and STB 5600) that for the first time allow a complete GPS system to be implemented by using just two chips. In the fourth quarter of 1998, the Company also delivered the first working prototypes of a single chip system called Euterpe, that combines voice recognition, voice synthesis and text to speech technologies. (iv) Industrial and Power Supplies. STMicroelectronics designs and manufactures products for industrial automation systems, lighting applications (lamp ballast), battery chargers and switch mode power supplies (SMPS). Its key products are power ICs for motor controllers and read/write amplifiers, intelligent power ICs for spindle motor control and head positioning in computer disk drives and battery chargers for portable electronic systems, particularly mobile telephone sets. The Groups also have two support divisions (i) digital signal processing and microcontroller cores and (ii) digital and mixed analog/digital semicustom. These two divisions are centers of excellence to develop key competences in the field of semicustom (digital and analog) as well as in DSP and microcontrollers cores. The Company is currently developing superintegrated solutions using its broad range of technologies (CMOS, BiCMOS, BCD) and its expertise in microcontrollers/DSP cores, dedicated IC megacells and embedded memory capability for hard disk drive applications. The same methodology is being applied to develop ICs for other computer peripherals such as monitors and inkjet printers. Consumer and Microcontroller Groups The Consumer and Microcontroller Groups are the successors to the Programmable Products Group and is responsible for the design, development and manufacture of designs, develops and manufactures microcomponents (including microcontrollers and digital signal processors), digital semicustom devices, graphic controllers and MPEG decoder ICs and image processing semicustom devices for many diverse products targeted at high growth digital applications, including information technology, automotive and multimedia. The Consumer and Microcontroller Groups are divided into the Consumer Group and the Microcontrollers Group, each further divided into several divisions. The Consumer Group has four divisions: (i) Digital Video. Emerging digital video technologies offer a number of advantages over traditional analog video, including the ability to compress video data for transmission and storage, to transmit and reproduce video data without perceptible image degradation and to randomly access and edit video data. In 1998, the digital consumer market grew due to the strong growth of digital TV satellite broadcasting in the United States and digital TV in the United Kingdom. 19
This division delivers large volumes of MPEG decoder ICs suitable for video CD products, personal computers, set-top boxes (including cable, satellite and terrestrial DVD) and digital TV applications. The majority of these products implement the MPEG 2 standard. In 1998, STMicroelectronics started volume production of the STi5500 Omega chip, the first in a family of highly integrated devices that combine an MPEG 2 audio/video decoder with a 32-bit microprocessor and other functions to create a complete set-top box back-end section on a single chip. Among recent important developments for digital TV, the Company introduced the STi5505, the world's first device to integrate a complete DVD back-end decoder and a 32-bit host processor on a single. In April 1998, STMicroelectronics introduced the STi7000 chip, the first integrated solution for High-Definition Television (HDTV) combining an MPEG 2 decoder with an advanced display and format converter into one single chip. Production of the STi7000 started in the fourth quarter of 1998. The Company has also been selected to provide the conditional access module to Canal+ for digital TV. (ii) Consumer Broad Band Division. This division develops chip sets for the front-end section of all major digital video applications. For example, this division designs and manufactures semi-custom products for data input from compact disc-audio and digital video players, digital broadcast and data exchange on cable as well as for the IEEE 1394 serial digital interface. (iii) TV, Monitor and Camera Division. This division targets analog television and video camera recorders, monitors and flat panel displays and image capturing and transmission. In addition to the traditional analog TV and monitor businesses, in 1998, the division started to address the market for digital cameras. In order to achieve its goals with respect to this market, the Company made in late 1998 an offer to acquire Vision Group plc, a U.K. company based in Edinburgh, Scotland, which has developed a technology for the production of CMOS sensors, and completed the acquisition in 1999. The Company also signed a partnership agreement with Live Picture to design a new microchip that will enable digital camera users to create instantly 360-degree panoramic photos and to introduce other virtual reality features. With CMOS imaging technology it is thus possible to produce the principal features of a camera on a single IC, which is significantly cheaper than using a multi-component chip set based on traditional Charge Coupled Devices (CCD) technology. Potential applications of the technology include PC cameras for transmitting images across the Internet, digital still cameras, camcorders, security cameras, videophones, automotive applications, biometrics and toys. (iv) Graphics Products. In 1998, the Company produced over 5 million Riva 128 and 128ZY graphic accelerators to deliver visual computing on PC platforms. The RIVA 128 was developed in conjunction with nVidia. In early 1999, the Company entered into a partnership agreement with Videologic of the United Kingdom for developing the next generation 3D accelerator aimed at the PC and digital consumer market. The Microcontroller Group has one division and two support groups: (i) Microcontroller Division. This division provides competitive, high-volume 8-bit microcontrollers for all major application segments and 16-bit DSP for the mass market. This family of products has been developed with a wide portfolio of processes capable of embedding nonvolatile memories such as EPROM, EEPROM and flash memories. Within the support groups, the Microcontroller Core Development group develops 32- and 64-bit microcontroller cores. Current products include the successful ST20 and ST40 products. The Company has entered an agreement with Hitachi to co-develop a 64-bit microcontroller core (ST50) based on Hitachi original Super H architecture and STMicroelectronics know-how in 64-bit 20
microprocessors for interactive set-top boxes, digital video products, car multimedia systems and other consumer oriented products. The Microcontroller Development Tools Group is concerned with software and hardware development tools for microcontroller cores and with software methodology for the microcontrollers and application divisions. Memory Products Group The Memory Products Group designs, develops and manufactures a broad range of semiconductor memory products but does not produce DRAMs. According to published industry data, on the basis of 1998 revenues, STMicroelectronics was the leading producer of EPROMs, with a 38% market share, and the second leading supplier of EEPROMs. According to published industry data, the total market for memory devices in 1998 was approximately $23.0 billion including DRAMs (61%), SRAMs (17%) and nonvolatile memories (22%). The Company's Memory Products Group is organized into the following divisions: (i) EPROMs; (ii) flash memories; (iii) smartcard products; (iv) EEPROMs and application-specific memories; and (v) SRAMs. EPROMs. STMicroelectronics produces a broad range of EPROMs, from 16 Kbit to 32 Mbit. According to published industry data, STMicroelectronics consolidated its world's leading market position for EPROMS in 1998, with revenues of $188 million or approximately 38% of worldwide EPROM sales. The Company currently produces EPROMs using 0.40 micron CMOS technologies. The EPROM market is relatively mature, and worldwide sales declined in 1998 according to published industry data. The Company has succeeded in maintaining its market leadership because of its EPROM technology, which has allowed the Company to build one of the broadest product portfolios currently offered in the market. At the same time, this technology has permitted continuous improvement of manufacturing yields and reduction of die size, giving the Company an advantageous cost position. Efficient manufacturing in its Singapore assembly plant together with STMicroelectronics' sales and distribution channels have contributed to the exploitation of the Company's technological advantage. Flash Memories. The Company currently supplies single voltage (down to 3.0 volt) NOR cell structure flash memory products up to 16 Mbit, and is introducing into production a family of 32 Mbit flash memories operating at 1.8 volt and manufactured using 0.25 micron technology. The Company is jointly developing with Mitsubishi a new generation of flash memory products, starting with multi-level 64 Mbit, as well as associated processes from 0.20 through 0.18 micron. The market for flash memories is growing fast, according to published industry data, driven by cellular phones and digital consumer applications growth. Smartcard Products. Smartcards are credit card-like devices containing integrated circuits that store data and provide an array of security capabilities. They are used in a wide and growing variety of applications, including public pay telephone systems (primarily in France and Germany), cellular telephone systems (primarily in Europe), bank cards (primarily in France) and pay television systems (primarily in the United States, United Kingdom and France). Other applications include medical record applications, card-access security systems and toll-payment applications. In 1998, the Company's total number of smartcard chips sold since 1983 exceeded one billion, with more than 100 million microcontroller-based smartcard ICs shipped per year since 1997. According to independent market analysts, the 1998 volume confirmed the Company's leading market position with approximately a 43% share in microcontroller-based smartcard ICs that form the basis for such advanced applications as electronic purses, bankcards, pay TV and GSM systems. In 1998, the Company was awarded certifications to ITSEC level E3 High, the most stringent level normally required in commercial applications, for two products that will be used in the French health card project, indicating the 21
Company's leadership position in terms of independent security certifications. The Company also introduced the ST16RF product range, the world's first dual mode (contact/contactless) smartcard microcontrollers. Originally developed for the French public transport system in Paris (RATP) and rail operator (SNCF), these devices have potential uses in public transport ticketing, with trial now underway in Nice, France. In November 1998, the Company also announced the world's first ISO 1443 type B contactless memory designed for use in electronic tags, RF/ID and similar applications where the memory is powered by the received carrier electromagnetic wave as well as a new addition to the ST19 family of smartcard chips, the ST19 SF64, which is a device particularly suited to high end telecoms, Java Cards and similar multiapplication cards. EEPROMs and Application-Specific Memories. The Company offers serial EEPROMs up to 256 Kbit and parallel EEPROMs up to 1 Mbit. Serial EEPROMs are the most popular type of EEPROMs and are generally used in computer, automotive and consumer applications. Parallel EEPROMs account for a smaller portion of the EEPROM market, being used mainly in telecommunications equipment. STMicroelectronics entered the parallel EEPROM market in late 1993. The Company intends to work closely with its key customers and strategic allies to identify and develop new application-specific memory devices using mixed technologies. In 1998, the sales of this division represented, according to industry data, approximately 17% of the world market for EEPROM and other nonvolatile memory compared to approximately 14% in 1997. SRAMS. The Company focuses on producing nonvolatile SRAMs (battery back-up) used in computers and telecommunications equipment. Discrete and Standard ICs Group The Discrete and Standard ICs Group designs, develops and manufactures discrete power devices, power transistors, standard linear and logic ICs, and RF products. According to published industry data, based on 1998 revenues, STMicroelectronics is among the leading suppliers of power transistors and among the top two suppliers of thyristors, worldwide. The Group's discrete and standard products are manufactured using mature technological processes. Although such products are less capital intensive than the Company's other principal products, the Company is continuously improving product performance and developing new product features. The Group has a diverse customer base, and a large percentage of the Group's products are sold through distributors. Discrete Power Devices. STMicroelectronics manufactures and sells a variety of discrete power devices, including rectifiers, protection devices and thyristors (SCRs and triacs). The Company's devices are used in various applications, including in particular telecommunications systems (telephone sets, modems and line cards), household appliances and industrial systems (motor control and power control devices). More specifically, rectifiers are used in voltage converters and voltage regulators, protection devices are used to protect electronic equipment from power supply spikes or surges, and thyristors are used to vary current flows through a variety of electrical devices, including lamps and household appliances. The Company offers a highly successful range of standard products built with its proprietary Application Specific Discretes (ASDTM) technology, which allows a variety of discrete structures to be merged into a single device optimized for specific applications such as EMI filtering for cellular phones. Power Transistors. STMicroelectronics designs, manufactures and sells power transistors, which (like the Company's discrete power devices) operate at high current and voltage levels in a variety of switching and pulse mode systems. The Company has three power transistor divisions: bipolar transistors, power MOSFETs (metal-oxide-silicon field effect transistors) and new power transistors such as IGBTs. 22
The Company's bipolar power transistors are used in a variety of high-speed, high-voltage applications, including SMPS (switch mode power supply) systems, television/monitor deflection circuits and lighting systems. According to published industry data, on the basis of 1998 revenues, STMicroelectronics is among the leading suppliers of bipolar transistors, including RF power transistors. The Company introduced power MOSFETs in 1991 to extend the use of power transistors to new high-frequency, high-voltage applications, including automotive components, crowbar protection devices, resonant converters and power factor correction devices. A new family of products, low voltage power MOSFETs known as the NE series, is being produced with a new technology that provides substantial advantages over conventional cellular power MOSFET processes. The Company also offers a family of VIPower (vertical integration power) products, as well as omnifets and application-specific devices. VIPower products exhibit the operating characteristics of power transistors while incorporating full thermal, short circuit and overcurrent protection and allowing logic level input. VIPower products are used in consumer goods (lamp ballasts) and automotive products (ignition circuits, central locking systems and transmission circuits). Omnifets are power MOSFETs with fully integrated protection devices that are used in a variety of sophisticated automotive and industrial applications. Application-specific devices are semicustom ICs that integrate diodes, rectifiers and thyristors on the same chip, thereby providing cost-effective and space-saving components with a short design time. In the first quarter of 1998, the Company extended its offer of VIPower technology by introducing a Smart H Bridge Driver that can sustain high peak current streams for short time periods. The Company also introduced innovative front-end and packaging technologies that significantly increase MOSFET power density and a new range of products based on its Application Specific Discrete (ASD) technology that integrate two key telephone set functions into a single surface mounting package. Standard Logic and Linear ICs. The Company produces a variety of bipolar and HCMOS logic devices, including clocks, registers, gates and latches. Such devices are used in a wide variety of applications, including increasingly in portable computers, computer networks and telecommunications systems. The Company also offers standard linear ICs covering a variety of applications, including amplifiers, comparators, decoders, detectors, filters, modulators, multipliers and voltage regulators. Radio Frequency Products. The Company supplies components for RF transmission systems used in television broadcasting equipment, radar systems, telecommunications systems and avionic equipment. The Company is targeting new applications for its RF products, including two-way wireless communications systems (in particular, cellular telephone systems) and commercial radio communication networks for business and government applications. Sales, Marketing and Distribution In 1998, the Company derived approximately 82% of its revenues from sales directly to customers through its regional sales organizations (compared to approximately 78% in 1997) and 18% of its net revenues from sales through distributors (compared to approximately 22% in 1997). The Company operates regional sales organizations in Europe, North America, the Asia Pacific region, Japan and, since January 1, 1998, in "Region Five" which includes emerging markets such as South America, Africa, Eastern Europe, the Middle East and India. In 1998, approximately 41.6% of the Company's revenues originated in Europe (compared to approximately 43.6% in 1997), while 22.1% originated in the Americas (compared to approximately 22.4% in 1997), 29.4% originated in the Asia Pacific region (compared to approximately 26.5% in 1997), 4.3% originated in Japan (compared to approximately 5.3% in 1997) and 2.6% originated in Region Five (compared to approximately 2.2% in 1997). In 1998, no single customer accounted for more than 10% of the Company's net revenues, and sales to the Company's top ten customers accounted for approximately 43% of the Company's net sales in 1998 (39% in 1997). 23
The European region is divided into ten sales and marketing units: five major accounts groups organized by market segments (telecom, industrial and smartcards, consumer, automotive and computer), four geographically configured units to cover mid-sized OEM customers (France and the Benelux, Central Europe, Northern Europe and Southern Europe) and a distribution unit. In North America, the sales and marketing team is organized into five business units that are located near major centers of activity for either a particular application or geographic region: automotive (Detroit, Michigan), industrial and consumer (Chicago, Illinois), computer and peripheral equipment (San Jose, California and Longmont, Colorado following the acquisition of Adaptec), communications (Dallas, Texas) and distribution (Boston, Massachusetts). Each business unit has a sales force that specializes in the relevant business sector, providing local customer service, market development and specialized application support for differentiated system oriented products. This structure allows STMicroelectronics to monitor emerging applications, to provide local design support, and to identify new products for development in conjunction with the various product divisions as well as to develop new markets and applications with its current product portfolio. A central product marketing operation in Boston provides product support and training for standard products for the North America region, while a logistics center in Phoenix supports just-in-time delivery throughout North America. In addition, a comprehensive distribution business unit provides product and sales support for the nationwide distribution network. In the Asia Pacific region, sales and marketing is organized by country and is managed from the Company's regional sales headquarters in Singapore. The Company has sales offices in Taiwan, Korea, China, Hong Kong, Malaysia, Thailand and Australia. The Singapore sales organization provides central marketing, customer service, technical support, shipping, laboratory and design services for the entire region. In addition, there are design centers in Taiwan, Korea, Hong Kong and Shenzhen. In Japan, the large majority of the Company's sales are made through distributors, as is typical for foreign suppliers to the Japanese market. However, the Company's sales and marketing engineers in Japan work directly with the customers as well as with the distributors to meet customers' needs. The Company provides marketing and technical support services to customers through sales offices in Tokyo and Osaka. In addition, the Company has established a design center and application laboratory in Tokyo. The design center designs custom ICs for Japanese clients, while the application laboratory allows Japanese customers to test STMicroelectronics' products in specific applications. Region Five was created as of January 1, 1998 and includes emerging markets such as South America, Africa, Eastern Europe, the Middle East and India. Prior to that time, these markets had been covered, where appropriate, by the other existing sales and marketing organizations. Region Five also includes the design center in India, which employs 428 people in a wide range of activities. The Company intends to increase its focus on the new sales and marketing region to enhance its presence in these new markets. The Company's central marketing efforts are organized into a central strategic marketing organization and a key account management organization. The strategic marketing organization is organized by application market. The focus is on system research and development and the timely generation of the advanced system know-how and intellectual property that is critical to the successful introduction of future generations of differentiated products. In 1996, the Company undertook the Gold Standard program, a long-term commitment to excellence in standard products. The program consists of manufacturing and offering standard products at the same price level as the market but with a superior level of quality, service and lead time. The related initiatives included worldwide advertising, promotional task forces in all regions, special distribution initiatives and worldwide training of salespeople and marketing personnel. 24
In addition to the central strategic marketing team, the Company has established key account management teams to serve key multinational customers. The key account management teams work with the Company's regional and divisional managers to provide a broad range of products to its major accounts and to develop complete systems solutions. The teams build strategic relationships with the Company's major accounts that can lead to the development of new products, increased access to evolving technologies and enhanced knowledge of customer requirements. Each of the five regional sales organizations operate dedicated distribution organizations. To support the distribution network, STMicroelectronics operates logistic centers in Saint Genis, France;Phoenix, Arizona; and Singapore, and has made considerable investments in warehouse computerization and logistics support. The Company also uses distributors and representatives to distribute its products around the world. Typically, distributors handle a wide variety of products, including products that compete with STMicroelectronics' products, and fill orders for many customers. Most of the Company's sales to distributors are made under agreements allowing for price protection and/or the right of return on unsold merchandise. The Company recognizes revenues when it ships products to distributors. Sales representatives generally do not offer products that compete directly with the Company's products, but may carry complementary items manufactured by others. Representatives do not maintain a product inventory; instead, their customers place large quantity orders directly with STMicroelectronics and are referred to distributors for smaller orders. Research and Development Management believes that research and development is critical to the Company's success and is committed to increasing research and development expenditures in the future. Despite significant cost reductions following the Company's formation in 1987, and particularly in 1990 and 1991 when the Company experienced losses, management did not reduce research and development spending. This commitment to research and development continues unabated, with the Company spending $690 million or 16.2% of revenue on research and development in 1998. The table below sets forth information with respect to the Company's research and development spending since 1994 (not including design center, process engineering, pre-production or industrialization costs): <TABLE> <CAPTION> Year ended December 31, ---------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- ------- -------- ------- (in millions, except percentages) <S> <C> <C> <C> <C> <C> Expenditures.......................... $338.3 $440.3 $532.3 $610.9 $689.8 as a percentage of net revenues....... 12.8% 12.4% 12.9% 15.2% 16.2% </TABLE> As a result of the history of the Company, approximately 81% of the Company's research and development expenses in 1998 were incurred in Europe, primarily in France and Italy. See "--State Support for the Semiconductor Industry." As of December 31, 1998, approximately 4,400 employees were employed in research and development activities. Central research and development units conduct research on the basic VLSI technologies, packaging technologies and design tools that are used by all product groups and the front-end manufacturing organization. STMicroelectronics' central research and development activities are conducted in Crolles, France; Agrate, Italy; Carrollton, Texas; Phoenix, Arizona; Berkeley, California; and Noida, India. The central research and development units participate in several strategic partnerships. The Company's manufacturing facility at Crolles, France houses a research and development center that is operated in the legal form of a French Groupement d'interet economique ("GIE") pursuant to a partnership agreement in effect until the end of 1998 between the Company and CNET, the research laboratory of France Telecom, an indirect shareholder of the Company. This center has developed submicron process technologies 25
and is currently working on the development of 0.18 micron and future generation technologies, including copper interconnect, low k dielectric, silicon germanium, embedded RAMs and RF options. The Company and CNET have decided to extend the GIE to include as a member the Laboratoire d'Electronique de Technologie d'Instrumentation ("LETI"), a research laboratory of CEA-Industrie, one of the indirect shareholders of the Company. The Company is also cooperating with Philips Semiconductors to jointly develop sub-micron CMOS logic processes in Crolles, France under an agreement which has been extended through the year 2000. In 1998, the Company also cooperated with GRESSI, the research and development GIE formed by the CNET and LETI. The objectives of the cooperation were to develop know-how on innovative aspects of VLSI technology evolution which can be transferred to industrial applications, and to address the development of innovative process steps and process modules to be used in future generations of VLSI products. The cooperation agreement provided for a pluriannual plan through 1998, and the Company bore half of the program's total cost. The cooperation with GRESSI was superseded, as of January 1, 1999, by a tripartite cooperation arrangement between the Company, CNET and LETI, within the framework of an extended GIE named Centre Commun de Microelectronique de Crolles. This cooperation is directed towards sub 0.18 micron technologies with a view to preparing the technology to begin production of 12-inch wafers and associated wafer fabrication processes. The tripartite cooperation is intended to last until the end of 2002 and the related contractual arrangements are in the process of being finalized. A technical center in Noida, India, develops design software and CAD libraries and tools. At the Agrate, Italy site, the Company is developing nonvolatile memory technologies and programmable logic processes using a pilot line which is being upgraded to 8-inch with a capability of 0.25 micron and below. See "Item 13: Interest of Management in Certain Transactions." The Company has developed a wide network of cooperation with several universities in the United Kingdom (Bristol and Newcastle), Italy (Bologna, Catania, Milan, Pavia and Turin), France (Grenoble, Marseille, Toulouse and Tours), in the United States (Carnegie Mellon, Stanford, Berkeley and UCLA) and Singapore for basic research projects on design and process development. In addition to central research and development, each operating division also conducts independent research and development activities on specific processes and products. State Support for the Semiconductor Industry Due to the importance of the semiconductor industry, various government authorities in the world, including the European Commission and individual countries in Europe, have established programs for the funding of research and development, innovation, industrialization and training in the industry. In addition, many countries grant various forms of tax relief, direct grants and other incentives to semiconductor companies as well as other industries to encourage investment. The Company has structured its operations to benefit from such programs and incentives and expects to continue to do so in the future. Unlike certain of its competitors, however, the Company does not receive significant direct or indirect financing from defense development programs. The main European programs in which the Company is involved include: (i) the Micro-Electronics Development for European Application ("MEDEA") cooperative research and development program, (ii) European Union research and development projects such as ESPRIT (European Strategic Programme for Information Technology) and RACE (Research and Development in Advanced Communications Technologies for Europe), (iii) national programs for research and development and industrialization in the electronics industries, and (iv) investment incentive programs for the economic development of certain regions. The pan-European programs are generally open to eligible companies operating and investing in Europe and cover a period of several years. In Italy, both electronics and economic development programs are open to eligible companies regardless of their ownership or country of incorporation. 26
The MEDEA cooperative research and development program was launched in June 1996 by the Eureka Conference and is designed to bring together many of Europe's top researchers in a 12,000 man-year program that will cover the period 1997-2000. The MEDEA program replaced the joint European research program called JESSI, which was a European cooperative project in microelectronics among several countries that covered the period 1988 through 1996 and involved more than 80 companies. In Italy, the Programma Nazionale per la Microelettronica has 18 participants, and various programs for intervention in the Mezzogiorno (southern Italy) are open to eligible companies, including non-European companies, operating in the region and regulated by specific laws. Italian programs often cover several years, but funding is typically subject to annual budget appropriation. In France, support for microelectronics is provided to over 30 companies manufacturing or using semiconductors. The amount of support under French programs is decided annually and subject to budget appropriation. As a result of the history of the Company, its research and development facilities and activities are mainly concentrated in France and Italy, and the substantial majority of the Company's state funding has been derived from programs in such countries. The Company has entered into funding agreements with France and Italy which set forth the parameters of state support under certain national programs and require, among other things, compliance with European Commission ("EC") regulations and approval by EC authorities and annual and project-by-project reviews and approvals. The EC adopted guidelines in 1995 seeking to limit state aid for research and development activities routinely performed in the normal course of the business. There can be no assurance that the Company will be able to continue to benefit from state aid previously committed, that such aid will not be revoked or discontinued at any time or that aid granted by a national government for research and development will not be reviewed or challenged by the EC. Funding of programs in France and Italy is subject to annual appropriation, and if such governments were unable to provide anticipated funding on a timely basis or if existing government-funded programs were curtailed or discontinued, such an occurrence could have a material adverse effect on the Company's business, operating results and financial condition. From time to time the Company has experienced delays in the receipt of funding under these programs. As the availability and timing of such funding are substantially outside the Company's control, there can be no assurance that the Company will continue to benefit from such government support, that funding will not be delayed from time to time, that sufficient alternative funding would be available if necessary or that any such alternative funding would be provided on terms favorable to the Company as those previously provided. Public authority funding for research and development is reported in "Other Income and Expenses" in the Company's consolidated statements of income. See Note 18 to the consolidated audited financial statements for each of the years in the three-year period ended December 31, 1998, including the Notes thereto (collectively, the "Consolidated Financial Statements") included elsewhere in this annual report on Form 20-F. Such funding has totalled $63.8 million, 55.3 million and $63.5 million in the years 1996, 1997 and 1998, respectively. Public funding for industrialization costs (which include certain costs incurred to bring prototype products to the production stage) is offset against expenses in computing cost of sales, and has the effect of increasing the Company's gross profit. Such funding of industrialization costs has totalled $4.6 million, $6.2 million and $3.1 million in 1996, 1997 and 1998, respectively. See Note 18 to the Consolidated Financial Statements. Government support for capital expenditures funding has totalled $93.3 million, $30.2 million, and $182.4 million in the years 1996, 1997 and 1998, respectively. Such funding has been used to support the Company's capital investment; while receipt of these funds is not directly reflected in the Company's results of operations, the resulting lower amounts recorded in property, plant and equipment reduce the level of depreciation recognized by the Company. Low interest financing has been made available (principally in Italy) under programs such as the Italian Republic's Fund for Applied Research, established in 1968 for the purpose of supporting Italian research projects meeting specified program criteria. At year-end 1996, 1997 and 1998, the Company had $95.2 million, $63.7 million 27
and $49.4 million, respectively, of indebtedness outstanding under state-assisted financing programs at an average interest cost of 2.3%, 2.1% and 2.1%, respectively. Intellectual Property Intellectual property rights which apply to various Company products include patents, copyrights, trade secrets, trademarks and maskwork rights. STMicroelectronics owns more than 17,000 original invention patents or pending patent applications, most of which have been registered in several countries around the world. In 1998, the Company filed 671 original patent applications around the world. Management believes that its intellectual property represents valuable property and intends to protect the Company's investment in technology by enforcing all of its intellectual property rights. The Company has entered into several patent cross-licenses with several major semiconductor companies, consisting primarily of most of the major Japanese and Korean semiconductor companies. The Company has announced that it has signed a broad patent cross-license agreement with IBM in June 1998 and with Intel in January 1999. The Company's success depends in part on its ability to obtain patents, licenses and other intellectual property rights covering its products and their design and manufacturing processes. To that end, the Company has acquired certain patents and patent licenses and intends to continue to seek patents on its inventions and manufacturing processes. The process of seeking patent protection can be long and expensive, and there can be no assurance that patents will issue from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to the Company. In addition, effective copyright and trade secret protection may be unavailable or limited in certain countries. Competitors may also develop technologies that are protected by patents and other intellectual property rights and therefore such technologies may be unavailable to the Company or available to the Company subject to adverse terms and conditions. Litigation, which could demand financial and management resources, may be necessary to enforce patents or other intellectual property rights of the Company. Also, there can be no assurance that litigation will not be commenced in the future against the Company regarding patents, maskworks, copyrights, trademarks or trade secrets, or that any licenses or other rights to necessary intellectual property could be obtained on acceptable terms. The failure to obtain licenses or other intellectual property rights, as well as the expense or outcome of litigation, could adversely affect the Company's results of operations or financial condition. The Company has from time to time received, and it may in the future receive, communications alleging possible infringement of certain patents and other intellectual property rights of others. Regardless of the validity or the successful assertion of such claims, the Company could incur significant costs with respect to the defense thereof which could have a material adverse effect on the Company's results of operations or financial condition. Backlog The Company's sales are made primarily pursuant to standard purchase orders that are generally booked from one to twelve months in advance of delivery. Quantities actually purchased by customers, as well as prices, are subject to variations between booking and delivery to reflect changes in customer needs or industry conditions. During periods of industry overcapacity and declining selling prices, customer orders are not generally made as far in advance of the scheduled shipment date as during periods of capacity constraint. Such reduced lead time can reduce management's ability to forecast production levels and revenues. The Company's backlog decreased during 1998 in difficult semiconductor market conditions. In the first quarter of 1999, backlog increased compared to year-end 1998. 28
STMicroelectronics also sells certain products to key customers pursuant to frame contracts. Frame contracts are annual fixed-price contracts with customers setting forth the terms of purchase and sale of specific products that may be ordered in the future. These contracts allow the Company to schedule production capacity in advance and allow customers to manage their inventory levels consistent with just-in-time principles while shortening the cycle times required to produce ordered products. Orders under frame contracts are also subject to risks of price reduction, order cancellation and modifications as to quantities actually ordered. Competition Markets for the Company's products are intensely competitive. While only a few companies compete with STMicroelectronics in all of the Company's product lines, the Company faces significant competition in each of its product lines. STMicroelectronics competes with major international semiconductor companies, some of which have substantially greater financial and other resources than the Company with which to pursue engineering, manufacturing, marketing and distribution of their products. Smaller niche companies are also increasing their participation in the semiconductor market, and semiconductor foundry companies have expanded significantly, particularly in Asia. Competitors include manufacturers of standard semiconductors, application-specific ICs and fully customized ICs, including both chip and board-level products, as well as customers who develop their own integrated circuit products and foundry operations. Some of the Company's competitors are also its customers. The Company gained market share in 1998, when the Company's net sales grew 5.7% while the TAM decreased 8.4% and the SAM decreased 5.2%, according to trade association data. The Company gained market share in 1995 and 1996 against both the TAM and the SAM although it lost market share against both the TAM and the SAM in 1997. The Company does not manufacture DRAMs, which are commodity memory products sold in high volumes that have experienced severe price cutting in 1996, 1997 and in 1998. The Company gained market share against both the TAM and the SAM in the first quarter of 1999, when the Company's revenues grew 10.7% compared to first quarter 1998 while the TAM grew 6.8% and the SAM grew 3.5%. The Company believes that recent difficult market conditions have led certain of its competitors to redirect their marketing focus and manufacturing capacity toward products that compete with the Company's products. The Company believes increased competition in its core product markets is generating greater pricing pressure, increased competition for market share in the SAM, and a generally more challenging market environment for the Company. According to published industry data and other industry sources, investment in worldwide semiconductor fabrication capacity totalled approximately $44 billion in 1996, $40 billion in 1997 and $28 billion in 1998, or approximately 33%, 29% and 22 %, respectively, of the TAM for such years. In addition to international semiconductor companies, companies specializing in operating semiconductor foundries such as UMC, TSMC and Chartered Semiconductors, have added significant capacity, particularly in Asia. These additions to capacity have contributed to an increase of supply over demand and to declines in average selling prices and the downturn in the industry. These has also been a shift in existing industry capacity to production of products that compete with the Company's products. The Company believes that fluctuations in the rate of industry capacity additions relative to the growth rate in demand for semiconductor products could continue to contribute to fluctuations in average selling prices and affect the Company's results of operations. The Company's primary competitors include Advanced Micro Devices, Hitachi, Intel Corporation, Lucent Technologies, Mitsubishi Electric Corporation, Motorola, National Semiconductor Corporation, Nippon Electric Company, Philips Semiconductors, Samsung, Siemens, Texas Instruments and Toshiba. Companies primarily operating foundries include UMC, TSMC and Charter Semiconductors. 29
The Company competes in different product lines to various degrees on the basis of price, technical performance, product features, product system compatibility, customized design, availability, quality and sales and technical support. In particular, standard products may involve greater risk of competitive pricing, inventory imbalances and severe market fluctuations than differentiated products. The Company's ability to compete successfully depends on elements both within and outside of its control, including successful and timely development of new products and manufacturing processes, product performance and quality, manufacturing yields and product availability, customer service, pricing, industry trends and general economic trends. Employees At December 31, 1998, the Company employed approximately 29,182 people, of whom approximately 5,938 were employed in France, 6,357 were employed in Italy, 637 were employed in the rest of Europe, 2,655 were employed in the United States, 5,449 were employed in Malta and Morocco and 4,686 were employed in Singapore, Malaysia and Japan. As of December 31, 1998 approximately 4,400 employees were engaged in research and development, 1,700 in marketing and sales, 20,200 in manufacturing, 1,600 in administration and general services and 1,300 in divisional functions. The Company's future success will depend, in part, on its ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel. Unions are present in France, Italy, Malta, Morocco and Singapore. The Company has not experienced any significant strikes or work stoppages in recent years, other than in connection with national strikes in Italy, and management believes that the Company's employee relations are good. As part of its commitment to the principles of TQM, the Company decided in July 1994 to develop an internal education organization called "ST University", responsible for organizing training courses to executives, engineers, technicians and sales personnel within the Company and coordinating all training for STMicroelectronics' employees. In 1998, ST University organized over 100,000 hours of training for 3,500 employees. Environmental Matters The Company's manufacturing operations use many chemicals and gases and the Company is subject to a variety of governmental regulations related to the use, storage, discharge and disposal of such chemicals and gases and other emissions and wastes. Consistent with the Company's TQM principles, the Company has established proactive environmental policies with respect to the handling of such chemicals and gases and emissions and waste disposals from its manufacturing operations. The Company has engaged outside consultants to audit its environmental activities and has created environmental management teams, information systems, education and training programs, and environmental assessment procedures for new processes and suppliers. All of the Company's plants are certified for the Eco- Management and Audit Scheme ("EMAS") and have also obtained ISO 14001 certification. Although the Company has not suffered material environmental claims in the past and believes that its activities conform to presently applicable environmental regulations, in all material respects, environmental claims or the failure to comply with present or future regulations could result in the assessment of damages or imposition of fines against the Company, suspension of production or a cessation of operations. Year 2000 Reference is made to the information appearing under the caption "Year 2000" on pages 36 through 39 of the Registrant's 1998 Annual Report, which information is incorporated herein by reference. 30
As of May 29, 1999, the Company's groups have fully completed Phases 1 to 3 and substantially completed Phases 4 and 5. Approximately 83% of items involved have a status of tested and certified compliant. For the 17% not yet tested and certified compliant, approximately 85% of the preparatory work has been completed. Globally, the Company is near 95% completion relative to the total work load, and is on schedule relative to the Year 2000 Project plan. At May 29, 1999, 94% of front-end equipment and 96% of back-end equipment had been tested or certified compliant. The Company's target is to have 100% tested compliance by mid 1999, but there remains the possibility of some delays due to the late delivery of solutions by certain suppliers. At May 29, 1999, 95% of facilities equipment was tested or certified compliant. For business software systems including financial accounting, sales order management and human resources systems applications which are not otherwise being upgraded, specific year 2000 compliance is being worked on internally. The Company expects to complete most such upgrades by the end of June 1999. At May 29, 1999, 64% of corporate materials suppliers and virtually all corporate equipment suppliers have indicated that they are currently Year 2000 Compliant. Substantially all other significant suppliers are on schedule to achieve Year 2000 Compliance in due time before January 1, 2000. The Company has determined the magnitude of the remaining tasks (completion of Phases 4 and 5) and has fixed schedules and assigned resources accordingly. The Company has estimated the total capital costs related to its Year 2000 activities to be in the range of approximately $40 million. Item 2: Description of Property Manufacturing STMicroelectronics currently operates 17 main manufacturing facilities around the world. The table below sets forth certain information with respect to STMicroelectronics' current manufacturing facilities, products and technologies. Front-end manufacturing facilities are wafer fabrication plants and back-end facilities are assembly, packaging and final testing plants. 31
<TABLE> <CAPTION> Location Products Technologies - --------------------- ------------------------------------------- -------------------------------------------------- <S> <C> <C> Front-end Facilities: Crolles, France Semicustom devices, microcontrollers Fab- 8-inch 0.5/0.18 micron CMOS and and dedicated products 0.7/0.25 micron BiCMOS; R&D on VLSI submicron technologies in conjunction with CNET and Philips Semiconductors Phoenix, Arizona Dedicated products Fab - 8-inch 0.7/0.35 micron CMOS, 0.5/0.35 micron BiCMOS Agrate, Italy Nonvolatile memories, microcontrollers and Fab 1- 6-inch 0.8/0.5 micron CMOS dedicated products Fab 2- 6-inch 2.0/0.8 micron BiCMOS and BCD Fab 3- 6-inch 0.35/0.18 micron CMOS pilot line being converted to 8-inch Rousset, France Microcontrollers, nonvolatile memories and Fab - 6-inch 0.8/0.5 micron CMOS smartcard ICs Catania, Italy Power transistors, smart power ICs Fab 1- 5-inch 3 micron bipolar power and nonvolatile memories Fab 2- 6-inch 4/1 micron MOS power Fab 3- 6-inch 4/1 micron pilot line Fab 4- 8-inch 0.5/0.25 CMOS Rennes, France Dedicated and power products Fab - 5-inch 2 micron BiCMOS, BCD and bipolar Castelletto, Italy Smart power BCD Fab - 6-inch 4.0/0.8 micron BCD pilot line Tours, France Protection thyristors, diodes and application- Fab 1- 4/5-inch discrete specific discretes Fab 2- 4/5-inch discrete Ang Mo Kio, Singapore Dedicated products, microcontrollers, power Fab 1- 5-inch 1.5 micron CMOS and power transistors and commodity products MOS Fab 2- 5-inch 6/3 micron bipolar transistor Fab 3- 5-inch 2.0/1.2 micron bipolar ICs Fab 4- 5-inch 5 micron standard linear Carrollton, Texas Memories, microcontrollers, dedicated Fab - 6-inch 0.7 micron BiCMOS, 1.0 products and semicustom devices micron BCD and 0.8/0.6 micron CMOS Rancho Bernardo, Dedicated products Fab - 6-inch 1.0 micron BCD California Back-end Facilities: Muar, Malaysia Dedicated and standard products, microcontrollers Kirkop, Malta Dedicated products, microcontrollers, semicustom devices Toa Payoh, Singapore Nonvolatile memories and power ICs Ain Sebaa, Morocco Discrete and standard products Shenzhen, China Nonvolatile memories, discrete and standard products Bouskoura, Morocco Subsystems, RF </TABLE> STMicroelectronics has expanded its diversified manufacturing infrastructure while improving the cost, quality and flexibility of its operations. STMicroelectronics has applied recent investments in its manufacturing facilities to bring to full capacity the 8-inch front-end manufacturing facility in Crolles, France, to continue the ramp up of the new 32
8-inch front-end manufacturing facilities in Phoenix, Arizona and Catania, Italy, and to continue to build and equip a new back-end facility in Shenzhen, China. Capital expenditures for 1998 were devoted principally (i) to the expansion of the 8-inch front-end wafer fabrication plant in Crolles, France, (ii) to equip and upgrade both the new 8-inch and existing 6-inch front-end facilities at the Catania, Italy plant, (iii) to the extension and conversion of an existing facility in Agrate, Italy, (iv) to the expansion of the 6-inch facility in Carrollton, Texas, (v) to the ramp-up of production at the Phoenix, Arizona 8-inch front-end facility, (vi) to the expansion of the back-end facilities in Muar, Malaysia, and (vii) to the expansion of the back-end facilities in Morocco, Malta and Shenzhen, China. The Company currently expects that capital spending for 1999 will continue to be at levels at least as high as in each of the last three years, and possibly higher. The most significant of the Company's 1999 capital expenditure projects are expected to be the conversion from 6-inch to 8-inch and expansion at one of its front-end wafer fabrications plants in Agrate, Italy, the increase of capacity of the 8-inch facilities in Catania, Italy, the completion of construction of its new 8-inch front-end wafer fabrications facility in Rousset, France, the conversion of its facilities in Crolles, France to 0.25 micron and 0.18 micron processes, the increase of capacity of the 8-inch facilities in Phoenix, Arizona and the expansion of the back-end facilities in Muar and Morocco. The Company has also identified an additional 8- inch wafer fabrication facility to be built in Italy that is planned to be operational by the year 2001. The Company has decided to build a new 300 millimeter, 12-inch wafer research fabrication and pilot line at Crolles (France) using 0.18 micron and below process technology. The Company will continue to monitor its level of capital spending, however, taking into consideration factors such as trends in the semiconductor market, capacity utilization and announcements by competitors. In 1994, the Company created a joint venture with a subsidiary of the Shenzhen Electronics Group ("SEG") that built and equipped a back-end manufacturing facility mentioned above in the Futian free-trade zone of Shenzhen in southern China. STMicroelectronics owns a 60% interest in the joint venture, with a subsidiary of SEG owning the remaining 40%. Construction of the plant and equipment installation was completed in 1996 as scheduled and production started at the end of 1996. The joint venture will have invested approximately $150 million in the project by the end of 1999. SEG is a diversified export-oriented electronics company controlled by the Shenzhen Municipal Government that manufactures communications equipment, computers and electronic products and components and engages in import-export trading, financial investment management and real estate. Although each fabrication plant is dedicated to specific processes, the Company's strategy is to develop local presences, better serve customers and mitigate manufacturing risks by having key processes operated in different manufacturing plants. The Company is also seeking to take advantage of current industry overcapacity by qualifying subcontractors on a limited basis both for wafer foundry and back-end services and thereby minimizing its capital expenditure needs. The Company's manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields, interrupt production or result in losses of products in process. As system complexity has increased and sub-micron technology has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become even more demanding. Although the Company's increased manufacturing efficiency has been an important factor in its improved results of operations, the Company has from time to time experienced production difficulties that have caused delivery delays and quality control problems, as is common in the semiconductor industry. No assurance can be given that the Company will be able to increase manufacturing efficiency in the future to the same extent as in the past or that the Company will not experience production difficulties in the future. STMicroelectronics is fostering a corporate-wide TQM culture that defines a common set of objectives and performance measurements for employees in all geographic regions, at every stage of product design, development, production and consignment for all product lines. TQM in STMicroelectronics is based on five key principles: 33
management commitment, employee empowerment, continuous improvement, management by fact and customer focus. TQM has become an integral part of the STMicroelectronics' culture and it is designed to develop a self-directed work force with a common set of values, objectives and problem-solving processes. Since 1987, the Company has improved average AIQ (electrical) status levels from 5,000 ppm to 14 ppm at the end of 1998. The Company uses through-the-wall mounted equipment for clean rooms to reduce the risk of wafer contamination from equipment. The Company also uses robot confinement systems to reduce the risk of wafer contamination. The Company's CIM systems provide management with real time data on all aspects of the performance of its manufacturing systems. Most of the Company's manufacturing facilities have been certified to conform to ISO international quality standards. Several major customers, including Hewlett-Packard, Nokia, Sharp, Chrysler and Sanyo, have recognized STMicroelectronics' commitment to quality and have honored the Company with quality awards in the recent past. In September 1997, the Company was awarded the 1997 European Quality Award For Business Excellence in the category of large business by the EFQM. STMicroelectronics' manufacturing processes use many raw materials, including silicon wafers, lead frame, mold compound, ceramic packages and chemicals and gases. The Company obtains its raw materials and supplies from diverse sources on a just-in-time basis. Although supplies for the raw materials used by the Company are currently adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry. The Company has principal executive offices located in the vicinity of Geneva Airport at Route de Pre-Bois 20, ICC Bloc A, 1215 Geneva 15, Switzerland and at Technoparc du Pays de Gex-BP112, 165 rue Edouard Branly, 01637 St. Genis Pouilly, France. The latter office is maintained by the Company's French subsidiary. The Company's corporate seat is in Amsterdam, The Netherlands. The Company also operates nine research and development centers and 31 design centers. The Company maintains regional sales headquarters in Geneva, Switzerland, Boston, Massachusetts, Singapore and Tokyo, Japan, and has 62 sales offices in 24 countries throughout Europe, North America, Japan, the Asia Pacific region and Region Five. In general, the Company owns its manufacturing facilities and leases most of its sales offices. As is common in the semiconductor industry, the Company has from time to time experienced difficulty in ramping up production at new facilities or effecting transitions to new manufacturing processes and, consequently, has suffered delays in product deliveries or reduced yields. There can be no assurance that the Company will not experience manufacturing problems in achieving acceptable yields, product delivery delays or interruptions in production in the future as a result of, among other things, capacity constraints, construction delays, ramping up production at new facilities, upgrading or expanding existing facilities, changing its process technologies, or contamination or fires, storms, earthquakes or other acts of nature, any of which could result in a loss of future revenues. In addition, the development of larger fabrication facilities that include 8-inch or larger capabilities and require 0.25 micron or smaller technology has increased the potential for losses associated with production difficulties, imperfections, or other causes of defects. In the event of an incident leading to an interruption of production at a fab, the Company may not be able to shift production to other facilities on a timely basis or the customer may decide to purchase products from other suppliers, and in either case the loss of revenues and impact on the Company's relationship with its customers could be significant. The Company's operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase commensurately. Item 3: Legal Proceedings As is the case with many companies in the semiconductor industry, the Company has from time to time received communications alleging possible infringement of certain intellectual property rights of others. Irrespective of the validity or the successful assertion of such claims, the Company could incur significant costs with respect to the defense thereof which could have a material adverse effect on the Company's results of operations or financial condition. 34
The Company is currently involved in certain legal proceedings; however, the Company does not believe that the ultimate resolution of pending legal proceedings will have a material adverse effect on its financial condition. The public prosecutor in Catania, Italy commenced a criminal investigation into alleged unauthorized use of public funds for research and development. Based on a report from a panel of experts appointed by the public prosecutor, the prosecutor issued a request for indictment in June 1997 against the 11 members of the Board of Directors of the research and development consortium Corimme, in which the Company's Italian subsidiary ("STMicroelectronics Italy") has a two-thirds voting interest (the remaining one-third interest is held by the University of Catania). The people indicted included eight employees or ex-employees of STMicroelectronics Italy and three professors of the University of Catania. Following the request for indictment, the 11 members of Corimme's Board of Directors filed an incidente probatorio in December 1997, requesting the appointment of a panel of independent experts to verify the assertions made by the public prosecutor's experts. During a hearing on March 25, 1998, the judge for the preliminary hearing accepted the incidente probatorio and named a panel of independent experts. The college of independent experts, in their public report filed with the court in February 1999, concluded that not only were the accusations formulated by the public prosecutor concerning the use of public funds for research and development unfounded, but also that the research and development performed by Corimme had been very wide ranging, complex, as well as fully in line with requirements for the public funding received. The court will now hold hearings to make a decision on the pursuit of charges against the 11 indicted persons in light of the report from the independent college of experts. In parallel, the tax authorities in Catania had issued proceedings against Corimme for alleged unauthorized VAT deductions and irregular invoicing for the years 1988 to 1993, and the tax authorities in Milan had issued proceedings against STMicroelectronics Italy for alleged VAT infringements during the years 1990 to 1994 and income tax infringements during the years 1990 to 1992 for invoicing for allegedly noneligible production services performed by Corimme for the account of STMicroelectronics Italy. In a final ruling in March 1999, the Commissione Tributaria Centrale confirmed the previous decisions favorable to Corimme entered by the Commissione Tributaria Provinciale and the Commissione Tributaria Regionale, with respect to the years 1988 and 1989. The Commissione Tributaria Provinciale of Catania has ruled in favor of Corimme with respect to the years 1990 to 1993, in first instance, and the Commissione Tributaria Provinciale of Milan has ruled in favor of STMicroelectronics Italy with respect to VAT claims for the years 1990 to 1994. Presently, appeals are pending before the Commissione Tributaria Regionale. The Commissione Tributaria Provinciale of Milan has also ruled in favor of STMicroelectronics Italy on the various income tax proceedings for the period 1990-1992. The tax authorities have accepted these rulings by waiving their right of appeal. The Company's management believes that Corimme's contractual and other requirements have been honored in all material respects in accordance with the requirements and with applicable financial procedures provided by the Italian government and has no grounds to suspect malfeasance. The Company has cooperated fully with the authorities in the conduct of the inquiry. Although it remains impossible to determine with certainty the ultimate outcome of the remaining ongoing investigations, management believes the investigations will not have a material effect on the financial condition or results of operations of the Company. 35
Item 4: Control of Registrant Principal Shareholders The following table sets forth certain information with respect to the ownership of the Company's Common Shares as of June 10, 1999. Shareholders Common Shares Owned (1) - ------------ ----------------------- Number(2) % ---------- ---- STMicroelectronics Holding II B.V. ("ST Holding II").....79,863,880 55.9 - -------------- (1) Prior to the offer and sale of Common Shares by the Company and ST Holding II, completed on June 10, 1998 (the "Share Offering"), ST Holding II held 68.9% of the outstanding Common Shares of the Company. Simultaneously with the Share Offering, the Company offered and sold $513,852,000 principal amount at maturity Liquid Yield OptionTM Notes (the "Notes") convertible, subject to certain conditions, into Common Shares at a conversion rate of 8.952 Common Shares per $1,000 principal amount at maturity. Assuming all Notes are converted, ST Holding II will own 54.2% of the outstanding Common Shares. These calculations do not give effect to Common Shares that may be issued under the Employee Stock Plan or pursuant to options granted to members and professionals of the Supervisory Board. (2) On June 16, 1999, the Company effected a 2:1 stock split. ST Holding is 50% owned by a group of French shareholders that are indirectly controlled by the French government and 50% owned by a group of Italian shareholders that are indirectly controlled by the Italian government. The group of French shareholders is comprised of France Telecom, the French state-controlled telephone company, and CEA-Industrie, a corporation controlled by the French atomic energy commission, who hold through FT1CI. The group of Italian shareholders is represented by MEI-Microelettronica Italiana s.r.l. ("MEI"), an Italian holding company owned by Istituto per la Ricostruzione Industriale-IRI S.p.A. ("I.R.I."), the holding company for Italian state-owned industrial and commercial interests, and Comitato per l'intervento nella SIR ed in settori ad alta tecnologia ("Comitato SIR"). As of June 18, 1999, the interest previously held by Comitato SIR was transferred to Ministero del Tesoro del Bilancio e della Programmazione Economica-Dipartimento del Tesoro, the Italian Ministry of Treasury. The shares of France Telecom are listed on the ParisBourse and the New York Stock Exchange. Certificats d'investissement of CEA-Industrie are listed on the ParisBourse. The officers and directors of the Company as a group do not own a material number of Common Shares. The chart below illustrates the current shareholding structure as of June 10, 1999: 36
This information was represented by an organizational chart in the original document. Description of Shareholding Structure: STMicroelectronics N.V. is owned 55.9% by STMicroelectronics Holding II B.V. and 44.1% by the public. STMicroelectronics Holding II B.V. is a wholly-owned subsidiary of STMicroelectronics Holding N.V. which is 50% owned by a group of French shareholders and 50% owned by a group of Italian shareholders. The French shareholder, FT1CI, is owned 51% by CEA-Industrie and 49% by France Telecom, respectively. The Italian shareholder, MEI, is owned 50.1% and 49.9% by I.R.I. and Comitato SIR(1), respectively. - -------------- (1) As of June 18, 1999, the interest previously held by Comitato SIR was transferred to Ministero del Tesoro del Bilancio e della Programmazione Economica-Dipartimento del Tesoro, the Italian Ministry of the Treasury. Shareholder Agreements In connection with the formation of the Company, Thomson-CSF and STET, as shareholders of the Company, entered into a shareholders agreement on April 30, 1987. In connection with the formation of ST Holding in 1989, which coincided with the acquisition by Thorn EMI of its interest in the Company, the shareholders agreement (as amended, the "Holding Shareholders Agreement") was amended to apply to the parties' ownership in ST Holding. The rights and obligations of Thomson-CSF and STET under the Holding Shareholders Agreement were subsequently transferred to or assumed by, as the case may be, FT2CI for Thomson-CSF, and Finmeccanica and MEI for STET. In connection with the transfer by Finmeccanica of its interest in ST Holding to MEI, the rights and obligations of Finmeccanica under the Holding Shareholders Agreement were subsequently transferred to or assumed by, as the case may be, MEI. The Holding Shareholders Agreement contemplates that the parties shall agree upon common proposals and jointly exercise their powers of decision and their full control of the strategies and actions of ST Holding and the Company. Under the Holding Shareholders Agreement, the Supervisory Board of ST Holding, which is composed of three representatives of the French Owner and three representatives of the Italian Owner, must give its prior approval before ST Holding, the Company, or any subsidiary of the Company may: (i) modify its articles of incorporation; (ii) change its authorized share capital, issue, acquire or dispose of its own shares, change any shareholder rights or issue any instruments granting an interest in its capital or profits; (iii) be liquidated or dispose of all or a substantial and material part of its assets or any shares it holds in any of its subsidiaries; (iv) enter into any merger, acquisition or joint venture agreement (and, if substantial and material, any agreement relating to intellectual property) or form a new company; (v) approve such company's draft consolidated balance sheets and financial statements or any profit 37
distribution by such company; or (vi) enter into any agreement with any of the direct or indirect French or Italian Owners outside the normal course of business. The Holding Shareholders Agreement also provides that long-term business plans and annual budgets of the Company and its subsidiaries, as well as any significant modifications thereto, shall be approved in advance by the Supervisory Board of ST Holding. In addition, the Supervisory Board of ST Holding shall also decide upon operations of exceptional importance contained in the annual budget even after financing thereof shall have been approved. Such agreement also provides that similar and adequate levels of research, development and technological innovation shall be achieved by the Company and its subsidiaries in France and Italy and that there shall be no substantial discrepancy in the percentage of state financing compared to research, development and technological innovation expenditures by the Company and its subsidiaries in each such country. See "Item 1: Description of Business--State Support for the Semiconductor Industry." Pursuant to the terms of the Holding Shareholders Agreement, ST Holding is not permitted, as a matter of principle, to operate outside the field of semiconductor products. The parties to the Holding Shareholders Agreement also undertake to refrain directly or indirectly from competing with the Company in the area of semiconductor products, subject to certain exceptions, and to offer the Company opportunities to commercialize or invest in any semiconductor product developments by them. Any financing or capital provided by the parties to ST Holding or the Company is intended to be provided pro rata based on the parties' respective shareholdings in ST Holding. In the Holding Shareholders Agreement, the parties state that it is of the utmost importance that the French and Italian governments grant sufficient and continuous financial support for research and development, and undertake to take suitable actions with a view to obtaining such funding. See "Item 1: Description of Business--State Support for the Semiconductor Industry." In the event of a disagreement that cannot be resolved between the parties as to the conduct of the business and actions contemplated by the Holding Shareholders Agreement, each party has the right to offer its interest in ST Holding to the other, which then has the right to acquire, or to have a third party acquire, such interest. If neither party agrees to acquire or have acquired the other party's interest, then together the parties are obligated to try to find a third party to acquire their collective interests, or such part thereof as is suitable to change the decision to terminate the agreement. The Holding Shareholders Agreement otherwise terminates in the event that one of the parties thereto ceases to hold shares in ST Holding. Pursuant to the terms of the Holding Shareholders Agreement and for the duration of such agreement, FT2CI (the "French Owner"), on the one hand, and MEI (the "Italian Owner"), on the other hand, have agreed to maintain equal interests in the share capital of ST Holding and maintain, together, ownership of the majority of ST Holding's issued voting shares. As a result of the merger of FT1CI and FT2CI, the rights and obligations of FT2CI under the Holdings Shareholders Agreement have been transferred to FT1CI. The admission of a third party to the share capital of ST Holding, whether through the sale of ST Holding's outstanding shares or through the issue by ST Holding of new shares, or by any other means, must be unanimously agreed upon. In the event of a new shareholder, the parties undertake to ensure that the balance between the French and Italian shareholdings is maintained until at least December 31, 1998. Pursuant to a Memorandum of Understanding dated February 24, 1998, the arrangements set forth in the Holding Shareholders Agreement were extended until at least December 31, 1998. The Company has also been informed that the Shareholders Agreement between FT1CI and Thomson-CSF relating to the management of their respective holdings in ST Holding and the Company terminated on October 6, 1997. The Company has been informed that the shareholders of FT1CI have also entered into a separate shareholder agreement that requires the consent of the Board of Directors of each such company to certain actions taken by ST Holding, the Company and its subsidiaries. These agreements provide for the management of the interests of CEA-Industrie and France Telecom in ST Holding and the Company, with the object of defining between them the positions, strategies and decisions to be taken by the French Owner in ST Holding affecting the management of ST Holding, and the Company and its subsidiaries. The Company is not a party to such agreement. 38
The agreement between the shareholders of FT1CI (CEA-Industrie and France Telecom) provides that the following acts with respect to ST Holding or the Company must be approved by three-quarters of the Board of Directors of FT1CI (which consists of five directors, three of whom are chosen by CEA-Industrie and two of whom are chosen by France Telecom): (i) any modification of the articles of association of ST Holding or the Company, (ii) any change in the capital of ST Holding or the Company, or issuance, purchase or sale by ST Holding or the Company of their shares or rights attached thereto, or the issuance of any securities giving rights to a share in the capital or profits of ST Holding or the Company, (iii) the liquidation or dissolution of ST Holding or the Company or the sale of all or an important and material part of the business or assets of ST Holding or the Company representing at least $10,000,000 of the consolidated shareholders' equity of the Company, (iv) any merger, acquisition, partnership in interest or the execution of any material agreement relating to intellectual property rights, in each case in which ST Holding or the Company participates or in which a proposal is made to participate, or the establishment by ST Holding or the Company of new companies or groups, (v) approval of the balance sheets and consolidated accounts of ST Holding, the Company and its subsidiaries as well as the policies of distributions of profits among the group, (vi) any agreement between ST Holding and/or the Company and the shareholders of FT1CI which is out of the ordinary course of business, (vii) the approval of, or material modifications to, shareholders agreements with the Italian Owner with respect to ST Holding or the Company and (viii) approval of strategic multi-year plans and annual consolidated budgets of ST Holding and the Company. Transfers of shares in FT1CI to third parties are subject to the approval of at least four members of the Board of Directors, and are subject to a right of first refusal of the other shareholders, as well as other provisions. In the event CEA-Industrie proposes to sell its interest in FT1CI, in whole or in part, France Telecom has the right to require the acquirer to purchase its interest as well. The FT1CI shareholders agreement terminates upon the termination of FT1CI. As is the case with other companies controlled by the French Government, the French Government has appointed a Commissaire du Gouvernement and a Controleur d'Etat for FT1CI. Pursuant to Decree No. 94-214, dated March 10, 1994, these Government representatives have the right (i) to attend any board meeting of FT1CI, and (ii) to veto any board resolution or any decision of the president of FT1CI within 10 days of such board meeting (or, if they have not attended the meeting, within 10 days of the receipt of the board minutes or the notification of such president's decision); such veto lapses if not confirmed within one month by the Ministry of the Economy or the Ministry of Industry. FT1CI is subject to certain points of the arrete of August 9, 1953 pursuant to which the Ministry of the Economy and any other relevant ministries (a) have the authority to approve decisions of FT1CI relating to budgets or forecasts of revenues, operating expenses and capital expenditures, and (b) may set accounting principles and rules of evaluation of fixed assets and amortization. In connection with the Initial Public Offering, ST Holding II and the Company entered into a registration rights agreement pursuant to which the Company agreed that, upon request from ST Holding II, the Company will file a registration statement under the Securities Act of 1933, as amended, to register Common Shares held by ST Holding II, subject to a maximum number of five requests in total as well as a maximum of one request in any twelve-month period. Subject to certain conditions, the Company will grant ST Holding II the right to include its Common Shares in any registration statements covering offerings of Common Shares by the Company. ST Holding II will pay a portion of the costs of any requested or incidental registered offering based upon its proportion of the total number of Common Shares being registered, except that ST Holding II will pay any underwriting commissions relating to Common Shares that it sells in such offerings and any fees and expenses of its separate advisors, if any. Such registration rights agreement will terminate upon the earlier of December 15, 2004 and such time as ST Holding II and its affiliates own less than 10% of the Company's outstanding Common Shares. The French and Italian shareholders of ST Holding have agreed in the Memorandum of Understanding dated February 24, 1998, which has not been modified, to continue to manage their interest in the Company through ST Holding until at least December 31, 1998, and accordingly, for so long as they hold their interests in ST Holding, they have undertaken (i) to jointly hold 100% of ST Holding's capital and voting rights, (ii) to maintain equality between the shareholdings of the French and Italian shareholders, (iii) to ensure that ST Holding maintains more than 50% of the Company's share 39
capital and voting rights, and (iv) to jointly exercise their decision-making powers and monitor strategies and actions as part of ST Holding's management bodies. On May 31, 1999, the Company's shareholders at the annual general meeting approved the creation of 180,000,000 Preference Shares. These Preference Shares entitle a holder to full voting rights at any meeting of shareholders and to a preferential right to dividends. On May 31, 1998, the Company entered into an option agreement with ST Holding II, which provides that Preference Shares shall be issued to ST Holding II upon request subject to the adoption of a resolution of the Supervisory Board of the Company recognizing that a hostile takeover or similar action exists and giving its consent to the exercise of the option and upon payment of at least 25% of the par value of the Preference Shares to be issued. The option is contingent upon ST Holding II retaining at least 33% of the issued share capital of the Company. Item 5: Nature of Trading Market Common Shares Since 1994, the Common Shares have been traded on the New York Stock Exchange under the symbol "STM" and on the ParisBourse and were quoted on SEAQ International. On June 5, 1998, the Common Shares were also listed for the first time on the Italian Stock Exchange, where they have been traded since that date. The Common Shares have been included in the CAC 40, the principal index published by the SBF-ParisBourse, since November 12, 1997. The CAC 40 is derived daily by comparing the total market capitalization of 40 stocks included in the monthly settlement market of the ParisBourse to a baseline established on December 31, 1987. Adjustments are made to allow for expansion of the sample due to new issues. The CAC 40 indicates the trends in the French stock market as a whole and is one of the most widely followed stock price indices in France. The table below indicates the range of the high and low prices in U.S. dollars for the Common Shares on the New York Stock Exchange and the high and low prices in euros for the Common Shares on the ParisBourse during each quarter in 1997, 1998 and to date 1999. In December 1994, the Company completed the Initial Public Offering of 21,000,000 Common Shares at an initial price to the public of $22.25 per share. On June 16, 1999, the Company effected a 2:1 stock split. The table below has been adjusted to reflect the split. 40
<TABLE> <CAPTION> New York Stock Exchange ParisBourse Price per Common Share Price per Common Share(1) ------------------------- --------------------------------- Calendar Period High Low High Low - --------------- ---- --- ---- --- <S> <C> <C> <C> <C> 1997 First quarter..................... $ 40-7/16 $ 31-7/8 Euro 33.39 Euro 26.91 Second quarter.................... $ 44 $ 31-1/4 Euro 37.66 Euro 28.06 Third quarter..................... $ 49-17/32 $ 40-9/32 Euro 47.79 Euro 35.83 Fourth quarter.................... $ 47 $ 25-3/4 Euro 43.07 Euro 23.87 1998 First quarter..................... $ 39-3/8 $ 25-5/8 Euro 37.24 Euro 23.63 Second quarter.................... $ 45-7/8 $ 32-1/4 Euro 42.46 Euro 29.42 Third quarter..................... $ 36-1/4 $ 22 Euro 33.26 Euro 18.37 Fourth quarter.................... $ 41-7/16 $ 17-15/16 Euro 34.99 Euro 15.02 1999 First quarter..................... $ 53-13/16 $ 40-1/4 Euro 48.50 Euro 34.40 Second quarter (through June 23).. $ 72-1/2 $ 49 Euro 67.95 Euro 44.50 <FN> - -------------- (1) For periods prior to January 1, 1999, the share prices on the ParisBourse have been converted into euros at the official exchange rate of Euro 1.00 = FRF 6.55957. </FN> </TABLE> At December 31, 1998, there were 142,478,106 Common Shares issued and outstanding, of which 14,331,742 or 10.05% were registered in the Common Share registry maintained on the Company's behalf in New York. Since June 5, 1998, the Common Shares have also been listed on the Italian Stock Exchange. The table below indicates the range of high and low prices in euros for the Common Shares on the Italian Stock Exchange, as adjusted for the 2:1 stock split. Calendar Period Italian Stock Exchange Price per Common Share(1) --------------------------------- High Low ------------ -------------- 1998 Second quarter (since June 5, 1998)..... Euro 32.79 Euro 30.38 Third quarter........................... Euro 32.53 Euro 19.92 Fourth quarter.......................... Euro 34.77 Euro 15.73 1999 First quarter........................... Euro 46.53 Euro 34.96 Second quarter (through June 23)........ Euro 67.23 Euro 45.94 - -------------- (1) For periods to January 1, 1999, the share prices on the Italian Stock Exchange have been converted into euros at the official exchange rate of Euro 1.00 = Lit. 1,936.27. 41
Dividends On May 31, 1999, the Company's shareholders approved the payment of a cash dividend with respect to the year ended December 31, 1998 of $0.16 per Common Share payable as of June 15, 1999 to shareholders of record on June 1, 1999. Liquid Yield OptionTM Notes The Liquid Yield OptionTM Notes ("LYONs") of the Company are traded on the New York Stock Exchange and the ParisBourse. The table below indicates the range of the high and low prices on the New York Stock Exchange and the high and low prices for the LYONs on the ParisBourse, in both cases as a percentage of principal amount at maturity, during each quarter in 1998 and to date in 1999. <TABLE> <CAPTION> New York Stock Exchange ParisBourse Price per LYON Price per LYON ------------------------ ------------------------ Calendar Period High Low High Low - --------------- ---- --- ---- --- <S> <C> <C> <C> <C> 1998 Second quarter (since June 5, 1998)... 85-1/8% 83-1/2% 99% 85.5% Third quarter......................... 85-1/8% 80% 88.5% 72.1% Fourth quarter........................ 83% 80% 89% 75% 1999 First quarter.......................... 94% 84% 97.5% 90% Second quarter (through June 23)....... 130% 94% 122.1% 101.3% </TABLE> ParisBourse The securities of most large public companies are listed on the Premier Marche with the Second Marche available for small and medium-sized companies. Both the Premier Marche and the Second Marche are operated by the SBF-ParisBourse (the "SBF"). Securities are also traded on the Marche Libre-OTC which is also operated by the SBF. The Common Shares are listed on the Premier Marche. Shares listed on the ParisBourse are placed in one of four categories depending on the volume of transactions. The Common Shares are listed in the category known as Continu A, which includes the most actively traded shares (with a minimum daily trading volume of FF250,000 or twenty trades). Official trading of listed securities on the ParisBourse is transacted through providers of investment services (investment companies and other financial institutions) and takes place continuously on each business day from 10:00 a.m. to 5:00 p.m., with a pre-opening session from 8:30 a.m. to 10:00 a.m. Any trade effected after the close of a stock exchange session will be recorded, on the next ParisBourse trading day, at the closing price for the relevant security at the end of the previous day's session. The SBF publishes a daily Official Price List that includes price information on each listed security. The ParisBourse has introduced continuous trading by computer for most listed securities. Trading in the listed securities of an issuer may be suspended by the SBF if quoted prices exceed certain price limits defined by the regulations of the SBF. In particular, if the quoted price of a Continu A security varies by more than 10 percent from the previous day's closing price, trading may be suspended for up to 15 minutes. Further suspensions for up to 15 minutes are also possible if the price again varies by more than five percent. The SBF may also 42
suspend trading of a listed security in certain other limited circumstances, including, for example, the occurrence of unusual trading activity in such security. Trades of securities listed on the Premier Marche of the ParisBourse are settled in either of two ways: in the cash settlement market or the monthly settlement market. The Common Shares are settled in the marche a reglement mensuel (monthly settlement market). In the monthly settlement market, the purchaser may elect to settle on the third trading day following the trade (reglement immediat or immediate settlement) or decide on the determination date (date de liquidation), which is the fifth trading day prior to the end of the month) either (i) to settle the trade no later than on the last trading day of such month or (ii) upon payment of an additional fee, to extend to the determination date of the following month the option either to settle no later than the last trading day of such month or to postpone further the selection of a settlement date until the next determination date (a procedure known as report). Such purchaser may decide to renew its option on each subsequent determination date upon payment of an additional fee. The majority of transactions in equity securities on the ParisBourse are settled on the monthly settlement market. In accordance with French securities regulation, any sale of shares executed on the monthly settlement market during the month of a dividend payment date is deemed to occur after payment of the dividend, and the purchaser's account will be credited with an amount equal to the dividend paid and the seller's account will be debited in the same amount. Securities Trading in Italy The Mercato Telematico Azionario (the "MTA"), the Italian automated screen-based quotation system on which the Company's Common Shares are listed, is organized and administered by Borsa Italiana S.p.A. ("Borsa Italiana") subject to the supervision and control of CONSOB, the public authority charged, inter alia, with regulating investment companies, securities markets and public offerings of securities in Italy to ensure the transparency and regularity of dealings and protect investors. Borsa Italiana was established to manage the Italian regulated financial markets (including the MTA) as part of the implementation in Italy of the EU Investment Services Directive pursuant to Legislative Decree No. 415 of July 23, 1996 (the "Eurosim Decree"). Borsa Italiana became operative in January 1998, replacing the administrative body Consiglio di Borsa, and has issued rules governing the organization and the administration of the Italian stock exchange, futures and options markets as well as the admission to listing on and trading in these markets. The shareholders of Borsa Italiana are primarily financial intermediaries. A five-day rolling cash settlement period applies to all trades of equity securities in Italy effected on a regulated market. Any person, through an authorized intermediary, may purchase or sell listed securities following (i) in the case of sales, deposit of the securities; and (ii) in the case of purchases, deposit of 100% of such securities' value in cash, or deposit of listed securities or government bonds of an equivalent amount. No "closing price" is reported for the electronic trading system, but an "official price", calculated for each security as a weighted average of all trades effected during the trading day net of trades executed on a "cross-order" basis, and a "reference price", calculated for each security as a weighted average of the last 10% of the trades effected during such day, are reported daily. If the opening price of a security (established each trading day prior to the commencement of trading based on bids received) differs by more than 10% (or such other amount established by Borsa Italiana) from the previous day's reference price, trading in that security will not be permitted until Borsa Italiana authorizes it. If in the course of a trading day the price of a security fluctuates by more than 5% from the last reported sale price (or 10% from the previous day's reference price), an automatic five minute suspension in the trading of that security will be declared. In the event of such a suspension, orders already placed may not be modified or canceled and new orders may not be processed. Borsa Italiana has the authority to suspend trading in any security, among other things, in response to extreme price fluctuations. In urgent circumstances, CONSOB may, where necessary, adopt measures required to ensure the transparency of the market, orderly trading and protection of investors. Italian law requires that trading of equity securities, as well as any other investment services, may be carried out on behalf of the public only by registered securities dealing firms and banks (with minor exceptions). Banks and 43
investment services firms organized in a member nation of the EU are permitted to operate in Italy provided that the intent of the bank or investment services firm to operate in Italy is communicated to (i) Bank of Italy and to (ii) Bank of Italy and CONSOB, respectively, by the competent authority of the member state. Non-EU banks and non-EU investment services firms may operate in Italy subject to a specific authorization granted by decree of the Italian Ministry of Treasury and CONSOB, respectively. The settlement of stock exchange transactions is facilitated by Monte Titoli. The settlement of stock exchange transactions is facilitated by Monte Titoli, a centralized securities clearing system owned by the Banca d'Italia and certain major Italian banks and financial institutions. Almost all Italian banks and some registered securities dealing firms have securities accounts with Monte Titoli. Beneficial owners of shares may hold their interests through specific deposit accounts with any depositary having an account with Monte Titoli. Beneficial owners of shares held with Monte Titoli may transfer their shares, collect dividends, create liens and exercise other rights with respect to those shares through such accounts. Participants in Euroclear and Cedelbank may hold their interests in shares and transfer the shares, collect dividends and exercise their shareholders' rights through Euroclear and Cedelbank. A holder may require Euroclear and Cedelbank to transfer its shares to an account of such holder with an Italian bank or any authorized broker having an account with Monte Titoli. Item 6: Exchange Controls and Other Limitations Affecting Security Holders None. Item 7: Taxation The following is a summary of certain tax consequences of the acquisition, ownership and disposition of the Common Shares based on tax laws of The Netherlands and the United States as in effect on the date of this annual report on Form 20-F, and is subject to changes in Netherlands or U.S. law, including changes that could have retroactive effect. The following summary does not take into account or discuss the tax laws of any country other than The Netherlands or the United States, nor does it take into account the individual circumstances of an investor. Prospective investors in the Common Shares in all jurisdictions are advised to consult their own tax advisers as to Netherlands, U.S. or other tax consequences of the purchase, ownership and disposition of the Common Shares. Netherlands Taxation The following summary of Netherlands tax considerations is based on present Netherlands tax laws as interpreted under officially published case law. The description is limited to the tax implications for an owner of Common Shares who is not, or is not deemed to be, a resident of The Netherlands for purposes of the relevant tax codes (a "non-resident Shareholder" or "Shareholder"). Withholding Tax Dividends distributed by the Company are subject to a withholding tax imposed by The Netherlands at a rate of, generally, 25%. The expression "dividends distributed by the Company" as used herein includes, but is not limited to: 44
(i) distributions in cash or in kind, deemed and constructive distributions and repayments of paid-in capital not recognized for Netherlands dividend withholding tax purposes; (ii) liquidation proceeds, proceeds of redemption of Common Shares or, as a rule, consideration for the repurchase of Common Shares by the Company in excess of the average paid-in capital recognized for Netherlands dividend withholding tax purposes; (iii) the par value of Common Shares issued to a Holder of Common Shares or an increase of the par value of Common Shares, as the case may be, to the extent that it does not appear that a contribution, recognized for Netherlands dividend withholding tax purposes, has been made or will be made; and (iv) partial repayment of paid-in capital, recognized for Netherlands dividend withholding tax purposes, if and to the extent that there are net profits ("zuivere winst"), unless the general meeting of shareholders of the Company has resolved in advance to make such repayment and provided that the par value of the Common Shares concerned has been reduced by an equal amount by way of an amendment of the Articles of Association. If a Holder of Common Shares is resident in a country other than The Netherlands and if a double taxation convention is in effect between The Netherlands and such country, such Holder may, depending on the terms of such double taxation convention, be eligible for a full or partial exemption from, or refund of, Netherlands dividend withholding tax. U.S. Shareholders. Under the Tax Convention of December 18, 1992, concluded between the United States and The Netherlands (the "Convention"), the withholding tax on dividends paid by the Company to a resident of the United States (as defined in the Convention) who is entitled to the benefits of the Convention under Article 26 may be reduced to 15% pursuant to Article 10 of the Convention. Dividends paid by the Company to U.S. pension funds and U.S. exempt organizations may be eligible for an exemption from dividend withholding tax. Relief/refund Procedure. If the 15% rate, or an exemption in case of a qualifying U.S. pension fund, is applicable pursuant to the Convention, the Company is allowed to pay out a dividend under deduction of 15%, or respectively without any deduction, if, at the payment date, the relevant shareholders have submitted the duly signed form IB 92 USA, which form includes a banker's affidavit. Holders of Common Shares through DTC will initially receive dividends subject to a withholding rate of 25%. An additional 10% of the dividend will be paid to holders upon receipt by the dividend disbursing agent of notification from the Participants in DTC that such holders are eligible for the reduced rate under the Convention. Only where the applicant has not been able to claim full or partial relief at source, will he be entitled to a refund of the excess tax withheld. In that case he should mention in the Form IB 92 USA the circumstances that prevented him from claiming relief at source. Qualifying U.S. exempt organizations can only ask for a full refund of the tax withheld by using the Form IB 95 USA, which form also includes a banker's affidavit. Income Tax and Corporate Income Tax A non-resident individual or corporate Shareholder will not be subject to Netherlands income tax (as opposed to the dividends withholding tax discussed above) with respect to dividends distributed by the Company on the Common Shares or with respect to capital gains derived from the sale or disposition of Common Shares in the Company, provided that: (a) the non-resident Shareholder does not have an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment or a permanent representative in The 45
Netherlands and to which enterprise or part of an enterprise, as the case may be, the Common Shares are attributable; and (b) the non-resident Shareholder does not have a substantial interest or a deemed substantial interest in the Company or, in the event the Shareholder does have such an interest, it forms part of the assets of an enterprise. Generally, a Shareholder will not have a substantial interest if he, his spouse, certain other relatives (including foster children) or certain persons sharing his household, do not hold, alone or together, whether directly or indirectly, the ownership of, or certain other rights over, shares representing five per cent or more of the total issued and outstanding capital (or the issued and outstanding capital of any class of shares) of the Company or rights to acquire shares, whether or not currently issued, that represent at any time (and from time to time) five percent or more of the total issued and outstanding capital (or the issued and outstanding capital of any class of shares) of the Company or the ownership of certain profit participating certificates that relate to five percent or more of the annual profit of the Company and/or to five percent or more of the liquidation proceeds of the Company. A deemed substantial interest is present if (part of) a substantial interest has been disposed of, or is deemed to have been disposed of, on a non-recognition basis. Net Wealth Tax A non-resident individual Shareholder is not subject to Netherlands net wealth tax with respect to the Shares, provided that the non-resident Shareholder does not have an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment or a permanent representative in The Netherlands and to which enterprise or part of an enterprise, as the case may be, the Common Shares are attributable. Corporations are not subject to Netherlands net wealth tax. Gift and Inheritance Tax A gift or inheritance of Common Shares from a non-resident Shareholder will not be subject to a Netherlands gift and inheritance tax, unless: (a) the non-resident Shareholder at the time of the gift has or at the time of his death had an enterprise or an interest in an enterprise that is or was, in whole or in part, carried on through a permanent establishment or a permanent representative in The Netherlands and to which enterprise or part of an enterprise, as the case may be, the Common Shares are attributable; or (b) in the case of a gift of Common Shares by an individual Shareholder who at the time of the gift was neither resident nor deemed to be resident in The Netherlands, the death of such individual occurs within 180 days after the date of the gift, while such individual is resident or deemed to be resident in The Netherlands. United States Taxation The following discussion is a summary of certain U.S. federal income tax consequences of the ownership of Common Shares by U.S. Holders, as defined below. This summary applies only to a beneficial owner of Common Shares (a) who owns, directly or indirectly, less than 10% of the voting stock of the Company, (b) who is (i) a citizen or resident of the United States for U.S. federal income tax purposes, (ii) a U.S. domestic corporation or (iii) otherwise subject to U.S. federal income taxation on a net income basis in respect of the Common Shares, (c) who holds the Common Shares as capital assets, (d) whose functional currency is the U.S. dollar, (e) who is a resident of the United 46
States and not also a resident of The Netherlands for purposes of the Convention, (f) who is entitled under the "limitation on benefits" provisions contained in the Convention to the benefits of the Convention and (g) who does not have a permanent establishment or fixed base in The Netherlands (a "U.S. Holder"). Certain holders (including, but not limited to, United States expatriates, tax-exempt organizations, persons subject to the alternative minimum tax, securities broker-dealers and certain other financial institutions, persons holding the Common Shares in a hedging transaction or as part of a straddle or conversion transaction or holders whose functional currency is not the U.S. dollar) may be subject to special rules not discussed below. Because this is a general summary, prospective purchasers are advised to consult their own tax advisors with respect to the U.S. federal, state, local and applicable foreign tax consequences of the purchase, ownership and disposition of Common Shares. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), the Convention, judicial decisions, administrative pronouncements and existing and proposed Treasury regulations as of the date hereof, all of which are subject to change, possibly with retroactive effect. Dividends For U.S. federal income tax purposes, the gross amount of distributions made by the Company with respect to the Common Shares (including the amount of any Netherlands taxes withheld therefrom) will generally be includable in the gross income of a U.S. Holder in the year received as foreign source dividend income to the extent that such distributions are paid out of the Company's current or accumulated earnings and profits as determined under U.S. federal income tax principles. To the extent, if any, that the amount of any such distribution exceeds the Company's current or accumulated earnings and profits, it will be treated first as a tax-free return of the U.S. Holder's tax basis in the Common Shares (thereby increasing the amount of any gain or decreasing the amount of any loss realized on the subsequent sale or disposition of such Common Shares) and thereafter as capital gain. No dividends received deduction will be allowed with respect to dividends paid by the Company. The amount of any distribution paid in Dutch guilders will be equal to the U.S. dollar value of such Dutch guilders on the date of distribution, regardless of whether the payment is in fact converted into U.S. dollars at that time. Gain or loss, if any, realized on the sale or other disposition of such Dutch guilders will be U.S. source ordinary income or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. Subject to certain limitations, Netherlands taxes withheld from a distribution at the rate provided in the Convention will be eligible for credit against a U.S. Holder's U.S. federal income tax liability. Under current Dutch law, the Company under certain circumstances may be permitted to deduct and retain from such withholding a portion of the amount that would otherwise be required to be remitted to the taxing authorities in The Netherlands. This amount generally may not exceed 3% of the total dividend distributed by the Company. To the extent that the Company has withheld an amount from dividends paid to shareholders which it then is not required to remit to any taxing authority in The Netherlands, such amount in all likelihood would not qualify as a creditable tax for U.S. tax purposes. The Company will endeavor to provide to U.S. Holders information concerning the extent to which it has applied the reduction described above to dividends paid to U.S. Holders. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by the Company with respect to the Common Shares will generally constitute "passive income" or, in the case of certain U.S. Holders, "financial services income." The rules relating to the determination of the U.S. foreign tax credit are complex and holders should consult their tax advisors to determine whether and to what extent a credit would be available. U.S. Holders that do not elect to claim a foreign tax credit may instead claim a deduction for all foreign taxes paid in the taxable year. Sale or Other Disposition of Common Shares Upon a sale or other disposition of Common Shares, a U.S. Holder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized and the U.S. Holder's tax basis 47
in such Common Shares. Such gain or loss will be capital gain or loss. Any such gain or loss, if any, will generally be U.S. source gain or loss. In the case of a U.S. Holder who is an individual, any capital gain generally will be subject to U.S. federal income tax at preferential rates if specified minimum holding periods are met. U.S. Information Reporting and Backup Withholding Dividend payments with respect to Common Shares and proceeds from the sale, exchange or redemption of Common Shares may be subject to information reporting to the Internal Revenue Service ("IRS") and possible U.S. backup withholding at a 31% rate. Backup withholding will not apply, however, to a holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification or who is otherwise exempt from backup withholding. Persons required to establish their exempt status generally must provide such certification on IRS Form W-9 (Request for Taxpayer Identification Number and Certification) in the case of U.S. persons and on IRS Form W-8 (Certificate of Foreign Status) in the case of non-U.S. persons. Finalized Treasury regulations have generally expanded the circumstances under which information reporting and backup withholding may apply for payments made after December 31, 2000. Holders of Common Shares should consult their tax advisors regarding the application of the information reporting and backup withholding rules, including the finalized Treasury regulations. Amounts withheld as backup withholding may be credited against a holder's U.S. federal income tax liability, and a holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS and furnishing any required information. Item 8: Selected Consolidated Financial Data Reference is made to the information appearing under the caption "Selected Consolidated Financial Data" on page 27 of the Registrant's 1998 Annual Report, which information is hereby incorporated by reference. Item 9: Management's Discussion and Analysis of Financial Condition and Results of Operations Reference is made to the information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 28 through 40 of the Registrant's 1998 Annual Report, which information is hereby incorporated by reference. Item 9A: Quantitative and Qualitative Disclosures About Market Risk The principal market risks to which the Company is exposed are changes in interest rates and foreign currency exchange rates. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio and long-term debt obligations. The Company places its cash and cash equivalents with high credit quality financial institutions. The Company manages the credit risks associated with financial instruments through credit approvals, investment limits and centralized monitoring procedures but does not normally require collateral or other security from the parties to the financial instruments with off-balance sheet risk. The Company is averse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. The Company primarily enters into debt obligations to support general corporate and local purposes including capital expenditures and working capital needs. 48
The Company enters into forward contracts and foreign currency options to protect against the volatility of foreign currency exchange rates and to cover a portion of both its probable anticipated, but not firmly committed, transactions and transactions with firm foreign currency commitments. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is made until the time it is settled. Forward contracts outstanding as of December 31, 1998 have remaining terms of one to 25 months, maturing mainly during first quarter 1999, and amount to $342.5 million forward sale of U.S. dollars, $20.1 million forward purchase of U.S. dollars, $200.4 million forward sale of other foreign currencies, and $71.8 million forward purchase of other foreign currencies. There were no foreign currency options outstanding as of December 31, 1998. The principal currencies covered are the German mark, the Singapore dollar, the Japanese yen, the French franc, the Swiss franc and the Italian lira. The Company does not anticipate any material adverse effect on its financial position, results of operations or cash flow resulting from the use of these instruments in the future. There can be no assurance that these strategies will be effective or that transaction losses can be minimized or forecasted accurately. The Company does not use financial instruments for speculative or trading purposes. The information below summarizes the Company's market risks associated with cash equivalents, debt obligations, and other significant financial instruments as of December 31, 1998. The information below should be read in conjunction with Notes 14 and 23 to the Consolidated Financial Statements. The table below presents principal amounts and related weighted-average interest rates by year of maturity for the Company's investment portfolio and debt obligations: <TABLE> <CAPTION> Fair value at December 31, 1999 2000 2001 2002 2003 Thereafter Total 1998 ---- ---- ---- ---- ---- ---------- ---- ------------- (in thousands of U.S. dollars, except percentages) Assets: <S> <C> <C> <C> <C> <C> <C> <C> <C> Cash equivalents............ $1,100,752 -- -- -- -- -- $1,100,752 $1,100,752 Average interest rate....... 6.63% -- -- -- -- -- 6.63% Long-term debt: Fixed rate.................. $45,245 $109,936 $102,460 $77,741 $9,200 $456,527 $801,109 $802,565 Average interest rate....... 4.12% 4.84% 5.29% 5.45% 5.00% 1.91% 3.28% </TABLE> Long-term debt by currency: Amount in Amount in thousands of thousands of original currency U.S. dollars ----------------- ------------ U.S. dollar............................. 455,885 $ 455,885 Italian lira (in million lira).......... 383,109 231,752 French franc............................ 552,347 98,628 Other currencies........................ -- 14,844 ----------- Total in U.S. dollars................... $ 801,109 =========== As of December 31, 1997, fixed-rate debt of $415.0 million was outstanding, with a fair value of $405.4 million, at an average interest rate of 5.19%. Additionally, cash equivalents of $702.2 million were outstanding, at an average interest rate of 5.64%. 49
The following table provides information about the Company's foreign exchange forward contracts at December 31, 1998: <TABLE> <CAPTION> Fair Value Notional Average in thousands of Amount(1) Contract Rate U.S. dollars ------------ ------------- --------------- <S> <C> <C> <C> Foreign Currency Forward Exchange Contracts to buy (sell) U.S. dollars for foreign currencies: Deutsche mark........................................................... (14,000) 1.692 $ (14,050) Malaysian ringgit....................................................... 4,672 3.796 4,667 French franc............................................................ (120,000) 5.610 (120,504) Italian lira.............................................................. (115,000) 1,662.102 (115,440) Singapore dollar........................................................ (78,000) 1.641 (77,391) ---------- --------- Total net in U.S. dollars............................................... (322,328) $ (322,718) ========= ========= Foreign Currency Forward Exchange Contracts to buy (sell) German marks for foreign currencies: U.S. dollar.............................................................. (80,000) 1.702 $ (47,826) Malaysian ringgit........................................................ 661 2.278 396 French franc............................................................. 6,910 1.016 4,213 ------ ---------- Total net in German marks................................................ (72,429) Total net in U.S. dollars................................................ (43,376) $ (43,217) ========== Foreign Currency Forward Exchange Contracts to buy (sell) Japanese yen for foreign currencies: U.S. dollar............................................................. (150,000) 121.550 $ (1,313) Italian lira............................................................ 200,000 14.407 1,775 Malaysian ringgit........................................................ 12,000 31.250 101 French franc............................................................ 650,000 21.693 5,736 Singapore dollar........................................................ (2,950,000) 71.686 (25,628) ----------- -------- Total net in Japanese yen............................................... (2,238,000) Total net in US dollars................................................. (19,461) $ (19,329) ========== Foreign Currency Forward Exchange Contracts to buy (sell) Swiss francs for foreign currencies: U.S. dollar............................................................. 55,001 1.356 $ 40,265 Italian lira............................................................ 1,500 1,218.500 1,107 French franc............................................................ 3,900 4.113 2,856 Singapore dollar........................................................ 277 1.227 199 --------- --------- Total net in Swiss francs............................................... 60,678 Total net in U.S. dollars............................................... 44,355 $ 44,427 ========= Foreign Currency Forward Exchange Contracts to buy (sell) Italian lira for foreign currencies (in million lira): U.S. dollar.............................................................. (200,000) 1,738.979 $ (125,137) Malaysian ringgit........................................................ 103 425.710 63 Singapore dollar......................................................... 934 1,002.000 559 --------- ----------- Total net in Italian lira................................................ (198,963) Total net in U.S. dollars............................................... (120,358) $ (124,515) =========== <FN> (1) Amounts in thousands of original currency (Italian lira expressed in millions). </FN> </TABLE> 50
The Company also entered into additional forward contracts as of December 31, 1998, for a countervalue of $19.4 million denominated in various currencies including pounds sterling, French francs, Spanish pesetas and European Currency Units, which approximated the fair value of such contracts. The notional amount of cross-currency contracts outstanding at December 31, 1997 was $305.2 million, which approximated the fair value of such contracts. These contracts expired in 1998. Item 10: Directors and Officers of Registrant Supervisory Board The management of the Company is entrusted to the Management Board under the supervision of the Supervisory Board. The Supervisory Board advises the Management Board and is responsible for supervising the policies pursued by the Management Board and the general course of affairs of the Company and its business. In fulfilling their duties under Dutch law, the members of the Supervisory Board must serve the interests of the Company and its business. The Supervisory Board consists of such number of members as is resolved by the general meeting of shareholders upon proposal of the Supervisory Board, with a minimum of six members. The members of the Supervisory Board are appointed upon proposal of the Supervisory Board by the general shareholders' meeting by a majority of the votes cast at a meeting where at least one-third of the outstanding share capital is present or represented. Pursuant to various shareholders agreements, the membership of the Supervisory Board of the Company must include three members designated by the French shareholders from the Board of Directors of FT1CI (following the merger of FT2CI and FT1CI, a corporation owned by CEA-Industrie and France Telecom), and three members designated by the Italian shareholders (of whom I.R.I. has the right to appoint two members and Ministero del Tesoro (following transfer of the interest previously held by Comitato SIR on June 18, 1999) has the right to appoint one member). See "Item 4: Control of Registrant--Shareholder Agreements." The Supervisory Board of the Company currently includes two members who are not affiliated with ST Holding and its direct and indirect shareholders. The members of the Supervisory Board appoint a chairman and vice chairman of the Supervisory Board from among the members of the Supervisory Board (with approval of at least three-quarters of the members of the Supervisory Board) and may appoint one or more members as a delegate supervisory director to communicate on a regular basis with the Management Board. Resolutions of the Supervisory Board require the approval of at least three-quarters of its members. The Supervisory Board must meet upon request by two or more of its members or by the Management Board. The Supervisory Board has adopted internal regulations to clarify the manner by which it carries out the supervisory duties imposed upon it by law, the Company's Articles of Association and resolutions of the shareholders and the Supervisory Board itself. By such resolution the Supervisory Board has authorized (i) the establishment of a secretariat (headed by an individual approved by it and appointed for a one-year renewable term) whose functions are to: (a) assist the Chairman and Vice Chairman of the Supervisory Board in the operations of the Board, (b) implement and oversee the execution within the Company of decisions adopted by the Supervisory Board, and (c) cooperate in and contribute to the execution of the functions of the designated Secretary and Assistant Secretary of the Supervisory Board; (ii) (a) the possibility of the appointment by the members of the Supervisory Board of assistants and (b) the appointment by such board of two controllers to exercise operational and financial control over the operations of the Company who, with assistants, will also review operation reports and the implementation of Supervisory Board decisions; and (iii) the establishment by the Supervisory Board of advisory committees. In addition, the Supervisory Board has established procedures for the preparation of Supervisory Board resolutions and the setting of the Board's calendar. 51
Members of the Supervisory Board must retire no later than at the ordinary general meeting of shareholders held after a period of three years following their appointment, but may be re-elected. A member of the Supervisory Board must retire at the ordinary general meeting of shareholders held in the year in which he reaches the age prescribed by Dutch law for retirement of a supervisory director (currently at age 72). Members of the Supervisory Board may be suspended or dismissed by the general meeting of shareholders. The Supervisory Board may make a proposal to the general meeting of shareholders for the suspension or dismissal of one or more of its members. The members of the Supervisory Board may receive compensation if authorized by the general meeting of shareholders. The shareholders agreement between the group of French shareholders and the group of Italian shareholders, as shareholders of ST Holding, also includes certain provisions requiring the approval of the Supervisory Board of ST Holding for certain actions by ST Holding, the Company and its subsidiaries. In addition, pursuant to the shareholders agreement among the group of French shareholders and a decree issued by certain Ministries of The Republic of France, the approval by members of the Supervisory Board appointed by the French shareholders of certain actions to be taken by the Company or its subsidiaries requires the approval of the Board of Directors of FT1CI and is subject to a veto by certain Ministries of The Republic of France. These requirements for the prior approval of various actions to be taken by the Company and its subsidiaries may give rise to a conflict of interest between the interests of the Company and the individual shareholders approving such actions, and may result in a delay in the ability of the Management Board to respond as quickly as may be necessary in the rapidly changing environment of the semiconductor industry. Such approval process is subject to the provisions of Dutch law requiring members of the Supervisory Board to act independently in the supervision of the management of the Company. The members of the Supervisory Board are: Name Position Year Appointed Age ---- -------- -------------- --- Jean-Pierre Noblanc Chairman 1994 60 Bruno Steve Vice Chairman 1989 57 Tom de Waard Member 1998 52 Remy Dullieux Member 1993 48 Riccardo Gallo Member 1997 55 Francis Gavois Member 1998 63 Alessandro Ovi Member 1994 55 Robert M. White Member 1996 60 Jean-Pierre Noblanc has been the Chairman of the Supervisory Board since May 31, 1999, and has been a member of the Supervisory Board since 1994. He served as Vice Chairman of the Supervisory Board from June 1996 to May 31, 1999. Mr. Noblanc is presently General Manager of the Components Sector of CEA Industrie. Prior to joining CEA Industrie, Mr. Noblanc served at CNET, the Research Center of France Telecom, as Director of the Applied Research Center of Bagneux and of the Microelectronics Center of Grenoble. Mr. Noblanc holds a degree in engineering from the Ecole Superieure d'Electricite and a doctoral degree in physical sciences from the University of Paris. Mr. Noblanc is an Associate Member of the Committee on Applications of the French Academy of Sciences and a director of Thomson S.A. Mr. Noblanc also serves on the board of Pixtech Inc. and Picogiga S.A. Bruno Steve has been a member of the Company's Supervisory Board since 1989 and its Chairman until May 31, 1999. He served as Vice Chairman of the Supervisory Board from 1989 to July 1990. From July 1990 to March 1993, Mr. Steve served as Chairman of the Supervisory Board. He has been with I.R.I., Finmeccanica's parent company, Finmeccanica and other affiliates of I.R.I. in various senior positions for over 17 years. Mr. Steve is currently Chairman of MEI, President of the board of statutory auditors of Alitalia S.p.a. and Iritecna S.p.a. in liquidazione and member of statutory auditors of Alitalia Express S.p.A., Stretto di Messina S.p.A. and Sigma S.p.A. He served as the Chief 52
Operating Officer of Finmeccanica from 1988 to July 1997 and Chief Executive Officer from May 1995 to July 1997. He was Senior Vice President of Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior to 1984, Mr. Steve served in several key executive positions at Telecom Italia, I.R.I.'s holding company for the telecommunications sector. Tom de Waard was appointed to the Supervisory Board in 1998. Mr. de Waard is a partner of Stibbe Simont Monahan Duhot, a leading Dutch law firm, where he has held several positions since 1979 and has gained extensive experience working with major international companies, particularly with respect to corporate finance. He is a member of the Amsterdam bar and received his law degree from Leiden University in 1979. Remy Dullieux has been a member of the Supervisory Board since 1993. He is a graduate of the Ecole Polytechnique. Since June 1996, Mr. Dullieux has served as a France Telecom Executive Manager for the Northern and Eastern areas of France. From 1991 to June 1996, Mr. Dullieux served as Group Executive Vice President for Strategic Procurement and Development of France Telecom. From 1985 to 1988, Mr. Dullieux served as Regional Manager of Creteil. Riccardo Gallo was appointed to the Supervisory Board in 1997. He is Associate Professor of Industrial Economics at the Engineering Faculty of "La Sapienza" University in Rome. He is also a member of the board of directors of Comitato Sir. From 1982 to 1991, he served as Director General at the Italian Ministry of the National Budget. In the early 1990s, he served as Vice Chairman of I.R.I. In 1994, he was appointed by the Italian Minister of Industry as Extraordinary Commissioner of Fidia, a research-oriented pharmaceutical company. Francis Gavois was appointed to the Supervisory Board in 1998. Mr. Gavois is the Chairman of the Supervisory Board of ODDO et Cie. He is also a member of the Board of Directors of Plastic Omnium and the Supervisory Board of the Consortium de Realisation (CDR). From 1984 to 1997, Mr. Gavois held several positions, including Chairman of the Board of Directors and President of Banque Francaise du Commerce Exterieur (BFCE). Prior to that time Mr. Gavois held positions in the French government. He is a graduate of the Institut d'Etudes Politiques de Paris and the Ecole Nationale d'Administration. Alessandro Ovi has been a member of the Supervisory Board since 1994. He received a doctoral degree in Nuclear Engineering from the Politecnico in Milan and a masters degree in operations research from Massachusetts Institute of Technology. He is currently the Chief Executive Officer of Tecnitel S.p.A., a subsidiary of Telecom Italia Group. Prior to joining Tecnitel S.p.A., Mr. Ovi was the Senior Vice President of International Affairs and Communications at I.R.I. He currently serves on the boards of Italtel (a Telecom Italia and Siemens Company), MEI, Sirti, Carnegie Mellon University and Corporation Development Committee of the Massachusetts Institute of Technology. Robert M. White was appointed to the Supervisory Board in June 1996. Mr. White is a University Professor and Department Head at Carnegie Mellon University and serves as a member of several corporate boards, including those of Ontrack Data Systems, Inc., and Zilog, Inc. He is a member of the U.S. National Academy of Engineering. From 1990 to 1993, Mr. White served as Under Secretary of Commerce for Technology in the United States Government. Prior to 1990, Mr. White served in several key executive positions at Xerox Corporation, Control Data Corporation and MCC. He received a doctoral degree in physics from Stanford University and graduated with a degree in science from Massachusetts Institute of Technology. The Supervisory Board has established an Audit Committee comprised of Messrs. Dullieux, Ovi and an independent director, Mr. White, and a Compensation Committee comprised of the Chairman (Mr. Noblanc), the Vice Chairman (Mr. Steve) and an independent director (Mr. White). 53
Management Board The management of the Company is entrusted to the Management Board under the supervision of the Supervisory Board. Under the Articles of Association, the Management Board must obtain prior approval from the Supervisory Board for (i) all proposals to be submitted to a vote at the general meeting of shareholders; (ii) the formation of all companies, acquisition or sale of any participation, and conclusion of any cooperation and participation agreement; (iii) all multi-year plans of the Company and the budget for the coming year, covering investment policy, policy regarding research and development, as well as commercial policy and objectives, general financial policy, and policy regarding personnel; and (iv) all acts, decisions or operations covered by the foregoing and constituting a significant change with respect to decisions already taken by the Supervisory Board. The Management Board must seek approval from the general meeting of shareholders for decisions relating to (i) the sale of all or of an important part of the Company's assets or concerns; and (ii) all mergers, acquisitions or joint ventures which the Company wishes to enter into and which the Supervisory Board considers to be of material significance. In addition, under the Articles of Association, the Supervisory Board may specify by resolution certain actions by the Management Board that require its prior approval. Following the adoption of such a resolution, the actions by the Management Board requiring such prior approval include the following: (i) modification of its Articles of Association; (ii) change in its authorized share capital, issue, acquisition or disposal of its own shares, change in any shareholder rights or issue of any instruments granting an interest in its capital or profits; (iii) liquidation or disposal of all or a substantial and material part of its assets or any shares it holds in any of its subsidiaries; (iv) entering into any merger, acquisition or joint venture agreement (and, if substantial and material, any agreement relating to intellectual property) or formation of a new company; (v) approval of such company's draft consolidated balance sheets and financial statements or any profit distribution by such company; (vi) entering into any agreement with any of the direct or indirect French or Italian shareholders outside the normal course of business; (vii) submission of documents reporting on (a) approved policy, expected progress and results and (b) strategic long-term business plans and consolidated annual budgets or any modifications to such; (viii) preparation of long-term business plans and annual budgets; (ix) adoption and implementation of such long-term business plans and annual budgets; (x) approval of all operations outside the normal course of business, including operations already provided for in the annual budget; and (xi) approval of the quarterly, semi-annual and annual consolidated financial statements prepared in accordance with internationally accepted accounting principles. Such resolution also requires that the Management Board obtain prior approval from the Supervisory Board for (i) the appointment of the members of the statutory management, administration and control bodies of the Company's French and Italian subsidiaries; and (ii) the nomination of the statutory management, administration and control bodies of the Company and each of the Company's other direct and indirect subsidiaries followed by confirmation to the Supervisory Board of such nominees' appointments. The general meeting of shareholders may also specify certain actions of the Management Board that require shareholder approval. The Company's Articles of Association provide that the Management Board must obtain shareholder approval prior to (i) the sale of all or an important part of the Company's assets and concerns; and (ii) all mergers, acquisitions or joint ventures which the Company wishes to enter into and which the Supervisory Board considers to be of material significance. See "Item 1: Description of Business" and "Item 13: Interest of Management in Certain Transactions." The Management Board shall consist of such number of members as resolved by the general meeting of shareholders upon the proposal of the Supervisory Board. The members of the Management Board are appointed for three year terms upon proposal by the Supervisory Board at the general shareholders' meeting by a majority of the votes cast at a meeting where at least one-third of the outstanding share capital is present or represented. The Supervisory Board appoints one of the members of the Management Board to be chairman of the Management Board (upon approval of at least three-quarters of the members of the Supervisory Board). Resolutions of the Management Board require the approval of a majority of its members. Mr. Pasquale Pistorio, the Company's President and Chief Executive Officer, is currently the sole member of the Management Board. His term expires in 2002. The general meeting of shareholders may suspend or dismiss one or more members of the Management Board at a meeting at which at least one-half of the outstanding share capital is present or represented. No quorum is required 54
if a suspension or dismissal is proposed by the Supervisory Board. The Supervisory Board may suspend members of the Management Board, but a general meeting of shareholders must be convened within three months after such suspension to confirm or reject the suspension. The Supervisory Board shall appoint one or more persons who shall, at any time, in the event of absence or inability to act of all the members of the Management Board, be temporarily responsible for the management of the Company. The Supervisory Board determines the compensation and other terms and conditions of employment of the members of the Management Board. Executive Officers The executive officers of the Company support the Management Board in its management of the Company, without prejudice to the Management Board's ultimate responsibility. The Company is organized in a matrix structure with geographical regions interacting with product divisions, bringing all levels of management closer to the customer and facilitating communication among research and development, production, marketing and sales organizations. 55
The executive officers of the Company are: <TABLE> <CAPTION> Years in Years with Semiconductor Name Position the Company(1) Industry Age ---- -------- -------------- -------- --- <S> <C> <C> <C> <C> Pasquale Pistorio President and Chief Executive Officer 19 35 63 Georges Auguste Corporate Vice President, Total Quality and 12 25 50 Environmental Management Laurent Bosson Corporate Vice President, Front-end 16 16 56 Manufacturing Carlo Bozotti Corporate Vice President, Memory Products 22 22 46 Group Salvatore Castorina Corporate Vice President, Discrete and 17 33 62 Standard ICs Group Alain Dutheil Corporate Vice President, Strategic Planning 16 29 54 and Human Resources Pietro Fox Corporate Vice President, European Region 35 41 61 Philippe Geyres Corporate Vice President, Consumer and 15 23 47 Microcontroller Group Maurizio Ghirga Corporate Vice President, Chief Financial 16 16 61 Officer Jean-Claude Marquet Corporate Vice President, Asia/Pacific 13 32 57 Region Pier Angelo Martinotti Corporate Vice President, New Ventures 18 31 58 Group Joel Monnier Corporate Vice President, Central Research 16 25 53 and Development Piero Mosconi Corporate Vice President, Treasurer 35 35 59 Richard Pieranunzi Corporate Vice President, Americas Region 18 33 60 Aldo Romano Corporate Vice President, Telecommunications, 33 33 58 Peripherals and Automotive Group Giordano Seragnoli Corporate Vice President, Back-end 34 36 62 Manufacturing and Subsystems Products Group Keizo Shibata Corporate Vice President, Japan Region 7 34 62 Enrico Villa Corporate Vice President, Region Five 31 31 58 <FN> - -------------- (1) Including years with Thomson Semiconducteurs or SGS Microelettronica. </FN> </TABLE> Pasquale Pistorio has more than 35 years of experience in the semiconductor industry. After graduating in Electrical Engineering from the Polytechnical University of Turin in 1963, he started his career selling Motorola products. Mr. Pistorio joined Motorola in 1967, becoming Director of World Marketing in 1977 and General Manager of the International Semiconductor Division in 1978. Mr. Pistorio joined SGS Microelettronica as President and Chief Executive Officer in 1980 and became President and Chief Executive Officer of the Company upon its formation in 1987. Georges Auguste has served as Corporate Vice President, Total Quality and Environmental Management since 1999. Mr Auguste received a degree in engineering from the Ecole Superieure d'Electricite (SUPELEC ) in 1974 and 56
a diploma in business administration from the Caen University in 1976. Prior to joining the Company, Mr. Auguste worked with Philips Components from 1974 to 1986, in various positions in the field of manufacturing. From 1990 to 1997 he headed the Company's operations in Morocco and from 1997 to 1999 Mr. Auguste served as director of Total Quality and Environmental Management. Laurent Bosson has served as Corporate Vice President, Front-end Manufacturing and VLSI Fabs since 1989 and from 1992 to 1996 he was given additional responsibility as President and Chief Executive Officer of the Company's operations in the Americas. Mr. Bosson received a Masters degree in Chemistry from the University of Dijon in 1969. He joined Thomson-CSF in 1964 and has held several positions in engineering and manufacturing. In 1982, Mr. Bosson was appointed General Manager of the Tours and Alencon facilities of Thomson Semiconducteurs. In 1985, he joined the French subsidiary of SGS Microelettronica as General Manager of the Rennes, France manufacturing facility. Carlo Bozotti has served as Corporate Vice President, Memory Products since August 1998. Mr. Bozotti joined SGS Microelettronica in 1977 after graduating in Electronic Engineering from the University of Pavia. Mr. Bozotti served as Product Manager for the Industrial, Computer Peripheral and Telecom divisions and as Product Manager for the Monolithic Microsystems' Telecom business unit from 1986 to 1987. He was appointed Director of Corporate Strategic Marketing and Key Accounts for the Headquarters Region in 1988 and became Vice President, Marketing and Sales, Americas Division in 1991. Mr. Bozotti has served as Corporate Vice President, Memory Products since August 1998, after having served as Corporate Vice President, Europe and Headquarters Region from 1994 to 1998. Salvatore Castorina has served as Corporate Vice President, Discrete and Standard ICs Group since 1989. Mr. Castorina received his engineering degree in Electronics from the Polytechnical University of Turin and began his career as a teacher of electrical and electronic technologies prior to joining Thomson-CSF in Milan in 1965. In 1967, he joined Motorola Semiconductors and held various positions in sales and marketing. In 1981, Mr. Castorina joined the Company as General Manager of Transistors in Catania and became the General Manager of the Company's Discrete Division in 1989. Alain Dutheil has served as Corporate Vice President, Strategic Planning and Human Resources since 1994 and 1992, respectively. Mr. Dutheil is also President of the Company's French subsidiary. After graduating in Electrical Engineering from the Ecole Superieure d'Ingenieurs de Marseilles (ESIM), Mr. Dutheil joined Texas Instruments in 1969 as a Production Engineer, becoming Director for Discrete Products in France and Human Resources Director for Texas Instruments, France in 1980 and Director of Operations for Texas Instruments, Portugal in 1982. He joined Thomson Semiconducteurs in 1983 as General Manager of a plant in Aix-en-Provence, France and then became General Manager of the Company's Discrete Products Division. From 1989 to 1994, Mr. Dutheil served as Director for Worldwide Back-end Manufacturing, in addition to serving as Corporate Vice President for Human Resources from 1992 until the present. Pietro Fox has served as Corporate Vice President, Europe Region since October 1998. He graduated from the Istituto Industriale A. Rosse in Vicenza in 1957 and studied Electrical Engineering at the Burrough Polytechnic in London. His professional career started in 1958 at Standard Telephones & Cables (the English ITT affiliate) where he worked as an Applications Engineer in the semiconductor field. In 1962, he returned to Italy to work as Product Marketing Engineer for semiconductors at Raytheon-Elsi SpA. His career in the Product Marketing sector of SGS Fairchild SpA, the company that subsequently became STMicroelectronics, began in 1964. In September 1971, he then became Marketing Manager for North America and was appointed President of the newly created SGS-Ates Semiconductor Corp. In March 1976, Mr. Fox moved to Germany and became General Manager of SGS-Thomson Microelectronics GmbH in Munich. In 1997, Mr. Fox gained increased responsibility in the European Telecom field when he became Vice President of the Telecom Business Unit for Europe. 57
Philippe Geyres has served as Corporate Vice President, General Manager Consumer and Microcontroller Group (formerly Programmable Products Group) since 1990. Mr. Geyres graduated from the Ecole Polytechnique in 1973 and began his career with IBM in France before joining Schlumberger Group in 1980 as Data Processing Director. He was subsequently appointed Deputy Director of the IC Division at Fairchild Semiconductors. Mr. Geyres joined Thomson Semiconducteurs in 1983 as Director of the Bipolar Integrated Circuits Division. He was appointed Strategic Programs Director in 1987 and, later the same year, became Corporate Vice President, Strategic Planning of the Company. Maurizio Ghirga became Corporate Vice President, Chief Financial Officer in 1987, after having served as chief financial controller of SGS Microelettronica since 1983. Mr. Ghirga has a degree in Business Administration from the University of Genoa. He spent more than ten years of his career in various financial capacities at ESSO Company (an Exxon subsidiary in Italy) and prior to joining the Company was Financial Controller of one of the largest refinery plants in Italy and of an ESSO chemical subsidiary. Jean-Claude Marquet has served as Corporate Vice President, Asia/Pacific Region since July 1995. After graduating in Electrical and Electronics Engineering from the Ecole Breguet Paris, Mr. Marquet began his career in the French National Research Organisation and later joined Alcatel. In 1969, he joined Philips Components. He remained at Philips until 1978, when he joined Ericsson, eventually becoming President of Ericsson's French operations. In 1985, Mr. Marquet joined Thomson Semiconducteurs as Vice President Sales and Marketing, France. Thereafter, Mr. Marquet served as Vice President Sales and Marketing for France and Benelux, and Vice President Asia Pacific and Director of Sales and Marketing for the region. Pier Angelo Martinotti has served as Corporate Vice President, General Manager New Ventures Group since 1994. A graduate in Electronic Engineering from the Polytechnical University of Turin, Mr. Martinotti began his career at the Company in 1965 as an Application and Marketing Engineer. In 1968, he joined Motorola Semiconductors in the area of strategic marketing in Europe, and in 1975 became the Marketing (Sales) Director for Europe. From 1986 to 1990, Mr. Martinotti was Chief Executive Officer of Innovative Silicon Technology, a former subsidiary of the Company. Mr. Martinotti was appointed Director of Corporate Strategic Planning in 1990. Joel Monnier has served as Corporate Vice President, Director of Central Research and Development since 1989. After graduating in Electrical Engineering from the Institut National Polytechnique of Grenoble, Ecole Nationale Superieure de Radio Electricite, Mr. Monnier obtained a doctoral degree in microelectronics at LETI/CENG. He began his career in the semiconductor industry in 1968 as a researcher with CENG, and subsequently joined the research and development laboratories of Texas Instruments in Villeneuve Loubet, France and Houston, Texas, eventually becoming Engineering Manager and Operation Manager at Texas Instruments. Mr. Monnier joined Thomson-CSF in 1983 as head of the research and manufacturing unit of Thomson Semiconducteurs. In 1987, he was appointed Vice President and Corporate Director of Manufacturing. Piero Mosconi has served as Corporate Vice President, Treasurer since 1987. After graduating in accounting from Monza in 1960, Mr. Mosconi joined the faculty at the University of Milan. Mr. Mosconi worked with an Italian bank before joining the Foreign Subsidiaries Department at SGS Microelettronica in 1964 and becoming Corporate Director of Finance in 1980. Richard Pieranunzi has served as Corporate Vice President, Americas Region since August 1996. Mr. Pieranunzi received his BSEE from the University of Rhode Island, and started his career in process engineering. Later, he joined Motorola's international marketing organization, including in Europe where he held management positions in sales and strategic marketing and applications. Mr. Pieranunzi joined SGS Semiconducteurs in 1981 as Marketing and Sales Manager and, upon the formation of the Company in 1987, he became Vice President Marketing and Sales for the U.S. organization. For three years, Mr. Pieranunzi headed the Company's Corporate Strategic Marketing and Corporate Key Account programs. 58
Aldo Romano has served as Corporate Vice President, General Manager Telecommunications, Peripherals and Automotive Group (formerly Dedicated Products Group) since 1987. Mr. Romano is also Managing Director of the Company's Italian subsidiary. A graduate in Electronic Engineering from the University of Padua in 1963, Mr. Romano joined SGS Microelettronica in 1965 as a designer of linear ICs, becoming head of the linear IC design laboratory in 1968 and head of Marketing and Applications in 1976. Mr. Romano became Director of the Bipolar IC Division (which has evolved into the Dedicated Products Group) in 1980. Giordano Seragnoli has served as Corporate Vice President, General Manager Subsystems Products Group since 1987 and since 1994, Director for Worldwide Back-end Manufacturing. After graduating in Electrical Engineering from the University of Bologna, Mr. Seragnoli joined the Thomson Group as RF Application Designer in 1962 and joined SGS Microelettronica in 1965. Thereafter, Mr. Seragnoli served in various capacities within the Company, including Strategic Marketing Manager and Subsystems Division Manager, Subsystems Division Manager (Agrate), Technical Facilities Manager, Subsystems Division Manager and Back-End Manager. Keizo Shibata has served as Corporate Vice President and President of the Company's Japanese subsidiary since 1992. Mr. Shibata obtained bachelors and masters degrees in Engineering from Osaka University and has 31 years of experience in the semiconductor industry. Prior to joining the Company, Mr. Shibata was employed with Toshiba Corporation since 1964 in various capacities. From 1987 to 1988, Mr. Shibata served as Chairman of both World Semiconductor Trade Statistics and the Trade Policy Committee of the Electric Industry Association of Japan. Enrico Villa has served as Corporate Vice President, Region Five since January 1, 1998. Mr. Villa has served in various capacities within the Company since 1968 after obtaining a degree in Business Administration from the University of Genoa and has 30 years of experience in the semiconductor industry. He is currently a member of the European Electronics Component Association ("EECA") for which he is now Chairman of the European Semiconductor Council as well as Chairman for Europe at the Joint Steering Committee of the World Semiconductor Council. As is common in the semiconductor industry, the Company's success depends to a significant extent upon, among other factors, the continued service of its key senior executives and research and development, engineering, marketing, sales, manufacturing, support and other personnel, and on its ability to continue to attract, retain and motivate qualified personnel. The competition for such employees is intense, and the loss of the services of any of these key personnel without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on the Company. The Company does not maintain insurance with respect to the loss of any of its key personnel. Item 11: Compensation of Directors and Officers The aggregate cash compensation payable for 1998 to the members of the Supervisory Board by the Company was approximately $240,000. The amount of cash compensation for 1998 paid to the executive officers of the Company and members of the Management Board as a group by the Company and its subsidiaries was approximately $7.5 million. In 1989, the Company established a Corporate Executive Incentive Program (the "EIP") that entitles selected executives and members of the Management Board to a yearly bonus based upon the individual performance of such executives. The maximum bonus awarded under the EIP is based upon a percentage of the executive's or member's salary and is adjusted to reflect the overall performance of the Company. The participants in the EIP must satisfy certain personal objectives that are focused on customer service, profit, cash flow and market share. The executive officers and the Management Board were also covered in 1998 under certain group life and medical insurance programs provided by the Company. The aggregate additional amount set aside by the Company in 1998 to provide pension, retirement or similar benefits for executive officers and the Management Board of the Company as a group is estimated to have been approximately $3.3 million. 59
Item 12: Options to Purchase Securities from Registrant or Subsidiaries Stock Option Plans The following description of the Company's stock options plans does not include adjustments for the 2:1 stock split effected on June 16, 1999. As of June 10, 1999, options to purchase up to an aggregate of 18,000 Common Shares were outstanding under the Company's first stock option plan (the "1989 Stock Option Plan"). Such options are fully vested and are exercisable at the original issue price, as adjusted to reflect the 40:1 stock split effected in connection with the Initial Public Offering, of NLG 25 per share. Of such outstanding options, 8,000 are held by executive officers of the Company as a group. All options outstanding under the 1989 Stock Option Plan expire December 18, 1999. On October 20, 1995, the shareholders of the Company approved resolutions authorizing the Supervisory Board for a period of five years to adopt and administer a new stock option plan which provides for the granting to managers and professionals of the Company of options to purchase up to a maximum of 5.5 million Common Shares (the "1995 Stock Option Plan"). The Company has granted a total of 2,495,500 options pursuant to the 1995 Stock Option Plan as follows: o The Company granted options to purchase 1,200,000 Common Shares with an exercise price per Common Share of $36.25, half of which vested and became exercisable on March 1, 1999 and half of which will vest and become exercisable on March 1, 2000. All such options will expire on March 1, 2004. As of June 10, 1999, 893,215 options were outstanding. o The Company granted options to purchase 645,500 Common Shares with an exercise price per Common Share of $85.375, which will vest and become exercisable on September 12, 2001 and will expire on September 12, 2005. As of June 10, 1999, 638,575 options were outstanding. o The Company granted options to purchase 650,000 Common Shares with an exercise price per Common Share of $72.1875, which will vest and become exercisable on July 28, 2002 and will expire on July 28, 2006. As of June 10, 1999, 648,265 options were outstanding. As of June 10, 1999, of the total options outstanding under the 1995 Stock Option Plan, 626,050 options were held by executive officers as a group. In June 1996, the general meeting of shareholders approved the granting of options to members and professionals of the Supervisory Board to purchase approximately 72,000 Common Shares of the Company over a period of three years, beginning in 1996. The following options have been granted: o The Company granted to members and professionals of the Supervisory Board options to purchase 33,000 Common Shares with an exercise price per Common Share of $54.00, which expire on October 22, 2004. As of June 10, 1999, 23,000 options were outstanding. o The Company granted to members and professionals of the Supervisory Board options to purchase 15,000 Common Shares with an exercise price per Common Share of $85.375, which expire on September 12, 2005. As of June 10, 1999, 13,500 options were outstanding. 60
o The Company granted to members and professionals of the Supervisory Board options to purchase 15,000 Common Shares with an exercise price per Common Share of $72.1875, which expire on July 28, 2006. As of June 10, 1999, 15,000 options were outstanding. Employee Stock Plan In 1998, the Company implemented an Employee Stock Plan under which employees have subscribed for a total of 288,299 Common Shares at a 12% discount from the public offering price used in the Share Offering ($72.1875 per Common Share). These Shares were subject to a six-month holding period which expired on December 10, 1998. Item 13: Interest of Management in Certain Transactions One of the Company's key customers is Thomson Multimedia. Thomson Multimedia and Thomson-CSF were indirect shareholders of the Company until October 1997 and are both controlled by Thomson S.A. The Company sells a broad range of products to Thomson Multimedia, including dedicated products, microcontrollers and semicustom devices, for use in televisions, videocassette recorders and satellite receiver systems. The Company believes that all of the products that it sells to Thomson Multimedia are sold on commercial terms no less favorable to the Company than could be obtained with non-affiliated parties. The Company has also formed a Groupement d'Interet Economique ("GIE") with Thomson Multimedia to conduct joint research and development on advanced television products, including digital television products. The Company and Thomson Multimedia share equally the funding of the joint venture's designers, engineers and managers. The Company has formed a joint venture research and development center with CNET in the form of a GIE. CNET is a research laboratory that is wholly owned by France Telecom, one of the indirect shareholders of the Company. See "Item 1: Description of Business--Research and Development" and "Item 4: Control of Registrant." The research center is housed at the Company's Crolles, France manufacturing facility, and is developing submicron process technologies. The joint venture between the Company and CNET was created in 1990 before France Telecom became an indirect shareholder of the Company. The Company has signed an agreement providing for a research and development cooperation with GRESSI, the research and development GIE formed by CNET and LETI, a research laboratory that is a department of CEA- Industrie, the parent of one of the indirect shareholders of the Company. See "Item 4: Control of Registrant." The objectives of the cooperation is to develop basic know-how on innovative aspects of VLSI technology evolution which can be transferred to industrial applications, and to address the development of innovative process steps and process modules to be used in future generations of VLSI products. The cooperation agreement was based upon a multi-year plan through 1998, of which the Company bore half of the total cost. The cooperation with GRESSI was superseded, as of January 1, 1999, by a tripartite cooperation arrangement between the Company, CNET and LETI, within the framework of an extended GIE named Centre Commun de Microelectronique de Crolles. This cooperation is directed towards sub 0.18 micron technologies with a view to preparing the technology to begin production of 12-inch wafers and associated wafer fabrication processes. The tripartite cooperation is intended to last until the end of 2002 and the related contractual arrangements are in the process of being finalized. The Company participates in certain programs sponsored by the French and Italian governments for the funding of research and development and industrialization through direct grants as well as low interest financing. See "Item 1: Description of Business--State Support for the Semiconductor Industry." The shareholders of ST Holding, the corporate parent of the Company's majority shareholder, are controlled, directly or indirectly, by the governments of the Republics of France and Italy. See "Item 4: Control of Registrant." Sales to shareholders of the Company and their affiliates totalled $5.6 million in 1998. 61
PART II Item 14: Description of Securities to be Registered Not applicable. PART III Item 15: Default Upon Senior Securities None. Item 16: Changes in Securities and Changes in Security for Registered Securities and Use of Proceeds On May 31, 1999, the Company's shareholders approved a 2:1 stock split and simultaneous redenomination of the par value of each Common Share to Euro 3.12. The changes became effective June 16, 1999. Shareholders authorized the creation of 180,000,000 Preference Shares which would entitle a holder to full voting rights at any meeting of shareholders and to a preferential right to dividends and designated the Supervisory Board as the corporate body authorized to issue the Preference Shares. See "Item 4: Control of Registrant -- Shareholder Agreements." After these changes in the Company's authorized share capital, its share capital was Euro 1,809,600,000, consisting of 400,000,000 Common Shares and 180,000,000 Preference Shares of Euro 3.12 nominal value each. PART IV Item 17: Financial Statements Not applicable. Item 18: Financial Statements See "Item 19: Financial Statements and Exhibits" for a list of financial statements filed pursuant to this Item 18. Item 19: Financial Statements and Exhibits With the exception of the items incorporated by reference elsewhere in this annual report, the 1998 Annual Report is not deemed to be filed as part of this annual report. (a) Financial Statements The financial statements, together with the report thereon of PricewaterhouseCoopers NV dated January 25, 1999, appearing on pages 41-56 and 58 of the 1998 Annual Report are incorporated herein by reference. 62
<TABLE> <CAPTION> Reference Page ------------------------ 1998 Annual Report to Form 20-F Shareholders --------- ------------ <S> <C> <C> Financial Statements: Report of Independent Accountants for Years Ended December 31, 1998, 1997 and 1996............................. 58 Consolidated Statement of Income for the Years Ended December 31, 1998, 1997 and 1996............................. -- 41 Consolidated Balance Sheet as of December 31, 1998 and 1997.. -- 42 Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............................. -- 43 Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996....................... -- 44 Notes to Consolidated Financial Statements................... 45 Financial Statement Schedules: For each of the three years in the period ended December 31, 1998 Schedule II Valuation and Qualifying Accounts............... S-1 -- All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Report of Independent Accountants on Financial Statement Schedule S-2 -- </TABLE> (b) Exhibits 3.(i) Articles of Association, as amended as of June 16, 1999, of the Company 10 Option Agreement, signed May 31, 1999 between the Company and STMicroelectronics Holding II B.V. 21 Subsidiaries of the Company (see Note 3 to the Consolidated Financial Statements) 23 Consent of PricewaterhouseCoopers NV Pages 27 to 56 and 58 of the 1998 Annual Report, submitted as a Report on Form 6-K by STMicroelectronics N.V. on June 30, 1999. 63
CERTAIN TERMS ASD.......................application-specific discrete technology ASIC......................application-specific IC ASSP......................application-specific standard product ATM.......................asynchronous transfer mode BCD.......................bipolar, CMOS and DMOS process technology BiCMOS....................bipolar and CMOS process technology CAD.......................computer aided design CIM.......................computer integrated manufacturing CMOS......................complementary metal oxide silicon DMOS......................diffused metal oxide silicon DRAMS.....................dynamic random access memory DSP.......................digital signal processor EEPROM....................electrically erasable programmable read-only memory EPROM.....................erasable programmable read-only memory GPS.......................global positioning system HCMOS.....................high-speed complementary metal-oxide-silicon IC........................integrated circuit IGBT......................insulated gate bipolar transistors ISDN......................integrated services digital network Kbit......................kilobit Mbit......................megabit MCUs......................microcontrollers units MIPS......................million instructions per second MOS.......................metal oxide silicon process technology MOSFET....................metal oxide silicon field effect transistor MPEG......................motion picture experts group NVRAM.....................nonvolatile SRAM OEM.......................original equipment manufacturer OTP.......................one-time programmable PROM......................programmable read-only memory RAM.......................random access memory RF........................radio frequency RISC......................reduced instruction set computing ROM.......................read-only memory SAM.......................serviceable available market SLIC......................subscriber line interface card SPC.......................statistical process control SRAM......................static random access memory STB.......................set-top box TAM.......................total available market VLSI......................very large scale integration 64
SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. STMICROELECTRONICS N.V. Date: June 30, 1999 By: /S/ PASQUALE PISTORIO --------------------------------- Name: Pasquale Pistorio Title: President and Chief Executive Officer 65
STMICROELECTRONICS N.V. VALUATION AND QUALIFYING ACCOUNTS (Currency - Thousands of U.S. dollars) <TABLE> <CAPTION> Valuation and qualifying accounts deducted Balance as Charged to Balance at from the related asset accounts beginning Translation costs and end of of period adjustment expenses Deductions period ---------- ----------- ---------- ------------ ---------- <S> <C> <C> <C> <C> <C> 1998 Inventories.................................. 68,182 - 53,955 (68,182) 53,955 Accounts Receivable ......................... 15,228 89 (3,741) (1,082) 10,494 1997 Inventories.................................. 45,176 - 68,182 (45,176) 68,182 Accounts Receivable.......................... 18,152 (1,902) 7 (1,029) 15,228 1996 Inventories.................................. 36,500 - 45,176 (36,500) 45,176 Accounts Receivable.......................... 17,881 (514) 1,114 (329) 18,152 </TABLE> S-1
Report of Independent Accountants on Financial Statement Schedule To the Supervisory Board of STMicroelectronics NV Our audits of the consolidated financial statements referred to in our report dated January 25, 1999 appearing on page 58 of the 1998 Annual Report to Shareholders of STMicroelectronics NV (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 20-F) also included an audit of the financial statement schedule listed in Item 19 of this Form 20-F. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers NV Amsterdam, The Netherlands January 25, 1999 S-2
INDEX TO EXHIBITS Name Page ---------- ------ 3.(i) Articles of Association, as amended as of June 16, 1999, of the Company 10 Option Agreement, signed May 31, 1999 between the Company and STMicroelectronics Holding II B.V............................ 23 Consent of PricewaterhouseCoopers NV.........................