SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 or 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
Report on Form 6-K dated March 23, 2004
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STMicroelectronics N.V.
(Name of Registrant)
39, Chemin du Champ-des-Filles
1228 Plan-les-Ouates, Geneva, Switzerland
(Address of Principal Executive Offices)
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Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F
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Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
Yes No X
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Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
--- ---
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- __________
Enclosures: Shareholder materials for STMicroelectronics' Annual General
Meeting of Shareholders ("AGM") of April 23, 2004, including: (i)
Agenda for AGM; (ii) Report of the Managing Board; (iii) Report of
the Supervisory Board; (iv) Annual Accounts for 2003; (v) AGM
Proposed Resolutions; (vi) Proposed New Supervisory Board Member
Data Forms; (vii) Deed of Amendment to the Articles of
Association; (viii) Corporate Governance Charter; (ix) Proxy
Appointment and Voting Instruction Card.
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Annual General Meeting 2004
Agenda
Annual General Meeting of Shareholders of STMicroelectronics N.V., established
in Amsterdam, the Netherlands to be held on April 23, 2004 at 10:00 a.m. in
Amsterdam, the Netherlands(1)
1. Call to order and opening
2. Report of the Managing Board on the 2003 financial year
3. Report of the Supervisory Board on the 2003 financial year
4. Adoption of the annual accounts for the 2003 financial year
5. Discharge of the sole member of the Managing Board
6. Discharge of the members of the Supervisory Board
7. Adoption of a dividend of $0.12 per common share
8. Proposal of appointment of Gerald Arbola as a new member of the
Supervisory Board as successor to, and to complete the three-year term
(to expire at our 2005 AGM) of, Jean-Pierre Noblanc
9. Proposal of appointment of Didier Lombard as a new member of the
Supervisory Board as successor to, and to complete the three-year term
(to expire at our 2005 AGM) of, Remy Dullieux
10. Approval of the compensation of the members of the Supervisory Board
11. Approval of the new employee stock purchase plan
12. Delegation to the Supervisory Board for five years of the authority to
issue new shares, to grant rights to subscribe for new shares and to
limit and/or exclude existing shareholders' pre-emptive rights
13. Approval of the change in the quorum for the general meeting of
shareholders from one-third of the issued share capital to 15% of the
issued share capital
14. Authorization of the amendment of the articles of association relating
to the items mentioned under item 13
15. Approval of our Corporate Governance Policy
16. Question time
17. Close
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(1) Location to be communicated shortly
1
Copies of the annual accounts, the report of the Supervisory Board, the report
of the Managing Board, the draft deed of amendment to the articles of
association (as well as an unofficial English translation thereof), the personal
data of the proposed members of the Supervisory Board as referred to in Section
2:142, subsection 3 of the Dutch Civil Code, the proposed Corporate Governance
Charter and other information included pursuant to law and the proposed
resolutions will be deposited for inspection by the shareholders and other
persons entitled to attend the meeting at the offices of Netherlands Management
Company B.V. (Locatellikade 1, 1076 AZ Amsterdam, the Netherlands), at the
offices of Credit Agricole Investor Services Corporate Trust S.N.C. (14, Rouget
de Lisle, 92862 Issy-les-Moulineaux, Cedex 09), at the offices of the Company in
New York (Corporate Information Office, 780 Third Avenue, 9th Floor, New York,
New York 10017, United States of America) and at the offices of Banca Intesa
S.p.A. (Centro Amministrativo Elettronico, Via Langhirano 1, CAP 43100 Parma,
Italy) as of March 19, 2004 up to and including the date of the meeting. The
documents are also available on the Company's internet site www.st.com and in
print at the Company's registered offices.
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[GRAPHIC OMITTED]
REPORT FROM OUR MANAGING BOARD
TO OUR SHAREHOLDERS
ST achieved progressive revenue gains throughout 2003, posting 14.6%
growth over the prior year. Net revenues surpassed $7.2 billion, reflecting
solid year-over-year increases in all major product groups and targeted market
segments. In 2003, revenues from differentiated products exceeded $5 billion and
accounted for 69.3% of the Company's net revenues.
Based upon currently-available industry data, ST's growth for the period
was basically in line with that of the markets we serve, enabling the Company to
maintain leading positions in a number of key areas, including sales of Analog
ICs, Application Specific ICs and Application Specific Standard Products.
ST's four major product groups continued to work together in 2003 to
provide products and solutions for a number of high-growth applications. For
example, in 2003 our revenues for wireless applications approximated $1.75
billion, 18% growth over the prior year, and revenues to digital consumer and
automotive products each exceeded $1 billion, increasing 27% and 22%,
respectively, from 2002 levels.
ST's twelve strategic customers with whom we have formal alliances
represented approximately 43% of our total net revenues in 2003. At the same
time, our company-wide initiative to offer ST products to an expanded customer
base fueled incremental, progressive revenue growth throughout the year. The
Company has committed significant resources to ensure the longterm success of
this accelerated marketing program, by creating new regional competence centers
that focus on specific applications, increasing design activities in advanced
products with multiple applications and launching a new generation of e-tools
for customer support.
Our top-line growth in 2003 was driven primarily by unit demand, as the
industry-wide overcapacity, that persisted during the year caused much of our
product portfolio to be under significant price pressure. This situation was
exacerbated by product mix, particularly the 27% year-over-year growth in Flash
memory product sales and the increase in sales of multi-socket products to a
broader customer universe. These factors, among others including currency
fluctuations, restricted our ability to generate operating leverage at the gross
margin line. Gross profit, while up 11.7% to $2.57 billion on a yearover-
year-basis, stood at 35.5% of 2003 net revenues, compared to 36.4% in 2003.
Operating income was penalized by the approximate 20% decline in the
value of the u.s. dollar against the Euro and several other currencies in 2003.
This decline significantly increased ST's reported research and development and
selling, general and administrative costs, which together account for the
majority of our operating expenses. In addition, we incurred impairment,
restructuring, and other related charges in 2003, which amounted to $139 million
on an after-tax basis, in connection with a detailed restructuring plan
developed to safeguard and increase ST's manufacturing cost competitiveness and
to enhance capacity.
In 2003, we repurchased approximately 78% of the amount originally
issued of our Zero-Coupon Senior Convertible Notes due 2010 and completed an
Offering of Senior Zero-Coupon Convertible Bonds due 2013. Repurchases of
higher-cost convertible debt to reduce interest expense and lengthen maturities
resulted in a non-operating, after-tax charge of $38 million in 2003.
The above-mentioned factors are the primary reasons that ST's reported
net income was $253 million, or $0.27 per diluted share for 2003, as compared to
$429 million, or $0.48 per diluted share in 2002.
It is noteworthy that at year-end 2003, our balance sheet was stronger
than it was at the end of 2000, when the semiconductor industry had reached a
record high sales level. At December 31, 2003, cash, cash equivalents, and
marketable securities totaled $3 billion. Total debt was $3.10 billion, of which
$2.94 billion was long term, comprised mostly of convertible bonds;
shareholders' equity totaled $8.10 billion; and the net debt to shareholders'
equity ratio was a modest 0.012. Throughout the period, we maintained our
emphasis on cash generation, reporting net operating cash flow for 2003 of $477
million.(1)
Importantly, we were able to blend sound financial management with solid
strategic initiatives and investments in 2003, which we believe have the
potential to provide significant returns in the periods ahead.
The Crolles2 Research and Development Alliance facility was formally
inaugurated early in 2003, and by the end of the year, ST and our partners,
Philips and Motorola, were producing research lots of 90-nanometer feature-size
silicon. ST's agreement with Hynix Semiconductor to jointly develop NAND Flash
products is also proceeding apace, with ST having already delivered samples of
512 megabit and 1 gigabit memories to key customers.
Our agreement with Texas Instruments and Nokia to jointly develop and
sell a CDMA chipset was announced in May 2003, and customer response has been
encouraging. As part of ST's joint venture with Dai Nippon, a mask-making
facility in which ST owns 19%, was opened adjacent to our fab in
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(1) Net operating cash flow is defined as cash flow from operating activities
net of payments for purchases of tangible, intangible and financial assets, and
for acquisitions.
Agrate, Italy in July, 2003. We expect this facility to be fully operational by
mid-2004.
We made two smartcard-related acquisitions in 2003, both of which have
given ST the ability to leverage its silicon know-how in order to offer
customers a broader array of products and solutions based upon their individual
requirements. And, we added to our broadband access portfolio and expertise
through the December 2003 acquisition of Synad, a UK-based wireless-LAN company.
Industry analysts currently forecast that 2004 will be a year of
substantial growth for the semiconductor industry, characterized by a
combination of higher unit demand and price increases. As noted in the Outlook
section of our 2003 fourth quarter/full-year earnings release, ST has entered
this recovery period with a solid order backlog and strong fundamental demand
for products serving key high-growth applications.
We intend to take full advantage of our leadership position in those
market segments and product families that are projected to drive the industry's
growth in 2004 and beyond, moving, as appropriate, from a provider of components
and Systems-on-Chip technology to a provider of platform solutions in those
segments that we target.
We are also determined to continue accelerating and strengthening our
commitment to our programs in corporate social responsibility. These programs
are in line with our leadership as one of the first signatories to the Global
Compact, which is the U.N. initiative that promotes responsible corporate
citizenship. We reiterate the Company's longstanding belief that those
corporations which pay special attention to their social responsibility and to
their behavior as good corporate citizens in the communities in which they
operate not only fulfill their ethical obligations but also maximize returns to
their shareholders. Our position is recognized by a number of financial indexes
on which ST's shares are included, such as: FTSE 4good; Dow Jones Sustainability
Indexes, Advanced Sustainable Performance Index, the Ethical Sustainability
Index and the Ethical Index Europe.
In addition, ST, with its unwavering commitment to sustainable development
emphasizing environmental protection, provides excellent proof of the validity
of these concepts. As an example, our energy-saving program, which cut per unit
energy consumption by an average of 6.3% per year since 1994, reduced our
electricity bill by approximately $80 million in 2003. At the same time, our
energy-conservation efforts have saved our planet the burden of another 150MW
power plant, with all its related polluting emissions.
In 2003, ST was also one of the world's first companies to be awarded OHSAS
18001 health and safety management certification for all of its plants. Through
OHSAS 18001, ST has committed to achieve continuous progress in several areas,
including Occupational Health and Safety, Risk Management, Property Conservation
and Business Continuity.
Finally, 2003 marked the beginning of the deployment of the Company's program to
help bridge the "digital divide", the gap that separates those having access to
modern information and communication technologies and those without such access.
Our program is based on providing education through specially-designed courses
and on offering access to personal computers and to the Internet in countries
such as Morocco, Malaysia and India, which are currently the primary targets for
our initiative. Our goal is to reach at least one million people in a decade,
thus enhancing the social and economic development of the communities where we
operate, while also being recognized as an excellent corporate citizen and as
the employer of choice in those communities.
On December 9, 2003, the final version of the Dutch Corporate Governance Code,
often referred to as the Tabaksblat Code, was published. The Code recommends
that companies communicate to shareholders in 2004 how they intend to comply
with the Code and we have determined that ST already largely complies with the
Code. It should be noted, however, that ST is a global company, with its shares
listed on the New York Stock Exchange, Euronext Paris, and Borsa Italiana, and
therefore certain of our policies may be reflective of practices in those
jurisdictions and in some cases may not be consistent with all Dutch "Best
Practice" recommendations contained in the Code. In light of this, we are
submitting our policies on Corporate Governance for approval at our 2004 Annual
General Meeting of Shareholders to be held in Amsterdam on April 23, 2004. Our
current corporate governance policies, as enumerated in our Charter on Corporate
Governance, will be updated and expanded whenever necessary or advisable. As
recommended by the Code, we will inform our shareholders of any significant
changes in our corporate governance policies and practices. Our Corporate
Governance Charter will be posted on our website www.st.com and will be
available in print to any shareholder who requests it.
March 10, 2004
/s/ Pasquale Pistorio
P. Pistorio
Sole member of the Managing Board
Report of the Supervisory Board of
STMicroelectronics
Monday, March 15, 2004
Annual Results
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In 2003, the semiconductor market improved markedly in comparison to 2002.
During 2003, ST produced annual revenues of almost $7.24 billion, driven
primarily by unit demand from ST's strategic customers, as well as from a
growing group of key customers, up 14.6% from the $6,318 million reported in
2002. ST remained solidly profitable for the year, as ST had during the severe
industry downturns of 2001 and 2002. Net operating cash flow(1) increased to
$477 million in 2003 from $342 million in 2002. However, profitability levels
were significantly limited by a number of factors, including industry-wide
overcapacity, pricing pressures and rapid currency fluctuations. Currency
fluctuations affected ST's reported operating expenses for 2003, thus negatively
impacting its bottom-line results in 2003 compared to 2002.
Proposed Dividend
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Considering ST's results in 2003, and upon the proposal of the Managing Board,
the Supervisory Board recommends to the Annual General Meeting of Shareholders
(AGM) the adoption of the annual accounts for the financial year 2003 and the
distribution, out of ST's profits realized during 2003, of a cash dividend of
$0.12 per share.
Supervisory Board and ST Corporate Governance
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The management of ST is entrusted to the Managing Board under the supervision of
the Supervisory Board. The Supervisory Board advises the Managing Board and is
responsible for supervising the policies pursued by the Managing Board as well
as the general course of ST's affairs and business.
Since early 2003, the Supervisory Board has monitored corporate governance
initiatives in the various markets in which ST is listed and incorporated,
particularly implementing rules of the Sarbanes-Oxley Act of 2002 and final
corporate governance standards of the New York Stock Exchange. The Supervisory
Board formed an Ad-Hoc Committee to analyze ST's corporate governance policies
and structure.
On December 9, 2003, the Dutch Corporate Governance Committee issued a Corporate
Governance Code (the "Code") effective January 1, 2004 for all publicly listed
companies incorporated in The Netherlands, including ST. Management, under the
supervision of the Ad-Hoc Committee, developed a Corporate Governance Charter.
On the recommendation of the Ad-Hoc Committee, ST is submitting its policy on
corporate governance for approval to the AGM. As ST is listed on the New York
Stock Exchange, Euronext Paris and Milano Borsa and not in The Netherlands, ST's
policies and practices are not consistent with all Dutch "Best Practice"
recommendations contained in the Code. ST's current corporate governance
policies, as enumerated in the Corporate Governance Charter, will be updated and
expanded whenever
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(1) Net operating cash flow is defined as cash flow from operating activities
net of payments for purchases of tangible, intangible and financial assets, and
for acquisitions.
1
necessary or advisable. As recommended by the Code, ST will inform shareholders
at its AGM of any significant changes in corporate governance policies and
practices. ST's Corporate Governance Charter will be posted on the website and
will be available in print to any shareholder who may request it. The
Supervisory Board recommends to shareholders adoption of ST's corporate
governance policy, as currently reflected in the ST Corporate Governance
Charter.
In fulfilling their duties under Dutch law, the members of the Supervisory Board
serve the best interests of all of ST's stakeholders and of ST's business. In
addition, as required by Dutch law, all of the members of the Supervisory Board,
however originally selected, act independently in their supervision of ST's
management. The Supervisory Board has adopted criteria to evaluate the
independence of its members in accordance with corporate governance listing
standards of the New York Stock Exchange. The Supervisory Board evaluated the
members and determined that all members are independent from ST's management.
Biographies of current Supervisory Board members' are annexed to this Report and
will be available on ST's website.
Proposed Supervisory Board Appointments
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The Supervisory Board announced the passing of former Vice-Chairman Jean-Pierre
Noblanc last summer and announces the resignation of Supervisory Board member
Mr. Remy Dullieux. Mr. Noblanc had been a member of the Supervisory Board since
1994, serving as Chairman from 1994-1996 and 1999-2002, and as Vice-Chairman
from 1996-1999 and 2002 through his passing in 2003. Mr. Dullieux was a member
of the Supervisory Board since 1993, serving as Audit Committee chair from 1996-
1999.
The Supervisory Board recommends the respective appointments of Gerald Arbola
and Didier Lombard as successors to fulfil the remaining period of the terms of
Messrs. Noblanc and Dullieux, to expire at the 2005 AGM. Biographies of proposed
Supervisory Board nominees Messrs. Arbola and Lombard annexed to this Report and
will be available on ST's website.
Supervisory Board activity in 2003
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During 2003, the Supervisory Board met eight times so as to closely monitor ST's
operations, strategy and evolution. The Supervisory Board reviewed ST's results
of operations, met with the corporate officers responsible for Research and
Development, the Telecoms, Peripherals and Automotive ("TPA") and Memory
Products businesses to monitor ST's projects, challenges, performance and
prospects in an intensely competitive environment. In addition, the Supervisory
Board supervised, oversaw and approved many ST corporate activities in 2003,
including:
o ST's acquisitions of Smart card product manufacturer Incard (Italy),
Smart card software company Proton (Belgium) and wireless-LAN
designer Synad Ltd. (UK)
o Attribution of stock options to executives and key employees of ST
under the 2001 and 2002 Stock Option Plans approved by shareholders
o Offerings of ST common shares to employees in May and November 2003
pursuant to ST's Employee Stock Purchase Plan approved by
shareholders
2
o ST's issuance of $1.4 billion aggregate principal amount at issuance
of negative yield zero coupon senior convertible bonds due 2013
o Several market repurchases of ST's zero coupon senior convertible
bonds due 2010
o ST's six-inch fabrication facility reorganization project
The Supervisory Board's committees were also very active in 2003.
Compensation Committee
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The Compensation Committee met four times in 2003, including one meeting outside
the presence of management or the CEO. Among its main activities, the
Compensation Committee defined the remuneration package of the CEO for the year
2003, determined CEO objectives and eligibility criteria to receive a bonus in
2004 (with reference to the market conditions in the semiconductor industry) and
proposed to the Supervisory Board the CEO's total remuneration package, which
approved it. Eligibility criteria for the CEO to receive a bonus relate to ST's
revenue growth compared to that of its main competitors, its profitability,
return on net assets, net cash flow, and market performance over the course of a
fiscal year. In 2003, the Compensation Committee also reviewed the CEO's 2002
performance in light of objectives and bonus eligibility criteria and proposed
adoption of the CEO's bonus to the Supervisory Board. Finally, the Compensation
Committee made a recommendation regarding the number of stock options to be
granted to the CEO.
The Compensation Committee approved the 2003 proposed allocation of stock
options to ST's executive officers and key employees pursuant to ST's 2001 Stock
Option Plan, based on the NYSE closing price of ST shares two days after the AGM
date. The Compensation Committee also extended the allocation to eligible
employees of acquired businesses. The Committee also reviewed the remuneration
policy for the ST's Managing Board and senior executive officers as well as the
Executive Incentive Program for all ST executives.
In 2003, the Compensation Committee confirmed the grant of stock options
approved by ST's shareholders to members and professionals of the Supervisory
Board pursuant to ST's 2002 Stock Option Plan, based on the NYSE closing price
of ST shares two days after the AGM date.
The Compensation Committee also monitored the results of the last two tranches
of ST's Employees Stock Purchase Plan, which were implemented in 2003. The
Compensation Committee reviewed and proposed to the Supervisory Board a new
Employee Stock Purchase Plan for the years 2004-2007, the principal terms and
conditions of which are being submitted to our April 23, 2004 AGM for approval.
Strategic Committee
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The Strategic Committee met six times in 2003, in the presence of the CEO, the
Director of Strategic Planning and the CFO. Among its main activities, the
Strategic Committee reviewed the Company's long-term plans and prospects and
various possible scenarios and opportunities to meet the challenges of the
semiconductor market, which included the increasing costs of R&D and of capital
investments in advanced production technologies.
The Strategic Committee was fully briefed prior to and during the negotiation
processes concerning the acquisition of Incard, a manufacturer of various Smart
card products, Proton
3
World International (PWI), a leading Smart card software company specializing in
high-security payment and identification Smart card systems, and Synad Ltd., the
wireless-LAN chip developer.
Audit Committee
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The Audit Committee met eleven times during 2003. At many of these meetings, the
Audit Committee received presentations on current financial and accounting
issues and had the opportunity to interview ST's CEO, CFO, General Counsel,
external and internal auditors. On several occasions, the Audit Committee met
with outside U.S. legal counsel, who explained and analyzed final implementing
rules promulgated by the U.S. Securities and Exchange Commission and the New
York Stock Exchange.
At the end of each quarter, prior to each Supervisory Board meeting to approve
ST's results and quarterly earnings press release, the Audit Committee reviewed
ST's interim financial information and the proposed press release and discussed
with the independent accountants those matters required to be discussed under
SAS 61. In addition, the Audit Committee reviewed ST's quarterly "Operating and
Financial Review and Prospects" and full interim financial statements (including
notes) before they are filed with the SEC and duly certified (pursuant to
sections 302 and 906 of the Sarbanes-Oxley Act).
The Audit Committee also proceeded with its annual review of ST's Internal
Audit, as well as the scope, planning and costs of ST's external audit
activities. The Audit Committee reviewed and approved management's proposal for
a new internal operating procedure regarding engagements with external auditors.
The Audit Committee reviewed its Charter with the assistance of ST's outside
U.S. counsel, with a view to compliance with final Sarbanes-Oxley implementing
rules and final NYSE listing standards, to the extent permitted by Dutch law.
The Audit Committee completed a self-evaluation and reported regularly to the
Supervisory Board.
In advance of its review of our draft annual Financial Statements, the Audit
Committee reviewed our external auditors' statement of independence with them.
The Audit Committee approved the compensation of our external auditors and also
approved the scope of their audit, audit-related and non-audit-related services,
held separate meetings with the external auditors and discussed ST's critical
accounting policies with our external auditors.
The Audit Committee reviewed ST's conclusions as to effectiveness of Internal
Controls in 2003, had various meetings with management, external auditors and
approved ST's internal audit plan for 2004. The Audit Committee also determined
that three members of the Audit Committee qualified as "audit committee
financial experts" and that all of its members are financially literate. The
Audit Committee's conclusions on such matters were reported to the Supervisory
Board, which adopted them.
Nominating and Corporate Governance Committee
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As part of the Supervisory Board's corporate governance review, the Supervisory
Board, on the recommendation of the Ad Hoc Committee, resolved to establish a
Nominating and Corporate
4
Governance Committee. The Supervisory Board will meet following the AGM to
resolve upon the composition and Charter of the new Nominating and Corporate
Governance Committee.
Finally, the Supervisory Board, in conjunction with the Managing Board, prepared
the agenda for the AGM and recommends for adoption the proposed resolutions. The
agenda, proposed resolutions and other information regarding the upcoming AGM
are available on ST's website and in print to any shareholder upon request.
Monday, March 15, 2004
Bruno STEVE Robert WHITE
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Tom DE WAARD Remy DULLIEUX
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Doug DUNN Riccardo GALLO
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Francis GAVOIS Alessandro OVI
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5
Current members of ST Supervisory Board
Bruno Steve has been a member of our Supervisory Board since 1989 and Chairman
since March 27, 2002. He served as Vice-Chairman of the Supervisory Board from
1989 to July 1990 and from May 1999 through March 2002. From July 1990 to March
1993 and from June 1996 until May 1999, Mr. Steve also served as Chairman of our
Supervisory Board. He has been with Istituto per la Ricostruzione
Industriale--IRI S.p.A. ("I.R.I".), a former shareholder of Finmeccanica,
Finmeccanica and other affiliates of I.R.I. in various senior positions for over
17 years. Mr. Steve is currently President of the board of statutory auditors of
Alitalia S.p.a.. Until December 1999, he served as Chairman of MEI. He served as
the Chief Operating Officer of Finmeccanica from 1988 to July 1997 and Chief
Executive Officer from May 1995 to July 1997. He was Senior Vice President of
Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior to 1984, Mr.
Steve served in several key executive positions at Telecom Italia. He is also a
professor at LUISS Guido Carli University in Rome.
Tom de Waard was appointed to the Supervisory Board in 1998. Mr. de Waard was
appointed chairman of the Audit Committee by the Supervisory Board in 1999. Mr.
de Waard has been a partner of Clifford Chance, a leading international law firm
since March 2000 and has been the Managing Partner of Clifford Chance Amsterdam
office since May 1, 2002. Prior to that, he was a partner at Stibbe, where he
held several positions since 1971 and gained extensive experience working with
major international companies, particularly with respect to corporate finance.
He is a member of the Amsterdam bar and was President of the Netherlands Bar
Association from 1993 through 1995. He received his law degree from Leiden
University in 1971. Mr. De Waard is a member of the Supervisory Board of BESI
N.V.
Remy Dullieux has been a member of the Supervisory Board since 1993. Mr.
Dullieux was chairman of the Audit Committee from 1996 to 1999. He is a graduate
of the Ecole Polytechnique. Since the beginning of 2004, he has been senior Vice
President for IT business ownership and technical intervention in the fixed line
and distribution Division of France Telecom. Between 1996 and 2004, Mr. Dullieux
served as a France Telecom Executive Manager for the Northern and Eastern areas
of France and then for the Western and Southwestern areas of France. From 1991
to June 1996, Mr. Dullieux served as Group Executive Vice President for
Strategic Procurement and Development for France Telecom. From 1985 to 1988, Mr.
Dullieux served as Regional Manager of Creteil, and announced his resignation
effective at the April 23, 2004 Annual General Meeting of Shareholders.
6
Doug Dunn was appointed to the Supervisory Board in 2001. He is President and
Chief Executive Officer of ASM Lithography Holding N.V., an original equipment
manufacturer in the semiconductor industry. Mr. Dunn currently serves on the
Board of Directors of ARM plc and Sendo plc, both UK companies. Mr. Dunn also
serves on the Board of MEDEA+. He was a member of the Managing Board of Royal
Philips Electronics in 1998. From 1996 to 1998 he was Chairman and Chief
Executive Officer of Philips Consumer Electronics and from 1993 to 1996 Chairman
and Chief Executive Officer of Philips Semiconductors. From 1980 to 1993 he held
various positions at Plessey Semiconductors. Prior to 1980, Mr. Dunn served in
executive positions at Motorola Semiconductors.
Riccardo Gallo was appointed to the Supervisory Board in 1997. He is Associate
Professor of Industrial Economics at the Engineering Faculty of "La Sapienza"
University in Rome. He is also a member of the board of directors of Comitato
Sir (since 1981). 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, which was at the time the largest state-owned industrial
holding. He currently serves as chairman of IPI, the Italian Institute for
Industrial Promotion.
Francis Gavois was appointed to the Supervisory Board in 1998. Mr. Gavois is a
member of the Boards of Directors of Plastic Omnium and FT1CI and of the
Supervisory Board of the Consortium de Realisation (CDR). He also served as the
Chairman of the Supervisory Board of ODDO et Cie until May 2003. From 1984 to
1997, Mr. Gavois held several positions, including Chairman of the Board of
Directors and Chief Executive Officer of Banque Francaise du Commerce Exterieur
(BFCE). Prior to that time Mr. Gavois held positions in the French government.
He is Inspecteur des Finances and a graduate of the Institut d'Etudes Politiques
de Paris and the Ecole Nationale d'Administration.
Alessandro Ovi has been a member of the Supervisory Board since 1994. He
received a doctoral degree in Nuclear Engineering from the Politecnico in Milan
and a masters degree in operations research from Massachusetts Institute of
Technology. He currently is Special Advisor to the President of the European
Community and serves on the boards of Seat S.p.A., Carnegie Mellon University,
N.W. Fund (Capital Group, E.U.P.A.C. (Capital Group) and Corporation Development
Committee of the Massachusetts Institute of Technology. Until April 2000, Mr.
Ovi was the Chief Executive Officer of Tecnitel S.p.A., a subsidiary of Telecom
Italia Group. Prior to joining Tecnitel S.p.A., Mr. Ovi was the Senior Vice
President of International Affairs and Communications at I.R.I.
Robert M. White was appointed to the Supervisory Board in June 1996. Mr. White
is a University Professor and Director of the Data Storage Systems Center at
Carnegie Mellon University and serves as a member of several corporate boards,
including that of Silicon Graphics, Inc. He is a member of the U.S. National
Academy of Engineering and the recipient of the American Physical Society's Pake
Prize. From 1990 to 1993, Mr. White served as Under Secretary of Commerce for
Technology in the United States Government. Prior to 1990, Mr. White served in
several key executive positions at Xerox Corporation, Control Data Corporation
and MCC. He received a doctoral degree in physics from Stanford University and
graduated with a degree in physics from Massachusetts Institute of Technology.
7
ST Supervisory Board Nominees
Gerald Arbola is recommended for appointment to the Supervisory Board at the
2004 AGM to fulfill the remaining term of Jean-Pierre Noblanc, whose passing the
Board has mourned since last summer, through the 2005 AGM. Mr. Arbola is an
Executive Board member of Areva and its Chief Financial Officer. Mr. Arbola is a
graduate of the Institut d'Etudes Politiques de Paris and holds an advanced
degree in economics. Mr. Arbola joined the Cogema group in 1982 as director of
planning and strategy for SGN, then served as chief financial officer at SGN
from 1985 to 1989, becoming executive vice president of SGN in 1988, chief
financial officer of Cogema in 1992. He was appointed as a member of the
executive committee in 1999, and also served as chairman of the board of SGN in
1997 and 1998. Mr. Arbola has served as chief financial officer and member of
the Executive Board of AREVA since July 3, 2001.
Didier Lombard is recommended for appointment to the Supervisory Board at the
2004 AGM to fulfil the remaining term of Remy Dullieux, who has retired, through
the 2005 AGM. Mr. Lombard currently serves as Executive Director and Member of
the Executive Committee of France Telecom, in charge of Technologies, Strategic
partnerships and New Usages. Mr. Lombard began his career in the R&D division of
France Telecom in 1967, where he contributed to the development of several new
products for France Telecom, in relationship with satellite and mobile systems.
From 1988 on, he served as scientific and technological director at the Ministry
of Research and Technology, General Director for industrial strategies at the
Ministry of Economy, Finances and Industry, and Delegate Ambassador for national
investments and president of the French Agency for international investments.
Mr. Lombard is also a member of the board of directors of Thomson. Mr. Lombard
is a graduate of the Ecole Polytechnique and the Ecole Nationale Superieure des
Telecommunications.
8
STMICROELECTRONICS N.V.
ANNUAL REPORT
DECEMBER 31, 2003
STMICROELECTRONICS N.V.
ANNUAL REPORT
DECEMBER 31, 2003
CONTENTS Page
----
DIRECTOR'S REPORT 1
BALANCE SHEET AS AT DECEMBER 31, 2003 2
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2003 3
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2003 4-17
OTHER INFORMATION 18
AUDITORS' REPORT 19
APPENDIX
STMicroelectronics N.V. consolidated financial statements as of December 31,
2003 and the year then ended.
STATUTORY DIRECTOR
/s/ Pasquale Pistorio
SUPERVISORY DIRECTORS
/s/ Bruno Steve
/s/ Remy Dullieux
/s/ Allesandro Ovi
/s/ Robert M. White
/s/ Riccardo Gallo
/s/ Tom de Waard
/s/ Francis Gavois
/s/ Douglas Dunn
STMICROELECTRONICS N.V.
DIRECTOR'S REPORT
DECEMBER 31, 2003
The director's report is available on request at the Company's office.
Amsterdam, March 10, 2004
STMICROELECTRONICS N.V.
BALANCE SHEET AS AT DECEMBER 31, 2003
(before proposed appropriation of income)
2003 2002
USD in millions USD in millions
ASSETS
- ------
FIXED ASSETS
Intangible fixed assets 368 377
Tangible fixed assets 12 10
Financial fixed assets 7 198 6 278
------ ------
Total fixed assets 7 578 6 665
------ ------
NON-CURRENT ASSETS
Long-term intercompany loans 56 32
------ ------
Total non-current assets 56 32
------ ------
CURRENT ASSETS
Inventories 69 32
Trade receivables 299 268
Short-term intercompany loans 312 312
Group companies receivables 601 636
Other receivables 51 58
Securities 0 2
Cash 2 890 2 473
------ ------
Total current assets 4 222 3 781
------ ------
TOTAL ASSETS 11 856 10 478
------ ------
SHAREHOLDERS' EQUITY AND LIABILITIES
- ------------------------------------
SHAREHOLDERS' EQUITY
Issued and paid in capital 1 186 983
Additional paid in capital 1 509 1 468
Retained earnings 4 888 4 558
Treasury stock (348) (348)
Cumulative translation adjustment 584 (96)
Income for the year 205 401
------ ------
Total shareholders' equity 8 024 6 966
------ ------
LONG-TERM LIABILITIES
Long-term loans 2 545 2 381
Deferred revenues 2 4
------ ------
Total long-term liabilities 2 547 2 385
------ ------
SHORT-TERM LIABILITIES
Trade payable 17 14
Taxes 11 17
Group companies payables 1 203 1 006
Accrued liabilities 54 90
------ ------
Total short-term liabilities 1 285 1 127
------ ------
TOTAL SHAREHOLDERS' EQUITY
AND LIABILITIES 11 856 10 478
------ ------
The accompanying notes form an integral part of the accounts.
- 2 -
STMICROELECTRONICS N.V.
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2003
2003 2002
USD in millions USD in millions
Income after taxes 117 111
Income from subsidiaries 88 290
------ ------
NET INCOME 205 401
------ ------
The accompanying notes form an integral part of the accounts.
- 3 -
STMICROELECTRONICS N.V.
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2003
1. GENERAL
A description of STMicroelectronics N.V. ("the Company"), its activities
and group structure are included in the attached consolidated financial
statements, prepared for United States reporting purposes, which also apply
to the company-only financial statements. The Company holds investments in
subsidiaries operating in the semiconductor manufacturing industry.
Additionally, the Company operates through a branch in Switzerland, which
markets a broad range of semiconductor integrated circuits and devices used
in a wide variety of microelectronic applications.
In accordance with Article 402, Title 9, Book 2 of the Dutch Civil Code the
statement of income is presented in abbreviated form.
2. BASIS OF PRESENTATION
Management of the Company is of the opinion that the functional currency of
the Company is the US dollar. Furthermore, the reporting currency of the
subsidiaries is also the US dollar. Accordingly, the financial statements
of the Company are expressed in US dollars.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The annual accounts are prepared in accordance with accounting principles
generally accepted in the Netherlands. The accounting principles as
described in the notes to the consolidated financial statements also apply
to the Company-only financial statements, unless indicated otherwise.
Consolidation
The consolidated financial statements of the Company for the year ended
December 31, 2003, which are attached, have been prepared in accordance
with accounting principles generally accepted in the United States (US
GAAP). In management's opinion, the attached consolidated financial
statements do not differ materially from those which would have been
prepared, had generally accepted Dutch accounting principles been applied,
except for the additional disclosures as presented in Notes 18, 19 and 20.
- 4 -
Intangible assets
Intangible assets include the cost of technologies and licences purchased
from third parties and capitalized internally developed software which are
amortized over a period ranging from three to seven years, as well as
goodwill acquired in business combinations which is amortized over its
estimated useful life, generally three to five years. Intangible assets are
reflected net of any impairment losses. The carrying value of intangibles
is evaluated whenever changes in circumstances indicate the carrying amount
may not be recoverable. In determining the recoverability, the Company
estimates the fair value based on the expected discounted future cash flows
and compares this to the carrying value of the identifiable intangibles. A
impairment charge is recognized for the excess of the carrying value over
the fair value. Significant estimates used in determining expected
undiscounted future cash flows include the applicable sales volume
forecasts, evolution of the average selling price and the market acceptance
of certain new technologies.
Foreign currencies
The share capital of the Company is denominated in Euro and the year-end
balance is translated into US dollars at the year-end exchange rate
(Euro/USD 1.2630). The translation differences are taken to the
non-distributable cumulative translation adjustment account.
Other non-current assets
Other non-current assets consist of underwriting and issuance costs related
to the zero-coupon convertible notes. These costs are amortized
straight-line over approximately 4 years, which represents the first right
of the holder to redeem the convertible notes.
- 5 -
4. INTANGIBLE FIXED ASSETS
Concessions,
licenses and rights
of intellectual
Goodwill ownership Total
-------- --------- -----
USD in millions USD in millions USD in millions
HISTORICAL COST
Balance at January 1, 2003 136 337 473
Additions 22 77 99
Write offs -- (7) (7)
---- ---- ----
Balance at December 31, 2003 158 407 565
---- ---- ----
ACCUMULATED AMORTIZATION
Balance at January 1, 2003 22 74 96
Charge for the year 29 75 104
Write off -- (3) (3)
---- ---- ----
Balance at December 31, 2003 51 146 197
---- ---- ----
NET BOOK VALUE
At December 31, 2003 107 261 368
---- ---- ----
At December 31, 2002 114 263 377
---- ---- ----
- 6 -
5. TANGIBLE FIXED ASSETS
Furniture Computer
and and R&D
(USD in millions) fixtures equipment Other Total
-------- --------- ----- -----
HISTORICAL COST
Balance at January 1, 2003 3 10 1 14
Additions -- 4 -- 4
Disposals (0) (--) (--) (--)
---- ---- ---- ----
Balance at December 31, 2003 3 14 1 18
---- ---- ---- ----
ACCUMULATED DEPRECIATION
Balance at January 1, 2003 1 3 -- 4
Charge for the year -- 2 -- 2
Disposals (--) (--) (--) (--)
---- ---- ---- ----
Balance at December 31, 2003 1 5 -- 6
---- ---- ---- ----
NET BOOK VALUE
At December 31, 2003 2 9 1 12
---- ---- ---- ----
NET BOOK VALUE
At December 31, 2002 2 7 1 10
---- ---- ---- ----
6. FINANCIAL FIXED ASSETS
2003 2002
(USD in millions)
Investments in consolidated group companies 7,155 6 243
Investments 26 14
Debt issuance costs, net 17 21
----- -----
7 198 6 278
----- -----
- 7 -
Investments in consolidated group companies
(USD in millions) 2003 2002
Balance January 1 6 243 4 940
Income from subsidiaries 88 290
Dividends paid (351) (159)
Capital increase 296 561
Translation effect 879 611
----- -----
Balance December 31 7 155 6 243
----- -----
7. INVENTORIES
The balance for inventories contains only finished goods.
8. TRADE RECEIVABLES
Trade receivables mature within one year.
9. SHORT-TERM INTERCOMPANY LOANS
Short-term intercompany loans consist of the following:
---------------------------------------------------------------------------
December 31, December 31,
2003 2002
---------------------------------------------------------------------------
STMicroelectronics SA (France)
Non-interest bearing cash advance 101 -
STMicroelectronics Inc (USA)
Loan due 2004 bearing interest at 3-month
LIBOR plus 1.50% 150 150
Loan due 2004 bearing interest at 3-month
LIBOR plus 1.50% 60 60
Synad Technology
Non-interest bearing cash advance 1 -
STMicroelectronics Srl (Italy)
- 8 -
---------------------------------------------------------------------------
December 31, December 31,
2003 2002
---------------------------------------------------------------------------
Loan due 2003 bearing fixed interest at 4% - 52
STMicroelectronics Ltd. (Malta)
Non-interest bearing cash advance - 50
---------------------------------------------------------------------------
Total short-term intercompany loans 312 312
===========================================================================
- 9 -
10. LONG-TERM INTERCOMPANY LOANS
Long-term intercompany loans consist of the following:
---------------------------------------------------------------------------
December 31, December 31,
2003 2002
---------------------------------------------------------------------------
STMicroelectronics Inc. (Canada)
Loan due 2005 bearing interest at 3-month - 32
LIBOR plus 1.50%
Loan due 2005 bearing interest at 3-month
LIBOR plus 0.375% 51 -
STMicroelectronics Ltd. (Israel)
Loan due 2006 bearing interest at 3-month
LIBOR plus 0.50% 5 -
---------------------------------------------------------------------------
Total long-term intercompany loans 56 32
===========================================================================
11. GROUP COMPANIES
2003 2002
USD in millions USD in millions
Trade receivables 564 436
Other receivables 37 200
------ ------
Total group companies receivables 601 636
------ ------
Trade payables 688 727
Other payables 515 279
------ ------
Total group companies payables 1 203 1 006
------ ------
- 10 -
12. SHAREHOLDERS' EQUITY
Issued and Additional Cumulative Income
paid in paid in Retained Treasury translation for the
capital capital earnings stock adjustment year Total
------- ------- -------- ----- ---------- ---- -----
(USD in millions)
Balance January 1, 2003 983 1 469 4 558 (348) (97) 401 6 966
Appropriation of 2002
net income -- -- 401 -- -- (401)
Issuance of shares 3 20 -- -- -- -- 23
Dividends paid -- -- (71) -- -- -- (71)
Net income 2003 -- -- -- -- -- 205 205
Premium on convertible debt -- 20 -- -- -- -- 20
Translation effect and other
Comprehensive income 200 -- -- -- 681 -- 881
------ ------ ------ ------ ------ ------ ------
Balance December 31, 2003 1 186 1 509 4 888 (348) 584 205 8 024
------ ------ ------ ------ ------ ------ ------
The EURO equivalent of the issued share capital at December 31, 2003
amounts to EURO 938,880,523 (2002: EURO: 936,960,496). For the changes in
issued and paid in capital and additional paid in capital, see the
consolidated financial statements of the Company as attached in the
Appendix.
Treasury stock
As of December 31, 2003, 13,400,000 shares of common stock totalling USD
348,335,000 (2002 : 13,400,000 shares totalling USD 348,335,000) have been
repurchased and reflected at cost as a reduction from shareholders' equity.
The repurchased shares have been allocated to be used in the Company's most
recent employee stock option plan. For details on the Company's stock
option plans, see Note 14 of the consolidated financial statements of the
Company.
13. LONG-TERM LOANS
In September 1999, the Company issued $919 million principal amount at
maturity of zero-coupon subordinated convertible notes (LYONs), due 2009,
for net proceeds of $708 million. The notes are convertible at any time by
the holders at the rate of 26.292 shares of the Company's common stock for
each one thousand dollar face value of the notes. The holders may redeem
their LYONs on September 22, 2004 at a price of $885.91 per one thousand
dollar face value of the LYONs. The Company may choose to pay the
redemption price in cash or in common shares or a combination of both. On
or after September 22, 2002 and prior to September 22, 2004, the Company
may redeem for cash all, but not a portion of the LYONs. On or after
September 22, 2004, the Company may redeem all or a portion of the LYONs
for cash. The notes are subordinated to all existing and future
indebtedness of the Company.
In November 2000, the Company issued $2,146 million principal amount at
maturity of zero-coupon unsubordinated convertible bonds, due 2010, for net
proceeds of $1,458 million. The notes are convertible at any time by the
holders at the rate of 9.32 shares of the Company's common stock for each
one thousand dollar face value of the notes. The holders may redeem their
convertible bonds for cash on January 17, 2005, at a price of $805.15 per
one thousand dollar face value of the convertible notes. On or after
November 16, 2003 and prior to November 16, 2005, the Company may redeem
for cash all, but not a portion of the convertible bonds. On or after
November 16, 2005, the Company may redeem for cash all or
- 11 -
a portion of the convertible bonds. The notes are unsubordinated to all
existing and future indebtedness of the Company.
In August 2003, the Company issued $1,332 million principal amount at
maturity of zero coupon senior convertible bonds due 2013. The bonds were
issued with a negative yield of 0.5% that resulted in a higher principal
amount at issuance of $1,400 million and net proceeds of $1,386 million.
The notes are convertible at any time by the holders at the rate of 29.9144
shares of the Company's common stock for each one thousand dollar face
value of the notes. The holders may redeem their convertible bonds on
August 5, 2006 at a price of $985.09, on August 5, 2008 at $975.28 and on
August 5, 2010 at $965.56 per one thousand dollar face value of the notes.
At any time from August 20, 2006 the Company may redeem for cash at their
decreted value all or a portion of the convertible bonds subject to the
level of the Company's share price.
14. LOANS AND BANKS
The Company has revolving lines of credit agreements with several financial
institutions totalling USD 163,000,000 (2002: USD 80,000,000). At December
31, 2003 no amounts were drawn on these available lines of credit (2002:
nil).
15. GUARANTEES
Guarantees given by the Company to banks of its subsidiaries amounted to
approximately USD 816,700,000 at December 31, 2003 (2002: USD 864,659,000).
- 12 -
16. WAGES, SALARIES AND SOCIAL CHARGES
2003 2002
USD in millions USD in millions
Wages and salaries 34 26
Social charges 3 2
Pension service costs 3 2
Other employee benefits 1 1
----- -----
41 31
----- -----
The average number of persons employed by the Company during the year ended
December 31, 2003 was 223 (2002: 187).
17. RENUMERATION TO BOARD OF DIRECTORS AND SUPERVISORY BOARD MEMBERS
Individual remuneration paid to Directors in 2003:
--------------------------------------------------
USD '000
P. Pistorio as sole Director
Wages and salaries 770
Bonus 539
Stock options granted to Directors in 2003:
-------------------------------------------
P. Pistorio as sole Director 400,000 at a grant price of $19.18
- 13 -
Individual remuneration paid to Supervisory Board Members :
2003 2002
USD'000 USD'000
B. Steve 92 89
J.P. Noblanc 92 89
R. Dullieux 41 46
F. Gavois 66 62
A. Ovi 77 66
R. Gallo 60 52
R. White 84 70
T. de Waard 82 74
D. Dunn 54 38
-- --
648 586
=== ===
Stock options granted to Supervisory Board Members :
-----------------------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------------------------
Number of Grant price Number of Granted price
options granted USD options granted USD
-----------------------------------------------------------------------------------------
B. Steve 12 000 19.18 12 000 31.11
J.P. Noblanc 12 000 19.18 12 000 31.11
R. Dullieux 12 000 19.18 12 000 31.11
F. Gavois 12 000 19.18 12 000 31.11
A. Ovi 12 000 19.18 12 000 31.11
R. Gallo 12 000 19.18 12 000 31.11
R. White 12 000 19.18 12 000 31.11
T. de Waard 12 000 19.18 12 000 31.11
D. Dunn 12 000 19.18 12 000 31.11
-----------------------------------------------------------------------------------------
18. CONSOLIDATED FINANCIAL STATEMENTS OF STMICROELECTRONICS N.V.
The consolidated financial statements of the Company for the year ended
December 31, 2003 are attached as an Appendix to these parent Company
accounts.
19. RECONCILIATION OF SHAREHOLDERS' EQUITY AND NET INCOME ACCORDING TO DUTCH
GAAP VERSUS US GAAP
In 2003, the Company charged USD 48 million (2002 : 28 million) related to
goodwill amortization expense to net income. Under US GAAP, no goodwill
amortization is allowed, but an impairment test is required. For US
purposes, the amortization expense is reversed from income.
- 14 -
Reconciliation of shareholders' equity
2003 2002
USD in millions USD in millions
Shareholders' equity in accordance with Dutch GAAP 8 024 6 966
Reversal of goodwill amortization 76 28
------ ------
Shareholders' equity in accordance with US GAAP 8 100 6 994
------ ------
Reconciliation of net income
2003 2002
USD in millions USD in millions
Net income in accordance with Dutch GAAP 205 401
Reversal of goodwill amortization 48 28
------ ------
Net income in accordance with US GAAP 253 429
------ ------
- 15 -
20. ADDITIONAL DISCLOSURES FOR THE ATTACHED CONSOLIDATED FINANCIAL STATEMENTS
TO COMPLY WITH DUTCH REQUIREMENTS AND GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN THE NETHERLANDS
Intangible fixed assets
Technologies & licenses,
Internally developed software
and purchased software
Goodwill Total
-------- -----
(USD in millions)
HISTORICAL COST
Balance at January 1, 2003 182 510 692
Additions, net 108 66 174
--- --- ---
Balance at December 31, 2003 290 576 866
--- --- ---
ACCUMULATED AMORTIZATION
Balance at January 1, 2003 51 199 250
Charge for the year, net 48 52 100
--- --- ---
Balance at December 31, 2003 99 251 350
--- --- ---
NET BOOK VALUE
At December 31, 2003 191 325 516
--- --- ---
At December 31, 2002 131 311 442
--- --- ---
- 16 -
Tangible fixed assets
Tangible
fixed asset
under
construction
Other and
Land Machinery tangible prepayments
and and fixed on tangible
buildings buildings assets fixed assets Total
--------- --------- ------ ------------ -----
(USD in millions)
HISTORICAL COST
Balance at January 1, 2003 916 10 711 486 455 12 568
Additions, net 161 2 375 77 -184 2 429
------ ------ ------ ------ ------
Balance at December 31, 2003 1 077 13 086 563 271 14 997
------ ------ ------ ------ ------
ACCUMULATED DEPRECIATION
Balance at January 1, 2003 181 5 849 318 - 6 348
Depreciation 39 1 886 104 - 2 029
------ ------ ------ ------ ------
Balance at December 31, 2003 220 7 735 422 - 8 377
------ ------ ------ ------ ------
NET BOOK VALUE
At December 31, 2003 857 5 351 141 271 6 620
------ ------ ------ ------ ------
At December 31, 2002 735 4 862 168 455 6 220
------ ------ ------ ------ ------
Wages, salaries and social charges
2003 2002
(USD in millions)
Wages and salaries 1 471 1 217
Social charges and pensions 453 376
1 924 1 593
The average number of persons employed by the Company and its subsidiaries
for the year ended December 31, 2003 was 44,545 (2002: 42,003).
-----------------------------
- 17 -
STMICROELECTRONICS N.V.
OTHER INFORMATION
DECEMBER 31, 2003
1. AUDITORS' REPORT
The report of the auditors, PricewaterhouseCoopers Accountants N.V., is
presented on page 19.
2. APPROPRIATION OF RESULT - PROVISIONS IN COMPANY'S ARTICLES OF ASSOCIATION
The Managing Directors, with the approval of the Supervisory Board, are
allowed to allocate net income to a reserve fund. The Articles of
Association provide that the net result for the year, after deduction of
the aforementioned allocation to the reserve fund, is subject to the
disposition by the Annual General Meeting of Shareholders.
In the case that a net loss for the year exceeds retained earnings, no
dividend payments are allowed until the loss has been recovered from net
income in future years.
3. SUBSEQUENT EVENTS
There are no matters to report.
-----------------------------
- 18 -
[PRICEWATERHOUSECOOPERS logo and letterhead]
To the Supervisory Board and Shareholders of
STMicroelectronics N.V.
Auditors' report
Introduction
In accordance with your instructions we have audited the financial statements of
STMicroelectronics N.V., Amsterdam, for the year 2003. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
Scope
We conducted our audit in accordance with auditing standards generally accepted
in the Netherlands. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audit provides a reasonable basis for
our opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the
financial position of the company as at December 31, 2003 and of the result for
the year then ended in accordance with accounting principles generally accepted
in the Netherlands and comply with the financial reporting requirements included
in Part 9 of Book 2 of the Netherlands Civil Code.
March 10, 2004
/s/ PricewaterhouseCoopers Accountants N.V.
- -------------------------------------------
PricewaterhouseCoopers is the trade name of amongst others the following
companies: PricewaterhouseCoopers Accountants N.V. (registered with the Trade
Register under number 34180285), PricewaterhouseCoopers Belastingadviseurs N.V.
(registered with the Trade Register under number 34180284),
PricewaterhouseCoopers Corporate Finance & Recovery N.V. (registered with the
Trade Register under number 34180287) and PricewaterhouseCoopers B.V.
(registered with the Trade Register under number 34180289). The services
rendered by these companies are governed by General Terms & Conditions, which
include provisions regarding our liability. These General Terms & Conditions are
filed with the Amsterdam Chamber of Commerce and can also be viewed at
www.pwcglobal.com/nl.
CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Page
----
Financial Statements:
Report of Independent Accountants for Years Ended December 31, 2003, 2002
and 2001 ...............................................................F-2
Consolidated Statements of Income for the Years Ended December 31, 2003,
2002 and 2001 ..........................................................F-3
Consolidated Balance Sheets as at December 31, 2003 and 2002.................F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003,
2002 and 2001...........................................................F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001........................................F-6
Notes to Consolidated Financial Statements ..................................F-7
[PRICEWATERHOUSECOOPERS logo and letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Supervisory Board and Shareholders of
STMicroelectronics N.V.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
STMicroelectronics N.V. and its subsidiaries at December 31, 2003 and December
31, 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
March 10, 2004
/s/ PricewaterhouseCoopers Accountants N.V.
PricewaterhouseCoopers is the trade name of amongst others the following
companies: PricewaterhouseCoopers Accountants N.V. (registered with the Trade
Register under number 34180285), PricewaterhouseCoopers Belastingadviseurs N.V.
(registered with the Trade Register under number 34180284),
PricewaterhouseCoopers Corporate Finance & Recovery N.V. (registered with the
Trade Register under number 34180287) and PricewaterhouseCoopers B.V.
(registered with the Trade Register under number 34180289). The services
rendered by these companies are governed by General Terms & Conditions, which
include provisions regarding our liability. These General Terms & Conditions are
filed with the Amsterdam Chamber of Commerce and can also be viewed at
www.pwcglobal.com/nl.
STMicroelectronics N.V.
Consolidated Statements of Income
(in million of U.S. dollars, except per share data ($))
Year ended
------------------------------------
December 31 December 31 December31
2003 2002 2001
------------------------------------
Net sales 7,234 6,270 6,304
Other revenues 4 48 53
------------------------------------
NET REVENUES 7,238 6,318 6,357
Cost of sales (4,672) (4,020) (4,047)
------------------------------------
GROSS PROFIT 2,566 2,298 2,310
Selling, general and administrative (785) (648) (641)
Research and development (1,238) (1,022) (978)
Other income and expenses, net (4) 7 (6)
Impairment, restructuring charges and other related closure costs (205) (34) (346)
------------------------------------
OPERATING INCOME 334 601 339
Interest expense, net (52) (68) (13)
Equity in loss of joint venture (1) (11) (5)
Loss on extinguishment of convertible debt (39) 0 0
------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 242 522 321
Income tax (expense) benefit 14 (89) (61)
INCOME BEFORE MINORITY INTERESTS 256 433 260
Minority interests (3) (4) (3)
------------------------------------
NET INCOME 253 429 257
====================================
EARNINGS PER SHARE (BASIC) 0.29 0.48 0.29
EARNINGS PER SHARE (DILUTED) 0.27 0.48 0.29
The accompanying notes are an integral part of these Consolidated Financial
Statements
F-3
STMicroelectronics N.V.
CONSOLIDATED BALANCE SHEETS
As at December 31, December 31,
In million of U.S. dollars 2003 2002
------------ ------------
- ------------------------------------------------------------------------------------------
ASSETS
- ------
Current assets:
Cash and cash equivalents 2,998 2,562
Marketable securities 0 2
Trade accounts receivable 1,272 1,095
Inventories 1,129 930
Deferred tax assets 106 35
Other receivables and assets 616 567
--------------------------
Total current assets 6,121 5,191
Goodwill 267 159
Other intangible assets, net 325 311
Property, plant and equipment, net 6,620 6,220
Long-term deferred tax assets 45 28
Investments and other non-current assets 99 95
--------------------------
7,356 6,813
--------------------------
Total assets 13,477 12,004
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Bank overdrafts 45 19
Current portion of long-term debt 106 146
Trade accounts payable 1,044 912
Other payables and accrued liabilities 693 606
Deferred tax liabilities 10 6
Accrued income tax 179 184
--------------------------
Total current liabilities 2,077 1,873
Long-term debt 2,944 2,797
Reserves for pension and termination indemnities 236 173
Long-term deferred tax liabilities 37 86
Other non-current liabilities 38 39
--------------------------
3,255 3,095
Total liabilities 5,332 4,968
Commitment and contingencies
Minority interests 45 42
Common Stock: 1,146 1,144
.. preferred stock:540,000,000 shares authorized, not issued
.. common stock:Euro 1.04 nominal value, 1,200,000,000
shares authorized, 902,769,734 shares issued, 889,369,734 shares
outstanding
Capital surplus 1,905 1,864
Accumulated result 4,774 4,592
Accumulated other comprehensive income (loss) 623 (258)
Treasury stock (348) (348)
--------------------------
Shareholders' equity 8,100 6,994
--------------------------
Total liabilities and shareholders' equity 13,477 12,004
==========================
F-4
The accompanying notes are an integral part of these Consolidated Financial
Statements
STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
----------------------------------------
December 31, December 31, December 31,
In million of U.S. dollars 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 253 429 257
Items to reconcile net income and cash flow from operating activities:
Depreciation and amortization 1,608 1,382 1,320
Amortization of discount on convertible debt 68 87 79
Loss on extinguishment of convertible debt 39 0 0
Gain on the sale of marketable securites (4) (1) (27)
Other non-cash items (53) 27 13
Minority interest in net income of subsidiaries 3 4 3
Deferred income tax (131) 14 (83)
Equity in loss of joint venture 1 11 5
impairment, restructuring charges and other related closure costs,
net of cash payments 197 11 345
Changes in assets and liabilities:
Trade receivables (109) (129) 545
Inventories (75) (71) 94
Trade payables (8) (21) (445)
Other assets and liabilities, net 131 (30) (49)
----------------------------------------
Net cash from operating activities 1,920 1,713 2,057
Cash flows from investing activities:
Payment for purchases of tangible assets (1,221) (995) (1,700)
Proceeds from the sale of marketable securities 4 1 31
Investment in intangible and financial assets (34) (69) (132)
Payment for acquisitions, net of cash received (188) (307) 0
----------------------------------------
Net cash used in investing activities (1,439) (1,370) (1,801)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,398 65 557
Repayment of long-term debt (1,432) (158) (433)
Increase (decrease) in short-term facilities 25 (16) 4
Capital increase 22 29 43
Payments to acquire treasury stock 0 (115) (233)
Dividends paid (71) (36) (36)
Other financing activities (1) (1) 0
----------------------------------------
Net cash used in financing activities (59) (232) (98)
Effect of changes in exchange rates 14 12 (15)
----------------------------------------
Net cash increase 436 123 143
========================================
Cash and cash equivalents at beginning of the period 2,562 2,439 2,296
Cash and cash equivalents at end of the period 2,998 2,562 2,439
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Supplemental cash information:
Interest paid 19 22 32
Income tax paid 102 95 264
- --------------------------------------------------------------------------------------------------------------------
F-5
The accompanying notes are an integral part of these Consolidated Financial
Statements
STMicroelectronics N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
In million of U.S. dollars, except per share amounts Accumulated
Other
Common Capital Treasury Accumulated Comprehensive Shareholders'
Stock Surplus Stock Result (Loss) income Equity
----------------------------------------------------------------------
Balance as of December 31, 2000 1,134 1,690 3,977 (676) 6,125
----------------------------------------------------------------------
Capital increase 8 146 154
Repurchase of common stock (233) (233)
Comprehensive income:
Net Income 257 257
Other comprehensive loss, net of tax (193) (193)
----------------
Comprehensive income 64
Dividends, $0.04 per share (35) (35)
----------------------------------------------------------------------
Balance as of December 31, 2001 1,142 1,836 (233) 4,199 (869) 6,075
----------------------------------------------------------------------
Capital increase 2 28 30
Repurchase of common stock (115) (115)
Comprehensive income:
Net Income 429 429
Other comprehensive income, net of tax 611 611
----------------
Comprehensive income 1,040
Dividends, $0.04 per share (36) (36)
----------------------------------------------------------------------
Balance as of December 31, 2002 1,144 1,864 (348) 4,592 (258) 6,994
----------------------------------------------------------------------
Capital increase 2 41 43
Comprehensive income:
Net Income 253 253
Other comprehensive income, net of tax 881 881
----------------
Comprehensive income 1,134
Dividends, $0.08 per share (71) (71)
----------------------------------------------------------------------
Balance as of December 31, 2003 1,146 1,905 (348) 4,774 623 8,100
----------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Financial
Statements
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
1 - THE COMPANY
STMicroelectronics N.V. (the "Company") is registered in The Netherlands with
its statutory domicile in Amsterdam. The Company was formed in 1987 with the
name of SGS-THOMSON Microelectronics by the combination of the semiconductor
business of SGS Microclettronica (then owned by Societa Finanziaria Telefonica
(S.T.E.T.), an Italian corporation) and the non-military business of Thomson
Semiconducteurs (then owned by Thomson-CSF, a French corporation) whereby each
company contributed their respective semiconductor businesses in exchange for a
50% interest in the Company.
The Company is a global independent semiconductor company that designs,
develops, manufactures and markets a broad range of semiconductor integrated
circuits ("ICs") and discrete devices. The Company offers a diversified product
portfolio and develops products for a wide range of market applications,
including automotive products, computer peripherals, telecommunications systems,
consumer products, industrial automation and control systems. Within its
diversified portfolio, the Company has focused on developing products that
leverage its technological strengths in creating customized, system-level
solutions with high-growth digital and mixed-signal content.
The Company's products are manufactured and designed using a broad range of
manufacturing processes and proprietary design methods. The Company uses all of
the prevalent function-oriented process technologies, including complementary
metal oxide silicon ("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 diffused
metal oxide silicon (DMOS)) for intelligent power applications and embedded
memory technologies. This broad technologies portfolio, a cornerstone of its
strategy for many years, enables the Company to meet the increasing demand for
"system-on-a-chip" solutions. Complementing this depth and diversity of process
and design technology is its broad intellectual property portfolio that the
Company uses to enter into important patent cross licensing agreements with
other major semiconductors companies.
The Company's major shareholders have established holding companies and a
shareholder agreement to enable them to manage their interests in
STMicroelectronics N.V.
At December 31, 2003, 34.5% of issued shares of the Company (December 31, 2002:
35.6%) were owned by STMicroelectronics Holding II B.V., 64.0% were owned by the
public (December 31, 2002: 62.9%), and 1.5% constituted treasury shares
(December 31, 2002: 1.5%).
At December 31, 2003 and 2002, STMicroelectronics Holding II B.V. was 100% owned
by STMicroelectronics Holding N.V.
At December 31, 2003, STMicroelectronics Holding N.V. was owned as follows:
- - 50% by FT1CI, a French holding company, whose shareholders were Areva
(63.8%) and France Telecom (36.2%)
- - 50% by Finmeccanica, an Italian holding company, whose shareholders were the
Italian Ministry of Economics (32.3%) and the public (67.7%).
At December 31, 2002, STMicroelectronics Holding N.V. was owned as follows:
- - 49% by FT1CI, a French holding company, whose shareholders were Areva (63.8%)
and France Telecom (36.2%)
- - 51% by Finmeccanica, an Italian holding company, whose shareholders were the
Italian Ministry of Economics (32.3%) and the public (67.7%).
F-7
2 - ACCOUNTING POLICIES
The accounting policies of the Company conform with accounting principles
generally accepted in the United States of America ("U.S. GAAP" ). All balances
and values in the current and prior periods are in millions of dollars, except
share and per-share amounts.
2.1 - Principles of consolidation
The consolidated financial statements of the Company have been prepared in
conformity with U.S. GAAP. The Company's consolidated financial statements
include the assets, liabilities, results of operations and cash flows of its
majority-owned subsidiaries. The ownership of other interest holders is
reflected as minority interests. Intercompany balances and transactions have
been eliminated in consolidation.
2.2 - Use of estimates
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of net revenue and expenses during the reporting period. The primary
areas that require significant estimates and judgments by management include,
but are not limited to, sales returns and allowances, allowances for doubtful
accounts, inventory reserves, warranty costs, evaluation of the impact of
litigation and claims, valuation of acquired intangibles, goodwill, investments
and tangible assets as well as the impairment of their related carrying values,
restructuring charges, other non-recurring special charges, and assumptions used
in calculating pension obligations, deferred income tax assets and liabilities
and valuation allowances and provisions for specifically identified income tax
exposures. The Company bases the estimates and assumptions on historical
experience and on various other factors such as market trends and business plans
that it believes to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities. The actual results experienced by the Company could differ
materially and adversely from management's estimates. To the extent there are
material differences between the estimates and the actual results, future
results of operations could be significantly affected.
2.3 - Foreign currency
The U.S. dollar is the reporting currency for the Company. This is consistent
with the worldwide semiconductor industry's use of the U.S. dollar as a currency
of reference for actual pricing in the market. Furthermore, there is no single
currency in which the majority of the Company's transactions are denominated,
and revenues from external sales in U.S. dollars exceed revenues in any other
currency. However, labor costs are concentrated primarily in the countries that
have adopted the Euro currency.
The functional currency of each subsidiary throughout the group is generally the
local currency. For consolidation purposes, assets and liabilities of these
subsidiaries are translated at current rates of exchange at the balance sheet
date. Income and expense items are translated at the monthly average exchange
rate for the period. The effects of translating the financial position and
results of operations from local functional currencies are included in "other
comprehensive income (loss)".
Assets, liabilities, revenue, expenses, gains or losses arising from foreign
currency transactions are recorded in the functional currency of the recording
entity at the exchange rate in effect at the date of the transaction. At each
balance sheet date, recorded balances denominated in a currency other than the
recording entity's functional currency are translated at the exchange rate
prevailing at that date. The related exchange gains and losses are recorded in
the consolidated statements of income.
The Company conducts its business on a global basis in various major
international currencies. As a result, the Company is exposed to adverse
movements in foreign currency exchange rates. The Company enters into foreign
currency exchange forward contracts and currency options to reduce its exposure
to changes in exchange rates and the associated risk arising from the
denomination of certain assets and liabilities in foreign currencies at the
Company's subsidiaries. The Company's only derivative instruments include
foreign currency exchange forward
F-8
contracts and currency options that do not qualify as hedging instruments under
Statement of Financial Accounting Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities. These instruments are marked-to-market at
each period-end with the associated changes in fair value recognized in "other
income and expenses, net" in the consolidated statements of income.
2.4 - Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2.5 - Revenue Recognition
Net sales
The policy of the Company is to recognize revenue from sales of products to its
customers when the rights and risks of ownership of the goods are passed to
customers, which usually occurs at the time of shipment. A portion of the
Company's sales are made to distributors who participate in certain programs
common in the semiconductor industry whereby the distributors are allowed to
return merchandise or receive potential price reductions on existing stock
on-hand under certain circumstances. Provisions are made at the time of sale for
estimated product returns and price protection, which may occur under the
contractual terms agreed with the distributors. These provisions are based on
the latest historical data and expected evolution of market prices.
The Company's customers return products from time to time for technical reasons.
In some cases, these returned products are reworked and shipped back to
customers. The Company analyzes the status of product returns and accrues for
the historical trends of returns.
Other revenue
Other revenue primarily consists of fees invoiced to partners under a
co-development contract and is recognized as the related costs are incurred. The
related costs under such contracts are recorded in "cost of sales". Other
revenue also includes certain contract indemnity payments and patent royalty
income, which arc recognized ratably over the term of the agreements.
Fundings
Fundings received by the Company are mainly from governmental agencies. Fundings
for research and development costs are recognized as the related costs are
incurred, after the finalization and signing of the fundings' contract with the
relevant government department or agency and are included in "other income and
expenses, net". Fundings for capital expenditures are deducted from the cost of
the related fixed assets and reduce depreciation over the assets' remaining
estimated useful lives.
2.6 - Advertising costs
Advertising costs are expensed as incurred and are recorded as selling, general
and administrative expenses.
Advertising expenses for 2003, 2002 and 2001 were $9 million, $11 million and
$21 million, respectively.
2.7 - Research and development
Research and development costs are charged to expense as incurred. Research and
development expenses include costs incurred by the Company, the Company's share
of costs incurred by other research and development interest groups, and costs
associated with co-development contracts. Research and development expenses do
not include marketing design center costs, which are accounted for as selling
expenses and process engineering, pre-production or process transfer costs which
are recorded as cost of sales.
F-9
2.8 - Start-up costs
Start-up costs are manufacturing costs incurred in the Company's new
manufacturing facilities, before reaching a minimum level of production and are
included in "other income and expenses, net" in the consolidated statements of
income.
2.9 - Income taxes
The provision for current taxes represents the income taxes expected to be
payable related to the current year income or to benefit in the case of a
current-year loss in each individual tax jurisdiction. Provisions for specific
tax exposures are also estimated and recorded when an additional tax payment is
determined probable. Deferred tax assets and liabilities are recorded for all
temporary differences arising between the tax and book bases of assets and
liabilities and for the benefits of tax credits and operating loss
carry-forwards. Deferred tax assets and liabilities are measured using the
enacted tax rates at which they are expected to be realized or settled. A
valuation allowance is provided where necessary to reduce deferred tax assets to
the amount for which management considers the possibility of recovery to be more
likely than not.
2.10 - Earnings per share
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share are computed by dividing net income (adding-back interest expense, net
of tax effects, related to convertible debt if determined to be dilutive) by the
weighted average number of common shares and common share equivalents
outstanding during the period. The weighted average shares used to compute
diluted earnings per share include the incremental shares of common stock
relating to outstanding options and convertible debt to the extent such
incremental shares are dilutive.
2.11 - Cash and cash equivalents
Highly liquid investments with insignificant interest rate risk purchased with
an original maturity of ninety days or less are considered to be cash and cash
equivalents.
2.12 - Marketable securities
Management determines the appropriate classification of investments in debt and
equity securities at the time of purchase and reassesses the classification at
each reporting date. For those marketable securities with a readily determinable
fair value and that are classified as available-for-sale, the securities are
reported at fair value with changes in fair value recognized as a separate
component of "other comprehensive income (loss)" in the statements of
shareholders' equity. Other than temporary losses are recorded in net income
based on the Company's assessment of any significant, sustained reductions in
the investment's market value and of the market indicators affecting the
securities. Gains and losses on securities sold are determined based on the
specific identification method and are recorded as "other income and expenses,
net".
2.13 - Trade accounts receivable
Trade accounts receivable are stated net of allowances for doubtful accounts.
The Company maintains an allowance for doubtful accounts for potential estimated
losses resulting from its customers' inability to stake required payments. The
Company bases its estimates on historical collection trends and records a
provision accordingly. In addition, the Company is required to evaluate its
customers' credit ratings from time to time and record an additional provision
for any specific account the Company estimates as doubtful.
F-10
2.14 - Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is
computed by adjusting standard cost to approximate actual manufacturing costs on
a quarterly basis; the cost is therefore dependent on the Company's
manufacturing performance. In the case of underutilitation of manufacturing
facilities, the costs associated with the excess capacity are not included in
the valuation of inventories but charged directly to cost of sales.
Provisions for obsolescence are estimated for uncommitted inventories based on
the previous quarter sales, orders' backlog and production plans.
2.15 - Intangible assets subject to amortization
Intangible assets subject to amortization include the cost of technologies and
licenses purchased from third parties, internally developed software which is
capitalized and purchased software. Intangible assets subject to amortization
are reflected net of any impairment losses. The carrying value of intangible
assets subject to amortization is evaluated whenever changes in circumstances
indicate that the carrying amount may not be recoverable. In determining
recoverability, the Company estimates the fair value based on the projected
discounted future cash flows associated with the intangible assets and compares
this to their carrying value. An impairment loss is recognized for the excess of
the carrying amount over the fair value. Amortization is computed using the
straight-line method over the following estimated useful lives:
------------------------------------------
Technologies & licenses 3-7 years
Internally developed software 3-5 years
Software 3 years
------------------------------------------
The Company evaluates the remaining useful life of an intangible asset each
reporting period to determine whether events and circumstances warrant a
revision to the remaining period of amortization.
The capitalization of costs for internally developed software begins when
preliminary project stage is completed and when the Company, implicitly or
explicitly, authorizes and commits to funding a computer software project. It
must be probable that the project will be completed and will be used to perform
the function intended.
2.16-Goodwill
Since January 1, 2002, goodwill acquired in business combinations is no longer
amortized and is subject to an impairment test to be performed on an annual
basis or more frequently if indicators of impairment exist, in order to assess
the recoverability of its carrying value. Goodwill subject to potential
impairment is tested in each reporting unit. The Company defines its reporting
units at an individual business level, which is one level below the four
semiconductor product groups described in Note 29. An impairment charge is
recognized when the fair value of each reporting unit for which goodwill is
allocated is lower than the total carrying amount of the reporting unit
including its allocated goodwill. The fair value is based on the Company's
estimate of the reporting unit's expected discounted future cash flows.
Significant estimates used in determining future cash flows include the
applicable reporting unit's volume forecasts, average selling price evolution
and the market acceptance of certain new technologies.
2.17 - Property, plant and equipment
Property, plant and equipment are stated at cost, net of government fundings and
any impairment losses. Major additions and improvements are capitalized, minor
replacements and repairs are charged to current operations.
F-11
Depreciation is computed using the straight-line method over the following
estimated useful lives:
--------------------------------------------------
Buildings 33 years
Facilities & leasehold improvements 10 years
Machinery and equipment 6 years
Computer and R&D equipment 3-6 years
Other 2-5 years
--------------------------------------------------
The Company evaluates the carrying value of its property, plant and equipment
whenever changes in circumstances indicate their carrying amount may not be
recoverable. In determining recoverability, the Company estimates the expected
undiscounted future cash flows associated with the tangible asset or group of
assets and compares this to their carrying value. An impairment charge is
recognized when the carrying value of the tangible asset or group of tangible
assets exceeds the fair value, which is normally estimated by the Company based
on the expected discounted cash flows or independent market appraisals.
Significant estimates used in determining the expected future cash flows include
the utilization of the Company's fabrication facilities and the ability to
upgrade such facilities, change in the selling price and the adoption of new
technologies.
Assets subject to leasing agreements and classified as capital lease are
included in property, plant and equipment and depreciated over the shorter of
the estimated useful life or the lease term.
When property, plant and equipment are retired or otherwise disposed of, the net
book value of the assets is removed from the Company's books and the net gain or
loss is included in "other income and expenses, net" in the consolidated
statements of income.
2.18 - Investments
Investments are accounted for using the equity method of accounting if the
investment gives the Company the ability to exercise significant influence over
an investee. Significant influence is generally deemed to exist if the Company
has a 20% to 50% ownership interest in the voting stock of the investee and
representation in the Board of Directors.
Investments without readily determinable fair values and for which the Company
does not have the ability to exercise significant influence are accounted for
under the cost method. Under the cost method of accounting, investments are
carried at historical cost and are adjusted only for declines in fair value. For
investments in public companies that have readily determinable fair values and
for which the Company does not exercise significant influence, the Company
classifies these investments as available-for-sale and, accordingly, recognizes
changes in their fair values as a separate component of "other comprehensive
income (loss)" in the consolidated statements of shareholders' equity.
Other-than-temporary losses are recorded in net income and are based on the
Company's assessment of any significant, sustained reductions in the
investment's market value and of the market indicators affecting the securities.
Gains and losses on investments sold are determined on the specific
identification method and are recorded as "other income or expenses, net" in the
consolidated statements of income.
2.19- Pension and termination indemnities
The Company sponsors various retirement plans for its employees; such plans
include both defined benefit and defined contribution plans. These plans conform
to local regulations and practices of the countries in which the Company
operates. Significant estimates are used in determining the assumptions
incorporated in the calculation of the pension obligations, which is supported
by input from independent actuaries.
F-12
2.20-Convertible debt
Zero-coupon convertible bonds are recorded at the principal amount on maturity
in long-term debt and are presented net of the debt discount on issuance. This
discount is amortized over the term of the debt as interest expense using the
interest rate method.
Zero-coupon convertible bonds issued with a negative yield are initially
recorded at their accreted value as of the first redemption right of the holder.
The negative yield is recorded as capital surplus and represents the difference
between the principal amount at issuance and the lower accreted value at the
first redemption right of the holder.
Debt issuance costs are capitalized as long-term investments and are amortized
in "interest expense, net" until the first redemption right of the holder.
2.21 - Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity of a business
during a period except those resulting from investment by shareholders and
distributions to shareholders. In the accompanying financial statements, "other
comprehensive income (loss)" consists of foreign currency translation
adjustments, the unrealized gain or loss on marketable securities classified as
available-for-sale and the change in the excess of the minimum pension liability
over the unrecognized prior service cost of certain pension plans.
2.22 - Fair value of stock-based compensation
At December 31, 2003, the Company has six stock-based employee and Supervisory
Board compensation plans which are described in detail in Note 14. The Company
applies the intrinsic-value-based method prescribed by Accounting Principles
Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25), and
related Interpretations, in accounting for stock-based awards to employees. No
stock-based employee compensation cost is reflected in net income, as all
options under those plans were granted at an exercise price equal to the market
value of the underlying common stock on the date of grant. Pro forma information
regarding net income and earnings per share ("EPS") is required by Statement of
Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation
(FAS 123) as if the Company had accounted for its stock-based awards to
employees under the fair value method prescribed by FAS 123. The fair value of
the Company's stock-based awards to employees was estimated using a
Black-Scholes option-pricing model.
The fair value was estimated using the following weighted-average assumptions:
- --------------------------------------------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
- --------------------------------------------------------------------------------
Expected life (years) 6 5 5
Volatility 59.6% 60.1% 57.4%
Risk-free interest rate 2.7% 4.1% 4.5%
Dividend yield 0.35% 0.20% 0.10%
F-13
The weighted average fair value of options granted during 2003 was $10.66
($16.80 in 2002 and $20.48 in 2001). The following table illustrates the effect
on net income and earnings per share if the Company had applied the fair value
recognition provisions of FAS 123 to employee stock-based compensation. Pro
forma net income and EPS for 2002 and 2001 has been revised to correct for the
reversal of compensation expense associated with forfeited stock option grants.
As a result, pro forma net income has increased by $37 million and $16 million
for 2002 and 2001, respectively.
- ------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Net income, as reported 253 429 257
Deduct: Total stock-based employee compensation expense
determined under FAS 123, net of related tax effects (186) (163) (119)
Net income, pro forma 67 266 138
Earnings per share:
Basic, as reported 0.29 0.48 0.29
Basic, pro forma 0.08 0.30 0.15
Diluted, as reported 0.27 0.48 0.29
Diluted, pro forma 0.07 0.30 0.15
2.23 - New accounting pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (FAS 141), which
is applicable for all business combinations initiated after June 30, 2001. This
statement eliminates the use of the pooling-of-interests method and provides
specific criteria for the recognition of intangible assets apart from goodwill.
Also in July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(FAS 142), which is effective for fiscal years beginning after December 15,
2001. FAS 142 primarily addresses the accounting that must be applied to
goodwill and intangible assets subsequent to initial recognition. In particular,
the statement requires that goodwill and indefinite lived intangible assets no
longer be amortized but be subject to annual impairment tests to determine the
appropriate carrying value. Had FAS 142 not been adopted, the Company would have
recorded an additional amortization expense of $48 million in 2003 and $28
million in 2002. FAS 142 also requires the reclassification of any intangible
assets which do not meet the FAS 141 definition of an identifiable intangible
asset. The statement requires all unidentifiable intangible assets to be
reclassified to goodwill. The Company adopted the standards required by this
statement in the first quarter of 2002. In connection with the adoption of FAS
142, the Company reclassified $3 million of its intangible assets for acquired
workforce to goodwill.
In the first quarter of 2002, the Company performed the transitional impairment
review required by FAS 142 and determined that no adjustment for impairment loss
was required as a result of adopting the standard. The following table presents
the impact of FAS 142 on net income and EPS had the standard been in effect for
the year ended December 31:
F-14
- -------------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
- -------------------------------------------------------------------------------------------------------
Net income as reported 253 429 257
Adjustments:
Amortization of goodwill 26
Amortization of acquired workforce
previously classified as intangible assets 2
Income tax effects (1)
Net income as adjusted 253 429 284
Basic EPS as reported 0.29 0.48 0.29
Basic EPS as adjusted 0.29 0.48 0.32
Diluted EPS as reported 0.27 0.48 0.29
Diluted EPS as adjusted 0.27 0.48 0.32
- -------------------------------------------------------------------------------------------------------
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees Including Indirect Guarantees of Indebtedness of Others, an
Interpretation of FASB Statement No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34 (FIN 45). FIN 45 clarifies the requirements of FASB
Statement No.5, Accounting for Contingencies, relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of guarantees.
FIN 45 clarifies that a guarantor is required to recognize a liability for the
fair value of the obligation under taken at the inception of the guarantee. The
disclosure requirements of this interpretation are effective for interim or
annual financial statement periods ending after December 15, 2002. The initial
measurement provisions are effective prospectively for all guarantees subject to
this interpretation that are issued or modified after December 31, 2002. The
Company adopted FIN 45 in the first quarter of 2003, and management determined
that FIN 45 has had no material effect on the Company's financial position, or
results of operations at December 31, 2003.
In 2003, the Company adopted Financial Accounting Standards Board Interpretation
No. 46 Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51 (revised 2003) and the related FASB Staff Positions (collectively "FIN 46")
and consolidates any Variable Interest Entities (VIEs) for which the company is
considered to be the primary beneficiary. The Company identifies VIEs as
entities where the Company's financial risk or reward is not consistent with the
equity ownership. An entity is considered a VIE if any of the following factors
are present: the equity investment in the entity is insufficient to finance the
operations of that entity without additional subordinated financial support from
other parties; the equity investors of the entity lack decision-making rights;
an equity investor holds voting rights that are disproportionately low in
relation to the actual economics of the investor's relationship with the entity
and substantially all of the entity's activities involve or are conducted on
behalf of that investor; other parties protect the equity investors from
expected losses; or parties, other than the equity holders, hold the right to
receive the entity's expected residual returns, or the equity investors' rights
to expect residual returns is capped. The primary beneficiary of a VIE is the
party that absorbs the majority of the entity's expected losses, receives the
majority of its expected residual returns, or both as a result of holding
variable interests. Assets, liabilities, and the non-controlling interest of
newly consolidated VIEs generally are initially measured at their fair values
with any resulting loss reported immediately as an extraordinary item or
resulting gain as a reduction of the amounts assigned to assets in the same
manner as if the consolidation resulted from a business combination.
F-15
The Company has identified the following VIES under the existing contracts and
disclosed the arrangements in the financial statements at December 31, 2003:
o a joint venture established with Dai Nippon for the development and
production of photomask in which the Company has a 19% stake, and
o the joint venture in SuperH, Inc. with Hitachi, Ltd., where the
Company owns 44%, and has commitments for future capital increases.
The Company has determined that it is not the primary beneficiary of the VIEs
and continues to account for the investments under the cost and equity method,
respectively.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Instruments with
Characteristics of Both Liabilities and Equity ("FAS 150"). FAS 150 specifies
that "freestanding" financial instruments within its scope embody obligations of
the issuer and therefore, the issuer must classify such instruments as
liabilities. FAS 150 is effective for all instruments entered into or modified
after May 31, 2003. For all other instruments, FAS 150 is effective for the
first interim period beginning after June 15, 2003. The Company adopted FAS 150
in the second quarter of 2003 and determined that it has no material effect on
its financial position or results of operations.
In 2003, the Emerging Issues Task Force issued EITF Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables (EITF 00-21), to address
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. In some arrangements, the
different revenue-generating activities (deliverables) are sufficiently
separable, and there exists sufficient evidence of their fair values to
separately account for some or all of the deliverables. EITF 00-21 applies to
all contractual arrangements (whether written, oral, or implied) entered into
after June 15, 2003 under which a vendor will perform multiple revenue
generating activities. In addition, EITF 00-21 should only be applied in those
situations where higher-level generally accepted accounting principles do not
exist that specify the appropriate accounting. The Company adopted EITF 00-21 in
the third quarter of 2003, and management determined that EITF 00-21 has had no
material effect on the Company's financial position or results of operations at
December 31, 2003.
In December, 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 (revised 2003), Employers' Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88, and 106, and a revision of FASB Statement No. 132 (FAS
132 revised). This Statement revises employers' disclosures about pension plans
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by FASB Statements No. 87, Employers'
Accounting for Pensions, No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
FAS 132 revised requires additional disclosures about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and
other postretirement benefit plans. The statement is generally effective for
2003 calendar year-end financial statements, with a delayed effective date for
certain disclosures for foreign plans. The Company adopted FAS 132 revised in
the fourth quarter of 2003 and included all immediately required disclosures at
December 31, 2003. The Company is currently evaluating the required disclosures
for its foreign plans and will include the additional information in its interim
and annual financial statements in 2004.
3 - CONSOLIDATED ENTITIES
The consolidated financial statements include the accounts of STMicroelectronics
N.V. and the following entities as of December 31, 2003:
F-16
Percentage
Ownership
Legal Seat Name (Direct or Indirect)
- ----------------------------------------------------------------------------------------------------------
Australia - Sydney STMicroelectronics PTY Ltd 100
Belgium - Zaventem STMicroelectronics Belgium N.V. 100
Belgium - Zaventem Proton World International N.V. 100
Brazil - Sao Paulo STMicroelectronics Ltda 100
Canada - Ottawa STMicroelectronics (Canada), Inc. 100
China - Shenzhen Shenzhen STS Microelectronics Co. Ltd 60
China - Shanghai STMicroelectronics (Shanghai)Co. Ltd 100
China - Bejing STMicroelectronics (Beijing) R&D Co. Ltd 100
Czech Republic - Prague STMicroelectronics Design and Application s.r.o. 100
Finland - Lohja STMicroelectronics OY 100
France - Meudon la Foret STMicroelectronics (Crolles 2) S.A.S. 100
France - Saint Genis Pouilly STMicroelectronics S.A. 100
Prance - Rousset STMicroelectronics (Rousset) S.A.S. 100
France - Palaiseau Waferscale Integration Sarl 100
Germany - Grasbrunn STMicroelectronics GmbH 100
Germany - Grasbrunn STMicroelectronics Design and Application GmbH 100
Hong Kong - Kong Kong STMicroelectronics LTD 100
India - Noida STMicroelectronics Pvt Ltd 100
Israel - Netanya STMicroelectronics Ltd 100
Italy - Vimercate Accent S.r.1. 51
Italy - Catania CO.RI.M.ME. 100
Italy - Aosta DORA S.p.a. 100
Italy - Agrate Brianza ST Incard S.r.l. 100
Italy - Naples STMicroelectronics Services S.r.l. 100
Italy - Agrate Brianza STMicroelectronics S.r.l. 100
Japan - Tokyo STMicroelectronics KK 100
Malaysia-Kuala Lumpur STMicroelectronics Marketing SDN BHD 100
Malaysia - Muar STMicroelectronics SDN BHD 100
Malta - Kirkop STMicroelectronics Ltd 100
Morocco - Rabat Electronic Holding S.A. 100
Morocco - Casablanca STMicroelectronics S.A. 100
Singapore - Ang Mo Kio STMicroelectronics ASIA PACIFIC Pte Ltd 100
Singapore - Ang Mo Kio STMicroelectronics Pte Ltd 100
Spain - Madrid STMicroelectronics S.A. 100
Sweden - Kista STMicroelectronics A.B. 100
Switzerland - Geneva STMicroelectronics S.A. 100
United Kingdom - Marlow STMicroelectronics Limited 100
United Kingdom - Marlow STMicroelectronics (Research & Development) Limited 100
United Kingdom - Bristol Inmos Limited 100
United Kingdom - Reading Synad Technologies Limited 100
United States - Carrollton STMicroelectronics Inc. 100
United States - Carrollton STMicroelectronics Leasing Co. Inc. 100
United States - Dover Proton World Americas Inc. 100
United States - Irvine Synad Technologies Inc. 100
United States - Wilmington STMicroelectronics (North America) Holding, Inc. 100
United States - Wilsonville The Portland Group, Incorporated 100
- ----------------------------------------------------------------------------------------------------------
F-17
4 - BUSINESS COMBINATIONS
Alcatel Microelectronics
On June 26, 2002 the Company acquired Alcatel Microelectronics, part of the
Alcatel Group, which was manufacturing and marketing semiconductor integrated
circuits. Concurrently, the Company sold the acquired mixed-signal business
activities of Alcatel Microelectronics and also its fabrication facility to AMI
Semiconductors, Inc. The consideration for the purchase of Alcatel
Microelectronics net of proceeds totaling $61 million from the resale to AMI and
purchase price adjustments recorded in the following quarters was $306 million,
which was fully paid as of December 31, 2002. The acquisition was conducted to
further develop the Company's strategic relationships with the Alcatel Group.
Purchase price allocations resulted in the recording of intangible assets of
$111 million for core technologies, $58 million for a supply contract signed
with the Alcatel Group and $92 million as goodwill. The core technologies and
supply contract have average useful lives of four years. The Company also
recorded an expense of $8 million in the second quarter of 2002 for in-process
research and development as certain of the acquired technologies had not reached
technological feasibility. The purchase price allocation is based on a third
party independent appraisal and makes reference to the future business
assumptions made by the Company, based on management's best knowledge of the
acquired company and the industry.
Proton World International
On April 24, 2003 the Company completed the acquisition of Proton World
International N.V. (PWI), a leading Smart card software company established in
Belgium, which specializes in high-security, payment and identification Smart
card systems. The original cash consideration for the purchase of PWI was E37
million (approximately $41 million). The terms of the agreement require the
Company to pay additional royalty payments of up to $25 million, based on
achieving future sales targets over the next ten years. The obligation to pay
these contingent amounts is not beyond a reasonable doubt, and therefore no
amount has been recorded as of December 31, 2003. The acquisition was conducted
to significantly extend the Company's know-how and participation in the Smart
card value chain. In July 2003, the computation of purchase price contractual
adjustments was finalized resulting in a reduction of the provisional price of
approximately $3 million. Purchase price allocation resulted in recording
assumed liabilities net of current and tangible assets of $5 million, and
intangible assets including $8 million for core technologies, $1 million for
customers' relationships, $1 million for trademarks and $33 million in goodwill.
The core technologies have an estimated useful life of seven years, the
customers' relationship of four years and the trademarks of one year.
Tioga Technologies
On April 28, 2003 the Company finalized the purchase of the assets and
liabilities of Tioga Technologies Ltd., a company based in Israel. The cash
consideration for this acquisition was $12 million. The acquisition was made to
further strengthen the strategic positioning of the Company in the areas of its
Digital Subscriber Line technology. Purchase price allocation resulted in
recording assumed liabilities net of current and tangible assets by $2 million
and intangible assets including $8 million for core technologies and $6 million
in goodwill. The core technologies have an estimated useful life of five years.
Incard
On June 2, 2003 the Company completed the acquisition of the business of Incard
S.p.A, a company based in Italy, for an original cash consideration of
approximately $89 million plus approximately $2 million in acquisition-related
taxes and fees. The acquisition of Incard was performed to complement the
purchase of PWI by extending the Company's know-how and customer basis in the
Smart card value chain. The acquisition will also allow the Company to offer a
much wider range of solutions to meet the multiple needs of the evolving Smart
card market. On September 26, 2003 the computation of purchase price contractual
adjustments was finalized resulting in a price reduction of approximately $7
million. Purchase price allocation resulted in the booking of $32 million of
tangible and current assets net of assumed liabilities, and intangible assets
including $15 million for core technologies. $4 million for customers'
relationships, $3 million for trademarks and $30 million in goodwill. The core
technologies
F-18
have an estimated useful life of seven years, the customers' relationships of
four years and the trademarks of three years.
Synad Technologies
On December 18, 2003, the Company completed the acquisition of Synad
Technologies Ltd., a wireless-LAN chip developer based in the United Kingdom.
The cash consideration for this acquisition was $55 million, plus approximately
$1 million in acquisition-related taxes and fees, of which $53 million was paid
as of December 31, 2003. The acquisition was conducted to strengthen the
Company's broadband access portfolio and add wireless networking capabilities to
its wide range of highly integrated cost-effective application platforms.
Purchase price allocation resulted in recording $2 million of tangible and
current assets net of assumed liabilities, and intangible assets including $15
million for core technologies and $34 million in goodwill. The Company also
recorded an expense of approximately $5 million in the fourth quarter of 2003
for in-process research and development as certain of the acquired technologies
cannot be capitalized since they did not reach technological feasibility. The
core technologies have an estimated useful life of 5 years.
For PWI, Incard and Synad, the purchase price allocation is based on a third
party independent appraisal and makes reference to the future business
assumptions made by the Company. For Tioga, the allocation is based on the
contractual values, which the Company believes to reflect the fair market value.
Such assumptions may be revised, as the Company obtains further knowledge of the
acquired companies, which could result in revisions to the purchase price
allocation within one year of the acquisitions.
The pro forma information below assumes that Alcatel Microelectronics acquired
in June 2002 had been acquired at the beginning of 2002 and incorporates the
results of Alcatel Microelectronics beginning on January 1, 2002. Additionally,
the pro forma information assumes that PWI and Tioga, both acquired in April
2003, Incard, acquired in June 2003, and Synad, acquired in December 2003, had
been purchased at the beginning of 2003. The years 2003 and 2002 have been
adjusted to incorporate the results of PWI, Tioga, Incard and Synad beginning on
January 1, 2003 and 2002. Such information is presented by the Company based on
its best knowledge of the acquired companies. This is shown for informational
purposes only and is not necessarily indicative of the results of future
operations or results that would have been achieved had the acquisitions taken
place as of the beginning of 2003.
Pro forma Statements of Income
Twelve Months ended
-------------------
December 31, December 31,
------------ ------------
2003 2002
---- ----
Net revenues 7,276 6,416
Gross profit 2,582 2,327
Operating expenses (2,256) (1,761)
Operating income 326 566
Net income 250 403
Earnings per share (basic) 0.28 0.45
Earnings per share (diluted) 0.27 0.45
As reported Statements of Income
Twelve Months ended
December 31, December 31,
------------ ------------
2003 2002
---- ----
Net revenues 7,238 6,318
Gross profit 2,566 2,298
Operating expenses (2,232) (1,697)
Operating income 334 601
Net income 253 429
Earnings per share (basic) 0.29 0.48
Earnings per share (diluted) 0.27 0.48
F-19
5 - JOINT VENTURE
During the third quarter of 2001, the Company and Renesas Technology Corp.
(previously known as Hitachi Ltd.) formed a joint venture to develop and license
RISC microprocessors. The joint venture, SuperH, Inc., was initially
capitalized with the Company's contribution of $15 million of cash plus
internally developed technologies with an agreed intrinsic value of $14 million
for a 44% interest. Hitachi, Ltd contributed $37 million of cash partially used
to purchase internally developed technologies from Hitachi, for a 56% interest.
During 2002, the Company contributed $5 million in cash to the SuperH joint
venture. As a result of deteriorating market conditions and the inability of
SuperH to meet its projected business plan objectives, at December 31, 2002, the
Company wrote off the $4 million remaining book value of its investment in
SuperH, Inc. and provisioned an additional $3 million for a capital
contribution that the Company was committed to and did make in the first quarter
of 2003. During the second and fourth quarters of 2003, the Company made an
additional capital contribution of $2 million. As of December 31, 2003, the
Company continues to maintain its 44% ownership of the joint venture.
The Company is accounting for its share in SuperH, Inc. joint venture under the
equity method based on the actual results of the joint venture. At December 31,
2003, the accumulated losses of the joint venture exceeded the Company's total
investment, and the investment was shown at a zero carrying value.
During the third quarter of 2003, the shareholders' agreement was amended to
require the Company to additionally contribute up to $3 million. The revised
Shareholder agreement also stipulated to review any additional cash requirements
in the second half of 2004, which could result in the Company being required to
make a final capital investment of up to $1 million. Based on the continued
inability of the joint venture to meet its projected business plan objectives,
the Company has recorded an impairment charge of $3 million in the third quarter
of 2003 for these required future capital contributions of which $1 million
remains to be paid. This impairment charge is reflected in the consolidated
statements of income as "Impairment, restructuring charges and other related
closure costs".
The Company has identified the joint venture relationship as a Variable Interest
Entity (VIE), but has determined that it is not the primary beneficiary of the
VIE. The Company estimates that no future loss exposure will result from the
joint venture in addition to the provisions recorded.
6 - AVAILABLE-FOR-SALE MARKETABLE SECURITIES
The Company has classified certain marketable securities as available-for-sale,
which relate to equity securities held as strategic investments in various
companies. These marketable securities are classified as current and non-current
assets and consist of the following:
- ------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized
December 31, 2002 Cost gain loss Fair value
- ------------------------------------------------------------------------------------------------------------------
Equity securities classified as current assets 1 1 -- 2
Equity securities classified as non-current assets 1 -- -- 1
- ------------------------------------------------------------------------------------------------------------------
Total 2 1 -- 3
- ------------------------------------------------------------------------------------------------------------------
Unrealized Unrealized
December 31, 2003 Cost gain loss Fair value
- ------------------------------------------------------------------------------------------------------------------
Fquity securities classified as non-current assets 1 3 - 4
- ------------------------------------------------------------------------------------------------------------------
Total 1 3 - 4
- ------------------------------------------------------------------------------------------------------------------
F-20
For fiscal years 2003, 2002 and 2001, gross realized gains associated with the
sale of the marketable securities were $16 million, $1 million and $25
million, respectively.
7 - TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consist of the following:
- ------------------------------------------------------------------------------------------------------------------
December 31, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
Trade accounts receivable 1,288 1,118
Less valuation allowance (16) (23)
- ------------------------------------------------------------------------------------------------------------------
Total 1,272 1,095
- ------------------------------------------------------------------------------------------------------------------
In December 2003 the Company did not sell any receivables amount. In December
2002, $50 million of receivables due in 2003 were sold without recourse.
In 2003, 2002 and 2001, one customer, the Nokia group of companies, represented
17.9%, 17.6% and 19.3% of consolidated net revenues, respectively.
8 - INVENTORIES
Inventories, net of reserve consist of the following:
- ------------------------------------------------------------------------------------------------------------------
December 31, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
Raw materials 50 53
Work-in-process 768 656
Finished products 311 221
------------------------------------------------------------------------------------------------------------------
Total 1,129 930
Total
- ------------------------------------------------------------------------------------------------------------------
9 - OTHER RECEIVABLES AND ASSETS
Other receivables and assets consist of the following:
- ------------------------------------------------------------------------------------------------------------------
December 31, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
Receivables from government agencies 194 125
Taxes and other government receivables 72 65
Advances to suppliers 4 11
Loans to employees 11 7
Prepaid expenses 162 145
Sundry debtors 83 142
Other 90 72
- ------------------------------------------------------------------------------------------------------------------
Total 616 567
- ------------------------------------------------------------------------------------------------------------------
F-21
Receivables from government agencies relate to research and development
contracts, industrialization contracts and capital investment projects.
10 - GOODWILL
Changes in the carrying amount of goodwill are as follows:
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications, Memory Consumer and Other Closing
Peripherals and Products Microcontroller net
Automotive value
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2001 8 18 31 6 63
Acquisitions:
Alcatel 92
92
Microelectronics
Alcatel Mobile 1 1
Phone
Transitional 2 1 3
reclassification of
acquired workforce
previously classified
as intangible assets
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2002 101 20 32 6 159
- ---------------------------------------------------------------------------------------------------------------------
Acquisitions:
PWI 33 33
Tioga 6 6
Incard 30 30
Synad 34 34
Alcatel 2 2
Microelectronics
purchase price
adjustment
Currency 2 1 3
translation
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2003 143 85 33 6 267
- ---------------------------------------------------------------------------------------------------------------------
With the Company's adoption of FAS 142 in the first quarter of 2002, goodwill is
no longer amortized.
F-22
11 - INTANGIBLE ASSETS
Intangible assets consist of the following:
- ------------------------------------------------------------------------------------------------------------------
December 31, 2003 Gross Accumulated Net
Amortization
- ------------------------------------------------------------------------------------------------------------------
Technologies & licenses 378 (156) 222
Internally developed software 78 (22) 56
Software 120 (73) 47
- ------------------------------------------------------------------------------------------------------------------
Total 576 (251) 325
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
December 31, 2002 Gross Accumulated Net
Amortization
- ------------------------------------------------------------------------------------------------------------------
Technologies & licenses 334 (106) 228
Internally developed software 98 (44) 54
Software 85 (56) 29
- ------------------------------------------------------------------------------------------------------------------
Total 517 (206) 311
- ------------------------------------------------------------------------------------------------------------------
The aggregate amortization expense in 2003, 2002 and 2001 was $103 million, $67
million and $45 million respectively.
The estimated amortization expense for the following years is:
- --------------------------------------------------------------------------------
Year
- --------------------------------------------------------------------------------
2004 107
2005 92
2006 72
2007 37
2008 13
Thereafter 4
- --------------------------------------------------------------------------------
Total 325
- --------------------------------------------------------------------------------
F-23
12 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
December 31, 2003 Gross Accumulated Net
Cost Depreciation Cost
- ------------------------------------------------------------------------------------------------------------------
Land 84 -- 84
Buildings 993 (215) 778
Facilities & leasehold improvements 2,373 (893) 1,480
Machinery and equipment 10,706 (6,847) 3,859
Computer and R&D equipment 449 (330) 119
Other tangible fixed assets 121 (92) 29
Construction in progress 271 -- 271
- ------------------------------------------------------------------------------------------------------------------
Total 14,997 (8,377) 6,620
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
December 31, 2002 Gross Accumulated Net
Cost Depreciation Cost
- ------------------------------------------------------------------------------------------------------------------
Land 70 -- 70
Buildings 846 (176) 670
Facilities & leasehold improvements 1,789 (659) 1,130
Machinery and equipment 8,917 (5,196) 3,721
Computer and R&D equipment 354 (246) 108
Other tangible fixed assets 137 (71) 66
Construction in progress 455 -- 455
- ------------------------------------------------------------------------------------------------------------------
Total 12,568 (6,348) 6,220
The depreciation charge in 2003, 2002 and 2001 was $1,505 million, $1,315
million and $1,248 million respectively.
During 2003, impairment charges were recorded to reduce the carrying value of
property, plant and equipment by $149 million. See Note 21.
13 - INVESTMENTS AND OTHER NON-CURRENT ASSETS
Investments and other non-current assets consist of the following:
- --------------------------------------------------------------------------------
December 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
Investments 38 24
Long-term deposits 44 50
Debt issuance costs, net 17 21
- --------------------------------------------------------------------------------
Total 99 95
- --------------------------------------------------------------------------------
The Company entered into a joint venture agreement in 2002 with Dai Nippon
Printing Co, Ltd for the development and production of photomask in which the
Company holds 19% interest. The joint venture, DNP Photomask Europe S.p.A, was
initially capitalized with the Company's contribution of (euro)2 million of
cash. Dai Nippon Printing Co, Ltd contributed (euro)8 million of cash for an 81%
interest. In the event of the liquidation of the joint-venture, the Company
F-24
is required to repurchase the land at cost, and the facility at 10'% of its net
book value, if no suitable buyer is identified. At December 31, 2003, the
Company's total contribution to the joint venture is $10 million. The Company
continues to maintain its 19% ownership of the joint venture.
The Company has identified the joint venture relationship as a Variable Interest
Entity (VIE), but has determined that it is not the primary beneficiary of the
VIE. The Company estimates that no future loss exposure will result from the
joint venture.
14-SHAREHOLDERS' EQUITY
14.1 - Outstanding shares
The authorized share capital of the Company is EUR 1,810 million consisting of
1,200,000,000 common shares and 540,000,000 preference shares each with a
nominal value of EUR 1.04. As of December 31, 2003 the number of shares of
common stock issued was 902,769,734 shares and 900,923,554 at December 31, 2002.
As of December 31, 2003 the number of shares of common stock outstanding was
889,369,734 (887,523,554 at December 31, 2002). Increases in common stock
outstanding related to stock option exercises totaling 1,846,180 common shares
in 2003 and 1,823,428 common shares in 2002 as well as conversions of
convertible debt of 945 common shares in 2002.
14.2 - Preference shares
The 540,000,000 preference shares entitle a holder to full voting rights and to
a preferential right to dividends and distributions upon liquidation. The
Company entered into an option agreement with STMicroclectronics Holding II B.V.
in order to protect the Company from a hostile takeover or other similar action.
The option agreement provides for 540,000,000 preference shares to be issued to
STMicroclectronics Holding II B.V. upon their request based on approval by the
Company's Supervisory Board. STMicroelectronics Holding II B.V. would be
required to pay at least 25% of the par value of the preference shares to be
issued, and to retain ownership of at least 30% of the Company's issued share
capital. There were no preference shares issued as of December 31, 2003.
14.3 - Treasury shares
As of December 31, 2003 13,400,000 shares of common stock totaling $348 million
have been repurchased and reflected at cost as a reduction of shareholders'
equity. In 2002, 4,000,000 shares were repurchased for a cost of $115 million,
and 9,400,000 shares were repurchased in 2001 for a cost of $233 million. No
treasury shares were acquired in 2003. The repurchased shares have been
designated to be used for the Company's most recent employee stock option plan.
14.4 - Stock option plans
In 1995, the Shareholders voted to adopt the 1995 Stock Option Plan (the "1995
Plan") whereby options for up to 33,000,000 shares may be granted in
installments over a five-year period. Under the 1995 Plan, the options may be
granted to purchase shares of common stock at a price not lower than the market
price of the shares on the date of grant. Under the 1995 Plan, at December 31,
2003, 15,431,957 of the granted options outstanding vest 50%, after three years
and 50% after four years following the date of the grant; 6,800,825 of the
granted options vest 32% after two years, 32% after three years and 36% after
four years following the date of the grant.
In 1996, the Shareholders voted to adopt the Supervisory Board Option Plan
whereby each member of the Supervisory Board was eligible to receive, during the
three-year period 1996-1998, 18,000 options for 1996 and 9,000 options for both
1997 and 1998, to purchase shares of common stock at the closing market price of
the shares on the date of the grant. In the same three-year period, the
professional advisors to the Supervisory Board were
F-25
eligible to receive 9,000 options for 1996 and 4,500 options for both 1997 and
1998. Under the Plan, the options vest over one year and are exercisable for a
period expiring eight years from the date of grant.
In 1999, the Shareholders voted to renew the Supervisory Board Option Plan
whereby each member of the Supervisory Board may receive, during the three-year
period 1999-2001, 18.000 options for 1999 and 9,000 options for both 2000 and
2001, to purchase shares of capital stock lithe closing market price of the
shares on the date of the grant. In the same three-year period, the professional
advisors to the Supervisory Board may receive 9,000 options for 1999 and 4,500
options for both 2000 and 2001. Under the Plan, the options vest over one year
and are exercisable for a period expiring eight years from the date of grant.
In 2001, the Shareholders voted to adopt the 2001 Stock Option Plan (the "2001
Plan") whereby options for tip to 60,000,000 shares may be granted in
installments over a five-year period. The options may be granted to purchase
shares of common stock at a price not lower than the market price of the
shares on the date of grant. Under the 2001 Plan at December 31, 2003, 3,296,721
of the granted options outstanding vest 50% after one year and 50% after two
years following the date of the grant; 30,528,294 of the granted options vest
32% after two years, 32% after three years and 36% after four years following
the date of the grant. The options expire ten years after the date of grant.
In 2002, the Shareholders voted to adopt a Stock Option Plan for Supervisory
Board Members and Professionals of the Supervisory Board. Under this plan,
12,000 options can be granted per year to each member of the Supervisory Board
and 6,000 options per year to each professional advisor to the Supervisory
Board. Options will vest 30 days after the date of grant. The options expire ten
years after the date of grant.
A summary of stock option activity for the plans for the three years ended
December 31, 2003, follows:
Price Per Share
---------------
Weighted
Number of Shares Range Average
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 27,149,935 $6.04 - $62.01 $28.98
Options granted:
1995 Plan 139,851 $31.65 - $44.00 $33.99
2001 Plan 9,599,000 $29.61 - $39.00 $38.92
Supervisory Board Plan 112,500 $39.00 $39.00
Options cancelled (956,750) $6.04 - $62.01 $39.90
Options exercised (1,372,935) $6.04 - $24.88 $10.36
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001 34,671,601 $6.04 - $62.01 $32.22
Options granted:
2001 Plan 13,751,393 $20.02 - $33.70 $30.88
Supervisory Board Plan 132,000 $31.11 $31.11
Options cancelled (1,124,788) $6.04 - $62.01 $36.21
Options exercised (612,445) $6.04 - $24.88 $10.88
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 46,817,761 $6.04 - $62.01 $32.01
Options granted:
2001 Plan 11,976,310 $19.18 - $25.90 $19.35
Supervisory Board Plan 132,000 $19.18 $19.18
Options cancelled (898,456) $6.04 - $62.01 $37.09
Options exercised (1,258,318) $6.04 - $24.88 $10.04
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 56,769,297 $6.04 -$62.01 $29.71
F-26
Stock options exercisable were as follows:
- -------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
- -------------------------------------------------------------------------------------------------
Options exercisable 23,338,811 15,277,776 7,640,893
Weighted average exercise price $28.87 $22.49 $11.91
- -------------------------------------------------------------------------------------------------
The weighted average remaining contractual life of options outstanding as of
December 31, 2003, 2002 and 2001 was 6.4, 6.5 and 6.3 years, respectively.
The range of exercise prices, the weighted average exercise price and the
weighted average remaining contractual life of options outstanding as of
December 31, 2003 was as follows:
---------------------------------------------------------------------------------
Weighted
Weighted average
average remaining
Option price exercise contractual
Number of shares range price life
---------------------------------------------------------------------------------
1,642,665 $6.04-$9.00 $6.12 0.2 years
5,727,432 $12.03-$14.23 $13.06 2.2 years
20,478,073 $19.18-$24.88 $21.60 7.0 years
209,160 $25.90-S29.70 $27.21 9.1 years
21,932,342 $31.09-$44.00 $34.36 7.8 years
6,779,625 $50.69-$62.01 $59.04 4.6 years
---------------------------------------------------------------------------------
The range of exercise prices, the weighted average exercise price and the
weighted average remaining contractual life of options exercisable as of
December 31, 2003 was as follows:
----------------------------------------------------------------------------------
Weighted
Weighted average
average remaining
Option price exercise contractual
Number of shares range price life
----------------------------------------------------------------------------------
1,642,665 6.04-S9.00 $6.12 0.2 years
5,727,432 $12.03-$14.23 $13.06 2.2 years
8,464,360 $19.18-$24.88 $24.80 3.8 years
23,571 $29.61-$29.70 $29.63 7.8 years
3,109,424 $31.11-$44.00 $38.65 7.3 years
4,371,359 $50.69-$62.01 $59.07 4.6 years
---------------------------------------------------------------------------------
F-27
14.5 - Employee stock purchase plans
In 2001, 2002 and 2003 the Company offered to certain of its employees worldwide
the right to acquire shares of capital stock:
- -------------------------------------------------------------------------------------------------------------------------
Number of shares Price per share Discount from Number of
offered per the market price shares issued
employee
------------------------------------
In U.S. Dollars In Euro
- -------------------------------------------------------------------------------------------------------------------------
May 2001 328 32.32 36.81 15% 580,817
December 2001 371 28.60 32.14 15% 384,566
July 2002 529 23.59 24.94 15% 461,164
December 2002 402 20.58 20.78 15% 749,819
June 2003 309 17.91 15.51 15% 587,862
- -------------------------------------------------------------------------------------------------------------------------
14.6 - Other comprehensive income (loss)
The accumulated balances related to each component of other comprehensive income
(loss) were as follows:
- -------------------------------------------------------------------------------------------------------------------------
Foreign Unrealized Minimum Accumulated
currency gain (loss) pension other
translation on available-for- liability comprehensive
income (loss) sale securities adjustment income (loss)
- -------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2000 (686) 10 -- (676)
Other comprehensive loss, net of tax (171) (10) (12) (193)
- -------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 (857) -- (12) (869)
Other comprehensive income (loss), net of tax 631 1 (21) 611
- -------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 (226) 1 (33) (258)
Other comprehensive income (loss), net of tax 880 2 (1) 881
- -------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 654 3 (34) 623
- -------------------------------------------------------------------------------------------------------------------------
14.7 - Dividends
In 2003, the Company paid a cash dividend of $0.08 per share for a total amount
of $71 million. In 2002 and 2001, the Company paid cash dividends of $0.04 and
$0.04 per share, totalling $36 million and $35 million respectively.
F-28
15-EARNINGS PER SHARE
For the years ended December 31, 2003, 2002 and 2001, earnings per share (EPS)
was calculated as follows:
- ------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Basic EPS
Net income 253 429 257
Weighted average shares outstanding 888,152,244 887,577,627 893,267,868
Basic EPS 0.29 0.48 0.29
Diluted EPS
Net income 253 429 257
Convertible debt interest, net of tax 2 -- --
- ------------------------------------------------------------------------------------------------------------
Net income adjusted 255 429 257
Weighted average shares outstanding 888,152,244 887,577,627 893,267,868
Dilutive effect of stock options 7,059,127 5,459,155 8,715,097
Dilutive effect of convertible debt 41,880,160 -- --
- ------------------------------------------------------------------------------------------------------------
Number of shares used in calculating diluted EPS 937,091,531 893,036,782 901,982,965
Diluted EPS 0.27 0.48 0.29
Outstanding convertible debt at December 31, 2003 was convertible into
70,418,060 shares, of which 28,537,900 were anti-dilutive and 41,880,160 were
dilutive. At December 31, 2003, outstanding stock options were equivalent to
56,769,297 common shares, of which 7,059,127 were dilutive and 49,710,170 were
anti-dilutive.
16-RETIREMENT PLANS
The Company and its subsidiaries have a number of defined benefit pension plans
covering employees in various countries. The plans provide for pension benefits,
the amounts of which are calculated based on factors such as years of service
and employee compensation levels. Eligibility is generally determined in
accordance with local statutory requirements.
The changes in benefit obligation and plan assets were as follows:
- ----------------------------------------------------------------------------------------------
December 3l, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year 171 139
Service cost 11 10
Interest cost 10 9
Benefits paid (2) (1)
Actuarial losses 10 7
Foreign currency translation adjustments 17 12
Other 1 (5)
- ----------------------------------------------------------------------------------------------
Benefit obligation at end of year 218 171
- ----------------------------------------------------------------------------------------------
F-29
- ----------------------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value at beginning of year 92 91
Actual return on plan assets 16 (10)
Employer contributions 7 10
Benefits paid (2) (1)
Foreign currency translation adjustments 9 7
Other 0 (5)
- ----------------------------------------------------------------------------------------------
Plan assets at fair value at end of year 122 92
- ----------------------------------------------------------------------------------------------
Funded status (96) (79)
Unrecognized prior service cost 5 5
Unrecognized transition obligation (2) (2)
Unrecognized actuarial loss 62 59
- ----------------------------------------------------------------------------------------------
Net amount recognized (31) (17)
- ----------------------------------------------------------------------------------------------
Net amount recognized in the balance sheet consists of the following:
Prepaid benefit cost 2 2
Accrued benefit liability (72) (54)
Intangible asset 2 2
Accumulated other comprehensive income 37 33
- -------------------------------------------------------------------------------------------------------------------
Net amount recognized (31) (17)
- -------------------------------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $216 million, $180 million and $172 million,
respectively, as of December 31, 2003 and $167 million, $135 million and $95
million, respectively, as of December 31,2002.
The weighted average assumptions used in the determination of the benefit
obligations were as follows:
- ---------------------------------------------------------------------------------------------------
Assumptions Year ended Year ended
December 31, December 31,
2003 2002
- ---------------------------------------------------------------------------------------------------
Discount rate 5.54% 5.80%
Salary increase rate 3.97% 4.02%
- ---------------------------------------------------------------------------------------------------
The components of the net periodic benefit cost include the following:
- -----------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Service cost 11 10 9
Interest cost 10 9 8
Expected return on plan assets (7) (8) (7)
Amortization of unrecognized transition obligation -- -- --
Amortization of net (gain) and loss 2 1 -
Amortization of prior service cost 1 1 1
- -----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 17 13 11
- -----------------------------------------------------------------------------------------------------------------
F-30
The weighted average assumptions used in the determination of the net periodic
benefit cost for the pension plans were as follows:
- ---------------------------------------------------------------------------------------------------------------
Assumptions Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Discount rate 5.80% 5.95% 6.09%
Salary increase rate 4.02% 3.97% 4.03%
Expected rate of return on funds 7.18% 7.28% 6.65%
- ---------------------------------------------------------------------------------------------------------------
The Company also has defined contribution pension plans, which provide
retirement and other service benefits to certain of its employees. The benefit
accrues to the employees on a pro-rata basis, adjusted for inflation, during
their employment period and is based on the individuals' salary. As of December
31, 2003 and 2002, the Company accrued $175 million and $134 million,
respectively, for these defined contribution pension plans. The annual cost of
these plans amounted to approximately $42 million, $44 million and $43 million
in 2003, 2002 and 2001, respectively.
F-31
17 - LONG-TERM DEBT
Long-term debt consists of the following:
- -------------------------------------------------------------------------------------------------------
December 31, December 31,
2003 2002
- -------------------------------------------------------------------------------------------------------
STMicroelectronics SA (France)
2.47% (weighted average) bank loans due 2006 146 160
0.00% (weighted average) other bank loans 1 3
4.80% (weighted average) capital leases 37 32
STMicroelectronics S.r.l. (Italy)
7.35% bank loan due 2005 2 3
5.35% bank loan due 2006 18 21
1.07% (weighted average) bank loans due 2009 72 51
3.43% (weighted average) other bank loans 14 13
STMicroelectronics N.V. (Netherlands)
2.44% Liquid Yield Option Notes (LYONs) due 2009 799 780
3.75% convertible bonds due 2010 366 1,601
-0.50% convertible bonds due 2013 1,379 --
STMicroelectronics PTE (Singapore)
2.52% bank loan due 2007 147 144
3.50% other bank loan 1 29
STMicroelectronics (others)
2.76% (weighted average) other bank loans 68 106
- -------------------------------------------------------------------------------------------------------
Total long-term debt 3,050 2,943
Less current portion 106 146
- -------------------------------------------------------------------------------------------------------
Total long-term debt, less current portion 2,944 2,797
- -------------------------------------------------------------------------------------------------------
F-32
Long-term debt is denominated in the following currencies:
- --------------------------------------------------------------------------------
December 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
U.S. dollar 2,574 2,449
Euro 304 294
Singapore dollar 148 173
Other 24 27
- --------------------------------------------------------------------------------
Total 3,050 2,943
- --------------------------------------------------------------------------------
Aggregate future maturities of long-term debt outstanding are as follows:
- ---------------------------------------------------------------
December 31,
2003
- ---------------------------------------------------------------
2004 106
2005 114
2006 140
2007 87
2008 25
Thereafter 2,578
- ---------------------------------------------------------------
Total 3,050
- ---------------------------------------------------------------
In September 1999, the Company issued $919 million principal amount at maturity
of zero-coupon subordinated convertible notes (LYONs), due 2009, for net
proceeds of $708 million. The notes are convertible at any time by the holders
at the rate of 26.292 shares of the Company's common stock for each one thousand
dollar face value of the notes. The holders may redeem their LYONs on September
22, 2004 at a price of $885.91 per one thousand dollar face value of the LYONS.
The Company may choose to pay the redemption price in cash or in common shares
or a combination of both. On or after September 22, 2002 and prior to September
22, 2004, the Company may redeem for cash all, but not a portion of the LYONs.
On or after September 22, 2004, the Company may redeem all or a portion of the
LYONS for cash. The notes are subordinated to all existing and future
indebtedness of the Company.
In November 2000, the Company issued $2,146 million principal amount at maturity
of zero-coupon unsubordinated convertible bonds, due 2010, for net proceeds of
$1,458 million. The notes are convertible at any time by the holders at the rate
of 9.32 shares of the Company's common stock for each one thousand dollar face
value of the notes. The holders may redeem their convertible bonds for cash on
January 17, 2005, at a price of $805.15 per one thousand dollar face value of
the convertible notes. On or after November 16, 2003 and prior to November 16,
2005, the Company may redeem for cash all, but not a portion of the convertible
bonds. On or after November 16, 2005, the Company may redeem for cash all or a
portion of the convertible bonds. The notes are unsubordinated to all existing
and future indebtedness of the Company. In 2003, the Company repurchased on the
market approximately $1,674 million aggregate principal amount at maturity. See
Note 23.
In August 2003, the Company issued $1,332 million principal amount at maturity
of zero coupon senior convertible bonds due 2013. The bonds were issued with a
negative yield of 0.5% that resulted in a higher principal amount at issuance of
$1,400 million and net proceeds of $1,386 million. The notes are convertible at
any time by the holders at the rate of 29.9144 shares of the Company's common
stock for each one thousand dollar face value of the notes. The holders may
redeem their convertible bonds on August 5, 2006 at a price of $985.09, on
August 5, 2008 at $975.28 and on August 5, 2010 at $965.56 per one thousand
dollar face value of the notes. At any time from August 20, 2006 the Company may
redeem for cash at their decreted value all or a portion of the convertible
bonds subject to the level of the Company's share price.
F-33
Credit facilities
The Company has revolving line of credit agreements with several financial
institutions totalling $1,163 million. At December 31, 2003, amounts available
under the lines of credit were reduced by borrowings of $45 million at an
average interest rate of 2.41%.
18-OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities consist of the following:
- --------------------------------------------------------------------------------
December 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
Taxes other than income taxes 55 57
Salaries and wages 235 199
Social charges 105 88
Advances received on fundings 32 13
Commercial rebates 21 15
Royalties payable 32 41
Other 213 193
- --------------------------------------------------------------------------------
Total 693 606
- --------------------------------------------------------------------------------
19 - OTHER REVENUES
Other revenues consist of the following:
- -------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
December December December
31, 2003 31, 2002 31, 2001
- -------------------------------------------------------------------------------------------------
Co-development contract fees - 47 49
Indemnity payments and patent royalty income 4 1 4
- -------------------------------------------------------------------------------------------------
Total 4 48 53
- -------------------------------------------------------------------------------------------------
F-34
20 - OTHER INCOME AND EXPENSES, NET
Other income and expenses, net consist of the following:
- ---------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
December December December
31, 2003 31, 2002 31, 2001
- ---------------------------------------------------------------------------------------------------
Research and development funding 76 76 58
Start-up costs (55) (57) (89)
Exchange gain, net 5 17 11
Patent claim costs (29) (8) (8)
Gain on sale of non-current assets 17 3 27
Other non-recurring, net (18) (24) (5)
- ---------------------------------------------------------------------------------------------------
Total (4) 7 (6)
- ---------------------------------------------------------------------------------------------------
21 - IMPAIRMENT, RESTRUCTURING CHARGES AND OTHER RELATED CLOSURE COSTS
During the third quarter of 2003, the Company finalized a plan to restructure
its 150mm fab operations and part of its back-end operations in order to improve
cost competitiveness.
150mm fab operations
The 150mm restructuring plan focuses on cost reduction by migrating a large part
of European and U.S. 150mm production to Singapore and by upgrading production
to a finer geometry 200mm wafer fab. The plan includes the discontinuation of
the production of Rennes (France), the closure as soon as operationally feasible
of the 150mm wafer pilot line in Castelletto (Italy), the downsize by
approximately one-half of the 150mm wafer fab in Carrollton, Texas. Furthermore,
the 150mm wafer fab production in Agrate (Italy) and Rousset (France) will be
gradually phased-out in favor of 200mm wafer ramp-ups at existing facilities in
these locations, which will be expanded or upgraded to accommodate additional
finer geometry wafer capacity. The fair values used in calculating the
impairment charges were based on the discounted expected future cash flows on
the assets. Impairment charges also include a reduction in the fair market value
of the facilities in Rancho Bernardo, California and Castelletto, Italy, which
were determined by independent real estate appraisals.
Back-end operations
During the third and fourth quarter of 2003, certain involuntary termination
payments were made for the partial restructuring of the back-end sites in
Morocco and impairment charges were incurred for the planned closure of the
back-end facilities in Tuas, Singapore. An independent real estate appraisal was
used in determining the fair value of the back-end facility.
Intangible assets and investments
In the third quarter of 2003, the Company also incurred an impairment charge of
$3 million relating to certain intangible assets subject to amortization and a
restructuring cost of $3 million for contractually committed future capital
contributions to Super H Inc, the joint venture formed with Renesas Technology
Corp. The fair value used in determining the impairments was based on discounted
expected future cash flows.
F-35
Other restructuring charges
Certain payments have been made for voluntary termination benefits in France
totalling $6 million and for lease contract terminations in the United States
amounting to $3 million.
Impairment, restructuring charges and other related closure costs incurred in
2003 are summarized as follows:
- -------------------------------------------------------------------------------------------------------------
Year ended Impairment Restructuring Other related Total impairment,
December 31, 2003 charges closure costs restructuring
charges and other
related closure
costs
- -------------------------------------------------------------------------------------------------------------
150mm fab operations (140) (32) (1) (173)
Back-end operations (15) (2) - (17)
Intangible assets and (6) - - (6)
investments
Other - (9) - (9)
Total (161) (43) (1) (205)
- -------------------------------------------------------------------------------------------------------------
The total impairment and restructuring costs for the front-end and back-end
reorganization is estimated to be approximately $350 million pre-tax (or $240
million after-tax). The restructuring plan and related manufacturing initiatives
are expected to be substantially completed over the next eighteen months. The
total actual costs that the Company will incur may differ from these estimates
based on the timing required to complete all these actions, the number of people
involved, the agreed termination benefits and the costs associated with the
transfer of equipment, products and processes.
In 2003, total cash outlays for the restructuring plan amounted to $8 million
corresponding mainly to the payment of voluntary termination benefits for $6
million, and to reduction of workforce for $2 million on back-end operations.
22 - INTEREST EXPENSE, NET
Interest expense, net consists of the following:
- --------------------------------------------------------------------------------
Year ended Year ended Year ended
December December December
31, 2003 31, 2002 31, 2001
- --------------------------------------------------------------------------------
Income 37 49 100
Expense (89) (117) (113)
- --------------------------------------------------------------------------------
Total (52) (68) (13)
- --------------------------------------------------------------------------------
Capitalized interest was $2 million, $3 million, and $9 million in 2003, 2002
and 2001, respectively.
F-36
23 - LOSS ON EXTINGUISHMENT OF CONVERTIBLE DEBT
In 2003, the Company repurchased on the market approximately $1,674 million
aggregate principal amount at maturity of its 3.75% Zero Coupon Senior
Convertible Bonds due 2010. The total cash amount paid was $1,304 million. The
repurchased convertible debt was equivalent to 15,596,824 shares and has been
cancelled.
In relation to these repurchases, the Company registered in the 2003 statements
of income a one-time non-operating pre-tax charge of $39 million, which included
$30 million related to the price paid in excess of the repurchased convertible
debt's accreted value and $9 million related to the write-off of bond issuance
costs. No repurchases of convertible debt were made in 2002.
24 - INCOME TAX
Income before income tax expense is comprised of the following:
- --------------------------------------------------------------------------------
Year ended Year ended Year ended
December December December
31, 2003 31, 2002 31, 2001
- --------------------------------------------------------------------------------
Income (loss) recorded in
The Netherlands 15 (1) (32)
Income from foreign
operations 227 523 353
- --------------------------------------------------------------------------------
Income before income
tax expense 242 522 321
- --------------------------------------------------------------------------------
STMicroelectronics N.V. and its subsidiaries are individually liable for income
taxes in their jurisdictions. Tax losses can only offset profits generated by
the taxable entity incurring such loss.
Income tax benefit (expense) is comprised of the following:
- --------------------------------------------------------------------------------
Year ended Year ended Year ended
December December December
31, 2003 31, 2002 31, 2001
- --------------------------------------------------------------------------------
The Netherlands taxes - current (4) 25 (5)
Foreign taxes-current (81) (100) (139)
- --------------------------------------------------------------------------------
Current taxes (85) (75) (144)
Foreign deferred taxes 99 (14) 83
- --------------------------------------------------------------------------------
Income tax benefit (expense) 14 (89) (61)
- --------------------------------------------------------------------------------
F-37
The principal items comprising the differences in income taxes computed at The
Netherlands statutory rate (34.5%) and the effective income tax rate are the
following:
- ------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Income tax expense computed at statutory rate (83) (183) (112)
Permanent and other differences (3) (32) (39)
Change in valuation allowances (1) (1) (2)
Impact of final tax assessments relating to prior years 6 27 --
Other tax and credits 7 6 (8)
Benefits from tax holidays 67 62 81
Earnings of subsidiaries taxed at different rates 21 32 19
- ------------------------------------------------------------------------------------------------------------
Income tax benefit (expense) 14 (89) (61)
- ------------------------------------------------------------------------------------------------------------
The tax holidays represent a tax exemption period aimed to attract foreign
technological investment in certain tax jurisdictions. The effect of the tax
benefits on basic earnings per share was $0.07, $0.06 and $0.09 for the years
ended December 31, 2003, 2002 and 2001, respectively. The Company will continue
to benefit from these tax holidays for at least the next several years.
Deferred tax assets and liabilities consist of the following:
- -------------------------------------------------------------------------------------------------------------
December 31, December 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------
Tax loss carryforwards and investment credits 141 74
Inventory valuation 27 19
Impairment charges and restructuring 79 20
Fixed asset depreciation in arrears 52 27
Receivables for government funding 40 9
Tax allowance granted on past capital investment 550 -
Pension service costs 11 7
Commercial accruals 11 13
Other temporary differences 40 35
- -------------------------------------------------------------------------------------------------------------
Total deferred tax assets 951 204
Valuation allowances (632) (26)
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets, net 319 178
- -------------------------------------------------------------------------------------------------------------
Accelerated fixed assets depreciation (172) (156)
Acquired intangible assets (3) (8)
Advances of government funding (23) (17)
Other temporary differences (17) (26)
- -------------------------------------------------------------------------------------------------------------
Deferred tax liabilities (215) (207)
- -------------------------------------------------------------------------------------------------------------
Net deferred income tax asset (liability) 104 (29)
- -------------------------------------------------------------------------------------------------------------
F-38
As of December 31, 2003, the Company and its subsidiaries have net operating
loss carryforwards that expire starting 2004, as follow:
- --------------------------------------------------------------------------------
Year
- --------------------------------------------------------------------------------
2004 6
2005 2
2006 2
2007 2
Thereafter 129
- --------------------------------------------------------------------------------
Total 141
- --------------------------------------------------------------------------------
25 - COMMITMENTS
Lease commitments
The Company leases land, buildings, plants, and equipment under operating leases
that expire at various dates under non-cancellable lease agreements. Operating
lease expense was $54 million, $37 million, and $42 million in 2003, 2002 and
2001, respectively.
At December 31, 2003, the Company had a non-cancellable capital lease of $37
million for a building.
The Company's commitments as of December 31, 2003 were as follows:
Payments due by period
----------------------
Total 2004 2005 2006 2007 2008 Thereafter
----- ---- ---- ---- ---- ---- ----------
(millions of U.S.$)
Operating leases (1) 246 58 43 38 15 13 79
Purchase commitments (2) 1,261 1,173 71 17 -- -- --
Contingent obligations (3) 1 1 -- -- -- -- --
Total 1,508 1,232 114 55 15 13 79
- ----------
(1) Operating leases are mainly related to building leases.
(2) Purchase obligations primarily include commitments for the purchase of
equipment, purchase contracts for outsourced foundry wafers and for the
purchase of software licenses.
(3) Contingent obligations related to additional contractual amounts which
could be paid for a future capital increase in the joint venture with
Hitachi, Ltd.
Other commitments
The Company has issued guarantees totalling $292 million related to its
subsidiaries' debt.
26 - CONTINGENCIES
The Company is subject to the possibility of loss contingencies arising in the
ordinary course of business. These include but are not limited to: warranty cost
on products not covered by insurance, breach of contract claims, tax claims and
provisions for specifically identified income tax exposures as well as claims
for environmental damages.
F-39
The Company has also received and may in future receive communications alleging
possible infringements of patents and similar intellectual property rights of
others. A provision is recorded when it is probable that a liability has been
incurred and when the amount of the loss can be reasonably estimated. The
Company regularly evaluates losses and claims to determine whether they need to
be adjusted based on the current information available to the Company. Legal
costs associated with claims are expensed as incurred. The Company is in
discussion with several parties with respect to claims and litigations against
the Company relating to possible infringements of patents and similar
intellectual property rights of others. For the suns of such claims, the Company
has recorded an accrual of $10 million, which represents its best estimate of
probable losses based on the information currently available to the Company.
27 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Treasury activities are regulated by the Company's procedures, which define
policies, objectives and controls. The policies focus on the management of
financial risk in terms of exposure to currency rates and interest rates. The
Company's objectives are to reduce exposure to changes in exchange rates, to
optimise the use of credit facilities and funds available, and to obtain the
best possible market conditions for financial and treasury operations. Treasury
controls include systematic reporting to senior management and are subject to
internal audits. Most treasury activities are centralized, with any local
treasury activities subject to oversight from head treasury office. The majority
of cash and cash equivalents are held in U.S. dollars and are placed with
financial institutions rated "A-" or higher. Marginal amounts are held in other
currencies. Foreign currency operations and hedging transactions are performed
only to cover commercial positions.
27.1 - Foreign exchange forward contracts and currency options
The Company enters into foreign exchange forward currency contracts and currency
options to manage exposure to fluctuations in foreign currency exchange rates
and to cover a portion of both its probable anticipated, but not firmly
committed, transactions and transactions with firm foreign currency commitments.
These transactions include international sales by various subsidiaries in
foreign currencies, foreign currency denominated purchases, intercompany sales
and other intercompany transactions. Such contracts outstanding as of December
31, 2003 have remaining terms of 5 days to four months, maturing on average
after 31 days.
The notional amounts of foreign exchange forward contracts totalled $1,568
million and $649 million at December 31, 2003 and 2002, respectively. The
principal currencies covered are the US dollar, the Euro, the Japanese yen and
the Swiss franc.
The risk of loss associated with purchased options is limited to premium amounts
paid for the option contracts. The risk of loss associated with forward
contracts is equal to the exchange rate differential from the time the contract
is entered into until the time it is settled. At December 31, 2003 and 2002, no
currency options were outstanding.
27.2 - Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of interest-bearing investments and trade
receivables. The Company places its cash and cash equivalents and certain other
financial instruments with a variety of high credit quality financial
institutions and has not experienced any material losses relating to such
instruments. The Company invests its excess cash in accordance with its
investment policy that aims to minimize credit risk.
The Company controls the credit risks associated with financial instruments
through credit approvals, investment limits and centralized monitoring
procedures but does not normally require collateral or other security from the
parties to financial instruments. At December 31, 2003 and 2002, one customer,
the Nokia Group of companies, represented 11.7% and 19.3% of trade accounts
receivable, respectively. Any remaining concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
and their dispersion across many geographic areas. The Company monitors the
creditworthiness of its customers to which it grants credit terms in the
F-40
normal course of business. The Company does not anticipate non-performance by
counterparties, which could have a significant impact on its financial position
or results of operations.
27.3 - Fair value of financial instruments
The estimates of fair value were obtained using prevailing financial market
information resulting from various valuation techniques.
2003 2002
---------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------------
Balance sheet
- Bank loans (including current portion) 506 498 561 568
- Convertible debt 2,544 2,706 2,381 2,403
Off-balance sheet
- Forward exchange contracts 30 30 6 6
- --------------------------------------------------------------------------------------------------------------------
The methodologies used to estimate fair value are as follows:
Cash and cash equivalents, accounts and notes receivable, bank overdrafts,
short-term borrowings, accounts and notes payable
The carrying amounts reflected in the consolidated financial statements are
reasonable estimates of fair value due to the relatively short period of time
between the origination of the instruments and their expected realization.
Long-term debt and current portion of long-term debt
The fair values of long-term debt were determined based on quoted market prices,
and by estimating future cash flows on a borrowing-by-borrowing basis and
discounting these future cash flows using the Company's incremental borrowing
rates for similar types of borrowing arrangements.
Foreign exchange forward contracts
The fair values of these instruments are estimated based upon quoted market
prices for the same or similar instruments.
28 - RELATED PARTY TRANSACTIONS
Transactions with significant shareholders, their affiliates and other related
parties were as follows:
- --------------------------------------------------------------------------------
December December December
31, 2003 31, 2002 31, 2001
- --------------------------------------------------------------------------------
Sales & other services 10 1 1
Research and development expenses (34) (29) (26)
F-41
Other purchases and expenses (17) (23) (31)
Accounts receivable 2 -- --
Accounts payable 22 11 5
For the years ended December 31, 2001, 2002 and 2003, the related party
transactions were primarily with Areva, France Telecom, Finnieccanica, Equant
and Orange, which represent significant shareholders of the Company or their
subsidiaries. See Note 1.
In addition the Company participates in an Economic Interest Group ("E.I.G.") in
France with Areva and France Telecom to share the costs of certain research and
development activities, which were not included in the previous table. The share
of costs recorded by the Company as research and development expenses incurred
by E.I.G during 2003 were not significant in 2003, $3 million in 2002 and $3
million in 2001. At December 31, 2003 the Company had net receivable amount of
$1 million and at December 31, 2002 the Company had net receivable amount of $7
million.
29 - SEGMENT INFORMATION
The Company operates in two business areas: Semiconductor and Subsystems.
In the Semiconductor business area, the Company designs, develops, manufactures
and markets a broad range of products including discrete, memories and standard
commodity components, ASICSs (full custom devices and semicustom devices) and
ASSPs for analog, digital, and mixed-signal applications. In addition, following
the acquisition of Incard, the Company started the full chain manufacturing of
smart card products, which includes the production and sale of chips, as in the
past, and of cards. The Company's principle investment and resource allocation
decisions are in the Semiconductor business area for expenditures on research
and development and capital investments in front-end and back-end manufacturing
facilities. The Company manages its semiconductor products in four segments,
following the Company's four main products groups: Telecommunications,
Peripherals and Automotive; Discrete and Standard ICs; Memory Products and
Consumer and Microcontroller (collectively referred to as the "Groups").
Revenues and operating results of the manufacturing of the smart card products
are included in Memory Products group. The Company manages its revenues and
internal operating income performance based on these segments.
In the Subsystems segment, the Company designs, develops, manufactures and
markets subsystems and modules for the Telecom, Automotive and Industrial
markets including mobile phone accessories, battery chargers, ISDN power
supplies and in-vehicle equipment for electronic toll payment. Based on its
immateriality to the Company, the Subsystems segment does not meet the
requirements for a reportable segment as defined in Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (FAS 131).
The following tables present the Company's internal net revenues and operating
income by semiconductor product segment. For the computation of the Groups'
internal financial measurements, the Company uses certain internal rules of
allocation for the costs not directly chargeable to the Groups including cost of
sales, selling, general & administrative expenses and a significant part of R&D
expenses. Additionally as per the Company's rules, certain items of costs are
not charged to the Groups, including start-up costs of the new manufacturing
facilities, some strategic and special R&D programs, certain corporate level
operating expenses, impairment and restructuring charges and other related
closure costs as well as certain other miscellaneous charges.
Net revenues by product group
- --------------------------------------------------------------------------------
December December December
31, 2003 31, 2002 31, 2001
- --------------------------------------------------------------------------------
Telecommunications,
Peripherals and Automotive 3,268 3,074 3,031
Discrete and Standard ICs 1,224 1,055 942
Memory Products 1,358 1,055 1,382
Consumer and Microcontroller 1,321 1,026 896
Others (1) 67 108 106
- --------------------------------------------------------------------------------
F-42
- --------------------------------------------------------------------------------
Total revenues 7,238 6,318 6,357
- --------------------------------------------------------------------------------
(1) Includes revenues from sales of subsystems mainly and other products not
allocated to product groups.
Operating Income by product group
- --------------------------------------------------------------------------------
December December December
31, 2003 31, 2002 31, 2001
- --------------------------------------------------------------------------------
Telecommunications,
Peripherals and Automotive 550 613 589
Discrete and Standard ICs 142 135 75
Memory Products (45) 7 340
Consumer and Microcontroller 78 57 (78)
- --------------------------------------------------------------------------------
Total operating income of
product groups 725 812 926
Others (391) (211) (587)
- --------------------------------------------------------------------------------
Total consolidated operating income 334 601 339
- --------------------------------------------------------------------------------
Reconciliation to consolidated operating income:
- --------------------------------------------------------------------------------
December December December
31, 2003 31, 2002 31, 2001
- --------------------------------------------------------------------------------
Total operating income
of product groups 725 812 926
Strategic R&D and other
R&D programs (61) (83) (48)
Start-up costs (54) (57) (82)
Impairment & restructuring
charges (205) (34) (416)
Subsystems 2 6 10
Patents claim costs (10) - -
Other non-allocated provisions (63) (43) (51)
- --------------------------------------------------------------------------------
Total operating income
(loss) Others (391) (211) (587)
Total consolidated operating
income 334 601 339
- --------------------------------------------------------------------------------
The following is a summary of operations by entities located within the
indicated geographic areas for 2003, 2002 and 2001. Net revenues represent sales
to third parties from the country in which each entity is located. Long-lived
assets consist of net property and equipment and other intangible assets.
Net revenues
- --------------------------------------------------------------------------------
December December December
31, 2003 31, 2002 31, 2001
- --------------------------------------------------------------------------------
The Netherlands 2,084 1,768 2,016
France 364 443 484
Italy 219 174 229
USA 992 876 958
Singapore 3,192 2,358 1,989
Japan 337 275 331
Other countries 50 424 350
- --------------------------------------------------------------------------------
Total 7,238 6,318 6,357
- --------------------------------------------------------------------------------
F-43
Long-lived assets
- --------------------------------------------------------------------------------
December December December
31, 2003 31, 2002 31, 2001
- --------------------------------------------------------------------------------
The Netherlands 478 404 123
France 2,205 2,033 1,732
Italy 2,102 1,872 1,687
Other European countries 219 204 210
USA 413 610 797
Singapore 1,149 863 749
Malaysia 389 449 548
Other countries 257 255 255
- --------------------------------------------------------------------------------
Total 7,212 6,690 6,101
- --------------------------------------------------------------------------------
F-44
[GRAPHIC OMITTED]
Proposed resolutions
--------------------
for the Annual General Meeting of Shareholders of STMicroelectronics N.V.
-------------------------------------------------------------------------
("ST") to be held on April 23, 2004 in Amsterdam
------------------------------------------------
The Supervisory Board proposes:
Agenda item 4 - Resolution 1
- -------------
to adopt the annual accounts for the financial year 2003, as drawn up by the
Managing Board, examined and audited by the auditors PricewaterhouseCoopers N.V.
Agenda item 5 - Resolution 2
- -------------
to discharge the sole member of the Managing Board for his management during the
financial year 2003.
Agenda item 6 - Resolution 3
- -------------
to discharge the members of the Supervisory Board for their supervision during
the financial year 2003.
Agenda item 7 - Resolution 4
- -------------
to distribute a dividend in cash of US$ 0.12 per common share.
Agenda item 8 - Resolution 5
- -------------
to appoint Gerald Arbola as a new member of the Supervisory Board as successor
to, and to complete the three-year term (to expire at our 2005 AGM) of, Mr.
Jean-Pierre Noblanc, former Vice Chairman of the Supervisory Board, who passed
away last year.
Agenda item 9 - Resolution 6
- -------------
to appoint Didier Lombard as a new member of the Supervisory Board as successor
to, and complete the three-year term (to expire at our 2005 AGM) of, Mr. Remy
Dullieux, who has resigned with effect from the 2004 AGM.
Agenda item 10 - Resolution 7
- --------------
to maintain the remuneration of the Chairman and the Vice Chairman of the
Supervisory Board at US$45,000 per annum; to maintain the remuneration of the
President of the Audit Committee at US$40,000 per annum; to maintain the
remuneration of the other members of the Supervisory Board at US$30,000 per
annum; to maintain the remuneration of the members of the Audit Committee at
US$10,000 per annum; to maintain the remuneration of the members of the
Compensation Committee at US$5,000 per annum; to maintain the remuneration of
the members of the Strategic Committee at US$ 5,000 per annum; to set the
remuneration of the members of the Nominating and Corporate Governance Committee
(to be established) at US$5,000 per annum; to maintain the attendance fee per
meeting of the Supervisory Board and of any Committee of the Supervisory Board
at U.S.$2,000 (with no
limitation on the number of Committees for which Supervisory Board members may
serve); and to maintain that attendance fees per meeting by telephone or
videoconference at US$500.
Agenda item 11 - Resolution 8
- --------------
to approve a new Company's Employee Stock Purchase Plan (the "Plan"), which
includes the following provisions:
o a total of 4.8 million newly issued common shares are to be offered
to employees of ST and its majority-owned subsidiaries in up to 24
specified countries and such other countries to which the Supervisory
Board may extend the Plan, on the recommendation of the Managing
Board;
o the Plan has a term of three years, from 2004 to 2007, and features
semi-annual offering periods;
o for each offering period, the subscription price will be equal to 85%
of the lesser of the NYSE closing price per share on the first day of
the offering period and the last day of the offering period; and
o the maximum fair market value of the Shares subscribed per employee
per offering period is $12,500.
The Supervisory Board proposes to approve the Plan in order for the Plan to
qualify under Section 423 of the Internal Revenue Code of the United States and
pursuant to "Best Practice" provisions of the Dutch Corporate Code and New York
Stock Exchange listing standards.
The Supervisory Board has approved the Plan.
Agenda item 12 - Resolution 9
- --------------
to designate the Supervisory Board as the corporate body authorized to resolve
to issue any number of common shares and/or preference shares as comprised in
ST's authorized share capital from time to time, to fix the terms and conditions
of share issuance, to limit or to exclude pre-emptive rights of existing
shareholders upon issuance of shares and to grant rights to subscribe for common
shares and/or preference shares, all for a period of five years as of the date
of the annual general meeting of shareholders.
Agenda item 13 - Resolution 10
- --------------
to change the quorum for the general meeting of shareholders as referred to in
article 32, paragraph 1 of ST's Articles of Association from one-third of ST's
issued share capital to 15% of ST's issued share capital and to amend article
32, paragraph 1 of ST's Articles of Association in this respect.
2
Agenda item 14 - Resolution 11
- --------------
in order to implement the change of quorum as referred to under agenda item 13 -
resolution 10, to amend ST's Articles of Association in conformity with the
draft notarial deed prepared by De Brauw Blackstone Westbroek N.V., dated March
12, 2003 (Dutch wording) and to authorize any and all lawyers practicing with De
Brauw Blackstone Westbroek N.V. to apply to the Ministry of Justice for the
required declaration of no-objection to the draft deed of amendment as well as
to execute the notarial deed of amendment.
Agenda item 15 - Resolution 12
- --------------
in order to comply with the Dutch Corporate Governance Code of December 9, 2003,
to approve ST's Corporate Governance Policy as follows:
The Dutch Corporate Governance Committee, in the preamble to the Dutch Corporate
Governance Code published on December 9, 2003 (the "Code") which is applicable
to all Dutch Companies listed within or outside the Netherlands effective
January 1, 2004, has recommended that such companies report to their
shareholders in the Annual General Meeting of Shareholders in 2004, on how they
intend to comply with the provisions of the Code.
STMicroelectronics N.V. has common shares listed on the New York Stock Exchange,
Euronext Paris and Borsa di Milano, and convertible bonds listed on the NYSE,
Euronext Paris and the Luxembourg Stock Exchange. Due to its various listings,
ST is required to comply simultaneously with the Corporate Governance provisions
of the Code, the corporate governance standards of the New York Stock Exchange
applicable to NYSE-listed non-U.S. companies (the "NYSE Rules"), as well as
applicable corporate governance standards of Euronext Paris, Borsa di Milano and
the Luxembourg Stock Exchange.
In response to corporate governance disclosure requirements of various exchanges
where ST is listed, particularly where Code recommendations (Best Practice
Provisions) and NYSE rules diverge, ST is communicating its current corporate
governance policies in the ST Corporate Governance Charter, divided into four
main chapters and a conclusion.
1. Corporate Organization;
2. Remuneration of ST's Managing and Supervisory Board Members;
3. Information Policy;
4. Corporate Policies relating to Business Ethics, Financial Reporting and
Disclosure; and
5. Conclusion.
It is ST's policy to (i) make the Corporate Governance Charter available on its
web site, as well as to any shareholder in print upon request and, (ii)
constantly monitor the Corporate Governance charter, in view of the ongoing
developments and requirements in this field, so as to modify, complete and
improve the procedures and policies covered by the Charter, as and when deemed
necessary.
By proceeding accordingly, ST is seeking to explain its corporate governance
policy, and pursuant to Code recommendations, requests shareholder approval of
its corporate governance policy as currently reflected in the ST Corporate
Governance Charter, as amended from time to time.
3
PERSONAL DATA
-------------
MR. ARBOLA
----------
(Section 2:142, subsection 3 Dutch Civil Code)
name : Gerald Arbola
age : 55
nationality : French
profession : Mr. Arbola is an Executive Board member
of Areva and its Chief Financial
Officer. Mr. Arbola has served as Chief
Financial Officer and member of the
Executive Board of AREVA since July 3,
2001
other positions : Mr Arbola is Chairman of the Board of
Directors of FT1CI and furthermore a
member of the Boards of Cogema,
Framatome ANP and Assystem
previous positions
to the extent
relevant : Mr. Arbola is a graduate of the
Institut d'Etudes Politiques de Paris
and holds an advanced degree in
economics. Mr. Arbola joined the Cogema
group in 1982 as director of planning
and strategy for SGN, then served as
Chief Financial Officer at SGN from
1985 to 1989, becoming Executive Vice
President of SGN in 1988, Chief
Financial Officer of Cogema in 1992. He
was appointed as a member of the
Executive Committee in 1999, and also
served as Chairman of the board of SGN
in 1997 and 1998
supervisory board
member of : Vice-chairman of the Supervisory Board
of STMicroelectronics Holding N.V.
motivation : The candidacy of Mr. Arbola as a new
Supervisory Board member is being
proposed on the basis of his specific
financial and technical expertise,
prior professional experience,
soundness of judgment, ability to make
analytical enquiries and willingness to
devote the time required to adequately
perform his activities as a Supervisory
Board member
1/2
Mr. Arbola does not hold any shares in the capital of STMicroelectronics N.V.
2/2
PERSONAL DATA
-------------
MR. LOMBARD
-----------
(Section 2:142, subsection 3 Dutch Civil Code)
name : Didier Lombard
age : 62
nationality : French
profession : Mr. Lombard currently serves as Executive
Director and Member of the Executive
Committee of France Telecom, in charge of
Technologies, Strategic partnerships and New
Usages
other positions : Mr. Lombard is also a member of the Board of
Directors of Orange, Wanadoo and member of
the supervisory board of Radiall
previous positions
to the extent
relevant : Mr. Lombard began his career in the R&D
division of France Telecom in 1967, where he
contributed to the development of several new
products for France Telecom, in relationship
with satellite and mobile systems. From 1988
on, he served as scientific and technological
director at the Ministry of Research and
Technology, General Director for industrial
strategies at the Ministry of Economy,
Finances and Industry, and Delegate
Ambassador for national investments and
President of the French Agency for
international investments. Mr. Lombard is a
graduate of the Ecole Polytechnique and the
Ecole Nationale Superieure des
Telecommunications. Mr Lombard spent several
years as Ambassador in charge of foreign
investment in France and as Chief Executive
Officer of the French Agency for
International Investment.
supervisory board
member of : N/A
motivation : The candidacy of Mr. Lombard as a new
Supervisory Board member is being proposed on
the basis of his
1/2
specific financial and technical expertise,
prior professional experience, soundness of
judgment, ability to make analytical
enquiries and willingness to devote the time
required to adequately perform his activities
as a Supervisory Board member.
Mr. Lombard holds 225 shares in the capital of STMicroelectronics N.V.
2/2
DE BRAUW
BLACKSTONE
WESTBROEK
version dated
12-03-2004
RBO/CdM/ASM
F:\1119\74550180\statutenwijziging\74550180.bse.doc
UNOFFICIAL TRANSLATION
----------------------
DRAFT DEED OF AMENDMENT
-----------------------
OF THE ARTICLES OF ASSOCIATION
------------------------------
STMICROELECTRONICS N.V.
-----------------------
two thousand and four appears before me, Cornelis Willem de Monchy, notaris
(civil-law notary) practising in Rotterdam:
**
The person appearing declares that on **
two thousand and four the general meeting of shareholders of STMicroelectronics
N.V., a limited liability company, with corporate seat in Amsterdam and address
at: 1118 BH Luchthaven Schiphol, municipality Haarlemmermeer (the Netherlands),
Schiphol Boulevard 265 Amsterdam Airport, on the proposal of the Supervisory
Board of this company, resolved to amend the articles of association of this
company and to authorise the person appearing to execute this deed.
Pursuant to those resolutions the person appearing declares that he amends the
company's articles of association as follows:
In article 32, paragraph 1 the word "one/third" shall be replaced by the words
"fifteen per cent". The required ministerial declaration of no-objection was
granted on ** two thousand and four, number N.V. 319.725.
The ministerial declaration of no-objection and a document in evidence of the
resolutions, referred to in the head of this deed, are attached to this deed.
In witness whereof the original of this deed which will be retained by me,
notaris, is executed in ** , on the date first mentioned in the head of this
deed.
Having conveyed the substance of the deed and given an explanation thereto and
following the statement of the person appearing that he has taken note of the
contents of the deed and agrees with the same, this deed is signed, immediately
after reading those parts of the deed which the law requires to be read, by the
person appearing, who is known to me, notaris, and by myself, notaris.
Preamble to ST Corporate Governance Charter
On December 9, 2003 the Dutch Corporate Governance Committee issued a Corporate
Governance Code (the "Code") effective January 1, 2004 for all publicly listed
companies incorporated in The Netherlands, including STMicroelectronics N.V.
("ST"). The Code recommends that companies communicate to shareholders in 2004
how they intend to comply. We are submitting our policies on Corporate
Governance for approval at our 2004 Annual General Meeting of Shareholders to be
held in Amsterdam on April 23, 2004. As ST is listed on the New York Stock
Exchange, Euronext Paris and Milano Borsa and not in The Netherlands, our
policies and practices are not consistent with all Dutch "Best Practice"
recommendations contained in the Code. Our current corporate governance
policies, as enumerated in our Charter on Corporate Governance, will be updated
and expanded whenever necessary or advisable. As recommended by the Code, we
will inform our shareholders of any significant changes in our corporate
governance policies and practices at our annual general meeting.
Our Corporate Governance Charter will be posted on our website and will be
available in print to any shareholder who may request it.
Monday, March 15, 2004
ST CORPORATE GOVERNANCE CHARTER
Introduction
Since our formation in 1987, we have demonstrated a consistent commitment to the
principles of good corporate governance, evidenced by:
(i) ST's corporate organization under Dutch law that entrusts ST management
to a Managing Board acting under the supervision and control of a
Supervisory Board totally independent from the Managing Board. Members of
the Managing Board and Supervisory Board are appointed and dismissed by
our shareholders;
(ii) ST's early adoption of policies on important issues such as "business
ethics" and "conflicts of interest" and ST's strict policies, implemented
since its 1994 IPO to comply with its regulatory requirements, concerning
financial reporting, insider trading and public disclosures;
(iii) ST's compliance with United States, French and Italian securities laws,
because our shares are listed in these jurisdictions, and with Dutch
securities laws, because we are a company incorporated under the laws of
The Netherlands, as well as our compliance with all corporate, social and
financial laws applicable to our subsidiaries in all of the countries in
which we do business; and
(iv) ST's broad-based activities in the field of Corporate Social
Responsibility, encompassing environmental, social, health, safety,
educational and other related issues.
2
I. CORPORATE ORGANIZATION
ST is organized under Dutch laws and operates with a Managing Board and a
Supervisory Board, both of which report to our shareholders.
A. Our Managing Board
1. Our Managing Board is entrusted with our general management.
The Managing Board whose Members are appointed and dismissed
by our shareholders, upon proposal by the Supervisory Board,
is currently comprised of one person, our President and Chief
Executive Officer. Our President and CEO is supported in his
tasks by a group of Executive Officers. Our President and CEO
may also propose to the Supervisory Board the appointment of a
Chief Operating Officer ("COO") reporting to the President and
CEO. By law, neither our CEO, our COO, nor any of our
Executive Officers can serve on our Supervisory Board. Neither
our CEO, nor any of our Executive Officers, serve as a
director of any other listed public company.
2. Our Managing Board is accountable to our Supervisory Board and
to our General Meeting of Shareholders. In discharging its
role according to Dutch law, the Managing Board guides ST in
our best interest as well as in consideration of the interests
of all of our stakeholders.
3. Our Managing Board prepares a report to the shareholders at
our General Meeting of Shareholders.
B. Our Supervisory Board
1. General Provisions
a. Our Supervisory Board advises our Managing Board in
performing its management tasks and supervises the
policies of our Managing Board and the general course of
our affairs and business. Our Supervisory Board approves
major management decisions including multiyear plans,
the budget for the coming year, investment policies, the
sale of all or an important part of our assets or
concerns, any agreement relating to Intellectual
Property if substantial and material, the formation of
new companies, the granting of guarantees to third
parties, research and development, marketing, general,
financial and personnel policies, as well as (subject to
further approval by our shareholders in the event the
Supervisory Board considers that these are material
transactions), all mergers, acquisitions or joint
venture agreements. Our Supervisory Board also approves
our financial reporting before publication of our
quarterly press release and submission of our accounts
for approval by our General Meeting of Shareholders. In
3
addition, our Supervisory Board approves all operations
outside the ordinary course, including any agreements
with our indirect shareholders, as well as the
appointment of the members of statutory management,
administration and control bodies and external auditors
of our major directly held subsidiaries.
b. In light of new corporate governance initiatives
particularly in The Netherlands where we are
incorporated, our Supervisory Board is currently
revising its Internal Regulation which sets forth the
rules and procedures governing its operations and the
manner in which it carries out its duties and exercises
operational and financial control over our operations.
The Internal Regulation will also set forth the
Supervisory Board's policies with respect to the number
of other boards on which ST Supervisory Board members
may sit, tenure, director orientation and continuing
education and other matters. The Internal Regulation,
once adopted will be posted on our website and will be
made available in print to shareholders upon request.
Our Supervisory Board prepares a report to the
shareholders at our general meeting of shareholders.
c. Supervisory Board Members are appointed and dismissed by
the General Meeting of Shareholders on the proposal of
the Supervisory Board for a maximum term of three years,
which is renewable. Our Supervisory Board currently
comprises nine members, including one vacant position.
Supervisory Board Members are selected on the basis of
their specific business, financial, technical and/or
legal expertise, prior professional experience,
soundness of judgment, ability to make analytical
enquiries and willingness to devote the time required to
adequately perform their activities as Supervisory Board
Members.
d. Our Supervisory Board has adopted a policy limiting
Members' participation on boards of other listed public
companies to five.
e. The current term of office of all Supervisory Board
Members in office is three years, expiring at the 2005
Annual General Meeting of Shareholders. To ensure
continuity and to retain the benefit of the experience
of leading industry experts, we do not believe it is in
our best interests to limit the number of terms a member
may serve on our Supervisory Board. At the 2005 General
Meeting of Shareholders, we may consider proposing a
rotation schedule to our shareholders for approval.
4
f. Certain of our Supervisory Board Members may be proposed
by and retain certain relationships with our direct or
indirect shareholders represented through
STMicroelectronics Holding II B.V. and
STMicroelectronics Holding N.V. All of our Supervisory
Board Members are committed to serve our best interests
and to take into account those of our other
stakeholders.
g. Our Supervisory Board Members may and do, at least once
a year, meet outside the presence of our Managing Board,
have full access to management and Company records on
request, and may, at our expense, hire their own
advisors when necessary and appropriate.
h. The Chairman and Vice Chairman of our Supervisory Board
constitute the primary communication channel between our
Managing Board and Supervisory Board.
2. Committees of ST's Supervisory Board
Our Supervisory Board has currently established three
permanent committees to advise it on certain issues: the Audit
Committee, the Strategic Committee and the Compensation
Committee, which have been in existence since 1996, and in
March 2004, resolved to establish a Nominating and Corporate
Governance Committee. All committees report regularly to the
Supervisory Board. A Charter governing the duties and
responsibilities of each Committee will, once adopted by each
Committee and approved by our Supervisory Board, be published
on our website and made available in print to any shareholder
upon request. Our Supervisory Board may amend Committee
Charters from time to time and we will publish updates on our
website.
a. The Audit Committee
The mission of the Audit Committee is to advise the
Supervisory Board with respect to oversight of:
o The integrity of our financial statements;
o Our compliance with all legal and regulatory
requirements applicable to Audit Committee
functions;
o The independence and qualification of our
independent auditors;
o The performance of our internal audit processes and
independent auditors including compliance with
their recommendations; and
o Any other financial or accounting matter such as
financing, internal risk management, control
systems and tax policies.
5
Our Audit Committee proposes our annual and quarterly
accounts for adoption by our Supervisory Board. Our
Audit Committee also, after a full review, authorizes
management to finalize our Operating and Financial
Review and Prospects and interim financial information
submitted to the SEC on a quarterly (6-K) and filed on
an annual (20-F) basis.
Our Audit Committee meets at least five times a year,
reports regularly to the Supervisory Board and performs
an annual self-evaluation.
Our Audit Committee has the authority to retain and
terminate any financial or other specialists to assist
it as and when necessary, including the authority to
approve a firm's fees and other retention terms.
Our Audit Committee is currently comprised of five
Supervisory Board Members, all of whom are financially
literate and three of whom have specific accounting or
financial management expertise. Our Audit Committee
intends to fully comply (to the extent not in
contradiction with applicable Dutch law) with SEC
regulations and NYSE listing standards on audit
committee qualifications, duties and responsibilities
applicable in July 2005. According to NYSE criteria
currently applicable to ST, each of the Audit Committee
members is independent except for one. While one of our
Audit Committee members holds an executive position with
a supplier to ST, our Supervisory Board has concluded
that the member's independent judgment is not impaired.
b. The Strategic Committee
The advisory mission of our Strategic Committee relates
to the following fields:
o Strategic developments in the Semiconductor
Industry
o Long term planning and budgeting
o Corporate Strategy
o Merger / Acquisition projects
o Major R&D programs
o Any other strategic or material project.
Our Strategic Committee has the authority to retain and
terminate outside specialists to assist it in its
mission if deemed necessary.
6
Our Strategic Committee has historically been comprised
of four Supervisory Board Members, including the
Chairman and Vice Chairman of the Supervisory Board,
although there is currently a vacancy. It meets at least
twice a year and reports periodically to the Supervisory
Board concerning items within its field and on the
agenda of a Supervisory Board meeting.
c. The Compensation Committee
Our Compensation Committee has several missions:
(i) To propose decisions for adoption by the
Supervisory Board concerning:
o The remuneration and bonus amount for the
member(s) of the Managing Board and the
performance criteria to be met by the member(s)
of the Managing Board to be eligible for the
annual bonus amount, as well as the number of
stock options to be attributed each year to the
member(s) of the Managing Board; and
o The terms and conditions for employee stock
purchase plans.
o Annual remuneration for Supervisory Board members
subject to shareholder approval and annual
remuneration of the Controllers, Secretary and
Assistant Secretary.
(ii) As a delegated administrative body of the
Supervisory Board:
o To determine allocation of stock options to our
Executive Officers and Managers following the
proposal made by the Managing Board, pursuant to
the terms of the Stock Option Plan for directors,
managers and selected employees approved by our
shareholders.
o To attribute stock options granted to Supervisory
Board members and professionals pursuant to the
Supervisory Board Stock Option Plan approved by
our shareholders
(iii) As an advisory Committee to the Supervisory
Board:
o To review our remuneration policy and Executive
Incentive Program for our Executive Officers and
Managers, based on performance criteria which
generally relate to customer service,
profitability, cash flow and market share; and
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o To resolve any other employee compensation matter
submitted by our Managing Board.
Our Compensation Committee also has authority to
retain and terminate compensation consultants to
assist it and to approve such firm's fees and
other retention terms.
Our Compensation Committee is comprised of a
maximum of three Supervisory Board Members
including the Chairman and Vice Chairman of the
Supervisory Board. It meets at least twice a
year.
All members of the Compensation Committee are
independent as defined by NYSE listing standards.
d. The Nominating and Corporate Governance Committee
As part of a recent review of our corporate governance
policies and practices, we elected to establish a
Nominating and Corporate Governance Committee of our
Supervisory Board.
The mission of our Nominating and Corporate Governance
Committee will relate to the following fields:
o Establishing selection criteria and appointment
procedures for Supervisory Board Members and
Managing Board Members;
o Assessing the size and composition of the
Supervisory Board and the Managing Board, and
making a proposal for a composition profile of the
Supervisory Board;
o Periodically assessing the functioning of
individual Supervisory Board Members, and reporting
on this to the Supervisory Board;
o Making proposals for appointments and
reappointments of members of the Supervisory and
Managing Boards;
o Supervising the policy of the Managing Board on the
selection criteria and appointment procedures for
senior management;
o Reviewing the corporate governance policies of the
Company;
o Recommending all decisions relating to the
organization and workings of the Supervisory Board.
The Nominating and Corporate Governance Committee will
be comprised of three Supervisory Board Members
including the
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Chairman and Vice Chairman of the Supervisory Board. It
will meet at least once a year, and more often as
appropriate. All members of the Nominating and Corporate
Governance Committee will be independent as defined by
NYSE listing standards.
3. Secretariat of the Supervisory Board
Our Supervisory Board appoints and dismisses a Secretary and
an Assistant Secretary as proposed by the Supervisory Board.
Furthermore, the Managing Board makes an Executive Secretary
available to the Supervisory Board. The Executive Secretary is
is also appointed and dismissed by the Supervisory Board. The
Secretary, Assistant Secretary and Executive Secretary
constitute the Secretariat of the Supervisory Board.
The mission of the Secretariat is to organize meetings, ensure
the continuing education and training of Supervisory Board
members, record-keeping, provide legal advice and
communications relating to Supervisory Board meetings. The
Secretariat is also responsible for providing all necessary
secretarial support to the Committees of the Supervisory
Board, in accordance with the requirements of the Chairman of
each Committee.
4. Controllers of the Supervisory Board
Our Supervisory Board appoints and dismisses two financial
experts ("Controllers"). The mission of the Controllers is
primarily to assist the Supervisory Board in evaluating our
operational and financial performance, business plan,
strategic initiatives and the implementation of Supervisory
Board decisions, as well as to review the operational reports
provided under the responsibility of the Managing Board. The
Controllers generally meet once a month with the management of
the Company and report to the Supervisory Board.
C. Our Shareholders
In accordance with our Articles of Association, our shareholders are
required to approve certain actions, including, but not limited to:
o the approval of our annual accounts prior to any regulatory
filings;
o the appointment and dismissal of Members of our Managing Board,
Supervisory Board and our External Auditors;
o the sale of an important part of our assets and businesses;
o all mergers, acquisitions or joint ventures which the Managing
Board wishes to conclude and which the Supervisory Board
considers of material significance;
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o capital increases and waiver of pre-emptive rights; and
o any changes to the Articles of Association.
II. REMUNERATION OF OUR MANAGING AND SUPERVISORY BOARD MEMBERS
A. Remuneration of our Managing Board
The remuneration of our sole Managing Board Member is fixed annually
by the Supervisory Board. It is comprised of a fixed salary and a
bonus which requires the sole Managing Board Member to fulfill
predetermined criteria, fixed at the beginning of each financial
year by the Supervisory Board upon the recommendation of the
Compensation Committee. Such criteria generally relate to the
Company's revenue growth compared to that of its main competitors,
its profitability, return on net assets, net cash flow, and market
performance over the course of a fiscal year. The sole Managing
Board Member is also attributed a number of stock options, as
determined by the Supervisory Board, upon recommendation of the
Compensation Committee (based on industry benchmarking and Company
performance) within the amount of stock options authorized for issue
under the Stock Option Plan for directors, managers and selected
employees of the Company and approved by the Company's shareholders.
Such stock options are irrevocably granted at the price of the
Company's shares on the NYSE on the grant date, which will in
principle occur once a year two business days after the Annual
General Meeting of Shareholders. The repricing of stock options
requires shareholder approval, which has never been solicited.
Our Managing Board remuneration policy is defined by our Supervisory
Board based on semiconductor industry practices.
The remuneration of the sole Managing Board Member does not involve
any loans from the Company.
B. Remuneration of ST's Supervisory Board Members
The remuneration of ST's Supervisory Board Members is fixed by the
Shareholders at the Annual General Meeting of Shareholders and is
comprised of:
o A lump sum compensation amount, and
o An attendance fee per meeting of the Supervisory Board or
Committee.
Such amounts are paid at the end of each fiscal year to each
Supervisory Board member or his or her designee.
o A defined number of stock options, pursuant to the terms of a
Stock Option Plan for Supervisory Board Members approved by the
Company Shareholders. Such stock options are irrevocably
granted to the Supervisory Board Members at the price of the
Company's shares on the NYSE on grant date, which occurs once a
year, in principle two business days after the Annual General
Meeting of
10
Shareholders. The repricing of stock options requires prior
shareholder approval, which has never been solicited.
o The remuneration of the Supervisory Board Members does not
involve any loans from the Company.
We strongly believe that the granting of irrevocable stock options
to Supervisory Board Members enables better identification with
shareholder interests and that stock options are conducive to
attracting, incentivizing and retaining the most suitable candidates
to accept service as Supervisory Board Members, in light of
worldwide semiconductor industry practices.
We will submit, as we have in the past, any Stock Option Plan
providing for the grant of stock options to our shareholders for
approval.
C. Exercise of Stock Options and Trading in ST Shares By Managing Board
and Supervisory Board Members
We report the exercise of stock options and trading in ST shares by
the Members of our Managing and Supervisory Boards to the Dutch
Authority over Financial Markets immediately after any transaction
is reported to us. We will simultaneously inform the Autorite des
Marches Financiers in France and the Consob in Italy and submit this
information under Form 6-K to the SEC in the United States. We
publish information concerning directors' transactions in our annual
filings with the SEC, the French Autorite des Marches Financiers and
the Italian Consob. We believe that ST shares held by the sole
Managing Board Member and our Supervisory Board Members are held as
long-term investments.
III. INFORMATION POLICY
We are committed to providing all of our stakeholders with comprehensive
financial and operating information on a timely basis in compliance with
applicable laws and regulations on financial disclosure. Our Corporate
Communications and Investor Relations Department work closely with our
Legal Department to ensure that we comply at all times with this
commitment.
Our policy is to issue a press release with full quarterly financial and
operating data and related commentary within approximately 25-30 days
after the end of each interim period. In addition to our timely reporting
of a statement of income and balance sheet, we include in each of our
results releases:
o Revenue breakdowns by product group, product family and
targeted segment
o Operating income by product group
o Cash-flow statements
o An "Outlook" section for the subsequent quarter
Earnings releases are prepared by the Managing Board, reviewed by the
Audit Committee and approved by the Supervisory Board prior to issuance.
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Our policy is also to submit quarterly interim financial information for
each of the first three fiscal quarters, complete with Operating and
Financial Review and Prospects (or "OFR") on Form 6-K with the SEC within
approximately 21 days after the release of the related quarterly results.
Fourth quarter interim unaudited financial information and annual audited
financial statements complete with OFR are filed with the SEC on Form 20-F
within approximately 30 days of our General Meeting of Shareholders.
Quarterly interim financial reports are made subject to review by our
Audit Committee and may be voluntarily certified pursuant to sections 302
and 906 of the Sarbanes-Oxley Act of 2002 by our CEO and CFO.
We also make filings with the French, Italian, Luxembourg and Dutch
regulators. In France, where our common shares are listed on the CAC 40
index of Euronext Paris, as well as our convertible bonds due 2009 and
2010, we publicly file a Document de Reference with the French Autorites
des Marches Financiers, containing a full description of our activities,
operating and financial review and prospects, statutory accounts,
corporate governance, risk factors and other required disclosures. In
Italy, where our common shares are listed on the MIB 30 index of the Milan
Stock Exchange, we also publicly furnish a complete Italian translation of
our Document de Reference to the Italian Consob, pursuant to mutual
recognition procedures. We make public filings in Luxembourg where our
convertible bonds due 2013 are listed on the Luxembourg Stock Exchange.
IV. CORPORATE POLICIES RELATING TO BUSINESS ETHICS AND CONFLICTS OF INTEREST
Our Managing Board has issued long-standing corporate standard operating
policies on Business Ethics and Conflict of Interest, which prohibit
insider trading, regulate financial reporting policies and disclosures,
and enumerate our goals in environmental protection, promotion of human
rights, health, safety, education and workplace practices. Our Business
Ethics and Conflict of Interest policy will, like the our Corporate
Governance Charter, be posted on our website and made available in print
to any shareholder who may request it, after approval of this Charter by
our General Meeting of Shareholders Scheduled set for April 23, 2004.
The Internal Regulations for our Supervisory Board currently under review,
and to be published once adopted, also set forth the rules applicable to
Supervisory Board Members related to trading in ST shares and conflicts of
interest.
V. CONCLUSION
Corporate Governance is a commitment to continuous improvement. We will
consistently monitor and report our corporate governance policies and
practices to update them as and when deemed necessary and we will report
major changes to our shareholders and other stakeholders. An updated
version of this charter will be available on our website. We will also
report major changes to our shareholders and other stakeholders at our
Annual General Meeting of shareholders.
12
DETACH PROXY CARD HERE
- --------------------------------------------------------------------------------
Mark, Sign, Date and Return |X|
the Proxy Card Promptly Votes must be indicated
Using the Enclosed Envelope. (x) in Black or Blue ink.
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
1. Adoption of the annual accounts [ ] [ ] [ ] 6. Proposal of appointment of Didier [ ] [ ] [ ]
for the 2003 financial year Lombard as a new member of the
Supervisory Board as successor to,
and to complete the three-year
term (to expire at our 2005 AGM)
2. Discharge of the sole member [ ] [ ] [ ] of Remy Dullieux
of the Managing Board
7. Approval of the compensation of [ ] [ ] [ ]
the members of the Supervisory
Board
3. Discharge of the members of [ ] [ ] [ ]
the Supervisory Board 8. Approval of the new employee [ ] [ ] [ ]
stock purchase plan
4. Adoption of a dividend of [ ] [ ] [ ] 9. Delegation to the Supervisory [ ] [ ] [ ]
$0.12 per common share Board for five years of the
authority to issue new shares,
5. Proposal of appointment of [ ] [ ] [ ] to grant rights to subscribe for
Gerald Arbola as a new new shares and to limit and/or
member of the Supervisory exclude existing shareholders'
Board as successor to, and to pre-emptive rights
complete the three-year term
(to expire at our 2005 AGM)
of, Jean-Pierre Noblanc
FOR AGAINST ABSTAIN
10. Approval of the change in the [ ] [ ] [ ]
quorum for the general meeting
of shareholders from one-third
of the issued share capital to
15% of the issued share capital
11. Authorization of the amendment [ ] [ ] [ ]
of the articles of association
relating to the items mentioned
under Resolution 10
12. Approval of our Corporate [ ] [ ] [ ]
Governance Policy
[ To change your address, please mark this box. [ ]
-------------------------------------
SCAN LINE
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The Voting Instruction must be signed
by the person in whose name the relevant
Receipt is registered on the books of
the Depositary. In the case of a
Corporation, the Voting Instruction
must be executed by a duly authorized
Officer or Attorney.
_____________________________ _____________________
] Date Share Owner sign here Co-Owner sign here
- --------------------------------------------------------------------------------
STMicroelectronics N.V.
Proxy Appointment and Voting Instruction Card
(Must be presented at the meeting or received by mail prior to 5:00 p.m.
(eastern standard time) on April 20, 2004)
The undersigned registered holder of common shares of New York Registry
(each representing one common share of Euro 1.04 nominal amount of
STMicroelectronics N.V.), hereby appoints ________________ or The Bank of New
York, as New York Transfer Agent and Registrar, through its agent, as the
proxy of the undersigned to attend and address the Annual General Meeting of
Shareholders of STMicroelectronics N.V. to be held in Amsterdam, The
Netherlands, on April 23, 2004 and, in general, to exercise all rights the
undersigned could exercise in respect of such common shares if personally
present thereat upon all matters which may properly become before such Meeting
and every adjournment thereof, and instructs such proxy to endeavor, in so far
as practicable, to vote or cause to be voted on a poll (if a poll shall be
taken) the common shares of STMicroelectronics N.V. represented by Shares of
New York Registry registered in the name of the undersigned on the books of the
New York Transfer Agent and Registrar as of the close of business on March 11,
2004, at such Meeting in respect of the resolutions specified on the reverse
side hereof.
NOTE: Please direct your proxy how it is to vote by placing an X in the
appropriate box opposite the resolutions specified on the reverse side
hereof. If you do not fill in the blank provided above, then you will
have appointed The Bank of New York as your proxy.
STMicroelectronics N.V.
P.O. Box 11473
New York, N.Y. 10203-0473
To include any comments, please mark this box. [ ]
Please complete and date this proxy on the reverse side and return it
promptly in the accompanying envelope.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
STMicroelectronics N.V. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
STMicroelectronics N.V.
Date: March 23, 2004 By: /s/ PASQUALE PISTORIO
------------------------------
Name: Pasquale Pistorio
Title: President and Chief Executive Officer
Enclosures: Shareholder materials for STMicroelectronics' Annual General Meeting
of Shareholders ("AGM") of April 23, 2004, including: (i) Agenda for AGM; (ii)
Report of the Managing Board; (iii) Report of the Supervisory Board; (iv) Annual
Accounts for 2003; (v) AGM Proposed Resolutions; (vi) Proposed New Supervisory
Board Member Data Forms; (vii) Deed of Amendment to the Articles of Association;
(viii) Corporate Governance Charter; (ix) Proxy Appointment and Voting
Instruction Card.