FORM 6-K
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 28, 2006
STMicroelectronics N.V.
(Name of Registrant)
39, Chemin du Champ-des-Filles
1228 Plan-les-Ouates, Geneva, Switzerland
(Address of Principal Executive Offices)
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 þ Form 40-F o
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 o No þ
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 o No þ
If Yes is marked, indicate below the file number assigned to the registrant in connection with
Rule 12g3-2(b): 82-
Enclosure: Shareholder materials for STMicroelectronics Annual General Meeting of Shareholders
(AGM) of April 27, 2006, including: (i) AGM Agenda; (ii) Statutory Annual Report of
STMicroelectronics N.V. (Dutch holding company) for the year ended
December 31, 2005 (IFRS); (iii) Proposed AGM Resolutions; (iv)
Proposed Supervisory Board Member Data Forms and (v) Proxy
Forms and Instruction Cards.
Annual General Meeting of Shareholders
2006
Agenda
Annual General Meeting of Shareholders of STMicroelectronics N.V., established
in Amsterdam, the Netherlands, to be held on April 27, 2006 at 10.30 a.m. at
the Pulitzer Hotel, Amsterdam, the Netherlands.
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Call to order and opening |
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2. |
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Report of the Managing Board on the 2005 financial year and discussion
thereof |
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3. |
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Report of the Supervisory Board on the 2005 financial year and
discussion thereof |
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4. |
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a. |
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Discussion on and adoption of the annual accounts for the 2005
financial year |
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b. |
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Adoption of a dividend of US$0.12 per common share |
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c. |
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Discharge of the sole member of our Managing Board |
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d. |
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Discharge of the members of our Supervisory Board. |
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5. |
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Appointment of three members of our Supervisory Board |
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6. |
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Adoption of the compensation of the members of our Supervisory Board |
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7. |
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Approval of the stock-based portion of the compensation of our
President and CEO |
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8. |
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Approval of the main terms for the grant of Stock-Based Compensation
for selected employees and delegation to our Supervisory Board of the
authority to approve all other terms of such grant |
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9. |
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Delegation to our 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 |
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10. |
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Question time |
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11. |
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Close |
Copies of the annual accounts, the report of the Supervisory Board, the
report of the Managing Board, 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 and other information included pursuant to law and the proposed
resolutions (including shareholders information) 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 Crédit 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 28, 2006 up to and including the date of the meeting. The documents
are also available on the Companys internet site
www.st.com and in print at
the Companys registered offices.
STMICROELECTRONICS N.V.
STATUTORY ANNUAL REPORT
DECEMBER 31, 2005
STMICROELECTRONICS N.V.
STATUTORY ANNUAL REPORT
DECEMBER 31, 2005
TABLE OF CONTENTS
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THIS STATUTORY ANNUAL REPORT HAS BEEN APPROVED AND DULY SIGNED BY:
THE MANAGING BOARD
THE SUPERVISORY BOARD
- 1 -
THE MANAGING BOARD IN 2005
Pasquale Pistorio (1936)
Former President and Chief Executive Officer. Served as the Sole Member of the Managing Board
until the 2005 annual general meeting of shareholders held on March 18, 2005
Italian nationality
Carlo Bozotti (1952)
President and Chief Executive Officer, serving as the Sole Member of the Managing Board upon his
appointment at the 2005 annual general meeting of shareholders held on March 18, 2005
Italian nationality
- 2 -
THE SUPERVISORY BOARD IN 2005
Gérald Arbola (1948) Chairman
First appointed 2004
Chief Financial Officer and member of the Executive Board of Areva
Current term until 2008
French nationality
Bruno Steve (1941) Vice Chairman
First appointed 1989
President of the Board of Statutory Auditors of Alitalia S.p.A.
Current term until 2008
Italian nationality
Matteo del Fante (1966)
First appointed 2005
Chief Financial Officer of CDP in Rome
Current term until 2008
Italian nationality
Tom de Waard (1946)
First appointed 1998
Member of the Management Committee at Clifford Chance
Current term until 2008
Dutch nationality
Douglas Dunn (1944)
First appointed 2001
Former President and Chief Executive Officer of ASML Holding N.V.
Current term expires at the 2006 AGM
British nationality
Riccardo Gallo (1943)
First appointed in 1997
Associate professor of Industrial Economics
Mandate expired at the 2005 AGM
Italian nationality
Francis Gavois (1935)
First appointed 1998
Former Chairman of the Board of Directors and Chief Executive Officer of Banque Française du
Commerce Extérieur (BFCE)
Current term expires at the 2006 AGM
French nationality
Didier Lombard (1941)
First appointed 2004
Chairman and Chief Executive Officer of France Telecom
Current term until 2008
French nationality
- 3 -
Alessandro Ovi (1943)
First appointed 1994
Special advisor to the former President of the European Union
Mandate expired at the 2005 AGM
Italian nationality
Antonino Turicchi (1965)
First appointed 2005
Managing Director of CDP in Rome
Current term until 2008
Italian nationality
Robert M. White (1938)
First appointed 1996
University Professor Emeritus Carnegie Mellon University
Current term expires at the 2006 AGM
American nationality
- 4 -
REPORT OF THE SUPERVISORY BOARD
Annual Results under International Financial Reporting Standards (IFRS) in compliance with
Dutch Statutory requirements
For the first time, ST is submitting for approval by its shareholders accounts prepared using IFRS
accounting principles instead of accounting principles generally
accepted in The Netherlands (Dutch GAAP) which have been drawn up by management, examined and
audited by PricewaterhouseCoopers Accountants N.V. and approved by the Supervisory Board. The
Companys results as reported using IFRS accounting standards differ from those reported pursuant
to accounting principles generally accepted in the United States
(U.S. GAAP) and contained in our annual report as filed with the Securities and Exchange
Commission (SEC) on March 3, 2006. Although IFRS constitutes the Companys legal reporting
standard effective 2006, ST wants to inform its shareholders and other stakeholders that it
intends, with the full support of its Supervisory Board, to continue in its quarterly
communications to investors and shareholders to use U.S. GAAP as its primary reporting standard to
ensure continuity and consistency in its financial reporting.
Supervisory Board and ST Corporate Governance
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 STs affairs and business.
In the area of corporate governance, the Supervisory Board devoted significant attention, in 2005,
to monitoring the corporate governance requirements for the Company in the various jurisdictions in
which ST is listed and incorporated, particularly those pursuant to the Dutch Corporate Governance
Code (the Code) and the evolving rules and corporate governance standards of the SEC and of the
New York Stock Exchange (NYSE). Notably, the Supervisory Board reviewed the Companys Corporate
Governance Charter and Supervisory Board Charter, which also described the independence
requirements for the Supervisory Board members. The updated charters were last approved by the
Supervisory Board in July 2005 and are posted on STs website under Corporate Governance.
In fulfilling their duties under Dutch law, Supervisory Board members serve the best interests of
all of STs stakeholders and of STs business. The Supervisory Board is carefully selected based
upon the combined experience and expertise of its members. In addition, as required by Dutch law,
all of the members of the Supervisory Board, however originally selected, act independently in
their supervision of STs management.
The above mentioned independence criteria differ to a certain extent from those set forth in best
practice provision III.2.2.
The Supervisory Board also adopted procedures for the receipt, retention and treatment of
complaints regarding accounting, internal accounting controls or auditing matters. These
procedures are incorporated in the Companys Business Conduct and Ethics policy, which is also
posted on the Companys website under Corporate Governance.
Proposed Supervisory Board Appointments
Pursuant to extensive research conducted by the Nominating and Corporate Governance Committee with
the support of a top executive research specialist, in March 2006, the
- 5 -
Nominating and Corporate Governance Committee submitted its report to the Supervisory Board,
identifying candidates for the three Supervisory Board positions up for renewal at the 2006 Annual
General Meeting of Shareholders (2006 AGM). In view of the recommendations made by the
Nominating and Corporate Governance Committee, the Supervisory Board proposes to the shareholders:
the appointment for a three-year term until the 2009 Annual General Meeting of Shareholders (2009
AGM) of Mr. Didier Lamouche as a new member of the Supervisory Board in replacement of Mr. Francis
Gavois whose mandate expires at the forthcoming Annual General Meeting of Shareholders (AGM), the
reappointment of Mr. Doug Dunn for a new three-year term until the 2009 AGM, as well as the
reappointment of Mr. Robert White for an additional one-year term until the AGM in 2007. Mr.
Didier Lamouche has been selected for his international experience in management functions for
technology companies. The proposal to reappoint Mr. Doug Dunn and Mr. Robert White are also based
on the international experience of such candidates.
The Supervisory Board wishes to warmly thank Mr. Francis Gavois for his significant contributions
to the works of the Supervisory Board, and in particular its Audit Committee.
The Supervisory Board notes that pursuant to the proposed appointments the mandates of the
Supervisory Board members will be staggered with one mandate expiring at the 2007 AGM, six mandates
expiring at the 2008 AGM and two mandates expiring at the 2009 AGM.
Proposed 2006 Cash Dividend and Retained Earnings and Dividend Policy
Upon the proposal of the Managing Board, the Supervisory Board decided to recommend to the 2006 AGM
a cash dividend of $0.12 per share, equal to last years cash dividend distribution.
This recommendation is consistent with the Companys dividend policy as communicated and discussed
at the 2005 Annual General Meeting of Shareholders (2005 AGM) whereby:
a) |
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The Company seeks to use its available cash in order to develop and enhance its position in
the very capital-intensive semiconductor market while at the same time managing its cash
resources to reward its shareholders for their investment and trust in the Company; |
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Based on its annual results, projected capital requirements as well as business conditions
and prospects, the Managing Board proposes each year to the Supervisory Board the allocation
of its earnings involving whenever deemed possible and desirable in line with the Companys
objectives and financial situation, the distribution of a cash dividend; and |
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The Supervisory Board, upon the proposal of the Managing Board, decides each year, in
accordance with this policy, which portion of the profits shall be retained in reserves to
fund future growth or for other purposes and makes a proposal to the shareholders concerning
the amount, if any, of the annual cash dividend. |
Supervisory Board Activities in 2005
The Supervisory Board is comprised of the following nine members: Messrs. Arbola (Chairman), Steve
(Vice Chairman), del Fante, de Waard, Dunn, Gavois, Lombard, Turicchi and White since our last AGM.
During 2005, the Supervisory Board met seven times so as to
- 6 -
closely monitor STs operations, strategy and evolution. Attendance at full Supervisory Board
Meetings and Committee Meetings in 2005 was as follows:
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Nominating and |
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Corporate |
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Full |
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Compensation |
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Strategic |
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Audit |
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Governance |
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Financing |
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Number of meetings attended in 2005(1) |
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Board |
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Committee |
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Committee |
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Committee |
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Committee |
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Committee |
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Bruno Steve |
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7 |
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5 |
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4 |
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4 |
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Gérald Arbola |
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7 |
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5 |
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4 |
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Tom de Waard |
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7 |
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11 |
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Douglas Dunn |
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7 |
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9 |
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Francis Gavois(3) |
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7 |
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11 |
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1 |
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Antonino Turicchi(2) |
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5 |
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3 |
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3 |
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2 |
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Didier Lombard |
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7 |
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3 |
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4 |
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1 |
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Matteo del Fante(2)(3) |
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5 |
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7 |
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Robert M. White |
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7 |
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11 |
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Riccardo Gallo(2) |
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2 |
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4 |
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Alessandro Ovi(2) |
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2 |
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1 |
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(1) |
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Includes meetings attended by way of conference call. |
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Messrs. Riccardo Gallo and Alessandro Ovi, who were Supervisory Board Members throughout
fiscal year 2004, were replaced by Messrs. Antonino Turicchi and Matteo del Fante at the
Annual General Meeting of Shareholders on March 18, 2005. |
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Appointed as non-voting observer to Audit Committee. |
The remuneration of the Supervisory Board members is described in Note 17 of the Company
Financial Statements 2005.
Biographies of the Supervisory Board members are available in Annex 1 of this Supervisory Board
report, which will posted on STs website.
In 2005, the Supervisory Boards activities comprised, inter alia:
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Approval of the Companys consolidated accounts, profit and loss accounts, balance sheet and
cash-flow statement in U.S. GAAP, as published quarterly by the management, including review
and approval of the associated press release. |
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Approval prior to the 2005 AGM, of the proposal to appoint Mr. Carlo Bozotti as Sole Member
of the Managing Board, President and Chief Executive Officer (CEO) replacing Mr. Pasquale
Pistorio, as well as the approval of the proposal made by Mr. Bozotti to appoint Alain
Dutheil as Chief Operating Officer (COO), reporting to the CEO. The Supervisory Board was
also informed of other changes made in 2005 to the executive officers and management
organization by Mr. Bozotti. |
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Approval prior to the 2005 AGM, of the proposal to appoint members to the Supervisory Board,
as well as the appointment of members for the Committees of the Supervisory Board. |
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Approval prior to the 2005 AGM, of the proposal to appoint PricewaterhouseCoopers Accountants
N.V. as the Companys auditors for a three-year term. |
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Nomination of Mr. Pasquale Pistorio as Honorary Chairman of the Company. |
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Approval of the Companys related party transactions. In particular, the Supervisory Board
determined that the Equant contract, the development and license agreement with Quadrics
Limited and transactions with Thomson are concluded in the ordinary course of business at
normal conditions and are in STs best interests. |
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Approval of the Companys plans to refinance its existing 2013 Convertible Bonds, which
provide holders with the right to require ST to redeem the bonds at their accreted value on
August 5, 2006. In this context, the Supervisory Board decided to create an Ad Hoc Committee
(the Financing Committee), composed of Messrs. del Fante, Gavois and de Waard with the
mandate and related authority to take any decision as required to be taken by the Supervisory
Board for the issuance of a new convertible bond offering, as well as the Companys first
senior bond offering. |
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Adoption of the terms and conditions of the Stock-Based Compensation Plan 2005-2007 for
Supervisory Board members and professionals, consistent with the approval given by the 2005
AGM. |
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Approval of amendments to the Companys existing 2001-2005 Employee Stock Option Plan,
consistent with the approval given by the 2005 AGM. |
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Approval of the decisions and terms and conditions of grant under the employee stock-based
compensation plan. In particular, the Supervisory Board sought to ensure that the conditions
linked to the Companys performance, which are required to be met for the vesting of the
4,100,000 stock awards granted in 2005 to employees of the Company, including the CEO
pursuant to the amended 2001-2005 Stock-Based Compensation Plan, are related to the creation
of long-term value for our shareholders. |
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Approval of the compensation policy for Mr. Carlo Bozotti as CEO, outside the presence of Mr.
Bozotti. Review of the CEO performance in 2005 with respect to the defined performance
criteria, outside the presence of Mr. Bozotti. |
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Review of the Companys corporate governance procedures, including conflicts of interest,
trading in the Companys shares, confidentiality obligations for Supervisory Board members,
the Supervisory Board Charter and the Companys Corporate Governance Charter. |
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Review of the Companys long-term strategy and business prospects, and approval of the
General guidelines as well as of the Companys 2006 Budget. |
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Review of the plans and progress of the Companys Research and Development (R&D)
effectiveness program and Key Projects. |
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Approval of the proposals by the Nominating and Corporate Governance Committee regarding
nominations of Supervisory Board members. |
The Supervisory Boards committees were also very active in 2005.
- 8 -
Compensation Committee
The Compensation Committee, whose current members are Messrs. Arbola (Chairman), Steve, Turicchi,
Lombard and de Waard, met four times in 2005, including one meeting outside the presence of
management and the President and CEO.
The Compensation Committee specifically reviewed and approved the Companys Managing Board
compensation policy and the compensation package of the President and CEO for the year 2005, and
proposed to the Supervisory Board the total compensation package for the Sole Member of the
Managing Board, President and CEO of the Company as well as the employment agreements to cover the
respective positions, Sole Member of the Managing Board on the one hand, President and CEO on the
other hand, which were approved by the Supervisory Board. The 2005 AGM approved the compensation
policy of the President, CEO and Sole Member of the Managing Board.
The remuneration for the function of President and CEO for the 2005 financial year, which was
proposed by the Compensation Committee and approved by the Supervisory Board, consisted of a base
salary of approximately $700,000 and a cash bonus computed following an evaluation by the
Compensation Committee of the CEOs performance vis-à-vis predetermined performance targets related
to: (i) the Companys R&D programs; (ii) the Companys sales; (iii) the Companys stock
performance; (iv) the Companys financial performance; and (v) the build up of the new
organization. For 2005, on March 14, 2006, the Supervisory Board upon the recommendation of its
Compensation Committee fixed the CEOs bonus at approximately 95% of the CEOs
base salary out of a possible maximum bonus of 150%.
In 2005, the President and CEO was also awarded, by the Supervisory Board upon the recommendation
of its Compensation Committee, up to 100,000 non-vested shares subject to the achievement of
predetermined performance criteria objectives fixed by the Supervisory Board. Such stock-based
compensation was approved by last years AGM. None of the restricted shares have vested, as vesting
is linked to the achievement of certain performance objectives, which will only be known at the end
of the first quarter of 2006. The President and CEO further benefited from a pension plan that was
granted in line with the pension benefits granted to all employees of STs Swiss branch. The
Supervisory Board, in 2005, also approved the establishment of a complementary pension plan for the
CEO and other top executive management, which is not yet in effect.
On March 14, 2006, the Supervisory Board, upon the recommendation of its Compensation Committee,
decided to maintain the base salary of the President and CEO for 2006 at $700,000 and to fix a
maximum cash bonus of up to 150% of his base salary based on predetermined performance targets for
2006 designed to generate value creation and related to: (i) the Companys new products; (ii) the
Companys market share; (iii) the Companys stock performance and (iv) the Companys financial
performance.
In addition, the Compensation Committee recommended the grant of up to a maximum number of 100,000
shares in stock-based compensation to Mr. Bozotti for services
to be rendered in 2006, which the Company
is proposing for approval by its shareholders at its forthcoming annual general meeting, and which
is further subject to the Company meeting specific sales and financial performance objectives to be
defined by the Supervisory Board.
- 9 -
The Compensation Committee also reviewed and approved a proposal by the Managing Board to amend the
existing 2001 Stock Option Plan for senior executives and key employees of the Company to provide
for the grant of non-vested shares instead of stock options. The Compensation Committee
reviewed the status of past grants, which were no longer functioning as a retention tool, and
approved amendments with the objective of better incentivizing our senior executives and key
employees through the grant of stock awards as approved by our 2005 AGM. The Compensation
Committee reviewed and recommended the criteria relating to our share price, sales and financial
performances as well as the continued service requirements to be met for the granted shares to vest
in favor of their designated beneficiaries. The Compensation Committee also approved the list of
proposed beneficiaries and the amount of granted shares pursuant to the proposal of the Companys
management and upon the delegation from the Companys Supervisory Board. Furthermore, the
Compensation Committee with the approval of the Supervisory Board authorized the Sole Member of the
Managing Board to grant up to 159,935 non-vested share awards plus the shares previously attributed
to employees who subsequently left the Company, so that the total number of shares granted to
executives and key employees under the Plan in addition to the 100,000 shares which may be received
by the Companys President and CEO may reach 4.1 million shares in accordance with the
authorizations granted by the Companys 2005 AGM.
The Compensation Committee also reviewed and submitted to the Supervisory Board for the relevant
approval, the proposal concerning the establishment of a stock-based compensation grant to members
and professionals of the Supervisory Board for a three-year period in accordance with the
authorizations granted by the Companys 2005 AGM.
The Company has not granted any loans to, nor has it granted any guarantees in favor of any of the
members of the Supervisory Board and the Sole Member of the Managing Board.
Strategic Committee
The Strategic Committee, whose current members are Messrs. Arbola (Chairman), Steve, Turicchi,
Lombard and White, met four times in 2005, in the presence of the CEO, the COO, the Director of
Strategy and the Chief Financial Officer (CFO). Among its main activities, the Strategic
Committee reviewed the Companys long-term plans and prospects and various possible scenarios and
opportunities to meet the challenges of the semiconductor market.
The Strategic Committee also was consulted on various other matters.
Audit Committee
The current members of the Audit Committee are Messrs. de Waard (Chairman), Dunn and White and the
current non-voting observers are Messrs. del Fante and Gavois. The Audit Committee met 11 times
during 2005. At many of these meetings, the Audit Committee received presentations on current
financial and accounting issues and had the opportunity to interview the CEO, CFO, General Counsel
and external and internal auditors. On several occasions, the Audit Committee met with outside
U.S. legal counsel, who explained and analyzed actions required by the new NYSEs final and amended
corporate governance rules and the Sarbanes-Oxley Act. In addition, the Audit Committee regularly
discussed the progress of implementation of internal controls over financial reporting and reviewed
managements conclusions as to the effectiveness of internal controls.
- 10 -
At the end of each quarter, prior to each Supervisory Board meeting to approve the results and
quarterly earnings press release, the Audit Committee reviewed the interim financial information
and the proposed press release and had the opportunity to raise questions to management and the
independent registered public accounting firm. In addition, the Audit Committee reviewed the
quarterly Operating and Financial Review and Prospects and the interim Consolidated Financial
Statements (and notes thereto) before they were filed with the SEC and voluntarily certified by the
CEO and the CFO (pursuant to sections 302 and 906 of the Sarbanes-Oxley Act).
The Audit Committee also reviewed the annual Consolidated Financial Statements under U.S. GAAP for
the year ended December 31, 2005 and the associated press release published on January 24, 2006 as
well as the Companys 2005 Annual Report as filed with the SEC on March 3, 2006. Additionally, the
Audit Committee reviewed the external auditors statement of independence with them. The Audit
Committee also approved the compensation of the external auditors and approved the scope of their
audit, audit-related and non-audit-related services for 2006. Furthermore, the Audit Committee
held separate meetings with the external auditors and discussed with them STs critical accounting
policies, outside the presence of the Companys management. The Audit Committee also reviewed and
approved the internal audit plan for 2005 as well as the scope, planning and costs of external
audit activities.
Furthermore, the Audit Committee monitored STs compliance with the European Directive that
requires the Company to prepare a set of accounts pursuant to IFRS in advance of the 2006 AGM. In
this respect, the Audit Committee has approved the decision to continue to report the Consolidated
Financial Statements under U.S. GAAP, while complying with the reporting obligations under IFRS by
preparing a set of 2005 statutory accounts. Furthermore, the Audit Committee has noted that while
the Companys accounting systems are in place to prepare a full set of accounts pursuant to IFRS
for financial year 2005, the Company did not have systems and controls in place to enable the
accurate accumulation of costs to be capitalized in respect of its
development expenses prior to 2005. Finally, the Audit Committee has, with the Companys management, analyzed the
various other constraints related to the preparation for the first time of consolidated accounts
with specific footnotes and account details, using a new set of reporting standards, IFRS, where a
significant number of new standards are being released and interpretations are evolving, and has
recommended to the Supervisory Board the approval of the Companys Statutory Annual Report for 2005
in IFRS as presented to the shareholders at the AGM of April 27, 2006.
In 2005, in compliance with NYSE requirements, the Audit Committee established procedures for the
receipt, retention and treatment of complaints regarding accounting, internal accounting controls
or auditing matters, and the confidential anonymous submission by employees of the Company
regarding questionable accounting or auditing matters. These procedures were approved by the
Supervisory Board and implemented under the responsibility of the Managing Board.
The Audit Committee reviewed its charter with the assistance of outside U.S. counsel, completed a
self-evaluation and reported regularly to the Supervisory Board. The Audit Committee Charter is
posted on the ST website under Corporate Governance.
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Nominating and Corporate Governance Committee
On October 25, 2005, the Supervisory Board appointed Mr. Tom de Waard as President of the
Nominating and Corporate Governance Committee and Messrs. Arbola, Steve, Turicchi and Lombard as
members. In 2005, the Nominating and Corporate Governance Committee met two times before the 2005
AGM and two times after the 2005 AGM.
The Nominating and Corporate Governance Committee reviewed the structure and composition of the
Supervisory Board in view of the pending expiration of the terms of Messrs. Dunn, Gavois and White.
The Nominating and Corporate Governance Committee began in the fall of 2005 to evaluate the
profiles of candidates and decided to appoint a top executive research specialist to assist it in
this mission, and since the beginning of 2006 has examined proposals to fill the three positions up
for renewal at the 2006 AGM.
The Nominating and Corporate Governance Committee advised the Supervisory Board on the
recommendations to be submitted for shareholder approval at the 2006 AGM.
Financing Committee
A Financing Committee whose members were Messrs. del Fante, Gavois and de Waard was created by the
Supervisory Board with the mandate to take any decision as required to be taken by the Supervisory
Board for the implementation of the Companys project for refinancing its 2013 Convertible Bonds.
The Financing Committee met once in 2005 and also held conference calls with the CFO, to review the
market conditions for a new convertible bond offering and other financing options, the process and
criteria for selecting the banks, the timing for the launch of any offering and the terms for the
invitation to underwrite. In 2006, the Financing Committee, duly delegated by the Supervisory
Board, approved the final conditions regarding the amount of the new convertible bond offering and
resolved upon the issuance of the number of shares to serve the relevant conversion and approved
the Companys first senior bond offering, issued by a new finance subsidiary and guaranteed by the
Company.
Conclusion
Finally, the Supervisory Board, in conjunction with the Managing Board, prepared the agenda for the
AGM. The Supervisory Board also voted on March 23, 2006 to adopt this report and recommend for
adoption of the proposed resolutions. The agenda, proposed resolutions and other information
regarding the upcoming AGM are available on STs website and in print to any shareholder upon
request.
Approved by the Supervisory Board Members on March 23, 2006
- 12 -
ANNEX 1
Current members of STs Supervisory Board
Gérald Arbola was appointed to our Supervisory Board at the 2004 annual shareholders meeting and
was reelected at the 2005 annual shareholders meeting. Mr. Arbola was appointed the Chairman of our
Supervisory Board on March 18, 2005. Mr. Arbola previously served as Vice Chairman of our
Supervisory Board from April 23, 2004 until March 18, 2005. Mr. Arbola is also Chairman of our
Supervisory Boards Compensation Committee and Strategic Committee, and serves on its Nominating
and Corporate Governance Committee. Mr. Arbola has served as Chief Financial Officer and member of
the Executive Board of Areva since July 3, 2001. 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 and 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 is currently a member of the boards of directors
of Cogema, Framatome ANP, Areva T&D Holdings and Chairman of Areva Finance Gestion S.A. and
Cogerap. Mr. Arbola is a graduate of the Institut dEtudes Politiques de Paris and holds an
advanced degree in economics. Mr. Arbola is the Chairman of the Supervisory Board of ST Holding and
a Chairman of the Board of Directors of FT1CI. Mr. Arbola is 57 years old.
Bruno Steve has been a member of our Supervisory Board since 1989 and was appointed Vice Chairman
of our Supervisory Board on March 18, 2005, and previously served as Chairman of our Supervisory
Board from March 27, 2002 through March 18, 2005, from July 1990 through March 1993, and from June
1996 until May 1999. He also served as Vice Chairman of the Supervisory Board from 1989 to July
1990 and from May 1999 through March 2002. Mr. Steve serves on our Supervisory Boards Compensation
Committee as well as on its Nominating and Corporate Governance and Strategic Committees. He was
with Istituto per la Ricostruzione Industriale-IRI S.p.A. (IRI), a former shareholder of
Finmeccanica, Finmeccanica and other affiliates of IRI in various senior positions for over 17
years. He is currently President of the statutory board of Selex Sensor and Airborne Systems. Mr.
Steve served as President of the board of statutory auditors of Alitalia S.p.a. until June 2005.
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 and IRI 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. Mr. Steve was Vice Chairman from May 1999 to
March 2002, Chairman from March 2002 to May 2003 and member until his resignation on April 21, 2004
of the Supervisory Board of ST Holding, our largest shareholder. Mr.
Steve is 64 years old.
Doug Dunn has been a member of our Supervisory Board since 2001. He is a member of its Audit
Committee since such date. He was formerly President and Chief Executive Officer of ASML Holding
N.V. (ASML), an equipment supplier in the semiconductor industry, a position from which he
retired effective October 1, 2004. Mr. Dunn currently serves as a non-executive director on the
Board of Directors of ARM Holdings plc, a UK company, LG.Philips LCD, a Korean company, OMI, an
Irish company, SOITEC, a French company, and on the board of TomTom NV. He is also a member of the
audit committees of ARM Holdings plc, SOITEC and TomTom N.V. Mr. Dunn was a member of the Managing
Board of Royal Philips Electronics in 1998. From 1996 to 1998 he was Chairman and Chief
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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. Mr. Dunn is 61 years old.
Tom de Waard has been a member of our Supervisory Board since 1998. Mr. de Waard was appointed
Chairman of the Audit Committee by the Supervisory Board in 1999 and Chairman of the Nominating and
Corporate Governance Committee in 2004 and 2005, respectively. He also serves on our Supervisory
Boards Compensation Committee. Mr. de Waard has been a partner of Clifford Chance, a leading
international law firm, since March 2000 and was the Managing Partner of Clifford Chance Amsterdam
office from May 1, 2002 until May 1, 2005. As of January 1, 2005, he was elected to the Management
Committee of Clifford Chance, where he represents Continental Europe. Prior to joining Clifford
Chance, 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. and of its audit and nominating committees. He is
also chairman of BESIs compensation committee. Mr. de Waard is a member of the board of the
foundation Stichting Sport en Zaken. Mr. de Waard is 59 years old.
Matteo del Fante was appointed to our Supervisory Board at our 2005 annual shareholders meeting.
Mr. del Fante is also a non-voting observer on its Audit Committee. Mr. del Fante has served as the
Chief Financial Officer of CDP in Rome since the end of 2003. Prior to joining CDP, Mr. del Fante
held several positions at JPMorgan Chase in London, England, where he became Managing Director in
1999. During his 13 years with JPMorgan Chase, Mr. del Fante worked with large European clients on
strategic and financial operations. Mr. del Fante obtained his degree in Economics and Finance from
Università Bocconi in Milan in 1992, and followed graduate specialization courses at New York
Universitys Stern Business School. Mr. del Fante is the Vice Chairman of the Supervisory Board of
ST Holding, our largest shareholder. Mr. del Fante is 39 years old.
Francis Gavois has been a member of our Supervisory Board since 1998. Mr. Gavois is currently a
non-voting observer on the Audit Committee of our Supervisory Board after previously having served
as a voting member through March 18, 2005. Mr. Gavois is a member of the Boards of Directors and of
the audit committee of Plastic Omnium and the Consortium de Réalisation (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 Française du Commerce Extérieur (BFCE). Prior to that time Mr. Gavois held positions in the
French government. He is Inspecteur des Finances and a graduate of the Institut dEtudes Politiques
de Paris and the Ecole Nationale dAdministration. Mr. Gavois is also a member of the Supervisory
Boards of ST Holding and FT1CI. Mr. Gavois is 70 years old.
Mr. Didier
Lamouche is a graduate of Ecole Centrale de Lyon and holds a PhD in semi-conductor
technology. He has 25 years experience in the semiconductor industry. Mr. Lamouche started his
career in 1984 in the R&D department of Philips before joining IBM Microelectronics where he held
several positions in France and the United States. In 1995, he became Director of Operations of
Motorolas Advanced Power IC unit in Toulouse (France). Three years later, he joined IBM to lead
the turnaround of the semiconductor site in Corbeil. Once restructuring and redeployment were
achieved, he created and managed as CEO Altis Semiconductor, a joint venture between IBM and
Infineon. From 2003 to
- 14 -
December 2004, Mr. Lamouche was Vice-President for IBM, based in the United States. Since December
2004, Mr. Lamouche has been the Chairman and CEO of Groupe Bull. He is also a member of the Board
of Directors of CAMEC and SOITEC.
Didier Lombard was first appointed to the Supervisory Board at the 2004 annual shareholders meeting
and was reelected at the 2005 Annual Shareholders Meeting. He serves on the Compensation and
Strategic Committees of our Supervisory Board. Mr. Lombard was appointed Chairman and Chief
Executive Officer of France Telecom in March 2005. Mr. Lombard began his career in the Research and
Development division of France Telecom in 1967. From 1989 to 1990, he served as scientific and
technological director at the Ministry of Research and Technology. From 1991 to 1998, he served as
General Director for industrial strategies at the French Ministry of Economy, Finances and
Industry, and from 1999 to 2003 he served as Ambassador at large for foreign investments in France
and as President of the French Agency for International Investments. From 2003 through February
2005, he served as France Telecoms Senior Executive Vice President in charge of technologies,
strategic partnerships and new usages and as a member of France Telecoms Executive Committee. Mr.
Lombard also spent several years as Ambassador in charge of foreign investment in France. Mr.
Lombard is also Chairman of the Board of Directors of Orange and a member of the Board of Directors
of Thomson, one of our important customers, and Wanadoo, as well as a member of the Supervisory
Board of ST Holding (our largest shareholder) and Radiall. Mr. Lombard is a graduate of the Ecole
Polytechnique and the Ecole Nationale Supérieure des Télécommunications. Mr. Lombard is 64 years
old.
Antonino Turicchi was appointed as a member of our Supervisory Board at our 2005 annual
shareholders meeting. He serves on its Compensation and Strategic Committees. Mr. Turicchi earned a
degree cum laude in Economics and Business from the University of Rome and, after receiving a
scholarship from Istituto San Paolo di Torino, he attended the masters program in Economics at the
University of Turin in 1991 and 1992. In 1993, he was awarded a grant from the European Social Fund
to attend the masters program in International Finance and Foreign Trade. Mr. Turicchi has been
Managing Director of CDP in Rome since June 2002. From 1994, Mr. Turicchi held positions with the
Italian Ministry of the Treasury (now known as the Ministry of the Economy and Finance). In 1999,
he was promoted to director responsible for conducting securitization operations and managing
financial operations as part of the treasurys debt management functions. Between 1999 and June
2002, Mr. Turicchi was also a member of the board of Mediocredito del Friuli; from 1998 until 2000,
he served on the board of Mediocredito di Roma; and from 2000 until 2003, he served on the board of
EUR S.p.A. Mr. Turicchi is 40 years old.
Robert M. White has been a member of our Supervisory Board since 1996. He serves on its Strategic
and Audit Committees. Mr. White is a University Professor Emeritus at Carnegie Mellon University
and serves as a member of several corporate boards, including that of Silicon Graphics, Inc., as
well as on its audit committee and nominating and corporate governance committee. Mr. White is a
member of the U.S. National Academy of Engineering and the recipient of the American Physical
Societys Pake Prize for research and technology management in 2004. 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, including Principal Scientist for Xerox
Corporation and Vice President and Chief Technology Officer for Control Data Corporation. He
received a doctoral degree in Physics from Stanford University and graduated with a degree in
Physics from the Massachusetts Institute of Technology. Mr. White is 67 years old.
- 15 -
REPORT OF THE MANAGING BOARD
2005 has been a year devoted to strengthening and reshaping ST into a stronger and more competitive
industry leader. We have undertaken a number of important initiatives and have made good progress
in implementing all of them.
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The first important initiative was research and development
(R&D) effectiveness, with the primary objective of improving
time to market both for technologies and for products. We are
addressing this through a comprehensive plan involving a
coordinated maneuver that has implied organizational changes, the
redeployment of important resources and a significantly higher
focus on the selection of programs and discipline on their
execution. |
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The second main set of initiatives were focused on Sales
Expansion. Here again, just as for R&D, our actions were deployed
on several fronts as we target major new accounts, while at the
same time reorganizing to sharpen our efforts and improve our
penetration of both the Chinese and Japanese markets. |
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Finally, the third big block of initiatives groups all of our wide
ranging cost reduction programs. We have targeted improvements in
purchasing, the centralization of services and increased overall
efficiencies across ST. In order to improve our cost structure,
we had to take some painful but indispensable restructuring
initiatives, which impacted basically most of our European sites,
the Mediterranean basin area and, to some extent, our operations
in the USA. |
Our roadmap to improved performance has been a huge and complicated undertaking, involving the
entire ST organization throughout the world. Every employee, directly or indirectly, has been
involved in a well orchestrated performance implying hundreds of simple initiatives that our
management team designed and which have been implemented throughout 2005 and as we move into 2006.
New product designs have accelerated. Customer base expansion efforts have been developed and are
being carried out. At the same time, cost reduction actions have been implemented across the board.
Also, we would like to highlight that in 2005 the following key organizational changes have been
implemented:
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We have adjusted our operations and in particular have regrouped
under the following new specific organizations: |
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Front End Technology and R&D; |
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Home Personal and Communication Products; and |
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Infrastructure and Services. |
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We have formed a new Executive Committee, which consists of our
Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Chief Strategy Officer and three Executive Vice
Presidents (representing the Product Group, the Manufacturing
organization and the Sales organization); and |
- 16 -
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We have created a new Greater China Region. |
U.S. GAAP and Dutch Statutory Annual Report
We report our quarterly, semi-annual and annual financial results to our investors and the general
public using Consolidated Financial Statements prepared under U.S. GAAP, which is the accounting
standard we have used since our creation in 1987. We believe that the reference to U.S. GAAP in
our financial reporting is important in our industry and in the mind of our investors to ensure the
comparability of our performance and results to those of our competitors, and to ensure the
continuity in the reporting of our financial performance. We intend to continue using U.S. GAAP as
our primary accounting standard for the Companys setting of financial and operational performance
targets, and for internal and external reporting purposes. Copies of our U.S. GAAP annual report,
based on Form 20-F, quarterly releases and other information, can be obtained from our offices and
are also available on STs website at www.st.com.
By means of regulation 1606/2002, the European Commission has stipulated that all listed companies
within the European Union member states are required to prepare their consolidated financial
statements under International Financial Reporting Standards (IFRS) as from January 1, 2005. We
have therefore, for Dutch statutory purposes, prepared our first annual report based on IFRS. We
wish to inform our shareholders that based on the fact that we have started to use IFRS for the
first time only since January 1, 2005, we do not yet have systems and controls in place to enable
us to accurately compare the figures relating to development expenses for 2004.
Full Year 2005 Results Highlights
During 2005, our performance constantly improved, quarter after quarter, from the bottom levels of
the first quarter 2005. Our goal is to continue to strengthen our financial performance and
product leadership based upon the execution of our corporate performance roadmap.
Our year-over-year financial results are, for the purposes of the statutory Managing Board Report
under Dutch law, presented using IFRS figures.
Our net revenues for the year ended December 31, 2005 were $8,882 million, an increase of 1.4% over
the $8,760 million recorded in 2004. Year-over-year sales growth was driven by wireless and data
storage applications, which both grew at double-digit rates. Automotive applications also grew at
a much faster rate than that of the Company year-over-year.
Gross profit was $3,000 million or 33.8% of net revenues in 2005, compared to $3,195 million, or
36.5% of net revenues in 2004. Operating profit was $394 million, or 4.4% of net revenues,
compared to $631 million or 7.2% of net revenues in 2004.
R&D costs for 2005 were $1,411 million, or 15.9% of net revenues, compared to $1,543 million, or
17.6% of net revenues in 2004. However, the 2005 R&D expenses are net of the development
capitalization, which started in 2005 and was not considered in the 2004 accounts; furthermore,
2005 R&D expenses included approximately $27 million in charges related to the accelerated vesting
of existing stock options. Selling, general, and administrative (SG&A) expenses were $1,069
million or 12.0% of net revenues in 2005, compared to $970 million or 11.1% of net revenues in
2004. 2005 SG&A expenses included
- 17 -
$18 million in one-time compensation and pension charges, $35 million in charges related to the
accelerated vesting of stock options and $5 million in other stock-based compensation costs. The
Company posted $98 million of impairment, restructuring charges, and other related closure costs in
2005, compared to $85 million in 2004.
Net profit attributable to the shareholders of the Company for 2005 was $347 million, or $0.39 per
diluted share. In the prior year, net profit attributable to the shareholders of the Company was
$523 million, or $0.56 per diluted share.
For ST, the effective average exchange rate of the euro versus the U.S. dollar for the full year
2005 was approximately $1.28 to 1, which reflects current exchange rate levels and the impact of
certain hedging contracts, compared to approximately $1.23 to 1 in 2004.
Net cash from operating activities for 2005 was $1,984 million compared to $2,305 million in 2004.
Capital expenditures, net of sales proceeds were $1,441 million in 2005, compared to $2,051 million
in 2004. Net operating cash flow for 2005 was $270 million, compared to $208 million in 2004.
Looking towards 2006, we want to share our vision on market trends by making certain forward
looking statements which of course are subject to certain risks and uncertainties, highlighted in
the Internal Control section.
We expect that 2006 will be a year of renewed sales growth. Our design wins are increasing and
should continue to in 2006, together with our sales, as we progress through the year after the
seasonal adjustment of the first quarter.
We aim at progressively regaining the market share fractions we have lost over the past several
years. We are working to address important business opportunities for us in the areas of wireless,
consumer, industrial and, in general, in what we define as the mass market. We are now starting to
see the benefits from the marketing initiatives we have been undertaking over the last nine months
or so, including the targeting of important new key accounts and specific initiatives for the
Japanese and Chinese markets.
We also see 2006 as the year of consolidation of our achievements, the year of further
strengthening and of preparation for the next step forward. We are definitely continuing our
effort to make ST a sharper research, design, manufacturing and marketing company. We are also
addressing other issues in order to protect the Company as much as we can against adverse external
conditions.
The impact of currency fluctuations, for example, continues to be a key challenging factor to our
cost structure, and we are constantly working to reduce our exposure to that risk. We are acting
on several fronts, with Asia playing a central role in these programs. Of course we are increasing
the Asian portion of our manufacturing. We are also expanding our supplier base to qualified Asian
suppliers. And, where appropriate, we will choose to move to Asia as we have just decided to do
for our Corporate Back-End other corporate functions, for which that continent acts as a natural
pole of attraction.
We are also working to develop a stronger, more consistent pipeline of new products. A wave of new
ST products is hitting the market everyday, now and in these past months starting with our Micro,
Linear and Discrete which has had an average of approximately four new products per working day.
Here, our effort on advanced analog products for industrial
- 18 -
applications is instrumental for our success in broadening our customer base and enhancing the
margin dynamics of that business.
We are also developing complex product platforms which represent some of the most powerful engines
for growth of ST. We believe that platforms are the answer to the growing need for full system
integration, as customers require from their silicon suppliers not just chips, but an optimized
combination of hardware and software. It is a huge task for the industry and it is a major change
in the way companies position themselves to better serve their customers.
In STs case more than 1,500 engineers and designers are currently working on the development of
five platforms. We have selected the following platforms, as we believe they are the spearheads of
our future growth plans in some of the fastest developing markets for the microelectronics
industry:
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Two in the consumer area, include: |
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Set-Top-Boxes, covering both standard and high definition satellite, cable,
digital terrestrial and Internet Protocol based devices; and |
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Digital TV, covering integrated and module solutions that capitalize on the
ongoing worldwide transition to digital television. |
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Two in the wireless area, include: |
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Application Processors, namely our Nomadik platform that is bringing multimedia to
the next-generation mobile devices; and |
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Wireless infrastructure, for 3-G base-stations. |
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And one platform in the computer peripherals area, is: |
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The SPEAr family of configurable System-on-Chip ICs for printers and related
applications. |
Needless to say, the complexity of these platforms and the amount of system content they integrate
on silicon, are such that they can best be developed in tight cooperation with our customers and
alliances. In this respect, ST has pioneered the concept of strategic alliances with customers and
has created a solid network of consolidated partnerships, which in the year 2005 contributed to as
much as 44% of total revenues, up 5% from the previous year.
We also have a long tradition of cooperation with competitors on technology, developments and
specific product families, where we join resources to better cater to the markets we serve.
Corporate Governance and Internal Controls
We confirm to our shareholders, and other stakeholders, that management at ST has always devoted
the highest importance to corporate governance and internal controls issues. We consider these
issues all the more relevant, that as a company subject to the laws of various jurisdictions which
may in certain cases have conflicting requirements in terms of best practices, we need to ensure
that our position on these important items is well communicated
- 19 -
and understood. For this reason and for the first time, we are including in our Statutory Annual
Report a special section on Corporate Governance and Internal Controls.
Conclusion
We would like to focus the attention of our shareholders and other stakeholders on our corporate
culture and our wholehearted commitment to corporate responsibility and sustainable development.
In a moment of profound changes, the attention of STs management team is on improving the
Companys financial performance. But the values we share are there, strong and solid as ever.
We believe that today, and just as in the past, ST will do business with integrity, and that ST is
aware of its responsibility towards its stakeholders. Big corporations are powerful, so they must
be accountable. Market conditions may change, and they may have an impact on the speed of
implementation of our programs. But ST management will not question the direction and the ultimate
goal. Our vision is to create value for all of our stakeholders.
Our corporate responsibility action is focused on four main areas:
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Integrity, the core of our business ethics, which we see as a deep ethical obligation; |
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Health and Safety, where we have pioneered OHSAS certifications. Here we would like to go
beyond the traditional concept of safety, working at protecting the health of our employees
inside and outside their workplace; |
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Our efforts to help bridge the digital divide; and |
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Sustainable development and more particularly energy conservation. This is an area where we
believe we could, and should do more. We and the entire industry should make a special
effort in designing and introducing new products that are more friendly to the environment,
particularly in the area of energy savings: from solar cells and fuel cells to fuel-saving
engine controls; from low-consumption lighting to more efficient power management controls
and, in general, low power technologies. We believe we can contribute to the protection of
the environment, while at the same time creating new market opportunities. |
We intend to pursue our activities in this field of corporate responsibility throughout 2006
and in the future.
Approved by the Managing Board on March 23, 2006.
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CORPORATE GOVERNANCE
Since our formation in 1987, we have demonstrated a consistent commitment to the principles of good
corporate governance, evidenced by:
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Our corporate organization under Dutch law that entrusts our
management to a Managing Board acting under the supervision and
control of a Supervisory Board totally independent from the
Managing Board. Members of our Managing Board and of our
Supervisory Board are appointed and dismissed by our shareholders; |
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Our early adoption of policies on important issues such as
business ethics and conflicts of interest and our strict policies,
implemented since our 1994 initial public offering, to comply with
applicable regulatory requirements concerning financial reporting,
insider trading and public disclosures; |
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Our compliance with United States, French and Italian securities
laws, because our shares are listed in these jurisdictions, and
with Dutch securities laws, because we are a company incorporated
under the laws of the Netherlands, as well as our compliance with
the corporate, social and financial laws applicable to our
subsidiaries in the countries in which we do business; and |
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Our broad-based activities in the field of corporate social
responsibility, encompassing environmental, social, health,
safety, educational and other related issues. |
As a Dutch company, we became subject to the Dutch Corporate Governance Code effective January 1,
2004. As we are listed on the NYSE, Euronext Paris and the Borsa Italiana in Milan, but not in the
Netherlands, our corporate governance principles and guidelines seek to achieve compliance with the
relevant practices in a variety of jurisdictions, always keeping in mind the best interests of the
shareholders, employees and other stockholders. As a result the corporate governance practices
differ in certain cases from the best practices recommended by the Dutch Corporate Governance
Code. However, by explaining the corporate governance practices in the Corporate Governance
Charter, the Company has endeavored to comply with the Dutch Corporate Governance Code. We have
summarized our policies and practices in the field of corporate governance in the ST Corporate
Governance Charter, including our corporate organization, the remuneration principles which apply
to our Managing and Supervisory Boards, our information policy and our corporate policies relating
to business ethics and conflicts of interest. Our Charter was discussed with and approved by our
shareholders at our 2004 AGM. The ST Corporate Governance Charter was updated in 2005 and will be
further updated and expanded whenever necessary or advisable. We are committed to inform our
shareholders of any significant changes in our corporate governance policies and practices at our
AGM. Along with our Supervisory Board Charter (which includes the charters of our Supervisory Board
Committees) and our Code of Business Conduct and Ethics, the current version of our ST Corporate
Governance Charter is posted on our website, at
http:/www.st.com/stonline/company/governance/index.htm, and these documents are available in print
to any shareholder who may request them.
STs corporate governance provisions, as highlighted by the ST Corporate Governance and Supervisory
Board Charters posted on the website under Corporate Governance can differ from the best practice
provisions in the Dutch Corporate Governance Code. The areas concern primarily remuneration, where
like many of the Companys peer companies in the
- 21 -
high-tech industry and due to the fiscal legislation in the various main countries in which the
Company operates, there is neither a requirement for a minimum three-year vesting period for
share-based compensation (best practice provisions II.2.1 and II.2.2 of the Dutch Corporate
Governance Code), nor a three-year minimum (five years for Managing Board members) holding
requirement (best practice provision II.2.3 of the Dutch Corporate Governance Code). Furthermore,
ST believes that Supervisory Board members compensation should include stock-based compensation in
order to ensure that they best identify with the interests of all shareholders in line with
international practices (best practice provision III.7.1 of the Dutch Corporate Governance Code).
STs Supervisory Board and Corporate Governance
ST has adopted a profile for its Supervisory Board members, the composition of the Supervisory
Board committees, as well as a definition of independence regarding the status of Supervisory Board
members which is described in the Supervisory Board Charter. Since the Companys creation in 1987,
STMicroelectronics Holding N.V. (ST Holding) has always been one of the major shareholders, and
some of the members of the Supervisory Board have long-standing relationships with both the
shareholders and with the Company. Such relationships are described in their biographies, which
are posted on our website. One of the Companys Supervisory Board members has been in office since
1987, which is more than twelve years (best practice provision III.3.5). Additionally, the
Chairman of the Supervisory Board is also the President of the Companys Supervisory Boards
Compensation Committee. This is due to the system of alternating the position of President of the
Supervisory Board (best practice provision III.5.11 of the Dutch Corporate Governance Code).
The Supervisory Board is carefully selected based upon the combined experience and expertise of its
members. Certain of our Supervisory Board members, as disclosed in their biographies attached to
the Supervisory Board report, have existing relationships or past relationships with Areva, Cassa
Depositi e Prestiti (CDP) and/or Finmeccanica, who are currently parties to the ST Holding
Shareholders Agreement as described below. Such relationships may give rise to potential
conflicts of interest. However, in fulfilling their duties under Dutch law, Supervisory Board
members serve the best interests of all of STs stakeholders and of STs business and must act
independently in their supervision of STs management.
Our Supervisory Board held several meetings in 2003, 2004 and 2005 to discuss the new Dutch
Corporate Governance Code, the implementing rules and corporate governance standards of the SEC and
of the NYSE. It created an Ad Hoc Committee composed of Messrs. de Waard (Chairman), Steve and
Gavois. The committee considered our independence criteria, Corporate Governance Charter and
Supervisory Board Charter. Based on the work of the Ad Hoc Committee, our Supervisory Board also
considered, with respect to such matters, our unique history as a European company incorporated in
the Netherlands following the combination of the Italian and French semiconductor businesses and
our shareholding structure, with approximately 70% of our shares held by the public and
approximately 30% indirectly held by French and Italian state-controlled companies.
Based on all these factors, in 2005, the Supervisory Board established the following independence
criteria for its members: Supervisory Board members must have no material relationship with
STMicroelectronics N.V., or any of our consolidated subsidiaries, or our management. A material
relationship can include commercial, industrial, banking,
- 22 -
consulting, legal, accounting, charitable and familial relationships, among others, but does not
include a relationship with direct or indirect shareholders.
The Supervisory Board also adopted specific bars to independence. On that basis, the Supervisory
Board in March 2005 concluded, in its business judgment that all members qualified as independent
based on the criteria set forth above.
The above mentioned independence criteria differ to a certain extent from best practice provision
III.2.2 of the Dutch Corporate Governance Code.
Pursuant
to the Dutch Corporate Governance Code, the Company is required to
remind its shareholders that the
Supervisory Board may, upon request of the Managing Board, decide to authorize the issue of
preference shares in order to protect ST against a hostile or unfriendly takeover; the Company
views this as an opportunity to create a level playing field for all ST stakeholders, if such an
event were to occur.
Commitment to Corporate Governance
We have demonstrated a consistent commitment to the principles of good corporate governance
evidenced by our early adoption of policies on important issues such as conflicts of interest.
Pursuant to our Supervisory Board Charter, the Supervisory Board is responsible for handling and
deciding on potential reported conflicts of interest between the Company on the one hand and
members of the Supervisory Board and Managing Board on the other hand.
For example, in 2005 our Managing Board requested that our Supervisory Board decide upon the
renewal of a contract for the provision of various telecom-related services with Equant, a
subsidiary of France Telecom. One of our Supervisory Board members is Chairman and CEO of France
Telecom. The Supervisory Board noted the Managing Boards assessment of the positive commercial
benefits of such contract and noted that the contract was concluded at normal and competitive
conditions and was based on a long-standing proven business relationship between Equant and us.
Additionally in 2005, our Managing Board requested that our Supervisory Board decide upon a
development and license agreement to be concluded with Quadrics Limited, a company owned by Alenia
Aeronautica that is in turn owned by Finmeccanica, one of our principal shareholders. The
Supervisory Board noted that the contract was concluded in the ordinary course of business at
normal conditions and that it was considered mutually beneficial for Quadrics Limited and us.
Additionally, one of our Supervisory Board members is a member of the Board of Directors of
Thomson, which is one of our strategic customers. We believe that the transactions with Thomson
are made on an arms length basis in line with market practices and conditions with neither Thomson
nor us benefiting from terms any more favorable than those which could be obtained in a bona fide
transaction with a third party (best practice provisions III.6.4, II.3.2., II.3.3. and II.3.4. have
consequently been complied with).
We prepared and published, in 2004, the Corporate Governance Charter, which explains in detail the
corporate organization, the remuneration principles that apply to the Managing and Supervisory
Boards, the information policy and highlights the corporate policies relating to business ethics
and conflicts of interest. The Corporate Governance Charter, which was approved by the
shareholders at the 2004 AGM, and has since been updated, as well as the current policies relating
to business ethics and conflict of interest, are available on the Companys website as well as in
print to any shareholder who may request a copy.
- 23 -
The Company has applied all best practices provisions and for completeness sake and in accordance
with the Dutch Corporate Governance Code, has explained all deviations from the Code in this
report. The Companys Corporate Governance Charter and the aforementioned deviations from the
Dutch Corporate Governance Code were approved by the 2004 AGM.
- 24 -
INTERNAL CONTROL
As Sole Member of our Managing Board, Mr. Carlo Bozotti is responsible for the design,
implementation and operation of the Companys internal risk management and control systems. Our
disclosure controls and procedures are also established and maintained under the responsibility of
the Companys Executive Vice President and Chief Financial Officer who reports to Mr. Bozotti.
The objective of the Companys internal controls and procedures is to ensure that material
information relating to the Company and its consolidated subsidiaries is made known to the Chief
Executive Officer and the Chief Financial Officer during each reporting period.
The effectiveness of the Companys internal controls and procedures is evaluated periodically, and
changes to such internal controls and procedures, as well as any significant deficiencies and
material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to affect the Companys ability to record, process or summarize and report
financial information are disclosed to our auditors and to the Audit Committee of our Supervisory
Board. Likewise any fraud, whether or not material, that involves management or other employees
who have a significant role in the Companys internal control over financial reporting are
disclosed to our auditors, and to the Audit Committee of our Supervisory Board. To date in our
ongoing evaluation, we have not detected any material weaknesses regarding our system of internal
controls.
In the various areas of business risk management we have established corporate policies and
procedures which set forth principles, business rules of behavior and conduct which are considered
to be consistent with proper business management, in line with our mission and strategic
objectives.
We have also adopted Corporate Standard Operating Procedures to describe the operational flow of
actions (outlining responsibilities for each step) to perform a task or activity, or to implement a
policy within a given functional field. We have over one hundred standard operating procedures
which cover a wide range of activities such as approvals, authorizations, verifications,
reconciliations, review of operating performance, security of assets and segregation of duties,
which are deployed throughout our organization, and which may be completed as and when required by
local operating procedures.
We also have an internal audit organization, which performs general scope internal audits covering
various areas, such as information technology, logistics and inventory management, human resources
and payroll, internal control systems, security, purchasing, treasury, etc. The audit plans for
our internal audit organization are reviewed at least once a year by the Audit Committee of our
Supervisory Board.
Summary
In summary, our internal risk management and control system cannot provide absolute assurance, but
aims at a reasonable level of assurance, that realization of strategic and operational objectives
is monitored, the financial reporting is reliable and where relevant applicable laws and
regulations are complied with.
In accordance with the requirements of recommendation II.1.4 of the Dutch Corporate Governance Code
and the recommendation of the Corporate Governance Code Monitoring
- 25 -
Committee on the application thereof, the Managing Board, to the best of its knowledge, believes
that with regard to financial reporting risks, our internal risk management and controls systems
provide a reasonable level of assurance that that they do not contain material inaccuracies, have
operated effectively in the year 2005 and that there are no indications that they will not operate
properly in the current year. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect all misstatements, fraud and non-compliance with laws and
regulations. Therefore, even those systems determined to be effective can only provide reasonable
assurance with respect to the financial statement preparation and presentation.
The aforementioned statement does not imply a statement regarding the adequacy and effectiveness of
the Companys internal controls over financial reporting as will be required by the Sarbanes-Oxley
Act section 404, when it applies to the Company as from January
1st 2006.
Our internal risk management and control systems were discussed with the Audit Committee and the
Supervisory Board.
Main Risks Factors
The business performance and results of ST and the ability of management to predict the future are
also affected by several risks factors such as those described below:
|
|
future developments of the world semiconductor market, in particular the future demand for semiconductor products in
the key application markets and from key customers served by our products; |
|
|
|
pricing pressures, losses or curtailments of purchases from key customers; |
|
|
|
the financial impact of inadequate or excess inventories if actual demand differs from our anticipations; |
|
|
|
changes in the exchange rates between the U.S. dollar and the euro and between the U.S. dollar and the currencies of
the other major countries in which we have our operating infrastructure; |
|
|
|
our ability to be successful in our strategic R&D initiatives to develop new products to meet anticipated market
demand, as well as our ability to achieve our corporate performance roadmap by completing successfully and in a timely
manner our other various announced initiatives to improve our overall efficiency and our financial performance; |
|
|
|
the anticipated benefits of R&D alliances and cooperative activities and the continued pursuit of our various
alliances, in the field of development of new advanced technologies or products; |
|
|
|
the ability of our suppliers to meet our demands for products and to offer competitive pricing; |
- 26 -
|
|
changes in the economic, social or political environment, as well as natural events such as severe weather, health
risks, epidemics or earthquakes in the countries in which we and our key customers operate; |
|
|
|
changes in our overall tax position as a result of changes in tax laws or the outcome of tax audits; |
|
|
|
product liability or warranty claims for a product containing one of our parts; and |
|
|
|
our ability to obtain required licenses on third-party intellectual property, the outcome of litigation and the results
of actions by our competitors. |
Our Annual Report filed with the SEC on March 3, 2006 under cover of Form 20-F, which is available
on our website, contains a more detailed list of risk factors which may affect our business and
operations, and future performance.
- 27 -
EXECUTIVE SUMMARY
We are a multinational group of companies that designs, develops, manufactures and markets a broad
range of semiconductor products used in a wide variety of microelectronic applications, including
automotive products, computer peripherals, telecommunications systems, consumer products,
industrial automation and control systems.
We were incorporated under the law of the Netherlands by notarial deed of incorporation of May 21,
1987. We are a limited liability company (naamloze vennootschap) and are governed by Dutch law,
including but not limited to Book 2 of the Dutch Civil Code. As a result of the listings of our
shares on Euronext Paris, the Borsa Italiana and the New York Stock Exchange, we are also subject
to French, Italian and United States rules relating thereto. Furthermore, we are subject to
elements of the legislation of all the jurisdictions in which we operate. We have our corporate
legal seat in Amsterdam and our head offices at WTC Schiphol Airport, Schiphol Boulevard 265, 1118
BH Schiphol Airport, Amsterdam, The Netherlands.
While STMicroelectronics N.V. is the parent company, we also conduct our operations through our
consolidated subsidiaries. Except for our subsidiaries in Shenzhen (China), in which we own 60% of
the shares and voting rights, Accent S.r.l. (Italy), in which we own 51% of the shares and voting
rights, Hynix, ST (China) venture company in which we own a 33% equity participation, Shanghai Blue
Media Co. Ltd (China) in which we own 65% and Incard do Brazil in which we own 50% of the shares
and voting rights, STMicroelectronics N.V. owns directly or indirectly 100% of all of our
significant operating subsidiaries shares and voting rights. Each subsidiary has its own
organization and management bodies, and is operated independently in compliance with the laws of
their country of incorporation. We provide certain administrative, human resources, legal,
treasury, strategy, manufacturing, marketing and other overhead services to our consolidated
subsidiaries pursuant to service agreements for which we receive compensation.
The simplified organigram below shows the principal industrial subsidiaries of ST:
- 28 -
According to provisional industry data published by iSuppli, we have been ranked the worlds fifth
largest semiconductor company based on forecasted 2005 total market sales and we held leading
positions in sales of Analog Products, Application Specific Integrated Circuits (or ASICs) and
Application Specific Standard Products (or ASSPs). Based on provisional 2005 results published
by iSuppli, we believe we were also number one in discretes and number two in automotive
electronics, industrial products and analog products and number three in NOR Flash. Based on 2004
industry results, we also believe we ranked as a leading supplier of semiconductors in 2005 for
set-top boxes, Smart cards and power management devices. Furthermore, based on our relationship
with Hewlett-Packard, which has a leading position in the printhead market, we believe that we are
a leading supplier of integrated circuits for printheads. Major customers include Axalto, Alcatel,
Bosch, Delphi, Delta, Ericsson, Hewlett-Packard, LG Electronics, Marelli, Maxtor, Motorola, Nokia,
Philips, Pioneer, Samsung, Scientific Atlanta, Seagate, Siemens, Thomson, Vestel, Visteon and
Western Digital. We also sell our products through global distributors and retailers, including
Arrow Electronics, Avnet, BSI Group, Wintech and Yosun.
The semiconductor industry has historically been a cyclical one and we have responded through
emphasizing balance in our product portfolio, in the applications we serve, and in the regional
markets we address. Consequently, from 1994 through 2005, our revenues grew at a compounded annual
growth rate of 11.6% compared to 7.6% for the industry as a whole.
We offer a diversified product portfolio and develop products for a wide range of market
applications to reduce our dependence on any single product, application or end market. Within our
diversified portfolio, we have focused on developing products that leverage our technological
strengths in creating customized, system-level solutions with high-growth digital and mixed-signal
content. Our product families include differentiated application specific products (which we
define as being our dedicated analog, mixed signal and digital ASIC and ASSP offerings and
semicustom devices), power microcontrollers and discrete products and non-volatile memory and Smart
cards. Application specific products, which are generally less vulnerable to market cycles than
standard commodity products, accounted for approximately 56% of our net revenues in 2005. Memory
product sales accounted for approximately 22% of our net revenues in 2005, while sales of Micro
linear and discrete products accounted for approximately 21% of our net revenues in 2005.
Our products are manufactured and designed using a broad range of manufacturing processes and
proprietary design methods. We use all of the prevalent function-oriented process technologies,
including complementary metal-on silicon oxide semiconductor (CMOS), bipolar and nonvolatile
memory technologies. In addition, by combining basic processes, we have developed advanced
systems-oriented technologies that enable us to produce differentiated and application specific
products, including bipolar CMOS technologies (BiCMOS) for mixed-signal applications and diffused
metal-on silicon oxide semiconductor (DMOS) technology (BCD technologies) for intelligent power
applications and embedded memory technologies. This broad technology portfolio, a cornerstone of
our strategy for many years, enables us to meet the increasing demand for System-on-Chip (SoC)
solutions. Complementing this depth and diversity of process and design technology is our broad
intellectual property portfolio that we also use to enter into important patent cross-licensing
agreements with other major semiconductor companies.
Effective January 1, 2005, we realigned our product groups to increase market focus and realize the
full potential of our products, technologies and sales and marketing channels. Since such date we
report our sales and operating profit in three product segments:
- 29 -
|
|
the Application Specific Product Group (ASG) segment, comprised
of three product lines our Home, Personal and Communication
Products (HPC), our Computer Peripherals Products (CPG) and
our Automotive Product (APG). Our HPC products are comprised of
the telecommunications and the audio divisions from the former
Telecommunications, Peripherals and Automotive Groups combined
with the consumer group from the former Consumer Microcontroller
Groups. Our CPG products cover computer peripherals products,
specifically disk drives and printers, and our APG products now
comprise all of our major complex products related to automotive
applications formerly within the automotive group of
Telecommunications, Peripherals and Automotive Groups and in other
product groups (notably from the former Discrete and Standard ICs
Group and the Microcontroller Group); |
|
|
|
the Memory Products Group (MPG) segment, comprised of our
memories and Smart card businesses; and |
|
|
|
the Micro, Linear and Discrete Product Group (MLD) segment,
comprised of the greater part of our former Discrete and Standard
ICs Group and our standard microcontroller and industrial devices
(including the programmable systems memories (PSM) division
previously forming part of MPG). |
Our principal investment and resource allocation decisions in the semiconductor business area are
for expenditures on R&D and capital investments in front-end and back-end manufacturing facilities.
These decisions are not made by product segments, but on the basis of the semiconductor business
area. All these product segments share common R&D for process technology and manufacturing capacity
for most of their products.
We have in 2005 pursued various initiatives to reshape the Company by: (i) reorganizing our
management team and setting up an Executive Committee; (ii) increasing our R&D effectiveness
through a program focus on 20 key initiatives, improved project control and redeployment of certain
resources with the aim to improve time to market for both technologies and products; (iii)
promoting sales expansion for mass market application and new major key accounts with a special
focus on the Chinese and Japanese markets with a view to increased overall efficiencies; (iv)
executing a plan to improve our manufacturing competitiveness through the restructuring of our
150-mm wafer production capacity and (v) launching and implementing various further cost reduction
initiatives through procurement savings, improved asset management, general and administration
centralization and head count restructuring.
We invest in a variety of R&D projects ranging from long-term advanced research for the
acceleration, in line with industry requirements and roadmaps such as the International Technology
Roadmap for Semiconductors (ITRS), of our broad range of process technologies including BiCMOS;
bipolar, CMOS and DMOS (BCD); High Performance Logic; and stand-alone and embedded Flash and
other nonvolatile memories; to the continued expansion of our system level design expertise and IP
creation for advanced architecture for SoC integration, as well as new products for many key
applications in the field of digital consumer wireless communications and networking, computer
peripherals, Smart cards and car multimedia among others.
We continue to make significant investments in R&D, while reducing our other general expenses. In
2005, we spent $1,411 million on R&D compared to $1,543 million in 2004.
- 30 -
Our reported R&D expenses are mainly in the areas of product design, technology and development and
do not include marketing design center costs, which are accounted for as selling expenses, or
process engineering, pre-production and process-transfer costs, which are accounted for as cost of
sales.
As of December 31, 2005, approximately 9,700 employees were employed in R&D activities worldwide.
We devote significant effort to R&D because semiconductor manufacturers face immense pressure to be
the first to make breakthroughs that can be leveraged into competitive advantages; new developments
in semiconductor technology can make end products significantly cheaper, faster or more reliable
than their predecessors and enable, through their timely appearance on the market, significant
value creation opportunities.
As of December 31, 2005, the average age of our 50,000 employees was 33.9 years and the voluntary
turn-over rate was 7.8%, compared to an average age of 33.7 years and a voluntary turn-over rate of
6.6% as of December 31, 2004.
Major Shareholders
The following table sets forth certain information with respect to the ownership of our issued
ordinary shares based on information available to us as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares Owned |
|
Shareholders(1) |
|
Number |
|
|
% |
|
STMicroelectronics Holding II B.V. (ST Holding II) |
|
|
250,704,754 |
|
|
|
27.6% |
|
Public1 |
|
|
580,787,153 |
|
|
|
63.9% |
|
Brandes Investment Partners |
|
|
62,932,372 |
|
|
|
7% |
|
Treasury shares |
|
|
13,400,000 |
|
|
|
1.5% |
|
|
|
|
(1) |
|
At the end of 2004, Capital Group International, Inc. owned more than 5% of our share
capital. As of December 31, 2005, Capital Group International, Inc. had reduced its
participation in our share capital below the 5% threshold and is, consequently, no longer one
of our major shareholders. |
Our principal shareholders do not have different voting rights from those of our other
shareholders.
ST Holding II is a wholly-owned subsidiary of STMicroelectronics Holding N.V. (ST Holding). As
of December 31, 2005, FT1CI (the French Shareholder) and a consortium of Italian shareholders
(the Italian Shareholders) made up of CDP and Finmeccanica directly held 50% each in ST Holding
based on voting rights. CDP held 30% in ST Holding and Finmeccanica held 20% in ST Holding based
on voting rights. The indirect interest of FT1CI and the Italian Shareholders is split on a
50%-50% basis. Through a structured tracking stock system implemented in the articles of
association of ST Holding and ST Holding II, FT1CI indirectly held 99,318,236 of our ordinary
shares, representing 10.9% of our issued share capital as of December 31, 2005, CDP indirectly held
91,644,941 of our ordinary shares, representing 10.1% of our issued share capital as of December
31, 2005 and Finmeccanica indirectly held 59,741,577 of our ordinary shares, representing 6.6% of
our issued share capital as of December 31, 2005. Any disposals or, as the case may be,
acquisitions by ST Holding II on behalf of respectively FT1CI, CDP and Finmeccanica, will decrease
or, as the case may be, increase the indirect interest of respectively FT1CI, CDP and Finmeccanica
in our issued share capital. FT1CI was formerly a jointly held company set up
- 31 -
by Areva and France Telecom to control the interest of the French shareholders in ST Holding.
Following the transactions described below, Areva is currently the sole shareholder of FT1CI.
Areva (formerly known as CEA-Industrie) is a corporation controlled by the French atomic energy
commission. Areva is listed on Euronext Paris in the form of Investment Certificates. CDP is an
Italian corporation 70% owned by the Italian Ministero dellEconomia e delle Finanze (the Ministry
of Economy and Finance) and 30% owned by a consortium of 66 Italian banking foundations.
Finmeccanica is a listed Italian holding company owned by the Italian Ministry of Economy, which
has a controlling interest, and the public. Finmeccanica is listed on the Italian Mercato
Telematico Azionario (MTA) and is included in the S&P/MIB 30 stock index.
ST Holding II owned 90% of our shares before our initial public offering in 1994, and has since
then gradually reduced its participation, going below the 66% threshold in 1997 and below the 50%
threshold in 1999. ST Holding may further dispose its shares as
provided below in Shareholders
Agreements STH Shareholders Agreement
and Disposals of our Ordinary Shares and pursuant to
the eventual conversion of our outstanding convertible instruments. Set forth below is a table of
ST Holding IIs holdings in us as of the end of each of the past three financial years:
Ordinary Shares Owned
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
% |
|
December 31, 2005 |
|
|
250,704,754 |
|
|
|
27.6 |
|
December 31, 2004 |
|
|
278,483,280 |
|
|
|
30.8 |
|
December 31, 2003 |
|
|
311,483,280 |
|
|
|
34.5 |
|
Announcements about additional disposals of our shares by ST Holding II on behalf of one or
more of its indirect shareholders, Areva, CDP, FT1CI or Finmeccanica may come at any time.
- 32 -
The chart below illustrates the shareholding structure as of December 31, 2005:
|
|
|
(1) |
|
CDP owns 30% of ST Holding, while Finmeccanica owns 20% of ST Holding. |
|
(2) |
|
Not a legal entity, purely for illustrative purposes. |
|
(3) |
|
FT1CI owns 50% of ST Holding and indirectly holds 99,318,236 of our ordinary shares. |
|
(4) |
|
CDP and Finmeccanica own 50% of ST Holding and indirectly hold 91,644,941 and 59,741,577 of
our ordinary shares, respectively. |
|
(5) |
|
The 70.9% includes the 7% shareholding of Brandes Investment Partners. |
|
(6) |
|
ST Holding II owns 27.6% of our shares, the Public owns 70.9% of our shares and we hold the
remaining 1.5% as Treasury Shares. |
Strategy
The semiconductor industry is undergoing several significant structural changes characterized by:
|
|
the changing long-term structural growth of the overall market for
semiconductor products; |
|
|
|
the strong development of new emerging applications in areas such
as wireless communications, solid state storage, digital TV and
video products and games; |
|
|
|
the increasing importance of the Asia Pacific region and emerging
countries, particularly China, which represents the fastest
growing regional market; |
|
|
|
the importance of convergence between wireless consumer and
computer applications, which drives customer demand for new
system-level, turnkey solutions; and |
|
|
|
the evolution of the customer base from original equipment
manufacturers (OEM) to a mix of OEM, electronic manufacturing
service providers (EMS) and original design manufacturers
(ODM). |
- 33 -
Our strategy within this challenging environment is designed to focus on the following
complementary key elements:
Broad, balanced market exposure. We offer a diversified product portfolio and develop products for
a wide range of market applications, thereby reducing our dependence on any single product,
application or end market. Within our diversified portfolio, we have focused on developing products
that leverage our technological strengths in creating customized, system-level solutions for
high-growth digital and mixed-signal applications. We target five key markets comprised of: (i)
communications, including wireless connectivity, mobile phone imaging, portable multimedia and
infrastructure; (ii) computer peripherals, including data storage, printers, monitors, displays and
optical mouse; (iii) digital consumer, including set-top boxes, DVD, digital TVs, digital cameras
and digital audio; (iv) automotive, including engine, body and safety, car radio, car multimedia
and telematics; and (v) industrial products, including banking, user ID/security, telephone Smart
card, power management and industrial control.
Product strategy. We aim to: (i) maintain existing and further establish leadership positions for
platforms and chipset solutions for digital consumer, wireless and multimedia digital core
offerings; (ii) maintain a leadership position in conventional semiconductor products such as
discretes for power management, automotive and analog and mixed signal applications, which require
less R&D effort and manufacturing capital intensity than more advanced and complex application
specific devices; and (iii) participate, as appropriate, in the nonvolatile memory market for
selected key applications.
Alliances and customer base expansion. We work with our key customers to identify evolving needs
and new applications and to develop innovative products and product features. We also leverage our
position as a supplier of application specific products in seeking to sell a broad range of
products and emphasize strategic customer alliances to expand our customer base. We have formal
alliances with certain strategic customers that allow us and our customers (with whom we jointly
share certain product developments) to exchange information and give our customers access to our
process technologies and manufacturing infrastructure. We have formed alliances with customers such
as Alcatel, Bosch, Hewlett-Packard, Marelli, Nokia, Nortel, Pioneer, Seagate, Siemens VDO, Thomson
and Western Digital, among others. Our twelve strategic alliances with key customers have been a
major growth driver for us. In 2003, 2004 and 2005, revenues from strategic customer alliances
accounted for approximately 43%, 39% and 44%, respectively, of our net revenues. We are targeting
new major key accounts, particularly in the United States and in the Asia Pacific region, with a
focus on China and Japan where we are also developing specific marketing efforts to increase our
market penetration. Furthermore, we have set up a new organization with specific e-tools, design
and support resources to address broader market applications.
Global integrated manufacturing infrastructure. We have a diversified, leading edge manufacturing
infrastructure capable of producing silicon wafers using our broad process technology portfolio,
including our CMOS, BiCMOS, BCD technologies and memories. Assembling, testing and packaging of our
semiconductor products take place in our large and modern back-end facilities, which generally are
located in low-cost areas. We have also developed relationships with outside contractors for
foundry and back-end services. We view these relationships as giving us the flexibility when
required by market demand to outsource up to a maximum of 20% of each of our front-end and back-end
production requirements, enabling us to manage the supply chain to our customers without a
commensurate increase in
- 34 -
capital spending. In 2005, we decided to combine our front-end manufacturing and our technology
R&D into one organization in order to improve our manufacturing competitiveness and efficiency and
our technology R&D effectiveness. In the current competitive environment, we have launched various
cost reduction initiatives in the area of manufacturing and our strategy consists of: (i)
establishing in the Asia Pacific region the major portion of our 150-mm manufacturing activity;
(ii) organizing our 200-mm manufacturing to increase operational efficiency through yield
improvements, improved leverage due to reduced depreciation from mature assets and full saturation
of all clean room areas; (iii) addressing the projected increase in demand for 300-mm manufacturing
through an appropriate ramp-up of internal capacity; and (iv) gaining flexibility in terms of
capacity needs and employed capital through selected sourcing from foundry manufacturers.
Industry partnerships. Partnerships with other semiconductor companies and suppliers enable us to
share the increasing costs and technological risks involved in the R&D of state-of-the-art
processes, product architectures and digital cores and to shorten the product development time of
certain products. For example, we are currently working under a joint R&D technology cooperation
program with Freescale Semiconductor, Inc. (Freescale) and Philips Semiconductors International
B.V. (Philips) for the joint R&D of CMOS process technology in Crolles, France (Crolles2). In
2005, we extended this agreement to cover 300-mm wafer testing and packaging, as well as the
development and licensing of core libraries and IP. Additionally, we are co-developing NAND Flash
memory products with Hynix Semiconductor Inc. (Hynix) and have started to build a jointly owned
dedicated memory manufacturing facility in China. Furthermore, we recently announced an agreement
with Intel Corporation (Intel) to standardize hardware and software interfaces used in leading
edge NOR Flash products in the wireless market and are working on various further initiatives.
Broad range of design and process technologies. We continue to utilize our expertise and experience
with a wide range of process and design technologies to further develop our capabilities. We are
committed to maintaining and, in certain areas, to increasing expenditures on core R&D projects as
well as to developing alliances with other semiconductor companies and suppliers of software
development tools, as appropriate. In 2005, we redeployed approximately 1,000 employees or 10% of
our R&D work force to emphasize our focus and commitment to higher priority projects.
Technological advances in the areas of transistor performance and interconnection technologies are
being developed for our CMOS logic products and semicustom devices. We work on an ongoing basis
with key suppliers to develop advanced and standardized design methodologies for our CMOS, mixed
signal and non-volatile memory processes, as well as libraries of macrofunctions and megafunctions
for many of our products, and are focusing on improving our concurrent engineering practices to
better coordinate design activities and reduce overall product development time.
Integrated presence in key regional markets. We have sought to develop a competitive advantage by
building an integrated presence in each of the worlds major economic zones: Europe, Asia
(including China), North America and Emerging Markets. An integrated presence means having
manufacturing and design, as well as sales and marketing capabilities in each region, in order to
ensure that we are well positioned to anticipate and respond to our customers business
requirements. We have leading edge, front-end manufacturing facilities in Europe, in the United
States and increasingly in Asia, where we sourced from internal and external manufacturers
approximately 44% of our wafers at the end of 2005. Our more labor-
- 35 -
intensive back-end facilities are located in Malaysia, Malta, Morocco, Singapore and China,
enabling us to take advantage of more favorable production cost structures, particularly lower
labor costs. Major design centers and local sales and marketing groups are within close proximity
of key customers in each region, which we believe enhances our ability to maintain strong
relationships with our customers. As appropriate, we intend to continue to build our integrated
local presence in those regions where we compete, such as China, which has recently been set up as
a separate marketing region and where we have both a back-end facility and a design center and have
started to build with Hynix a jointly owned front-end memory manufacturing plant in Wuxi City, as
well as India, where we have been expanding our design and software development centers. We have
also continued to develop our sales and support organization for Emerging Markets.
Product Quality Excellence.
We aim to develop a product of quality excellence in the various applications we serve and are
planning the launch of a company-wide Product Quality Awareness program built around a
three-pronged approach: (i) the improvement of our full product cycle involving robust design and
manufacturing, improved detection of potential defects, and better anticipation of failures through
improved risk assessment, particularly in the areas of product and process changes; (ii) improved
responsiveness to customer demands; and (iii) ever increasing focus on quality and discipline in
execution.
2005 Business Overview
In 2005, the semiconductor market experienced a moderate increase in total sales after the strong
growth recorded in 2004. Semiconductor industry data for 2005 indicates that revenues improved
supported by a solid economic environment in the major world economies.
The total available market is defined as the TAM, while the serviceable available market, the
SAM, is defined as the market for products produced by us (which consists of the TAM and excludes
PC motherboard major devices such as microprocessors (MPU), dynamic random access memories
(DRAMs), and optoelectronics devices).
Based upon recently published data, semiconductor industry revenues increased year-over-year by
approximately 7% both for the TAM and the SAM in 2005, to reach $227.5 billion and approximately
$152 billion, respectively. This increase was driven by unit demand while average selling prices
remained basically flat. In the fourth quarter of 2005, the TAM and the SAM increased
approximately 9% and 13% year-over-year, respectively, and increased by approximately 2% and 3%
sequentially, respectively.
Our 2005 revenues were characterized by significant high volume demand and improved product mix,
which did not translate into an equivalent revenue performance due to persisting negative impact of
price pressure in the market we serve. As a result, our revenues increased by approximately 1% to
$8,882 million compared to $8,760 million in 2004. Our sales growth was driven primarily by
Computer Peripherals, Telecom and Automotive market segments while both Consumer and Industrial and
Other declined. Our sales trend, however, was below the TAM and the SAM growth rates.
In summary, our financial results for 2005 compared to the results of 2004 were favorably impacted
by the following factors:
- 36 -
|
|
higher sales volume and a more favorable product mix in our revenues, which
contributed to an increase in our net revenues over 2004; |
|
|
|
continuous improvement of our manufacturing performances; |
|
|
|
net interest income; and |
|
|
|
lower income tax expense. |
Our financial results in 2005 were negatively affected by the following factors:
|
|
negative pricing trends due to a persisting overcapacity in the industry, which
translated into our average selling prices declining by approximately 8%, as a pure
pricing effect; |
|
|
|
the impact of the effective U.S. dollar exchange rate against the euro and other
currencies, which translated into an increase of our cost of sales and in our
operating expenses being significantly higher than the favorable impact on our
revenues; |
|
|
|
the one-time compensation packages and special bonuses to our former CEO and to a
limited number of retired senior executives, the new pension scheme charges for
executive management and the share-based compensation charges for non-vested shares
granted to employees and members and professionals of our Supervisory Board for a
total of $37 million; |
|
|
|
the acceleration of the vesting of all outstanding share
options; and |
|
|
|
the recognition of interest charges on our 2013 convertible
debt, starting from 2005, due to the split of the liability component. |
- 37 -
LIQUIDITY AND FINANCIAL POSITION
At December 31, 2005, cash and cash equivalents totaled $2,027 million, compared to $1,950 million
as of December 31, 2004. During 2005, we invested in credit-linked deposits issued by several
primary banks in order to maximize the return on available cash. The principal was fully repaid to
us in December 2005. We did not have marketable securities at December 31, 2005 as well as at
December 31, 2004. Changes in the instruments adopted to invest our liquidity in future periods may
occur and may significantly affect our finance income (costs).
Liquidity
We maintain a significant cash position and a low debt to equity ratio, which provide us with
adequate financial flexibility. As in the past, our cash management policy is to finance our
investment needs mainly with net cash generated from operating activities.
Net cash from operating activities. As in prior periods, the major source of cash during 2005 was
cash provided by operating activities. Our net cash from operating activities totaled $1,984
million in 2005, decreasing compared to $2,305 million in 2004.
Net cash used in investing activities. Net cash used in investing activities was $1,714 million in
2005, compared to $2,097 million in 2004. Payments for purchases of tangible assets were the main
utilization of cash, amounting to $1,523 million for 2005, a significant decrease over the $2,061
million in 2004. In 2005, cash used for investments in intangible assets and financial assets was
$287 million and capital contributions to associates were $38 million.
Capital expenditures for 2005 were principally allocated to:
|
|
the capacity expansion of our 200-mm and 150-mm front-end facilities in Singapore; |
|
|
|
the conversion to 200-mm of our front-end facility in Agrate (Italy); |
|
|
|
the capacity expansion of our back-end plants in Muar (Malaysia), Shenzhen (China), Toa Payoh
(Singapore) and Malta; |
|
|
|
the expansion of our 200-mm front-end facility in Phoenix (Arizona); |
|
|
|
the capacity expansion of our 200-mm front-end facility in Rousset (France); |
|
|
|
the completion of building and continuation of facilities for our 300-mm front-end plant in
Catania (Italy); |
|
|
|
the expansion of our 150-mm front-end facility and the start of a 200-mm pilot line in Tours
(France); and |
|
|
|
the expansion of the 300-mm front-end joint project with Philips Semiconductor International
B.V. and Freescale Semiconductor Inc., in Crolles2 (France). |
Capital expenditures for 2004 were principally allocated to:
|
|
the expansion of our 200-mm and 150-mm front-end facilities in Singapore; |
- 38 -
|
|
the expansion of our 200-mm front-end facility in Rousset (France); |
|
|
|
the facilitization of our 300-mm facility in Catania (Italy); |
|
|
|
the upgrading of our front-end facility and R&D pilot line in Agrate (Italy); |
|
|
|
the upgrading of our 200-mm front-end facility in Catania (Italy); |
|
|
|
the expansion and upgrading of our 200-mm and 150-mm, respectively, front-end facilities in
Phoenix and in Carrollton (United States); and |
|
|
|
the capacity expansion in our back-end plants in Muar (Malaysia), Toa Payoh (Singapore),
Shenzhen (China) and Malta. |
Net operating cash flow. We define net operating cash flow as net cash from operating activities
minus net cash used in investing activities, excluding payment for purchases of and proceeds from
the sale of marketable securities. We believe net operating cash flow provides useful information
for investors because it measures our capacity to generate cash from our operating activities to
sustain our investments for our operating activities. Net operating cash flow is determined as
follows from our Consolidated Statements of Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net cash from operating activities |
|
$ |
1,984 |
|
|
$ |
2,305 |
|
Net cash used in investing activities |
|
|
(1,714 |
) |
|
|
(2,097 |
) |
Payment for purchase and proceeds from sale
of marketable securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating cash flow |
|
$ |
270 |
|
|
$ |
208 |
|
|
|
|
|
|
|
|
Due to the capacity of our operating activities to generate cash in excess of our investing
activities, we generated net operating cash flow of $270 million in 2005, compared to net operating
cash flow of $208 million in 2004. This resulted mainly from the decrease in net cash used in
investing activities.
Net cash used in financing activities. Net cash used in financing activities was $131 million in
2005 compared to $1,281 million in 2004. The major item of the cash used in 2005 was the payment of
the dividends amounting to $107 million, equivalent to the amount paid in 2004. The major item of
the cash used for financing activities in 2004 was the repayment of long-term debt for a total
amount of $1,288 million, mainly consisting of the redemption of all outstanding 2009 LYONs for an
amount paid of $813 million and of the repurchase of all outstanding 2010 Bonds for an amount paid
of $375 million. These bonds were cancelled.
Capital Resources
Net financial position
We define our net financial position as the difference between our total cash position (cash and
cash equivalents) net of total financial debt (bank overdrafts, current portion of long-term debt
and long-term debt). We believe our net financial position provides useful information for
investors because it gives evidence of our global position either in terms of net
- 39 -
indebtedness or net cash by measuring our capital resources based on cash and cash equivalents and
the total level of our financial indebtedness. The net financial position is determined as follows
from our Consolidated Balance Sheets as at December 31, 2005 and December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Cash and cash equivalents |
|
$ |
2,027 |
|
|
$ |
1,950 |
|
Marketable securities |
|
|
|
|
|
|
|
|
Total cash position |
|
|
2,027 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
Bank overdrafts |
|
|
(11 |
) |
|
|
(58 |
) |
Current portion of long-term debt |
|
|
(1,499 |
) |
|
|
(133 |
) |
Long-term debt |
|
|
(269 |
) |
|
|
(1,767 |
) |
|
|
|
|
|
|
|
Total financial debt |
|
|
(1,779 |
) |
|
|
(1,958 |
) |
|
|
|
|
|
|
|
Net financial position |
|
$ |
248 |
|
|
$ |
(8 |
) |
|
|
|
|
|
|
|
The net financial position (cash and cash equivalents net of total financial debt) as of
December 31, 2005 moved to a positive net financial cash position of $248 million, representing an
improvement from the net financial debt position of $8 million as of December 31, 2004. The
improvement of the net financial position mainly results from favorable net operating cash flow
generated during 2005.
At December 31, 2005, the aggregate amount of our long-term debt was approximately $1,768 million,
including $1,356 million of 2013 Bonds. At the holders option, any outstanding 2013 Bond may be
redeemed for cash on August 5, 2006, 2008 or 2010 for a total aggregate amount payable by us of
$1,379 million on August 5, 2006 or $1,365 million on August 5, 2008 or $1,352 million on August 5,
2010. See Note 14 to our Consolidated Financial Statements.
On February 23, 2006, we issued Zero Coupon Senior Convertible Bonds due 2016 totaling gross
proceeds of $928 million. The amount due to bondholders upon redemption or at maturity based on
the accreted value of the bonds will produce a yield equivalent to 1.5% per annum on a semi-annual
bond equivalent basis. We granted the managers an option to increase the issue size by up to 5%,
totaling $46 million, through March 24, 2006. The bonds are convertible into a maximum of 42
million of our underlying ordinary shares, including the increase option. The conversion price is
$23.19, based on the closing price of ordinary shares on the NYSE on February 14, 2006, plus a 30%
premium.
On March 17, 2006, we issued 500 million Floating Rate Senior Bonds due 2013 in the Euro Debt
Capital Market. These bonds will pay interest quarterly at a rate equal to three-month Euribor
plus 40 basis points.
Financial Outlook
We currently expect that capital spending for 2006 will be approximately $1.8 billion, an increase
compared to the $1.4 billion net of sales proceeds spent in 2005. The major part of our capital
spending will be dedicated to the leading edge technology fabs by increasing 300-mm capacity and by
saturating our existing 200-mm fabs. We have the flexibility to modulate our investments up or down
in response to changes in market conditions. At December 31, 2005, we had $576 million in
outstanding commitments for equipment purchases for 2006.
- 40 -
The most significant of our 2006 capital expenditure projects are expected to be: (a) for the
front-end facilities: (i) the expansion of the 300-mm joint project with Philips Semiconductor
International B.V. and Freescale Semiconductor Inc., in Crolles2 (France); (ii) the facilitization
of a portion of our 300-mm plant in Catania (Italy); (iii) the upgrading to finer geometry
technologies for our 200-mm plant in Rousset (France); (iv) the capacity expansion and the
upgrading of our 200-mm plant in Singapore; and (v) the upgrading of our 200-mm fab and pilot line
in Agrate (Italy); and (b) for the back-end facilities, the capital expenditures will be mainly
dedicated to the capacity expansion in our plants in Shenzhen (China), Bouskoura (Morocco) and Muar
(Malaysia). We will continue to monitor our level of capital spending by taking into consideration
factors such as trends in the semiconductor industry, capacity utilization and announced additions.
We expect to have significant capital requirements in the coming years and in addition we intend to
continue to devote a substantial portion of our net revenues to R&D . We plan to fund our capital
requirements from cash provided by operating activities, available funds and available support from
third parties (including state support), and may have recourse to borrowings under available credit
lines and, to the extent necessary or attractive based on market conditions prevailing at the time,
the issuing of debt, convertible bonds or additional equity securities. A substantial deterioration
of our economic results and consequently of our profitability could generate a deterioration of the
cash generated by our operating activities. Therefore, there can be no assurance that, in future
periods, we will generate the same level of cash as in the previous years to fund our capital
expenditures for expansion plans, our working capital requirements, R&D and industrialization
costs.
The holders of our 2013 Bonds may require us to redeem them on August 5, 2006 at a price of $985.09
per $1,000 face value. The conversion ratio is $985.09 per $1,000 principal amount of 2013 Bonds
at August 5, 2006, $975.28 at August 5, 2008 and $965.56 at August 5, 2010, subject to adjustments
in certain circumstances. The total redeemable amount will be equivalent to $1,379 million on
August 5, 2006. As part of our refinancing strategy, we recently issued 500 million Floating Rate
Senior Bonds due 2013 in the Euro Debt Capital Market. This issuance complemented our recent
placement of $928 million of Zero Coupon Senior Convertible
Bonds due 2016. To the extent that we
do not use the proceeds from both of these offerings for the repayment of amounts due under the
2013 Bonds or for repurchases of the 2013 Bonds, we will use the proceeds for general corporate
purposes.
Market Risk About Financial Instruments
We are exposed to changes in financial market conditions in the normal course of business due to
our operations in different foreign currencies and our ongoing investing and financing activities.
Market risk is the uncertainty to which future earnings or asset/liability values are exposed due
to operating cash flows denominated in foreign currencies and various financial instruments used in
the normal course of operations. The major risks to which we are exposed are related to the
fluctuations of the U.S. dollar exchange rate compared to the euro and the other major currencies,
the coverage of our foreign currency exposures, the variation of the interest rates and the risks
associated to the investments of our available cash. We have established policies, procedures and
internal processes governing our management of market risks and the use of financial instruments to
manage our exposure to such risks.
Our Income Statement is exposed to the fluctuations of the exchange rates such as the U.S. dollar,
the euro and the other major currencies since our revenues are mainly denominated in U.S. dollars
while a large part of our costs is denominated in euros or other major currencies. We enter into
cash flow hedges to cover a portion of our costs denominated in euros. Our
- 41 -
balance sheet is also exposed to these exchange rates fluctuations since the functional currency of
our subsidiaries is generally the local currency and as such, foreign exchange fluctuations are
generating adjustments for the translation into U.S. dollar consolidated reporting of their assets
and liabilities.
We have exposures in foreign currencies since our operating cash flows are denominated in various
foreign currencies as a result of our international business activities and certain of our
borrowings are exposed to changes in foreign exchange rates. The functional currency of our
subsidiaries is either the local currency or the U.S. dollar. We continuously evaluate our foreign
currency exposures based on current market conditions and the business environment. In order to
mitigate the impact of changes in foreign currency exchange rates, we enter into forward exchange
and currency options contracts. The magnitude and nature of such outstanding instruments are
detailed in Note 28 to our Consolidated Financial Statements. Forward contracts outstanding as of
December 31, 2005 have remaining terms of four days to five months, which mature on average after
less than two months. The notional amounts of foreign exchange forward contracts totaled $2,206
million and $8,852 million at December 31, 2005 and 2004, respectively. The principal currencies
covered are the U.S. dollar, the euro, the Japanese yen and the Singapore dollar. The risk of loss
associated with these forward contracts is equal to the exchange rate differential from the date
the contract is made until the time it is settled.
We are exposed to changes in interest rates primarily as a result of our borrowing activities which
include long-term debt used to fund business operations. We borrow in U.S. dollars as well as in
other currencies from banks and other sources. We primarily enter into debt obligations to support
general corporate and local purposes including capital expenditures and working capital needs. The
nature and amount of our long-term debt can be expected to vary as a result of future business
requirements, market conditions, and other factors. The principal risks are related to interest
rates variations to which we are exposed in regard to our long-term obligations. We primarily
utilize fixed-rate debt and do not expect changes in interest rates to have a material effect on
income or cash flows in 2006.
We place our cash and cash equivalents, or a part of it, with high credit quality financial
institutions with at least a single A rating, mainly on a short-term basis; as such we are
exposed to the fluctuations of the market interest rates on our placement and our cash, which can
have an impact on our accounts. We manage the credit risks associated with financial instruments
through credit approvals, investment limits and centralized monitoring procedures but do not
normally require collateral or other security from the parties to the financial instruments.
We do not anticipate any material adverse effect on our financial position, result of operations or
cash flows resulting from the use of our instruments in the future. There can be no assurance that
these strategies will be effective or that transaction losses can be minimized or forecasted
accurately.
The information below summarizes our market risks associated with cash equivalents, debt
obligations, and other significant financial instruments as of December 31, 2005. The information
below should be read in conjunction with Note 28 to the Consolidated Financial Statements.
- 42 -
STATUTORY FINANCIAL STATEMENTS
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS |
|
44 |
|
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 |
|
45 |
|
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004 |
|
46 |
|
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 |
|
47 |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 |
|
48 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
|
49 |
|
COMPANY FINANCIAL STATEMENTS |
|
109 |
|
COMPANY BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004 |
|
110 |
|
ABBREVIATED COMPANY STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 |
|
111 |
|
NOTES TO THE COMPANY FINANCIAL STATEMENTS |
|
112 |
|
OTHER INFORMATION |
|
122 |
|
AUDITORS REPORT |
|
124 |
- 43 -
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- 44 -
STMICROELECTRONICS N.V. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
In million of U.S. dollars except per share amounts |
|
Note |
|
|
2005 |
|
|
2004 |
|
Sales |
|
|
|
|
|
|
8,876 |
|
|
|
8,756 |
|
Other revenues |
|
|
|
|
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
8,882 |
|
|
|
8,760 |
|
Cost of sales |
|
|
20 |
|
|
|
(5,882 |
) |
|
|
(5,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
3,000 |
|
|
|
3,195 |
|
Selling, general and administrative |
|
|
20 |
|
|
|
(1,069 |
) |
|
|
(970 |
) |
Research and development |
|
|
20 |
|
|
|
(1,411 |
) |
|
|
(1,543 |
) |
Other income |
|
|
18 |
|
|
|
104 |
|
|
|
147 |
|
Other expenses |
|
|
18 |
|
|
|
(132 |
) |
|
|
(113 |
) |
Impairment, restructuring charges and other related closure costs |
|
|
19 |
|
|
|
(98 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
|
|
|
|
394 |
|
|
|
631 |
|
Finance income |
|
|
21 |
|
|
|
53 |
|
|
|
41 |
|
Finance cost |
|
|
21 |
|
|
|
(57 |
) |
|
|
(47 |
) |
Share of loss of associates |
|
|
3 |
|
|
|
(3 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Profit before income taxes |
|
|
|
|
|
|
387 |
|
|
|
621 |
|
Income tax expense |
|
|
22 |
|
|
|
(39 |
) |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net profit |
|
|
|
|
|
|
348 |
|
|
|
526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders of the Company |
|
|
|
|
|
|
347 |
|
|
|
523 |
|
Minority interest |
|
|
|
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Basic) |
|
|
17 |
|
|
|
0.39 |
|
|
|
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Diluted) |
|
|
17 |
|
|
|
0.39 |
|
|
|
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 45 -
STMICROELECTRONICS N.V. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at |
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
In million of U.S. dollars |
|
Note |
|
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
10 |
|
|
|
6,179 |
|
|
|
7,446 |
|
Goodwill |
|
|
8 |
|
|
|
174 |
|
|
|
188 |
|
Other intangible assets |
|
|
9 |
|
|
|
458 |
|
|
|
291 |
|
Deferred income tax assets |
|
|
22 |
|
|
|
160 |
|
|
|
145 |
|
Investments in associates |
|
|
3 |
|
|
|
35 |
|
|
|
6 |
|
Investments and other non-current assets |
|
|
11 |
|
|
|
118 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
|
|
|
|
7,124 |
|
|
|
8,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
6 |
|
|
|
1,413 |
|
|
|
1,348 |
|
Trade accounts receivable |
|
|
5 |
|
|
|
1,490 |
|
|
|
1,408 |
|
Derivative financial instruments |
|
|
28 |
|
|
|
3 |
|
|
|
200 |
|
Other receivables and assets |
|
|
7 |
|
|
|
586 |
|
|
|
643 |
|
Cash and cash equivalents |
|
|
23 |
|
|
|
2,027 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
5,519 |
|
|
|
5,549 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
|
|
|
|
12,643 |
|
|
|
13,736 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Equity attributable to the shareholders of the Company |
|
|
15 |
|
|
|
8,650 |
|
|
|
9,028 |
|
Minority interests |
|
|
|
|
|
|
50 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
|
|
|
|
8,700 |
|
|
|
9,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
14 |
|
|
|
269 |
|
|
|
1,767 |
|
Retirement benefit obligations |
|
|
13 |
|
|
|
300 |
|
|
|
303 |
|
Deferred income tax liabilities |
|
|
22 |
|
|
|
83 |
|
|
|
80 |
|
Other non-current liabilities |
|
|
|
|
|
|
16 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
|
|
|
|
668 |
|
|
|
2,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
14 |
|
|
|
1,499 |
|
|
|
133 |
|
Trade accounts payable |
|
|
|
|
|
|
965 |
|
|
|
1,352 |
|
Derivative financial instruments |
|
|
28 |
|
|
|
31 |
|
|
|
109 |
|
Other payables, accrued liabilities and provisions |
|
|
12 |
|
|
|
617 |
|
|
|
667 |
|
Current income tax liabilities |
|
|
|
|
|
|
152 |
|
|
|
176 |
|
Bank overdrafts |
|
|
|
|
|
|
11 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,275 |
|
|
|
2,495 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
3,943 |
|
|
|
4,660 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
|
|
|
|
|
12,643 |
|
|
|
13,736 |
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
- 46 -
STMICROELECTRONICS N.V. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity attributable to the shareholders |
|
|
|
|
|
|
|
|
|
|
of the Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury |
|
Retained |
|
Other |
|
Minority |
|
Total |
In million of U.S. dollars, except per share amounts |
|
Note |
|
Ordinary Shares |
|
Capital Surplus |
|
Shares |
|
Earnings |
|
Reserves |
|
Interests |
|
Equity |
Balance as of January 1, 2004 |
|
|
|
|
|
|
1,146 |
|
|
|
1,905 |
|
|
|
(348 |
) |
|
|
4,652 |
|
|
|
684 |
|
|
|
45 |
|
|
|
8,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on available-for-sale financial
assets, net of tax |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
Unrealized gain on cash flow hedge, net of tax |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
59 |
|
Foreign currency translation difference |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
440 |
|
|
|
|
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income recognized directly in equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496 |
|
|
|
|
|
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523 |
|
|
|
|
|
|
|
3 |
|
|
|
526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized income for 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523 |
|
|
|
496 |
|
|
|
3 |
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee share award scheme: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of services provided |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
54 |
|
Exercise of share options |
|
|
15 |
|
|
|
4 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
Dividends, $0.12 per share |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
19 |
|
|
|
|
|
|
|
(107 |
) |
|
|
54 |
|
|
|
|
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004 |
|
|
|
|
|
|
1,150 |
|
|
|
1,924 |
|
|
|
(348 |
) |
|
|
5,068 |
|
|
|
1,234 |
|
|
|
48 |
|
|
|
9,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt-Equity component |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
114 |
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance as of January 1, 2005 |
|
|
|
|
|
|
1,150 |
|
|
|
1,924 |
|
|
|
(348 |
) |
|
|
5,014 |
|
|
|
1,348 |
|
|
|
48 |
|
|
|
9,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedge, net of tax |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
|
|
|
|
(67 |
) |
Foreign currency translation difference |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(764 |
) |
|
|
1 |
|
|
|
(763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income recognized directly in equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(831 |
) |
|
|
1 |
|
|
|
(830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347 |
|
|
|
|
|
|
|
1 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized income for 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347 |
|
|
|
(831 |
) |
|
|
2 |
|
|
|
(482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee share award scheme: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of services provided |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
118 |
|
Exercise of stock options |
|
|
15 |
|
|
|
3 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
Dividends, $0.12 per share |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
32 |
|
|
|
|
|
|
|
(107 |
) |
|
|
118 |
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
|
|
|
|
1,153 |
|
|
|
1,956 |
|
|
|
(348 |
) |
|
|
5,254 |
|
|
|
635 |
|
|
|
50 |
|
|
|
8,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 47 -
STMICROELECTRONICS N.V. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
In million of U.S. dollars |
|
Note |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash generated from operations |
|
|
24 |
|
|
|
2,091 |
|
|
|
2,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
|
|
|
|
|
(17 |
) |
|
|
(16 |
) |
Income tax paid |
|
|
|
|
|
|
(90 |
) |
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
|
|
|
|
1,984 |
|
|
|
2,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of subsidiaries |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Payment for purchase of tangible assets |
|
|
10 |
|
|
|
(1,523 |
) |
|
|
(2,061 |
) |
Proceeds from the sale of tangible assets |
|
|
10 |
|
|
|
82 |
|
|
|
10 |
|
Investment in intangible and financial assets |
|
|
9, 11 |
|
|
|
(287 |
) |
|
|
(79 |
) |
Capital contributions to associates |
|
|
3 |
|
|
|
(38 |
) |
|
|
(2 |
) |
Interest received |
|
|
|
|
|
|
52 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(1,714 |
) |
|
|
(2,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares |
|
|
15 |
|
|
|
35 |
|
|
|
23 |
|
Proceeds from issuance of long-term debt |
|
|
14 |
|
|
|
50 |
|
|
|
91 |
|
Repayment of long-term debt |
|
|
14 |
|
|
|
(110 |
) |
|
|
(1,288 |
) |
Dividends paid to the Companys shareholders |
|
|
16 |
|
|
|
(107 |
) |
|
|
(107 |
) |
Other financing activities |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
|
|
|
|
(131 |
) |
|
|
(1,281 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates |
|
|
|
|
|
|
(15 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash increase (decrease) |
|
|
|
|
|
|
124 |
|
|
|
(1,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
1,892 |
|
|
|
2,953 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
|
|
|
|
2,016 |
|
|
|
1,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents for balance sheet purposes |
|
|
|
|
|
|
2,027 |
|
|
|
1,950 |
|
Bank overdrafts |
|
|
|
|
|
|
(11 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents for cash flow statement
purposes |
|
|
|
|
|
|
2,016 |
|
|
|
1,892 |
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
- 48 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except per share amounts)
1 GENERAL INFORMATION
STMicroelectronics N.V. (the Company) is registered in The Netherlands with its statutory
domicile in Amsterdam. The Company was formed in 1987 to be the holding company for the combination
of the semiconductor business of SGS Microelettronica (then owned by Società 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 and its subsidiaries (together the Group) are a global independent semiconductor
company that designs, develops, manufactures and markets a broad range of semiconductor integrated
circuits (ICs) and discrete devices. The Group 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 Group has focused on developing products that
leverage its technological strengths in creating customized, system-level solutions with
high-growth digital and mixed-signal content.
These financial statements have been approved for issue by the Supervisory Board on March 23, 2006.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements, prepared for Dutch statutory purposes, have been prepared
in accordance with International Financial Reporting Standards (IFRS) as adopted by the European
Union. In accordance with Article 402, Title 9, Book 2 of the Dutch Civil Code the statement of
income is presented in abbreviated form for the Companys accounts further presented in these
statutory financial statements.
All balances and values in the current and prior periods are in millions of dollars, except share
and per-share amounts. Under Article 35 of the Companys Articles of Association, the financial
year extends from January 1 to December 31, which is the period-end of each fiscal year.
For internal and external reporting purposes, the Group follows accounting principles generally
accepted in the United States of America (U.S. GAAP). U.S. GAAP is the Groups primary accounting
standard for the setting of financial and operational performance targets.
The consolidated financial statements have been prepared under the historical cost convention, as
modified by available-for-sale financial assets and certain financial assets and financial
liabilities (including derivative instruments) at fair value. The preparation of consolidated
financial statements in conformity with IFRS requires the use of certain critical accounting
estimates. It also requires management to exercise its judgment in the process of applying the
Groups accounting policies. The areas involving a higher degree of judgment
- 49 -
or complexity, or areas where assumptions and estimates are significant to the consolidated
financial statements are disclosed in Note 2.22.
First-time Adoption of IFRS
Historically, the Group has prepared its consolidated financial statements under accounting
principles generally accepted in the Netherlands (Dutch GAAP). By means of regulation 1606/2002,
the European Commission has stipulated that all listed companies within the European Union member
states are required to prepare their consolidated financial statements under IFRS from January 1,
2005. Hence, the Group has prepared its first annual report under IFRS as endorsed by the European
Commission. As the Group publishes comparative information for one year in its annual report, the
transition date to IFRS is January 1, 2004. The financial information has been prepared on the
basis of all IFRS standards effective and endorsed by the European Commission as of December 31,
2005, with certain standards being early adopted by the Group where stated in these consolidated
financial statements. IFRS 1, First-time Adoption of International Financial Reporting Standards
(IFRS 1), allows the Group to elect to use one or more exemptions from IFRS in its transition.
The Group has elected to apply the following exemptions:
|
|
The Group has not retrospectively applied IFRS 3, Business
Combinations, to acquisitions prior to the transition date.
Consequently business combinations recognized before January 1,
2004 have not been restated; |
|
|
|
The application of IFRS 2, Share-based Payment, and the related
interpretations, has been limited to awards granted after November
7, 2002 and not fully vested as at January 1, 2005; |
|
|
|
The Group has not restated the comparative 2004 consolidated
financial statements for the impact of IAS 32, Financial
Instruments: Disclosure and Presentation and IAS 39, Financial
Instruments: Recognition and Measurement and the related
amendments. |
|
|
|
The Group has applied prospectively from the IFRS transition date
the corridor approach in the accounting for actuarial gains and
losses on its retirement benefit
obligations. As such, the cumulative unrecognized loss related to
its defined benefit plans was recognized in net equity in its
opening consolidated balance sheet. |
To the extent that the accounting principles previously applied under Dutch GAAP differ from the
accounting principles as prescribed under IFRS, the Group has adjusted its accounting policies. The
main impact of the adoption of IFRS is in the areas that are discussed below.
Reconciliation at January 1, 2004, December 31, 2004 and January 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
|
|
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
Consolidated shareholders equity under
Dutch GAAP |
|
|
|
|
|
|
8,024 |
|
|
|
8,981 |
|
|
|
8,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill amortization, net of tax |
|
|
(a |
) |
|
|
|
|
|
|
52 |
|
|
|
52 |
|
Restructuring charges, net of tax |
|
|
(b |
) |
|
|
21 |
|
|
|
|
|
|
|
|
|
Share-based payment, net of tax |
|
|
(c |
) |
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
- 50 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
|
|
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
Pension costs, net of tax |
|
|
(d |
) |
|
|
(22 |
) |
|
|
(12 |
) |
|
|
(12 |
) |
Borrowing costs, net of tax |
|
|
(e |
) |
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
Deferred tax computation |
|
|
(f |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
Convertible debt, net of tax |
|
|
(g |
) |
|
|
|
|
|
|
|
|
|
|
60 |
|
Consolidated shareholders equity under IFRS |
|
|
|
|
|
|
8,040 |
|
|
|
9,028 |
|
|
|
9,088 |
|
Reconciliation of profit attributable to the shareholders of the Group for the year ended
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
2004 |
|
Consolidated net profit attributable to the
shareholders of the Group under Dutch GAAP |
|
|
|
|
|
|
549 |
|
|
Goodwill amortization, net of tax |
|
|
(a |
) |
|
|
52 |
|
Restructuring charges, net of tax |
|
|
(b |
) |
|
|
(21 |
) |
Share-based payment, net of tax |
|
|
(c |
) |
|
|
(52 |
) |
Pension cost, net of tax |
|
|
(d |
) |
|
|
7 |
|
Borrowing costs, net of tax |
|
|
(e |
) |
|
|
1 |
|
Deferred tax computation |
|
|
(f |
) |
|
|
(13 |
) |
Consolidated net profit attributable to the
shareholders of the Group under IFRS |
|
|
|
|
|
|
523 |
|
(a) Goodwill amortization
Under Dutch GAAP, goodwill recognized on business combinations is amortized over its useful life.
When applying IAS 36 (revised), Impairment of Assets, goodwill is not amortized but rather is
subject to an impairment test. As a result, the Group reversed the 2004 goodwill amortization
recorded under Dutch GAAP amounting to $52 million.
(b) Restructuring charges Termination benefits
The Group applies IAS 37, Provisions, Contingent Liabilities and Contingent Assets for the
recognition of provision for restructuring charges, including involuntary termination benefits.
In 2003, the Group committed to a plan to restructure its 150mm front-end manufacturing operations
and part of its back-end operations in order to improve cost competitiveness. Pursuant to this
plan, the Group recorded under Dutch GAAP as at December 31, 2003 a provision amounting
approximately to $21 million net of tax ($31 million before tax), for contractual and legal
involuntary termination benefits for an estimated number of employees at two of its European
subsidiaries. The plan was formally communicated to employees only in 2004. IAS 37 requires the
Group to communicate the details of the restructuring plan to the affected employees prior to
recording a provision. Consequently, under IAS 37, the provision was reversed in opening equity at
January 1, 2004 and recorded in the consolidated statement of income in 2004.
(c) Share-based Payment
At January 1, 2004, the Group had five stock-based employee and Supervisory Board stock-option
plans. Previously under Dutch GAAP, the Group applied the intrinsic-value-based
- 51 -
method in accounting for stock-based awards to employees. No stock-based employee compensation
cost was reflected in net profit, as all options under those plans were granted at an exercise
price equal to the market value of the underlying ordinary shares on the date of grant. With the
adoption of IFRS, the Group applies IFRS 2, Share-based Payment (IFRS 2) in accounting for
share-based awards, which requires the measurement of the cost of share-based service awards
according to the grant-date fair value of the award. The cost is recognized ratably over the period
during which an employee is required to provide service in exchange for the award or the requisite
service period, which usually corresponds to the vesting period.
Pursuant to IFRS 1 optional exemptions, the Group has elected to record compensation cost only for
share-based awards granted after November 7, 2002 and not fully vested as at January 1, 2005.
Expensing the fair value of share-based awards granted has ultimately no impact on total
shareholders equity as the associated credit is directly to equity, although timing differences
can occur between periods. The Groups adoption of IFRS 2 at the transition date resulted in an
adjustment to opening equity of $2 million for share-based compensation expense capitalized as part
of inventory. The Group recorded share-based compensation cost of $54 million for the year ended
December 31, 2004, of which $4 million was capitalized as part of inventory.
(d) Pension benefits
The $22 million difference at the IFRS transition date relates to the following:
|
a. |
|
Historically under Dutch GAAP the Group recorded an additional minimum pension
liability adjustment for the unfunded portion of the accumulated benefit obligation of its
defined benefit pension plans, which is not required under IFRS. Dutch GAAP requires the
portion of this additional minimum liability exceeding unrecognized prior service cost to
be recorded directly to equity. Therefore, $37 million has been reversed in the IFRS
opening balance sheet at the IFRS transition date corresponding to this additional minimum
pension liability for a GBP-denominated defined beneft plan. |
|
|
b. |
|
The Company has elected the optional exemption on transition to IFRS and has applied
the corridor approach prospectively from January 1, 2004. Consequently, a charge of $57
million net of tax was recorded as of the IFRS transition date representing the net
cumulative amount of unrecognized actuarial losses. |
|
|
c. |
|
When reviewing its pension schemes, the Group has identified certain components of
pension costs for which the accounting treatment was different under IAS 19, Employee
Benefits and recorded a charge of $2 million in its consolidated financial statements as of
January 1, 2004. |
The reconciling difference was decreased by $10 million at December 31, 2004 to reach $12 million.
The decrease relates to:
|
|
An adjustment of $3 million to reverse the additional foreign
currency translation adjustment (CTA) generated by the
GBP-denominated defined benefit plan for the additional minimum
pension liability recorded in Dutch GAAP. |
- 52 -
|
|
The measurement of and timing recognition for certain elements of
some defined benefit plans, such as valuation and limitation of
pension assets, recognition of prior service cost or transition
amounts that have generated differences representing a positive
impact of $7 million. |
(e) Borrowing costs
Pursuant to the adoption of IAS 23, Borrowing Costs, the Group elected to capitalize interest cost
directly attributable to the acquisition or construction of an asset on all qualifying assets.
Historically, under Dutch GAAP, the Group had elected to capitalize interest cost on material
assets only. Consequently, the Group capitalized $2 million interest expense, after tax, on its
consolidated balance sheet as of the IFRS transition date. For the year ended December 31, 2004,
the Group capitalized borrowing costs for an additional $1 million.
(f) Deferred tax computation
A positive adjustment of $13 million was recorded in the IFRS opening balance sheet corresponding
to the computation in one of the local tax jurisdictions of the Group of deferred tax assets and
liabilities based on the new tax rate substantively enacted in 2003, while under Dutch GAAP, only
tax laws and tax rates enacted at the balance sheet date was used to measure deferred tax assets
and liabilities. Since the tax rate was enacted in 2004, there is no longer a reconciling item as
of December 31, 2004.
(g) Convertible debt
Under IFRS, compound financial instruments must be analyzed into debt and equity components based
on the circumstances at the inception of the instruments. The fair value of the liability portion
of the convertible debt was determined using a market interest rate for an equivalent
non-convertible debt over the period of future probable cash flows as estimated on the date of
issuance. This was determined to be a three-year timeframe corresponding to the period to the first
date of redemption for cash at the option of the holder. This amount is recognized as a liability
on an amortized cost basis until redeemed, extinguished on conversion or on the maturity of the
bonds. The remainder of the proceeds is allocated to the conversion option. The embedded rights of
the bond holder to extend the bond beyond the probable three year period, by not exercising their
redemption option, are measured at fair value through profit and loss.
Debt issuance and other transaction costs that relate to the issue of a compound financial
instrument are allocated to the liability and equity components of the instrument in proportion to
the allocation of proceeds. Only the costs allocated to the liability component of the financial
instrument are amortized in finance cost until the first redemption option right of the holder.
In application of the first-time adoption requirements as set out in IFRS 1, the Group separated
the equity and liability components of the convertible debt at the debt issuance. This resulted in
a $60 million net impact to equity at January 1, 2005, which was composed of $114 million of the
equity component and related issuance costs ($136 million of the
equity component gross of $22 million of premiums and related issuance
costs already accounted for in the previous years) and $54 million of cumulative interest expense.
Cash
Flow under IFRS
In the
transition to IFRS, the major impact on cash flow statement under IFRS is the
capitalization of the development costs, which are now included as cash
flows from investing activities as opposed to cash flows from
operating activities.
- 53 -
2.1 Principles of consolidation
The Groups 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. Intergroup balances and transactions have been
eliminated in consolidation.
(a) Subsidiaries
Subsidiaries are all entities over which the Group has the power to govern the financial and
operating policies generally accompanying a shareholding of more than one half of the voting
rights. The existence and effect of potential voting rights that are currently exercisable or
convertible are considered when assessing whether the Group controls another entity.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group.
They are de-consolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the
Group. The cost of an acquisition is measured at the fair value of the assets given, equity
instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly
attributable to the acquisition. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their fair values at the
acquisition date, irrespective of any minority interest. The excess of the cost of acquisition over
the fair value of the Companys share of the identifiable net assets acquired is recorded as
goodwill (Note 2.12). If the cost of acquisition is lower than the fair value of the Companys
share in the net assets of the entity acquired, the difference is recognized directly in the income
statement.
(b) Associates
Associates include all entities over which the Group has significant influence but not control,
generally accompanying a shareholding of between 20% and 50% of the voting rights. These
investments are accounted for by the equity method of accounting and are initially recognized at
cost. They are presented on the face of the consolidated balance sheet as Investments in
associates.
The Groups share in its associates profit and losses is recognized in the income statement as
Shares of loss of associates and in the balance sheet as an adjustment against the carrying
amount of the associate. When the Groups share of losses in an associate equals or exceeds its
interest in the associate, including any unsecured receivable, the Group does not recognize further
losses, unless it has incurred obligations or made payments on behalf of the associate.
2.2 Foreign currency
The U.S. dollar is the presentation currency for the Group and the functional currency for the
Company, which is the currency of the primary economic environment in which the Company operates.
The worldwide semiconductor industry uses the U.S. dollar as a currency of reference for actual
pricing in the market. Furthermore, the majority of the Groups transactions are denominated in
U.S. dollars, and revenues from external sales in U.S. dollars largely exceed revenues in any other
currency. However, labor costs are concentrated primarily in the countries that have adopted the
Euro currency.
- 54 -
For consolidation purposes, assets and liabilities included in the financial statements of the
Companys subsidiaries are measured using the currency of the primary economic environment in which
the entity operates and are translated at current rates of exchange at the balance sheet date.
Income and expense items and cash flow items are translated at the monthly average exchange rate of
the period. The effects of translating the financial position and results of operations from local
functional currencies are reported as a component of other reserves in the consolidated
statements of changes in equity.
Assets, liabilities, revenues, expenses, gains or losses arising from foreign currency transactions
are recorded in the functional currency of the recording entity at the exchange rate during the
month of the transaction. At each balance sheet date, recorded balances denominated in a currency
other than the recording entitys functional currency are remeasured into the functional currency
at the exchange rate prevailing at the balance sheet date. The related exchange gains and losses
are recorded in the consolidated statements of income.
2.3 Revenue Recognition
Revenue comprises the fair value of the sale of goods and services, net of value-added tax, rebates
and discounts and after eliminating intercompany sales within the Group. Revenue is recognized as
follows:
(a) Sales
Revenue from the sale of products is recognized upon transfer of significant risks and rewards of
ownership to the customer. This usually occurs at the time of shipment. Distribution costs are
recorded in cost of sales.
(b) Other revenues
Other revenues primarily consist of license revenue and patent royalty income, which are recognized
ratably over the term of the agreements.
(c) Fundings
Fundings received by the Group are mainly from governmental agencies and income is recorded when
all qualifying expenditures have been performed and the Group has obtained sufficient evidence from
the relevant authorities that the credit will be granted. The Groups primary sources for
government funding are French, Italian and other European Union (EU) governmental entities, and
Singapore agencies. Such funding is generally provided to encourage research and development
activities, industrialization and local economic development. The EU has developed model contracts
for research and development funding that require beneficiaries to disclose the results to third
parties on reasonable terms. The conditions for receipt of government funding may include
eligibility restrictions, approval by EU authorities, annual budget appropriations, compliance with
European Commission regulations, as well as specifications regarding objectives and results.
Certain specific contracts contain obligations to maintain a minimum level of employment and
investment during a certain period of time. There could be penalties if these objectives are not
fulfilled. Other contracts contain penalties for late deliveries or for breach of contract, which
may result in repayment obligations. In accordance with the Groups revenue recognition policy,
funding related to these contracts is recorded when the conditions required by the contracts
- 55 -
are met. The Groups funding programs are classified under three general categories: funding for
research and development activities, capital investment, and loans.
Funding for research and development activities is the most common form of funding that the Group
receives. Public funding for such activities is recorded as other income in the Groups
consolidated statements of income. Public funding is recognized ratably as the related costs are
incurred once the agreement with the respective governmental agency has been signed and all
applicable conditions are met. No major public funding is received for development projects
recognized by the Group as intangible assets, which would have supposed that the Group would have
recognized such funding as a reduction of the corresponding intangible assets.
The Group receives certain specific project-related research tax credits in one of its European tax
jurisdictions. Such credits can be recovered through the reduction of income tax to be paid for the
year. Nevertheless, the Group is entitled to receive in cash such credit even if no income tax is
expected to be paid. As such the Group recognizes these credits as research and development
funding, which are included in other income in the consolidated statements of income.
Capital investment funding is recorded as a reduction of property, plant and equipment and is
recognized in the Groups consolidated statements of income according to the depreciation charges
of the funded assets during their useful lives. The Group also receives capital funding in Italy,
which is recovered through the reduction of various government liabilities, including income taxes,
value-added tax and employee-related social charges. The funding has been classified as long-term
receivable and is reflected in the balance sheet at its discounted net present value. The
subsequent accretion of the discount is recorded as non-operating profit in Finance cost.
The Group receives certain loans, mainly related to large capital investment projects, at
preferential interest rates. The Group records these loans at their nominal value as debt in its
consolidated balance sheets, which has also been determined to
approximate its effective rate based on the term outstanding.
2.4 Research and development
Research and development expenditures include costs incurred by the Group, the Groups 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. Research costs are charged to expense
as incurred.
Expenditures incurred on development projects, mainly related to the design and testing of new or
improved products, are recognized as intangible assets when it is probable that the project will be
a success, considering its commercial and technological feasibility, and costs can be measured
reliably. Development expenditures recognized as assets are amortized over their estimated useful
lives, not exceeding three years (Note 2.11). Other development costs are recognized as an expense
as incurred. Development costs recognized as an expense are not recognized as an asset in a
subsequent period. The amortization expense recognized on capitalized development costs is recorded
as cost of sales. Amortization expense on technologies and licenses purchased by the Group from
third parties to facilitate the Groups research is recorded as research and development expenses.
- 56 -
2.5 Start-up costs
Start-up costs represent costs incurred in the start-up and testing of the Groups new
manufacturing facilities, before reaching the earlier of a minimum level of production or 6-months
after the fabrication lines quality qualification. No sales are associated with these costs. As
such, they are not included as part of cost of sales and are presented in other expenses in the
consolidated statements of income.
2.6 Income taxes
Income tax expense represents the income taxes expected to be paid or the benefit expected to be
received related to the current year income or loss in each individual tax jurisdiction. Income
tax expense for specific tax assessments are also estimated and recorded when an additional tax
payment is determined probable. Deferred tax assets and liabilities are recorded, using the
liability method, for 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. However,
deferred income tax is not accounted for if it arises from initial recognition of an asset or
liability in a transaction other than a business combination that, at the time of the transaction,
affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax
rates and laws that have been enacted or substantially enacted by the balance sheet date and are
expected to apply when the related deferred income tax asset is realized or the deferred income tax
liability is settled. Deferred income tax assets are recognized to the extent that it is probable
that future taxable profit will be available against which the temporary differences can be
utilized. The Group does not provide deferred income taxes on temporary differences arising on
investments in subsidiaries and associates because the timing of the reversal of the temporary
difference is controlled by the Group, and it is probable that the temporary difference will not
reverse in the foreseeable future, or if reversed, will not be subject to tax.
Certain specific research tax credits received in one of the European tax jurisdictions of the
Group are recognized as research and development funding and included in other income in the
consolidated statements of income since the Group is entitled to receive in cash such credit even
if no income tax is expected to be paid for the year in which the research tax credit must be
recognized.
2.7 Earnings per share
Basic earnings per share are computed by dividing net profit by the weighted average number of
ordinary shares outstanding during the period. Diluted earnings per share are computed using the
treasury stock method by dividing net profit (adding-back interest expense, net of tax effects,
related to convertible debt if determined to be dilutive) by the weighted average number of
ordinary shares and potential ordinary shares outstanding during the period. The weighted average
shares used to compute diluted earnings per share include the incremental shares of ordinary shares
relating to stock options granted, nonvested shares and convertible debt to the extent such
incremental shares are dilutive. Nonvested shares with performance or market conditions are
included in the computation of diluted earnings per share if their conditions have been satisfied
at the balance sheet date and if the awards are dilutive.
- 57 -
2.8 Cash and cash equivalents
Cash and cash equivalents represents cash on hand, deposits at call with banks, highly liquid
investments with insignificant interest rate risk purchased with an original maturity of ninety
days or less. For cash flow presentation purposes, cash and cash equivalents includes bank
overdrafts. Bank overdrafts are shown as part of current liabilities on the consolidated balance
sheets.
2.9 Trade accounts receivable
The accounts receivable are initially recognized at fair value, and subsequently measured at
amortized cost using the effective interest method, net of allowances for doubtful accounts. The
Group maintains an allowance for doubtful accounts for estimated losses resulting from its
customers inability to make required payments. The amount of provision is the difference between
the assets carrying amount and the present value of the estimated present cash flows, discounted
at the effective interest rate. The amount of the provision is recognized in the income statement
as selling, general and administrative expenses.
2.10 Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is based on the weighted
average cost by adjusting standard cost to approximate actual manufacturing costs on a quarterly
basis; the cost is therefore dependent on the Groups manufacturing performance. In the case of
underutilization 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. Net realizable
value is the estimated selling price in the ordinary course of business, less applicable variable
selling expenses.
Additionally, the Group evaluates its product inventory to identify obsolete or slow-selling stock.
The Group also identifies any excess uncommitted inventory based on the previous quarter sales,
orders backlog and production plans. Inventory associated with obsolete or uncommitted inventory
is expensed to cost of sales.
2.11 Intangible assets subject to amortization
Intangible assets subject to amortization include the cost of technologies and licenses purchased
from third parties, purchased software, internally developed software which is capitalized and
costs incurred on other development projects that meet all capitalization criteria as defined in
IAS 38 (revised), Intangible Assets. 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. An impairment loss is recognized in the income statement for the amount by which the
assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an
assets fair value and value in use. The fair value which would normally be estimated based on
independent market appraisals has not been used by the Group as market appraisals have not been
feasible for the Groups intangible assets. The value in use corresponds to the sum of discounted
future cash flows to be derived from the particular asset or to the cash-regenerating unit to which
it relates.
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Amortization is computed using the straight-line method over the following estimated useful lives:
|
|
|
|
Technologies
& licenses
|
|
3-7 years |
Purchased software
|
|
3-4 years |
Internally developed software
|
|
4 years |
Capitalized development costs
|
|
3 years |
|
The Group evaluates the remaining useful life of an intangible asset at each reporting period
to determine whether events and circumstances warrant a revision to the remaining period of
amortization.
The capitalization of costs for internally generated software developed for the Groups internal
use begins when preliminary project stage is completed and when the Group, 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.
Expenditures incurred on development projects, mainly related to the design and testing of new or
improved products, are recognised as intangible assets net of any material government funding
directly attributable to the specific projects when the Group can demonstrate all of the following:
(i) the technical feasibility of completing the item under development so that it will be available
for use or sale; (ii) its intention to complete the item under development and to use it or sell
it; (iii) its ability to use or sell the intangible asset under construction; (iv) how the item
under development will generate probable future economic benefits; (v) the availability of adequate
technical, financial and other resources to complete the development and to use or sell the item
under development; and (vi) its ability to measure reliably the expenditure attributable to the
project during its development. Development costs that have been capitalized are amortized on a
straight-line basis over the period of their expected benefits, not exceeding three years.
Development costs incurred before the Group can demonstrate the compliance with the capitalization
criteria described above and after the commencement of the generation of benefits through the use
or production of the developed item are not capitalized and are recognized in the consolidated
statements of income as research and development expenses.
The Groups consolidated balance sheets as of January 1, 2004 and December 31, 2004 do not include
any capitalized development costs due to the fact that the Groups administrative systems were not
implemented in such a manner that all criteria for capitalization as described above could be met.
During the second half of 2004 the Group made changes to its administrative systems in order to
capture and accumulate costs and to identify pre and post technological feasibility for individual
development projects. This information was not captured or accumulated previously and proved
impossible to generate subsequently for periods prior to the implementation of these systems. As a
result the Group was able to meet all IFRS criteria for capitalizing certain development
expenditures only as from January 1, 2005.
2.12 Goodwill
Goodwill recognized in business combinations is not amortized but rather is subject to an
impairment test to be performed on an annual basis or more frequently if indicators of
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impairment exist, in order to assess the recoverability of its carrying value. Goodwill subject to
potential impairment is allocated to cash-generating units (CGUs) for the purpose of impairment
testing. These CGUs, which represent a component of an operating segment for which discrete
financial information is available and is subject to regular review by segment management are
further described in detail in Note 8. This impairment test determines whether the recoverable
amount of each cash-generating unit, which is the higher of its assets net selling price and its
value in use, is lower than its total carrying amount. If lower, an impairment loss is recognized
for the excess of the carrying amount over the recoverable amount. If the impairment loss exceeds
the book value of goodwill, allocation is made on a pro rata basis. In determining the value in use
of a cash-generating unit, the Group usually estimates the expected discounted future cash flows
associated with the unit. Significant management judgments and estimates are used in forecasting
the future discounted cash flows, including: the applicable industrys sales volume forecast and
selling price evolution, the cash-generating units market penetration, the market acceptance of
certain new technologies, relevant cost structure, the discount rates applied using a weighted
average cost of capital and the perpetuity rates used in calculating cash flow terminal values.
2.13 Property, plant and equipment
Property, plant and equipment are stated at historical cost, net of government fundings,
depreciation and any impairment losses. Major additions and improvements are capitalized, minor
replacements and repairs are charged to the consolidated statement of income.
Land is not depreciated. Depreciation on fixed assets is computed using the straight-line method
over the following estimated useful lives:
|
|
|
|
Buildings |
|
33 years |
Facilities & leasehold improvements
|
|
5-10 years |
Machinery and equipment |
|
3-6 years |
Computer and R&D equipment |
|
3-6 years |
Other |
|
2-5 years |
|
The Group evaluates each period whether there is reason to suspect that tangible assets or
groups of assets might not be recoverable. Several impairment indicators exist for making this
assessment, such as: significant changes in the technological, market, economic or legal
environment in which the Group operates or in the market to which the asset is dedicated, or
available evidence of obsolescence of the asset, or indication that its economic performance is, or
will be, worse than expected. For the purposes of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash flows (cash-generating units). An
impairment loss is recognized in the income statement for the amount by which the assets carrying
amount exceeds its recoverable amount. The recoverable amount is the higher of an assets fair
value less costs to sell and value in use. The fair value is normally estimated by the Group based
on independent market appraisals. The value in use corresponds to the sum of discounted future cash
flows to be derived from the particular asset, using market assumptions such as the utilization of
the Groups fabrication facilities and the ability to upgrade such facilities, change in the
selling price and the adoption of new technologies. The Group also evaluates, and adjusts if
appropriate, the assets useful lives, at each balance sheet date or when impairment indicators
exist. Assets classified as held for sale are reflected at the lower of their carrying amount or
fair value less selling costs and are not
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depreciated during the selling period. Costs to sell include incremental direct costs to transact
the sale that would not have been incurred except for the decision to sell.
When property, plant and equipment are retired or otherwise disposed of, the net book value of the
assets is removed from the Groups books and the net gain or loss is included in other income in
the consolidated statements of income.
Leasing agreements in which a significant portion of the risks and rewards of ownership are
retained by the Group are classified as capital leases. These leases are included in property,
plant and equipment and depreciated over the shorter of the estimated useful life or the lease
term. Leasing agreements classified as operating leases are arrangements in which the lessor
retains a significant portion of the risks and rewards of ownership of the leased asset. Payments
made under operating leases are charged to the income statement on a straight-line basis over the
period of the lease.
Borrowing costs incurred for the construction of any qualifying asset are capitalized during the
period of time that is required to complete and prepare the asset for its intended use. Other
borrowing costs are expensed.
2.14 Financial Assets
The Group classifies its financial assets in the following categories: financial assets at fair
value through profit and loss, loans and receivables and available-for-sale financial assets. The
classification depends on the purpose for which the investments were acquired. Management
determines the classification of its investments at initial recognition and re-evaluates this
designation at each reporting date.
(a) Financial assets at fair value through profit and loss
A financial asset is classified in this category if acquired principally for the purpose of selling
in the short term or if so designated by management. Assets in this category are classified as
current assets when they are expected to be realized within twelve months of the balance sheet
date.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that
are not quoted in an active market. They arise when the Group provides money, goods or services
directly to a debtor with no intention of trading the receivable. They are included in current
assets, except for maturities greater than twelve months after the balance sheet date, which are
classified as non-current assets. Loans and receivables with maturities lower than twelve months
are included in trade accounts receivable and other receivables and assets in the consolidated
balance sheets. Their carrying amounts are assumed to approximate their fair value. Loans and
receivables are carried at amortized cost using the effective interest method.
(c) Available-for-sale financial assets
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 reserves in the consolidated statements of changes in equity.
Impairment losses are recorded in net profit based on the Groups
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assessment of any significant, sustained reductions in the investments 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 or other expenses
in the consolidated statement of income.
Purchases and sales of investments are recognized on trade date, which is the date on which the
Group commits to purchase or sell the asset. Investments are derecognized when the rights to
receive cash flows from the investments have expired or have been transferred and the Group has
transferred substantially all risks and rewards of ownership.
2.15 Derivative Instruments
(a) Foreign Currency Forward Contracts Not Designated as a Hedge
The Group conducts its business on a global basis in various major international currencies. As a
result, the Group is exposed to adverse movements in foreign currency exchange rates. The Group
enters into foreign currency 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 Companys subsidiaries. In addition forward contracts
are also used by the Company to reduce its exposure to U.S. dollar fluctuations in euro-denominated
forecasted intercompany transactions that cover a large part of research and development
expenditures and certain corporate expenses incurred on the Companys behalf by subsidiaries.
These intercompany transactions are not closely limited to ultimate transactions with third
parties. These instruments do not qualify as hedging instruments and are marked-to-market at each
period-end with the associated changes in fair value recognized in other income or other
expenses in the consolidated statements of income.
(b) Cash Flow Hedges
To further reduce its exposure to U.S. dollar exchange rate fluctuations, the Company also hedged
in 2005 and 2004 a portion of its euro-denominated forecasted intercompany purchases of products
whose underlying front-end manufacturing production costs of semi-finished goods are incurred in
euros. The foreign currency forward contracts used to hedge exposures are reflected at their fair
value in the consolidated balance sheet and meet the criteria for designation as cash flow hedges.
The criteria for designating a derivative as a hedge include the instruments effectiveness in risk
reduction, close link to ultimate sales to third parties and, in most cases, a one-to-one matching
of the derivative instrument to its underlying transaction. Foreign currency forward contracts used
as hedges are effective at reducing the euro/U.S. dollar currency fluctuation risk and are
designated as a hedge at the inception of the contract. For these derivatives, the gain or loss
from the effective portion of the hedge is reported as a component of other reserves in the
consolidated statements of changes in equity and is reclassified into earnings in the same period
in which the hedged transaction affects earnings, and within the same income statement line item as
the impact of the hedged transaction. The gain or loss is recognized immediately in other income
and other expenses in the consolidated statements of income when a designated hedging instrument
is either terminated early or an improbable or ineffective portion of the hedge is identified.
- 62 -
2.16 Employee benefits
(a) Pension obligations
The Group sponsors various pension schemes for its employees. These schemes conform to local
regulations and practices of the countries in which the Group operates. They are generally funded
through payments to insurance companies or trustee-administered funds, determined by periodic
actuarial calculations. Such plans include both defined benefit and defined contribution plans. A
defined benefit plan is a pension plan that defines the amount of pension benefit that an employee
will receive on retirement, usually dependent on one or more factors such as age, years of service
and compensation. A defined contribution plan is a pension plan under which the Group pays fixed
contributions into a separate entity. The Group has no legal or constructive obligations to pay
further contributions if the fund does not hold sufficient assets to pay all employees the benefits
relating to employee service in the current and prior periods.
The liability recognized in the consolidated balance sheet in respect of defined pension plans is
the present value of the defined benefit obligation at the balance sheet date less the fair value
of plan assets, together with adjustments for unrecognized actuarial gains and losses and past
service costs. Significant estimates are used in determining the assumptions incorporated in the
calculation of the pension obligations, which is supported by input from independent actuaries. The
defined benefit obligation is calculated annually by independent actuaries using the projected unit
credit method. The present value of the defined benefit obligation is determined by discounting the
estimated future cash outflows using interest rates of high-quality corporate bonds that are
denominated in the currency in which the benefits will be paid, and that have terms to maturity
approximating the terms of the related pension liability. Actuarial gains and losses arising
from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of
the value of plan assets or 10% of the defined benefit obligation are charged or credited to income
over the employees expected average remaining working lives. Past-service costs are recognized
immediately in income, unless the changes to the pension scheme are conditional on the employees
remaining in service for a specified period of time (the vesting period). In this case, the
past-service costs are amortized on a straight-line basis over the vesting period.
For defined contribution plans, the Group pays contributions to publicly or privately administered
pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further
payment obligations once the contributions have been paid. The contributions are recognized as
employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the
extent that a cash refund or a reduction in the future payments is available.
(b) Termination benefits
Termination benefits are payable when employment is terminated before the normal retirement date,
or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group
recognizes termination benefits when it is demonstrably committed to either: terminating the
employment of current employees according to a detailed formal plan without possibility of
withdrawal; or providing termination benefits as an offer made to encourage voluntary redundancy.
Benefits falling due more than twelve months after the balance sheet date are discounted to present
value. In the case of an offer made to encourage
- 63 -
voluntary redundancy, the Group bases the measurement of termination benefits on the number of
employees expected to accept the offer.
(c) Profit-sharing and bonus plans
The Group recognizes a liability and an expense for bonuses and profit-sharing plans when it is
contractually obliged or where there is a past practice that has created a constructive obligation.
(d) Share-based compensation
The Group applies IFRS 2, Share-based Payment, in accounting for
share-based awards to employees. The application of IFRS 2 to past grants under the first-time
adoption requirements set out in IFRS 1 has been limited to equity instruments granted after
November 7, 2002 and not fully vested on January 1, 2005. The fair value of the employee services
received in exchange for the grant of share-based awards is recognized as an expense and as a
corresponding increase in shareholders equity. The total amount to be expensed over the vesting
period is determined by reference to the fair value of the awards granted. Any applicable employee
social charges are also expensed ratably over the same period as the share-based compensation
expense.
Share Options
At December 31, 2005, the Group had five employee and Supervisory Board share-option plans, which
are described in detail in Note 15. In 2005, the Group redefined its equity-based compensation
strategy by no longer granting options but rather issuing non-vested shares. In July 2005, the
Group amended its latest Share Option Plans for employees, Supervisory Board and Professionals of
the Supervisory Board accordingly. As part of this revised share compensation policy, the Group
decided in July 2005 to accelerate the vesting period of all outstanding unvested share options,
following authorization from the Groups shareholders at the annual general meeting held on March
18, 2005. As a result, underwater options equivalent to approximately 32 million shares became
exercisable immediately in July 2005. The fair value of the share options granted was measured
using a BlackScholes pricing model. The number of awards used to measured compensation expense
was based on the best estimate of the number of share options expected to vest. Total compensation
expense was recognized ratably through graded vesting. At acceleration of the vesting of all
unvested share options, the corresponding compensation charge was recognized immediately in the
consolidated statement of income for the year ended December 31, 2005 for the amount that otherwise
would have been recognized for services received over the remainder of the vesting period.
Nonvested Shares
On October 25, 2005, the Group granted nonvested shares to senior executives, selected employees
and members of the Supervisory Board to be issued upon vesting from treasury shares. The shares
were granted for free to employees and at their nominal value for the members of the Supervisory
Board. The awards granted to employees will contingently vest upon achieving market or performance
conditions and progressively upon completion of a three-year service period. Shares granted to the
Supervisory Board vest unconditionally along the same vesting period as employees. Since nonvested
shares granted to Supervisory Board members are not forfeited, even if the service period is not
completed, their associated compensation cost has been recorded immediately at grant. The Group
records compensation
- 64 -
expense for the nonvested shares based on the fair value of the awards at grant date. The fair
value of the nonvested shares affected by a market condition reflects a discount, using a Monte
Carlo path-dependent pricing model, to measure the probability of achieving the market condition.
Nonvested shares are further explained in Note 15.
2.17 Financial Debt
(a) Compound Financial Instruments
Compound
financial instruments are separated into debt and equity components based on the
circumstances at the inception of the instruments. In application of the first-time adoption
requirements as set out in IFRS 1 in relation to convertible debt accounting, the Group identified
separately the two elements of equity and liability only for the convertible debt outstanding as at
January 1, 2005, which corresponds to zero-coupon convertible bonds issued in August 2003. The fair
value of the liability portion of the convertible debt was determined using a market interest rate
for an equivalent non-convertible debt over the period of future probable cash flows as estimated
on the date of issuance. This was determined to be a three-year timeframe corresponding to the
period to the first date of redemption for cash at the option of the holder. This amount is
recognized as a liability on an amortized cost basis until redeemed, extinguished on conversion or
on the maturity of the bonds. The remainder of the proceeds is allocated to the conversion option.
The embedded rights of the bond holder to extend the bond beyond the probable three year period, by
not exercising their redemption option, are measured at fair value through profit and loss.
Debt issuance and other transaction costs that relate to the issue of a compound financial
instrument are allocated to the liability and equity components of the instrument in proportion to
the allocation of proceeds. The costs allocated to the liability component of the financial
instrument are amortized in finance cost until the first redemption right of the holder.
(b) Bank loans
Bank loans are recognized initially at fair value, net of transaction costs incurred. They are
subsequently stated at amortized cost; any difference between the proceeds (net of transaction
costs) and the redemption value is recognized in the consolidated statement of income over the
period of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless the Group has an unconditional right to
defer settlement of the liability for at least twelve months after the balance sheet date.
2.18 Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of
new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Where any subsidiary purchases the Groups equity share capital (treasury shares), the
consideration paid, including any directly attributable incremental costs, (net of income taxes),
is deducted from equity attributable to the Groups shareholders until the shares are cancelled,
reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration
received net of directly attributable incremental transaction costs and the related income tax
effect is included in equity attributable to the Groups shareholders.
- 65 -
2.19 Other reserves
Other reserves correspond to changes in equity of a business during a period except those resulting
from investment by shareholders and distributions to shareholders. In the accompanying
consolidated financial statements, other reserves consists of fair value of services provided
under share award schemes, unrealized gains or losses on marketable securities classified as
available-for-sale and the unrealized gain (loss) on derivative instruments designated as cash flow
hedge, all net of tax as well as foreign currency translation adjustments.
2.20 Provisions
Provisions for restructuring costs, and legal claims are recognized when: the Group has a present
legal or constructive obligation as a result of past events; it is more likely than not that an
outflow of resources will be required to settle the obligation; and the amount has been reliably
estimated. Restructuring provisions comprise lease termination penalties and employee termination
payments. Provisions are not recognized for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in
settlements is determined by considering the class of obligations as a whole. A provision is
recognized even if the likelihood of the outflow with respect to any one item included in the same
class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle
the obligation using a pre tax rate that reflects current market assessments of the time value of
money and the risk specific to the obligation. The increase in the provision due to passage of time
is recognized as finance cost.
2.21 Segment reporting
A business segment is a group of assets and operations engaged in providing products that are
subject to risk and returns that are different from those of other business segments. A
geographical segment is engaged in providing products within a particular economic environment that
are subject to risks and returns that are different from those of segments operating in other
economic environments.
2.22 Summary of critical accounting estimates and judgments
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates
will, by definition, seldom equal the related actual results. Estimates and judgments are
continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under circumstances. Estimates and
assumptions that have a significant risk of causing material adjustments to the carrying amounts of
assets and liabilities within the next financial year are described below.
(a) Provision for sales returns and sales deductions
Consistent with standard business practice in the semiconductor industry, price protection is
granted to distribution customers on their existing inventory of the Groups products to compensate
them for declines in market prices. The ultimate decision to authorize a distributor refund
remains fully within the control of the Group. The Group accrues a provision for price protection
based on a rolling historical price trend computed on a monthly
- 66 -
basis as a percentage of gross distributor sales. This historical price trend represents
differences in recent months between the invoiced price and the final price to the distributor,
adjusted if required, to accommodate a significant move in the current market price. The short
outstanding inventory time period, visibility into the standard inventory product pricing (as
opposed to certain customized products) and long distributor pricing history have enabled the Group
to reliably estimate price protection provisions at period-end. The Group records the accrued
amounts as a deduction of revenue at the time of the sale.
The Groups customers occasionally return the Groups products for technical reasons. The Groups
standard terms and conditions of sale provide that if the Group determines that products are
non-conforming, the Group will repair or replace the non-conforming products, or issue a credit or
rebate of the purchase price. Quality returns are not related to any technological obsolescence
issues and are identified shortly after sale in customer quality control testing. Quality returns
are always associated with end-user customers, not with distribution channels. The Group provides
for such returns when they are considered as probable and can be reasonably estimated. The Group
records the accrued amounts as a reduction of revenue.
The Groups insurance policy relating to product liability only covers physical damage and other
direct damages caused by defective products. The Group does not carry insurance against immaterial
non consequential damages. The Group records a provision for warranty costs as a charge against
cost of sales, based on historical trends of warranty costs incurred as a percentage of sales,
which management has determined to be a reasonable estimate of the probable losses to be incurred
for warranty claims in a period. Any potential warranty claims are subject to the Groups
determination that the Group is at fault for damages, and such claims usually must be submitted
within a short period following the date of sale. This warranty is given in lieu of all other
warranties, conditions or terms expressed or implied by statute or common law. The Groups
contractual terms and conditions limit its liability to the sales value of the products which gives
rise to the claims.
(b) Trade receivables
The Group maintains an allowance for doubtful accounts for estimated losses resulting from its
customers inability to make required payments. The Group bases its estimates on historical
collection trends. Furthermore, the Group is required to evaluate its customers credit ratings
from time to time and take an additional provision for any specific account that it estimates as
doubtful. Although the Group has determined that its most significant customers are creditworthy,
if the financial condition of these customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances could be required.
(c) Income taxes
The Group is required to assess the likelihood of recovery of deferred tax assets. As of December
31, 2005, the Group believes that all of the deferred tax assets as recorded on the consolidated
balance sheet, would ultimately be recovered. However, should there be a change in the Groups
ability to recover deferred tax assets or in the tax rates applicable in the various jurisdictions,
this could have an impact on the Groups future tax provision in the periods in which these changes
could occur.
- 67 -
In addition, the calculation of tax liabilities involves dealing with uncertainties in the
application of complex tax regulations. The Group recognizes liabilities for anticipated tax audit
issues based on estimates that probable additional taxes will be due. The Group reverses the
liability and recognizes a tax benefit during the period if it ultimately determines that the
liability is no longer necessary. An additional charge is recorded in income tax expense in the
period in which the Group determines that the recorded tax liability is less than the Group expects
the ultimate assessment to be.
(d) Inventory
The valuation of inventory requires the Group to estimate obsolete or excess inventory as well as
inventory that is not of saleable quality. Inventory is reduced to
the expected realizable value for any excess
uncommitted inventories based on the previous quarter sales, order backlog and production plans. To
the extent that future negative market conditions generate order backlog cancellations and
declining sales, or if future conditions are less favorable than the projected revenue assumptions,
the Group could be required to record additional inventory adjustments, which would have a negative
impact on the gross margin.
(e) Impairment of long-lived assets
Long-lived assets are tested or reviewed for impairment in accordance with accounting policies
stated in Notes 2.11, 2.12 and 2.13. Considerable management judgments are necessary to identify
impairment indicators and to estimate future sales and expenses, which underlie the discounted
future cash flow projections. Factors such as changes in the planned use of property, plant and
equipment, the closure of fab, lower than anticipated sales for products which capitalize rights,
the change in the use or in the market acceptance of certain new technologies, could result in
shortened useful lives or impairment charges to be recognized in the period in which such
determination is made.
(f) Pension obligations
The Group sponsors various pension schemes for its employees. The expense incurred under the
defined benefit retirement plans is based upon statistical and actuarial calculations, and is
impacted by assumptions on discount rates used to reach the present value of future pension
liabilities, expected return that will be made on existing pension assets, future salary increases
as well as future pension increases and statistical-based assumptions covering future withdrawals
of participants from the plan and estimates of life expectancy. The actuarial assumptions used may
differ materially from actual results due to changes in market and economic conditions, higher or
lower withdrawal rates or longer or shorter life spans of participants and significantly impact the
amount of pension costs and pension liabilities to be recognized in the period in which such
determination is made.
(g) Restructuring charges
The Group has undertaken, and may continue to undertake, significant restructuring initiatives,
which have required, or may require in the future, to develop formalized plans for exiting
activities or to dispose of certain activities. The Group recognizes the fair value of a liability
for costs associated with an exit or disposal activity when a probable liability exists and it can
be reasonably estimated. Given the significance and the timing of the execution of such activities,
the process is complex and involves periodic reviews of estimates made at the time the original
decisions were taken. As the Group operates in a highly cyclical industry, it
- 68 -
continues to evaluate business conditions. If broader or new initiatives, which could include
production curtailment or closure of other manufacturing facilities, were to be taken, the Group
may be required to incur additional charges as well as to change estimates of amounts previously
recorded in the period in which such determination is made.
2.23 Recent accounting pronouncements
On December 2, 2004 the International Financial Reporting Interpretations Committee (IFRIC)
released IFRIC Interpretation No. 4, Determining whether an Arrangement contains a Lease (IFRIC
4). This interpretation gives guidance on determining whether arrangements that do not take the
legal form of a lease should nonetheless be accounted for in accordance with International
Accounting Standard No. 17, Leases (IAS 17). It specifies that an arrangement contains a lease if
it depends on the use of a specific asset and conveys a right to control the use of that asset. The
Interpretation is effective for annual periods beginning on or after January 1, 2006, with early
application permitted. The Group expects to adopt IFRIC 4 in 2006 and is currently assessing the
impact of arrangements within the scope of IFRIC 4 on its future financial position and results of
operations.
On December 16, 2004 the IASB issued Amendment to IAS 19, Employee Benefits Actuarial Gains and
Losses, Group Plans and Disclosures. This amendment introduces the option of an alternative
recognition approach for actuarial gains and losses. As the Group does not intend to change
accounting policies adopted for recognition of actuarial gains and losses and does not participate
in any multi-employer plans, adoption of this amendment will only
impact the format and extent of
disclosures presented in the consolidated financial statements. The Group will apply this amendment for annual periods
beginning January 1, 2006.
On August 18, 2005 the IASB issued International Financial Reporting Standard No. 7, Financial
Instruments: Disclosures (IFRS 7), with the main objective of revising and enhancing the
disclosures in International Accounting Standard No. 30, Disclosures in the Financial Statements of
Banks and Similar Financial Institutions (IAS 30) and International Accounting Standard No. 32,
Financial Instruments: Disclosure and Presentation (IAS 32). IFRS 7 requires disclosure of the
significance of financial instruments for an entitys financial position and performance, which
incorporate many of the requirements previously in IAS 32. IFRS 7 also requires qualitative and
quantitative information about exposure to risks arising from financial instruments, including
specified minimum disclosures about credit risk, liquidity risk and market risk. The Standard is
effective for annual periods beginning on or after January 1, 2007, with early adoption permitted.
The Group will adopt IFRS 7 in 2007 and is currently evaluating the effect of IFRS 7 on its
disclosures concerning financial instruments.
In 2005 the IASB issued the following amendments to IAS 39, Financial Instruments: Recognition and
Measurement:
|
|
|
IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup
Transactions, effective from January 1, 2006, which the
Group early adopted in 2005. The amendment allows the foreign currency
risk of highly probable forecast intragroup transaction to qualify as a hedged item in
the consolidated financial statements, provided that: (a) the transaction is
denominated in a currency other than the functional currency of the entity entering
into that transaction; and (b) the foreign currency risk will affect consolidated
profit and loss. This amendment is relevant to the Groups operations, as the Group
uses forward contracts to reduce its exposure to U.S. |
- 69 -
|
|
|
dollar fluctuations in euro-denominated forecasted intercompany transactions that cover
a large part of research and development expenditures and certain corporate expenses
incurred on behalf of the Company by subsidiaries. These intercompany transactions are
not closely limited to ultimate transactions with third parties and these instruments do
not qualify as hedging instruments. The Company also hedged in 2005 and 2004 a portion
of its euro-denominated forecasted intercompany purchases of products whose underlying
front-end manufacturing production costs of semi-finished goods are incurred in euros.
The foreign currency forward contracts used to hedge exposures meet the criteria for
designation as cash flow hedges. |
|
|
|
|
IAS 39 (Amendment), The fair Value Option, effective from January 1, 2006. This
amendment changes the definition of financial instruments classified at fair value
through profit or loss and restricts the ability to designate financial instruments as
part of this category. The Group believes that this amendment should not have a
significant impact on the classification of financial instruments, as the Group should
be able to comply with the amended criteria for the designation of financial
instruments at fair value through profit and loss. The Group will apply this amendment
from annual periods beginning January 1, 2006. |
|
|
|
|
IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts, effective from
January 1, 2006. This amendment requires issued financial guarantees, other than those
previously asserted by the entity to be insurance contracts, to be initially recognized
at their fair value and subsequently measured at the higher of; (a) the unamortized
balance of the related fees received and deferred, and (b) the expenditure required to
settle the commitment at the balance sheet date. Management considered this amendment
to IAS 39 and concluded that it is not relevant to the Group. |
3 INVESTMENTS IN ASSOCIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
|
|
|
|
2005 |
|
2004 |
Beginning of the year |
|
|
|
|
|
|
6 |
|
|
|
|
|
New investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SuperH Inc. |
|
|
|
|
|
|
2 |
|
|
|
UPEK, Inc. |
|
|
|
|
|
|
8 |
|
|
|
Hynix ST Investment |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UPEK, Inc. |
|
|
(6 |
) |
|
|
|
|
Share of loss of associates |
|
|
|
|
|
|
(3 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
End of the year |
|
|
|
|
|
|
35 |
|
|
|
6 |
|
|
|
|
|
|
The Groups interests in its principal associates, all of which are unlisted, are detailed as
follows:
- 70 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
Country of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
Name |
|
incorporation |
|
|
Assets |
|
|
Liabilities |
|
|
Revenues |
|
|
Profit/(loss) |
|
|
interest held |
|
Hynix ST Investment |
|
China
|
|
|
|
117 |
|
|
|
14 |
|
|
|
|
|
|
|
(10 |
) |
|
|
33% |
|
|
December 31, 2004 |
|
|
|
Country of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
Name |
|
incorporation |
|
|
Assets |
|
|
Liabilities |
|
|
Revenues |
|
|
Profit/(loss) |
|
|
interest held |
|
SuperH Inc. |
|
United States of America
|
|
|
|
7 |
|
|
|
10 |
|
|
|
7 |
|
|
|
(11 |
) |
|
|
44% |
|
UPEK, Inc. |
|
United States of America
|
|
|
|
23 |
|
|
|
7 |
|
|
|
8 |
|
|
|
(6 |
) |
|
|
33% |
SuperH Inc.
In 2001, the Group and Renesas Technology Corp. (previously known as Hitachi, Ltd.) formed a
company to develop and license RISC microprocessors. The investment, SuperH Inc., was initially
capitalized with the Groups contribution of $15 million of cash plus internally developed
technologies with an agreed intrinsic value of $14 million for a 44% interest. Renesas Technology
Corp. contributed $37 million of cash for a 56% interest. The Group accounted for its share in
SuperH, Inc. under the equity method based on the actual results of the company. During 2002 and
2003, the Group made additional capital contributions on which accumulated losses have exceeded the
Groups total investment, which is shown at a zero carrying value in the consolidated balance sheet
as of December 31, 2004.
In 2004, the shareholders agreed to restructure the company by transferring the intellectual
properties to each shareholder and continuing any further development individually. Based upon
estimates of forecasted cash requirements of the investment, the Group paid an additional $2
million, which is reflected in the 2004 consolidated statement of income as Share of loss of
associates. In 2005, SuperH Inc. was liquidated with no further losses incurred by the Group.
UPEK, Inc.
In 2004, the Group and Sofinnova Capital IV FCPR formed a new company, UPEK, Inc., as a venture
capital-funded spin-off of the Groups TouchChip business. UPEK, Inc. was initially capitalized
with the Groups transfer of the business, personnel and technology assets related to the
fingerprint biometrics business, formerly known as the TouchChip Business Unit, for a 48% interest.
Sofinnova Capital IV FCPR contributed $11 million of cash for a 52% interest. During the first
quarter of 2005, an additional $9 million was contributed by Sofinnova Capital IV FCPR, reducing
the Groups ownership to 33%. The Group accounted for its share in UPEK, Inc. under the equity
method and in 2004 recorded losses of approximately $2 million, which were reflected in the 2004
consolidated statement of income as Share of loss of associates.
On June 30, 2005, the Group sold its interest in UPEK Inc. for $13 million and recorded a gain
amounting to $6 million in Other income of its consolidated statement of income.
- 71 -
Additionally, on June 30, 2005, the Group was granted warrants for 2,000,000 shares of UPEK, Inc.
at an exercise price of $0.01 per share. The warrants are not limited in time but can only be
exercised in the event of a change of control or an Initial Public Offering of UPEK, Inc. above a
predetermined value.
Hynix ST Investment
Pursuant to the agreement signed in 2004 by the Group with Hynix Semiconductor Inc. to build a $2
billion front-end memory-manufacturing facility in Wuxi City, Jiangsu Province, China, the Group
made capital contributions to the associate totaling $38 million in 2005. Under the agreement,
Hynix Semiconductor Inc. will contribute $500 million for a 67% equity interest and the Group will
contribute $250 million for a 33% equity interest (Note 25). In addition, the Group committed to
grant $250 million in long-term financing to the new company guaranteed by the subordinated
collateral of the companys assets. As of December 31, 2005 the Group has not provided any debt
financing to the company under this commitment. The Groups current maximum exposure to loss as a
result of its involvement with the investment is limited to its equity investment and eventual debt
commitments.
The Group accounts for its share in the Hynix ST investment under the equity method based on the
actual results of the company and recorded losses totaling $4 million in 2005 as Share of loss of
associates.
4 AVAILABLE-FOR-SALE MARKETABLE SECURITIES
In 2003 the Group has classified certain marketable securities as available-for-sale, which related
to equity securities held as strategic investments in various companies. During 2004, all
available-for-sale securities were sold. For fiscal years 2005 and 2004, gross realized gains
associated with the sale of the marketable securities were $0 million, and $5 million respectively.
5 TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Trade accounts receivable |
|
|
1,517 |
|
|
|
1,429 |
|
Provision for impairment |
|
|
(27 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
|
1,490 |
|
|
|
1,408 |
|
Impairment losses recognized in 2005 and 2004 were $7 million and $5 million, respectively. In
2005 and 2004, one customer, the Nokia group of companies, represented 22.4% and 17.1% of
consolidated total revenues, respectively. Doubtful account expense is reported as selling, general
and administrative expenses in the consolidated statements of income.
6 INVENTORIES
Inventories consisted of the following:
- 72 -
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Raw materials |
|
|
60 |
|
|
|
70 |
|
Work-in-process |
|
|
881 |
|
|
|
877 |
|
Finished products |
|
|
472 |
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,413 |
|
|
|
1,348 |
|
The variation of inventories included in cost of sales amounted to a positive impact of $170
million and $146 million, for the years ended December 31, 2005 and 2004 respectively.
7 OTHER RECEIVABLES AND ASSETS
Other receivables and assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Receivables from government agencies |
|
|
226 |
|
|
|
270 |
|
Taxes and other government receivables |
|
|
189 |
|
|
|
143 |
|
Advances to suppliers |
|
|
2 |
|
|
|
3 |
|
Advances to employees |
|
|
10 |
|
|
|
16 |
|
Prepaid expenses |
|
|
48 |
|
|
|
88 |
|
Sundry debtors within cooperation agreements |
|
|
67 |
|
|
|
85 |
|
Other |
|
|
44 |
|
|
|
38 |
|
Total |
|
|
586 |
|
|
|
643 |
|
The carrying amounts are assumed to approximate fair value. Receivables from government
agencies relate to research and development contracts, research tax credits, industrialization
contracts and capital investment projects.
8 GOODWILL
Changes in the carrying amount of goodwill are presented in the following segment-level summary of
goodwill allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Specific Products |
|
Memory Products |
|
Other |
|
Total |
December 31, 2003 |
|
|
126 |
|
|
|
61 |
|
|
|
4 |
|
|
|
191 |
|
TouchChip sale |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
Foreign currency translation |
|
|
(3 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
123 |
|
|
|
64 |
|
|
|
1 |
|
|
|
188 |
|
CPE goodwill impairment |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
Foreign currency translation |
|
|
|
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
December 31, 2005 |
|
|
113 |
|
|
|
61 |
|
|
|
|
|
|
|
174 |
|
Goodwill is allocated to the Groups cash-generating units (CGUs). The recoverable amount of
a CGU is determined based on value-in-use calculations. These calculations use
- 73 -
cash flow projections based on financial budgets approved by management covering a five-year
period.
The key-assumptions used for value-in-use calculations are based on a five-year plan of each CGU
tested including revenues growth higher than Groups average by approximately 12% resulting from
the forecasted faster growth for these businesses and their incoming new products, and a gross
margin within a range of 27% and 53%. A 12% discount rate has been applied to the cash flow
projections.
These assumptions have been used for the analysis of each CGU within the product segments.
Management determined budgeted gross margin based on past performance and its expectations for the
market development. The average yearly growth rates used are consistent with the forecasts included
in industry reports. The discount rates used are pre-tax and reflect specific risks relating to the
relevant CGUs.
In 2005, the Group decided to reduce its Access technology products for Customer Premises Equipment
(CPE) modem products. The Group reports CPE business as part of the Access CGU, included in the
Application Specific Products Group (ASG) segment. Following the decision to discontinue a
portion of this CGU, the Group, in compliance with IAS 36, Impairment of Assets, re-measured using
market comparables goodwill associated with the business to be discontinued on the basis of the
relative values of the business to be discontinued and the portion of the CGU retained. The
reassessment resulted in a $10 million goodwill impairment in 2005.
9 INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
Amortization and |
|
|
December 31, 2005 |
|
Gross Cost |
|
Impairments |
|
Net Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technologies & licenses |
|
|
309 |
|
|
|
(199 |
) |
|
|
110 |
|
Purchased software |
|
|
162 |
|
|
|
(114 |
) |
|
|
48 |
|
Internally developed software |
|
|
114 |
|
|
|
(48 |
) |
|
|
66 |
|
Capitalized development costs |
|
|
238 |
|
|
|
(4 |
) |
|
|
234 |
|
Total |
|
|
823 |
|
|
|
(365 |
) |
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
Amortization and |
|
|
December 31, 2004 |
|
Gross Cost |
|
Impairments |
|
Net Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technologies & licenses |
|
|
409 |
|
|
|
(233 |
) |
|
|
176 |
|
Purchased software |
|
|
148 |
|
|
|
(100 |
) |
|
|
48 |
|
Internally developed software |
|
|
104 |
|
|
|
(37 |
) |
|
|
67 |
|
Total |
|
|
661 |
|
|
|
(370 |
) |
|
|
291 |
|
Changes in the net carrying amount of intangible assets are detailed as follows:
- 74 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased |
|
|
|
Internally |
|
Capitalized |
|
|
|
|
technologies & |
|
Purchased |
|
developed |
|
development |
|
|
|
|
licenses |
|
software |
|
software |
|
costs |
|
Total |
December 31, 2003 |
|
|
222 |
|
|
|
47 |
|
|
|
56 |
|
|
|
|
|
|
|
325 |
|
Additions |
|
|
31 |
|
|
|
4 |
|
|
|
44 |
|
|
|
|
|
|
|
79 |
|
Disposals |
|
|
2 |
|
|
|
3 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
Transfers |
|
|
|
|
|
|
13 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
Amortization expense |
|
|
(76 |
) |
|
|
(21 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
(112 |
) |
Impairment charges |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Foreign currency translation |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
December 31, 2004 |
|
|
176 |
|
|
|
48 |
|
|
|
67 |
|
|
|
|
|
|
|
291 |
|
Additions |
|
|
18 |
|
|
|
15 |
|
|
|
29 |
|
|
|
238 |
|
|
|
300 |
|
Disposals |
|
|
(2 |
) |
|
|
1 |
|
|
|
(3 |
) |
|
|
|
|
|
|
(4 |
) |
Transfers |
|
|
|
|
|
|
12 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
Amortization expense |
|
|
(59 |
) |
|
|
(25 |
) |
|
|
(14 |
) |
|
|
(4 |
) |
|
|
(102 |
) |
Impairment charges |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
Foreign currency translation |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(5 |
) |
December 31, 2005 |
|
|
110 |
|
|
|
48 |
|
|
|
66 |
|
|
|
234 |
|
|
|
458 |
|
The Group applies IAS 38, Intangible Assets, in accounting for development expenditures.
During the second half of 2004 the Group made changes to its administrative systems in order to
provide sufficient information to comply with IFRS capitalization criteria starting from January 1,
2005. Sufficient reliable information to account for capitalization of development expenditures
under IFRS before January 1, 2005 is not available.
The aggregate amortization expense in 2005 and 2004 was $102 million and $112 million,
respectively. The 2005 amortization expense included $10 million in costs of sales, $61 million in research
and development and $31 million in selling general and administrative. The 2004
amortization expense included $6 million in costs of sales, $77 million in research and
development and $29 million in selling general and administrative.
10 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Accumulated |
|
Net |
December 31, 2005 |
|
Cost |
|
Depreciation |
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
84 |
|
|
|
|
|
|
|
84 |
|
Buildings |
|
|
1,071 |
|
|
|
(267 |
) |
|
|
804 |
|
Buildings under capital lease |
|
|
55 |
|
|
|
(29 |
) |
|
|
26 |
|
Facilities and leasehold improvements |
|
|
2,715 |
|
|
|
(1,294 |
) |
|
|
1,421 |
|
Machinery and equipment |
|
|
12,473 |
|
|
|
(9,063 |
) |
|
|
3,410 |
|
Computer and R&D equipment |
|
|
492 |
|
|
|
(381 |
) |
|
|
111 |
|
Other tangible fixed assets |
|
|
131 |
|
|
|
(103 |
) |
|
|
28 |
|
Construction in progress |
|
|
295 |
|
|
|
|
|
|
|
295 |
|
Total |
|
|
17,316 |
|
|
|
(11,137 |
) |
|
|
6,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Accumulated |
|
Net |
December 31, 2004 |
|
Cost |
|
Depreciation |
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
93 |
|
|
|
|
|
|
|
93 |
|
Buildings |
|
|
1,021 |
|
|
|
(250 |
) |
|
|
771 |
|
Building under capital lease |
|
|
66 |
|
|
|
(31 |
) |
|
|
35 |
|
- 75 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Accumulated |
|
Net |
December 31, 2004 |
|
Cost |
|
Depreciation |
|
Cost |
Facilities and leasehold improvements |
|
|
2,763 |
|
|
|
(1,187 |
) |
|
|
1,576 |
|
Machinery and equipment |
|
|
12,898 |
|
|
|
(8,581 |
) |
|
|
4,317 |
|
Computer and R&D equipment |
|
|
516 |
|
|
|
(382 |
) |
|
|
134 |
|
Other tangible fixed assets |
|
|
125 |
|
|
|
(108 |
) |
|
|
17 |
|
Construction in progress |
|
|
503 |
|
|
|
|
|
|
|
503 |
|
Total |
|
|
17,985 |
|
|
|
(10,539 |
) |
|
|
7,446 |
|
Changes in the net carrying amount of tangible assets are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings |
|
Facilities and |
|
Machinery |
|
Computer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under capital |
|
leasehold |
|
and |
|
and R&D |
|
Other tangible |
|
Construction |
|
|
|
|
Lands |
|
Buildings |
|
lease |
|
improvements |
|
equipment |
|
equipment |
|
fixed assets |
|
in progress |
|
Total |
December 31, 2003 |
|
|
84 |
|
|
|
744 |
|
|
|
37 |
|
|
|
1,476 |
|
|
|
3,860 |
|
|
|
119 |
|
|
|
29 |
|
|
|
274 |
|
|
|
6,623 |
|
Additions |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
1,565 |
|
|
|
52 |
|
|
|
42 |
|
|
|
463 |
|
|
|
2,204 |
|
Disposals |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(10 |
) |
|
|
(1 |
) |
|
|
(40 |
) |
|
|
(4 |
) |
|
|
(58 |
) |
Transfers |
|
|
2 |
|
|
|
23 |
|
|
|
|
|
|
|
152 |
|
|
|
78 |
|
|
|
5 |
|
|
|
|
|
|
|
(260 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Depreciation expense |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
(229 |
) |
|
|
(1,401 |
) |
|
|
(49 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
(1,725 |
) |
Foreign currency
translation |
|
|
5 |
|
|
|
39 |
|
|
|
3 |
|
|
|
98 |
|
|
|
225 |
|
|
|
8 |
|
|
|
(1 |
) |
|
|
30 |
|
|
|
407 |
|
December 31, 2004 |
|
|
93 |
|
|
|
771 |
|
|
|
35 |
|
|
|
1,576 |
|
|
|
4,317 |
|
|
|
134 |
|
|
|
17 |
|
|
|
503 |
|
|
|
7,446 |
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
822 |
|
|
|
43 |
|
|
|
95 |
|
|
|
394 |
|
|
|
1,419 |
|
Disposals |
|
|
(2 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(105 |
) |
|
|
(1 |
) |
|
|
(78 |
) |
|
|
(2 |
) |
|
|
(214 |
) |
Transfers |
|
|
1 |
|
|
|
174 |
|
|
|
|
|
|
|
190 |
|
|
|
190 |
|
|
|
2 |
|
|
|
5 |
|
|
|
(562 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Depreciation expense |
|
|
|
|
|
|
(35 |
) |
|
|
|
|
|
|
(252 |
) |
|
|
(1,494 |
) |
|
|
(54 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
(1,846 |
) |
Foreign currency
translation |
|
|
(8 |
) |
|
|
(84 |
) |
|
|
(3 |
) |
|
|
(154 |
) |
|
|
(320 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
(38 |
) |
|
|
(620 |
) |
December 31, 2005 |
|
|
84 |
|
|
|
804 |
|
|
|
26 |
|
|
|
1,421 |
|
|
|
3,410 |
|
|
|
111 |
|
|
|
28 |
|
|
|
295 |
|
|
|
6,179 |
|
The depreciation charge in 2005 and 2004 was $1,846 million and $1,725 million respectively.
The 2005 depreciation charge included $1,656 million in costs of sales, $156 million in
research and development and $34 million in selling general and administrative. The 2004
depreciation charge included $1,544 million in costs of sales, $152 million in research and
development and $29 million in selling general and administrative.
Capital investment funding has totalled $38 million and $46 million in the years ended December 31,
2005 and 2004, respectively. Public funding reduced the depreciation charge by $66 million and $74
million in 2005 and 2004, respectively.
11 INVESTMENTS AND OTHER NON-CURRENT ASSETS
Investments and other non-current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Investments |
|
|
36 |
|
|
|
34 |
|
Long-term receivables related to funding |
|
|
33 |
|
|
|
33 |
|
Deposits and other long-term receivables |
|
|
49 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
118 |
|
|
|
111 |
|
- 76 -
Long term receivables are recognized initially at fair value and subsequently measured at
amortized cost using the effective interest rate method. The effective interest rates on
non-current receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Long-term receivables related to funding |
|
|
1.26 |
% |
|
|
2.24 |
% |
12 OTHER PAYABLES, ACCRUED LIABILITIES AND PROVISIONS
Other payables, accrued liabilities and provisions consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Taxes other than income taxes |
|
|
77 |
|
|
|
68 |
|
Salaries and wages |
|
|
248 |
|
|
|
261 |
|
Social charges |
|
|
113 |
|
|
|
120 |
|
Advances received on government fundings |
|
|
24 |
|
|
|
25 |
|
Provision for restructuring (note 19) |
|
|
41 |
|
|
|
37 |
|
Provision for legal claims |
|
|
|
|
|
|
10 |
|
Termination and defined contribution plan benefits |
|
|
21 |
|
|
|
11 |
|
Other accrued liabilities |
|
|
93 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
617 |
|
|
|
667 |
|
Other accrued liabilities are composed of individually not material amounts at December 31,
2005 and 2004. The provision for legal claims for the year ended December 31, 2004 was paid during
the year. (Note 27)
13 RETIREMENT PLANS
The Group has 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. The Group uses a December 31 measurement
date for all its plans. Eligibility is generally determined in accordance with local statutory
requirements. The amounts recognized in the balance sheet are determined as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Present value of funded obligations |
|
|
10 |
|
|
|
35 |
|
Fair value of plan assets |
|
|
10 |
|
|
|
35 |
|
|
Present value of unfunded obligations |
|
|
(316 |
) |
|
|
(295 |
) |
Unrecognized actuarial loss |
|
|
16 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
Total pension liabilities |
|
|
(300 |
) |
|
|
(303 |
) |
The movement in the liability recognized in the consolidated balance sheet is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Beginning of the year |
|
|
303 |
|
|
|
266 |
|
Exchange differences |
|
|
(23 |
) |
|
|
27 |
|
- 77 -
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Total expense charged in the income statement |
|
|
50 |
|
|
|
52 |
|
Contributions paid |
|
|
(30 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
End of year |
|
|
300 |
|
|
|
303 |
|
The actual return on plan assets was $21 million in 2005 and $9 million in 2004.
The weighted average assumptions used in the determination of the benefit obligations were as
follows:
|
|
|
|
|
|
|
|
|
Assumptions |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
4.71 |
% |
|
|
5.02 |
% |
Future salary increases |
|
|
3.14 |
% |
|
|
3.34 |
% |
The amounts recognized in the income statement are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December
31, 2005 |
|
December 31, 2004 |
Current service cost |
|
|
40 |
|
|
|
46 |
|
Interest cost |
|
|
21 |
|
|
|
17 |
|
Expected return on plan assets |
|
|
(11 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
Total pension costs |
|
|
50 |
|
|
|
52 |
|
The weighted average assumptions used in the determination of pension costs were as follows:
|
|
|
|
|
|
|
|
|
Assumptions |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
4.34 |
% |
|
|
4.71 |
% |
Expected long-term rate of return on funds for the pension expense of the year |
|
|
6.34 |
% |
|
|
6.44 |
% |
Future salary increases |
|
|
3.34 |
% |
|
|
3.14 |
% |
The discount rate was determined by comparison against long-term corporate bond rates
applicable to the respective country of each plan. In developing the expected long-term rate of
return on assets, the Group modelled the expected long-term rates of return for broad categories of
investments held by the plan against a number of various potential economic scenarios.
14 LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
Bank loans: |
|
|
|
|
|
|
|
|
2.62% (weighted average), due 2006, floating interest rate at Libor + 0.30 |
|
|
45 |
|
|
|
105 |
|
2.53% (weighted average), due 2007, fixed interest rate |
|
|
120 |
|
|
|
153 |
|
- 78 -
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
4.77% (weighted average rate), due 2007, variable interest rate |
|
|
36 |
|
|
|
44 |
|
5.08% due 2008, floating interest rate at Libor + 0.40 |
|
|
25 |
|
|
|
|
|
5.11% due 2010, floating interest rate at Libor + 0.40 |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding program loans (held at nominal amount): |
|
|
|
|
|
|
|
|
5.35% (weighted average), due 2006, fixed interest rate |
|
|
4 |
|
|
|
13 |
|
1.07% (weighted average), due 2009, fixed interest rate |
|
|
72 |
|
|
|
102 |
|
3.10% (weighted average), due 2012, fixed interest rate |
|
|
12 |
|
|
|
14 |
|
0.83% (weighted average), due 2017, fixed interest rate |
|
|
47 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
Capital leases: |
|
|
|
|
|
|
|
|
4.78%, due 2011, fixed interest rate |
|
|
26 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
Convertible debt: |
|
|
|
|
|
|
|
|
-0.50% nominal rate (2.96% effective rate) convertible bonds due 2013 |
|
|
1,356 |
|
|
|
1,379 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
1,768 |
|
|
|
1,900 |
|
Less current portion |
|
|
(1,499 |
) |
|
|
(133 |
) |
|
|
|
|
|
|
|
|
|
Total long-term debt, less current portion |
|
|
269 |
|
|
|
1,767 |
|
Long-term debt is denominated in the following currencies:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
U.S. dollar |
|
|
1,431 |
|
|
|
1,404 |
|
Euro |
|
|
206 |
|
|
|
324 |
|
Singapore dollar |
|
|
120 |
|
|
|
153 |
|
Other |
|
|
11 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,768 |
|
|
|
1,900 |
|
Aggregate future maturities of long-term debt outstanding are as follows:
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
2006 |
|
|
1,499 |
|
2007 |
|
|
119 |
|
2008 |
|
|
58 |
|
2009 |
|
|
30 |
|
2010 |
|
|
22 |
|
Thereafter |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,768 |
|
Convertible debt
- 79 -
In August 2003, the Group issued $1,332 million principal amount at maturity of zero coupon
unsubordinated 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 bonds are convertible at any time by the holders at the rate of 29.9144 shares of the
Groups ordinary shares for each one thousand dollar face value of the bonds. 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. As a
result of this holders redemption option in August 2006, the outstanding amount of 2013 bonds was
classified in the consolidated balance sheet as current portion of long-term debt as of December
31, 2005. At any time from August 20, 2006 the Group may redeem for cash at their negative accreted
value all or a portion of the convertible bonds subject to the level of the Groups share price.
In application of the first-time adoption requirements as set out in IFRS 1, the Group identified
separately the two elements of equity and liability only for the convertible debt outstanding at
the IAS 32 / 39 transition date. The fair value of the liability component and the equity
conversion component were determined at issuance of the bond.
The convertible debt recognized in the balance sheet is calculated as follows:
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
Face value of the convertible debt issued on August 2003 |
|
|
1,400 |
|
Equity component |
|
|
(136 |
) |
Accumulated interest recognized on retained earnings |
|
|
54 |
|
Liability component at issuance |
|
|
1,318 |
|
Interest expense recognized in 2005 consolidated statement of income |
|
|
38 |
|
|
|
|
|
|
Liability component as of December 31, 2005 |
|
|
1,356 |
|
The fair value of the liability component of the convertible debt amounted to $1,356 million
as of December 31, 2005. The assumption made by the Group was to determine the fair value of the
liability component using a market interest rate for an equivalent non-convertible debt over the
period of future probable cash flows as estimated on the date of issuance. This was determined to
be a three-year timeframe corresponding to the period to the first date of redemption for cash at
the option of the holder. The fair value is calculated using cash flows discounted at a rate based
on the non-convertible debt rate of 2.96%. This amount is recognized as a liability on an amortized
cost basis until redeemed, extinguished on conversion or on the maturity of the bonds. The embedded
rights of the bond holder to extend the bond beyond the probable three year period, by not
exercising their redemption option, are measured at fair value through profit and loss. The fair
value of these embedded rights was not material at the end of 2005 and 2004. The remainder of the
proceeds is allocated to the conversion option.
Credit facilities
The Group has revolving line of credit agreements with several financial institutions totaling
$1,957 million at December 31, 2005. At December 31, 2005, amounts available under the lines of
credit were reduced by borrowings of $11 million at a weighted average interest rate of 4.40%.
- 80 -
15 SHARE CAPITAL
The changes in share capital are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Ordinary |
|
Capital |
|
Treasury |
|
|
|
|
shares outstanding |
|
shares |
|
Surplus |
|
shares |
|
Total |
Balance as of January 1, 2004 |
|
|
889,369,734 |
|
|
|
1,146 |
|
|
|
1,905 |
|
|
|
(348 |
) |
|
|
2,703 |
|
Employee share award scheme: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of share options |
|
|
2,537,401 |
|
|
|
4 |
|
|
|
19 |
|
|
|
|
|
|
|
23 |
|
Conversion of bonds |
|
|
1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004 |
|
|
891,908,997 |
|
|
|
1,150 |
|
|
|
1,924 |
|
|
|
(348 |
) |
|
|
2,726 |
|
Employee share award scheme: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of share options |
|
|
2,515,223 |
|
|
|
3 |
|
|
|
32 |
|
|
|
|
|
|
|
35 |
|
Conversion of bonds |
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
894,424,279 |
|
|
|
1,153 |
|
|
|
1,956 |
|
|
|
(348 |
) |
|
|
2,761 |
|
15.1 Outstanding shares
The authorized share capital of the Company is 1,810 million consisting of 1,200,000,000 ordinary
shares and 540,000,000 preference shares, each with a nominal value of 1.04. As of December 31,
2005 the number of ordinary shares issued was 907,824,279 shares (905,308,997 at December 31,
2004). All issued shares are fully paid.
15.2 Authorized 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 holds an option agreement with
STMicroelectronics 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
STMicroelectronics Holding II B.V. upon their request based on approval by the Companys
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
Companys issued share capital. An amendment was signed in November 2004 which reduced the
threshold required for STMicroelectronics Holding II B.V. to exercise its preference shares of the
Company down to 19% issued share capital from the previous at least 30%. No preference shares were
issued as of December 31, 2005.
15.3 Treasury shares
In 2002 and 2001, the Company repurchased 13,400,000 of its own shares, for a total amount of $348
million, which were reflected at cost as a reduction of the shareholders equity. No treasury
shares were acquired in 2003, 2004 and 2005.
Treasury shares of 4,100,000 have been designated to be used for the Companys share-based
remuneration programs as decided in 2005. As of December 31, 2005, none of the ordinary shares
repurchased had been transferred to employees under the Companys share-based remuneration
programs.
- 81 -
15.4 Stock option plans
In 1995, the Shareholders voted to adopt the 1995 Employee Share Option Plan (the 1995 Plan)
whereby options for up to 33,000,000 shares may be granted in instalments over a five-year period.
Under the 1995 Plan, the options may be granted to purchase ordinary shares at a price not lower
than the market price of the shares on the date of grant. At December 31, 2005, under the 1995
Plan, 10,106,151 of the granted options outstanding originally vest 50% after three years and 50%
after four years following the date of the grant; 6,417,880 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 10 years after the date of grant. During 2005, the vesting periods for all options
under the plan were accelerated.
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 ordinary shares 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 eligible to receive 9,000 options for 1996 and
4,500 options for both 1997 and 1998. Under the Plan, the options vest over one year and are
exercisable for a period expiring eight years from the date of grant.
In 1999, the Shareholders voted to renew the Supervisory Board Option Plan whereby each member of
the Supervisory Board may receive, during the three-year period 1999-2001, 18,000 options for 1999
and 9,000 options for both 2000 and 2001 to purchase shares of capital stock at the closing market
price of the shares on the date of the grant. In the same three-year period, 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.
The reason for granting share options to Supervisory Board Members and other share-based
compensation is disclosed in the Companys Governance charter. The Company believes that such
compensation to Supervisory Board Members enables better identification with shareholder interest
and that share-based compensation is conducive to attracting and retaining the most suitable
candidates to accept service as Supervisory Board Members in light of worldwide practices in the
semiconductor and technology industries. Share-based compensation for Supervisory Board Members is
subject to a prior shareholders approval.
In 2001, the Shareholders voted to adopt the 2001 Employee Share Option Plan (the 2001 Plan)
whereby options for up to 60,000,000 shares may be granted in instalments over a five-year period.
The options may be granted to purchase ordinary shares at a price not lower than the market price
of the shares on the date of grant. In connection with a revision of its equity-based compensation
policy, the Company decided in 2005 to accelerate the vesting period of all outstanding unvested
share options. The options expire ten years after the date of grant.
In 2002, the Shareholders voted to adopt a Share 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.
- 82 -
A summary of share option activity for the plans for the two years ended December 31, 2005 and 2004
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Per Share |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number of Shares |
|
Range |
|
Average |
Outstanding at December 31, 2003 |
|
|
56,769,297 |
|
|
$ |
6.04 - $62.01 |
|
|
$ |
29.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted: |
|
|
|
|
|
|
|
|
|
|
|
|
2001 Plan |
|
|
12,365,280 |
|
|
$ |
17.08 - $27.21 |
|
|
$ |
22.66 |
|
Supervisory Board Plan |
|
|
132,000 |
|
|
$22.71 |
|
|
$ |
22.71 |
|
|
|
Options forfeited |
|
|
(1,304,969 |
) |
|
$ |
6.04 - $62.01 |
|
|
$ |
29.20 |
|
Options exercised |
|
|
(2,537,401 |
) |
|
$ |
6.04 - $24.88 |
|
|
$ |
8.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 |
|
|
65,424,207 |
|
|
$ |
12.03 - $62.01 |
|
|
$ |
29.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted: |
|
|
|
|
|
|
|
|
|
|
|
|
2001 Plan |
|
|
42,200 |
|
|
$ |
16.73 - $17.31 |
|
|
$ |
16.91 |
|
Options forfeited |
|
|
(2,364,862 |
) |
|
$ |
12.03 - $62.01 |
|
|
$ |
29.65 |
|
Options exercised |
|
|
(2,542,978 |
) |
|
$ |
12.03 - $14.23 |
|
|
$ |
13.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
60,558,567 |
|
|
$ |
12.03 - $62.01 |
|
|
$ |
29.80 |
|
The related weighted average market price of options at the time of exercise was $17.13 and
$24.67 for the years ended December 31, 2005 and December 31, 2004, respectively.
Share options exercisable following acceleration of vesting for all outstanding unvested share
options were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Options exercisable |
|
|
60,558,567 |
|
|
|
32,212,680 |
|
Weighted average exercise price |
|
|
$29.80 |
|
|
|
$33.84 |
|
The weighted average remaining contractual life of options outstanding as of December 31, 2005
and 2004 was 5.5 and 6.3, respectively.
The range of exercise prices, the weighted average exercise price and the weighted average
remaining contractual life of options exercisable as of December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
Weighted average |
|
remaining |
Number of shares |
|
Option price range |
|
exercise price |
|
contractual life |
2,523,511 |
|
$ |
12.03 - $17.31 |
|
|
$ |
12.43 |
|
|
|
1.2 |
|
30,682,918 |
|
$ |
19.18 - $24.88 |
|
|
$ |
22.03 |
|
|
|
6.2 |
|
236,990 |
|
$ |
25.90 - $29.70 |
|
|
$ |
27.18 |
|
|
|
7.3 |
|
- 83 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
Weighted average |
|
remaining |
Number of shares |
|
Option price range |
|
exercise price |
|
contractual life |
20,679,858 |
|
$ |
31.09 - $44.00 |
|
|
$ |
34.37 |
|
|
|
5.9 |
|
6,435,290 |
|
$ |
50.69 - $62.01 |
|
|
$ |
59.08 |
|
|
|
2.6 |
|
|
60,558,567 |
|
$ |
12.03 - $62.01 |
|
|
$ |
29.80 |
|
|
|
5.5 |
|
The range of exercise prices, the weighted average exercise price and the weighted average
remaining contractual life of options exercisable as of December 31, 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
Weighted average |
|
remaining |
Number of shares |
|
Option price range |
|
exercise price |
|
contractual life |
4,889,037 |
|
$ |
12.03 - $17.08 |
|
|
$ |
13.00 |
|
|
|
1.2 |
|
8,555,722 |
|
$ |
19.18 - $24.88 |
|
|
$ |
24.74 |
|
|
|
2.9 |
|
44,751 |
|
$ |
25.90 - $29.70 |
|
|
$ |
29.63 |
|
|
|
6.8 |
|
12,070,010 |
|
$ |
31.09 - $44.00 |
|
|
$ |
34.85 |
|
|
|
6.8 |
|
6,653,160 |
|
$ |
50.69 - $62.01 |
|
|
$ |
59.08 |
|
|
|
3.6 |
|
|
32,212,680 |
|
$ |
12.03 - $62.01 |
|
|
$ |
33.84 |
|
|
|
6.3 |
|
The fair value of the Companys share options was estimated under IFRS 2 using a Black-Scholes
option pricing model since the simple characteristics of the share options did not require complex
assumptions. The Company has amortized the compensation expense incurred on the grant of share
options over the nominal vesting period for employees based on the graded vesting of each plan.
The compensation expense recorded for the year ended December 31, 2005 included a charge of $80
million relating to the effect of accelerating the vesting period of all outstanding unvested share
options during the third quarter of 2005, which has been recognized immediately for the amount that
otherwise would have been recognized ratably over the remaining vesting period.
The fair value of share options under IFRS 2 provisions was estimated using the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, 2005 |
|
December 31, 2004 |
Expected option life (years) |
|
|
6.1 |
|
|
|
6.1 |
|
Weighted average share price |
|
$ |
16.91 |
|
|
$ |
21.62 |
|
Historical Company share price volatility |
|
|
41.5 |
% |
|
|
51.4 |
% |
Risk-free interest rate |
|
|
3.8 |
% |
|
|
3.6 |
% |
Dividend yield |
|
|
0.69 |
% |
|
|
0.54 |
% |
Share options were issued at market price. The Company has determined the historical share
price volatility to be the most appropriate estimate of future price activity. The historical share
price volatility is based on statistical analysis of daily share prices over the expected option
life. The weighted average fair value of share options granted during
2005 and 2004 was $5.24 and
$7.93 respectively.
- 84 -
The following table illustrates the classification of share-based compensation included in the
consolidated statement of income for grants of employee share options during the years ended
December 31, 2005 and December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, 2005 |
|
December 31, 2004 |
Cost of sales |
|
|
(25 |
) |
|
|
(11 |
) |
Selling, general and administrative |
|
|
(47 |
) |
|
|
(23 |
) |
Research and development |
|
|
(35 |
) |
|
|
(18 |
) |
Total compensation expense |
|
|
(107 |
) |
|
|
(52 |
) |
15.5 Nonvested share awards
On October 25, 2005 the Company granted 3,940,065 nonvested shares to senior executives, selected
employees and members of the Supervisory Board, to be issued upon vesting from treasury shares. The
shares were granted for free to employees. The shares granted to the employees will vest upon
completion of market or internal performance conditions. Under the program, if the defined market
condition is met in the first quarter of 2006, each employee will receive 100% of the nonvested
shares granted. If the market condition is not achieved, the employee can earn one third of the
grant for each of the two performance conditions. If neither the market or performance conditions
are met, the employee will receive none of the grant. In addition to the market and performance
conditions, the nonvested shares will vest over a requisite service period: 32% after 6 months, 32%
after 18 months and 36% after 30 months following the date of the grant. At December 31, 2005
3,914,220 nonvested shares were outstanding.
On October 25, 2005, the Compensation Committee granted 66,000 share-based awards to the members of
the Supervisory Board and professionals of the Supervisory Board. These awards are granted at the
nominal value of the share of 1.04 and are not subject to any vesting conditions. Their associated
compensation cost was recorded immediately at grant. As of December 31, 2005, 51,000 awards were
outstanding.
A summary of the nonvested share activity for the year ended December 31, 2005 is presented below:
|
|
|
|
|
|
|
|
|
Nonvested Shares |
|
Number of Shares |
|
Price |
Outstanding at December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards granted: |
|
|
|
|
|
|
|
|
Amended 2001 Plan |
|
|
3,940,065 |
|
|
|
$0 |
|
Supervisory Board Plan |
|
|
66,000 |
|
|
|
1.04 |
|
Awards forfeited: |
|
|
|
|
|
|
|
|
Amended 2001 Plan |
|
|
(25,845 |
) |
|
|
$0 |
|
Supervisory Board Plan |
|
|
(15,000 |
) |
|
|
1.04 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
3,965,220 |
|
|
$ |
0-1.04 |
|
- 85 -
The Company recorded compensation expense for the nonvested share awards based on the fair
value of the awards at the grant date, which represents the $16.61 share price at the date of the
grant. The fair value of the nonvested shares affected by a market condition, reflects a discount
of 49.50%, using a Monte Carlo path-dependent pricing model to measure the probability of achieving
the market condition.
The following assumptions were incorporated into the Monte Carlo pricing model to estimate the
49.50% discount:
|
|
|
|
|
|
|
2005 grant |
Historical share price volatility |
|
|
27.74 |
% |
Historical volatility of reference index |
|
|
25.5 |
% |
Three-year average dividend yield |
|
|
0.55 |
% |
Risk-free interest rates used |
|
|
4.21%-4.33 |
% |
Consistent with fair value calculations of stock option grants in prior years, the Company has
determined the historical share price volatility to be the most appropriate estimate of future
price activity. The historical share price volatility and the historical volatility of reference
index are based on historical evolution of the Companys share and reference index over an average
period of three years. The weighted average grant-date fair value of nonvested shares granted in
2005 was $8.50.
The following table illustrates the classification of share-based compensation included in the
statement of income for grants of nonvested shares during the year ended at December 31, 2005:
|
|
|
|
|
Selling, general and administrative |
|
6 million |
Research and development |
|
3 million |
Total share-based compensation expense |
|
9 million |
The compensation expense recorded for nonvested shares in 2005 included a reduction for
estimated forfeitures of 6%, reflecting the historical trend of forfeitures on past share award
plans. This estimate will be adjusted for actual forfeitures. For employees eligible for
retirement during the three-year requisite service period, the Company records compensation expense
over the applicable shortened period.
In 2005, the Company recognized in the income statement total deferred income tax benefit related
to nonvested share compensation expense amounting to $2 million and in total equity excess tax
benefits amounting to $1 million. Compensation cost capitalized as part of inventory was $2 million
at December 31, 2005. As of December 31, 2005 there was $40 million of total unrecognized
compensation cost related to the grant of nonvested shares, which is expected to be recognized over
a weighted average period of ten months.
- 86 -
16 OTHER RESERVES
16.1 Other reserves
The accumulated balances related to each component of other reserves were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
currency |
|
gain on |
|
Unrealized |
|
|
|
|
Convertible |
|
Share-based |
|
translation |
|
available-for-sale |
|
gain (loss) on |
|
Total other |
|
|
debt |
|
payment |
|
difference |
|
securities |
|
derivatives |
|
reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003 |
|
|
|
|
|
|
24 |
|
|
|
657 |
|
|
|
3 |
|
|
|
|
|
|
|
684 |
|
Employee share awards schemes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of services provided |
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54 |
|
Foreign currency translation
differences |
|
|
|
|
|
|
|
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004 |
|
|
|
|
|
|
78 |
|
|
|
1,097 |
|
|
|
|
|
|
|
59 |
|
|
|
1,234 |
|
Convertible debt equity
component |
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
Employee share awards schemes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of services provided |
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
Foreign currency translation
differences |
|
|
|
|
|
|
|
|
|
|
(764 |
) |
|
|
|
|
|
|
|
|
|
|
(764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
(59 |
) |
Unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
114 |
|
|
|
196 |
|
|
|
333 |
|
|
|
|
|
|
|
(8 |
) |
|
|
635 |
|
16.2 Dividends
In 2005 and 2004, the Company paid a cash dividend of $0.12 per share for a total amount of $107
million each year. Upon the proposal of the Companys Managing Board, the Supervisory Board decided
in January 2006 to recommend for the 2006 Annual General Meeting of shareholders (AGM) the
distribution of a cash dividend of $0.12 per share.
- 87 -
17 EARNINGS PER SHARE
For the years ended December 31, 2005 and 2004, earnings per share (EPS) was calculated as
follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
Year ended |
|
|
|
December
31,
2005 |
|
|
December
31,
2004 |
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
|
|
|
|
|
|
|
Net profit attributable to shareholders of the Company |
|
347 |
|
|
|
523 |
|
|
Weighted average shares outstanding |
|
892,760,520 |
|
|
|
891,192,542 |
|
|
Basic EPS |
|
0.39 |
|
|
|
0.59 |
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
Net profit attributable to shareholders of the Company |
|
347 |
|
|
|
523 |
|
|
Convertible debt interest, net of tax |
|
|
|
|
|
5 |
|
|
Net profit attributable to shareholders of the
Company adjusted |
|
347 |
|
|
|
528 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
892,760,520 |
|
|
|
891,192,542 |
|
|
Dilutive effect of share options |
|
648,186 |
|
|
|
1,910,978 |
|
|
Dilutive effect of nonvested shares |
|
2,516,646 |
|
|
|
|
|
|
Dilutive effect of convertible debt |
|
|
|
|
|
41,880,160 |
|
|
Number of shares used in calculating diluted EPS |
|
895,925,352 |
|
|
|
934,983,680 |
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
0.39 |
|
|
|
0.56 |
|
|
18 OTHER INCOME AND EXPENSES
18.1 Other income
Other income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December
31,
2005 |
|
December
31,
2004 |
|
|
|
|
|
|
|
|
|
Research and development funding |
|
|
92 |
|
|
|
108 |
|
Exchange gain |
|
|
|
|
|
|
33 |
|
Gain on sale of non-current assets |
|
|
12 |
|
|
|
6 |
|
Total |
|
|
104 |
|
|
|
147 |
|
18.2 Other expenses
Other expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December
31,
2005 |
|
December
31,
2004 |
|
|
|
|
|
|
|
|
|
Start-up costs |
|
|
(56 |
) |
|
|
(63 |
) |
Exchange loss |
|
|
(51 |
) |
|
|
|
|
- 88 -
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, 2005 |
|
December 31, 2004 |
Patent litigation costs |
|
|
(14 |
) |
|
|
(31 |
) |
Patent pre-litigation costs |
|
|
(8 |
) |
|
|
(6 |
) |
Other expenses |
|
|
(3 |
) |
|
|
(13 |
) |
Total |
|
|
(132 |
) |
|
|
(113 |
) |
Patent litigation costs include legal and attorney fees and payment of claims, and patent
pre-litigation costs are composed of consultancy fees and legal fees. Patent litigation costs are
costs incurred in respect of pending litigation. Patent pre-litigation costs are costs incurred to
prepare for licensing discussions with third parties with a view to concluding an agreement.
19 IMPAIRMENT, RESTRUCTURING CHARGES AND OTHER RELATED CLOSURE COSTS
In 2005, the Group has incurred charges related to the following main items: (i) the 150mm
restructuring plan started in 2003; (ii) the streamlining of certain activities decided in the
first quarter of 2005; (iii) the headcount reduction plan announced in the second quarter of 2005
and (iv) the yearly impairment review.
During the third quarter of 2003, the Group commenced a plan to restructure its 150mm fab
operations and part of its back-end operations in order to improve cost competitiveness. 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 finer geometry 200mm wafer fabs. The plan
includes the discontinuation of the 150mm production of Rennes (France), the closure as soon as
operationally feasible of the 150mm wafer pilot line in Castelletto (Italy) and the downsizing by
approximately one-half of the 150mm wafer fab in Carrollton, Texas. Furthermore, the 150mm wafer
fab productions 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 Group is expecting to incur the
balance of the restructuring charges related to this manufacturing restructuring plan in the second
half of 2006, later than previously anticipated to accommodate unforeseen qualification
requirements of the Groups customers.
In the first quarter of 2005, the Group decided to reduce its Access technology products for
Customer Premises Equipment (CPE) modem products. This decision was intended to eliminate certain
low volume, non-strategic product families whose returns in the current environment did not meet
internal targets. Additional restructuring initiatives were also implemented in the first quarter
of 2005 such as the closure of a research and development design center in Karlsruhe (Germany) and
in Malvern (USA), and the discontinuation of a development project in Singapore.
In May 2005, the Group announced additional restructuring efforts to improve profitability. These
initiatives will aim to reduce the Groups workforce by 3,000 outside Asia by the second half of
2006, of which 2,300 are planned for Europe. The Group plans to reorganize its European activities
by optimizing on a global scale its EWS activities (wafer testing);
- 89 -
harmonizing its support functions; streamlining its activities outside its manufacturing areas and
by disengaging from certain activities.
In the third quarter of 2005, the Group performed the impairment test on an annual basis in order
to assess the recoverability of the goodwill carrying value.
Impairment, restructuring charges and other related closure costs incurred in 2005 and 2004 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges and other |
Year ended |
|
|
|
|
|
Restructuring |
|
Other related |
|
related closure |
December 31, 2005 |
|
Impairment |
|
charges |
|
closure costs |
|
costs |
150mm fab plan |
|
|
|
|
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(9 |
) |
2005 restructuring initiatives |
|
|
(37 |
) |
|
|
(49 |
) |
|
|
(2 |
) |
|
|
(88 |
) |
Other |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Total |
|
|
(38 |
) |
|
|
(53 |
) |
|
|
(7 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges and other |
Year ended |
|
|
|
|
|
Restructuring |
|
Other related |
|
related closure |
December 31, 2004 |
|
Impairment |
|
charges |
|
closure costs |
|
costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150mm fab plan |
|
|
|
|
|
|
(49 |
) |
|
|
(24 |
) |
|
|
(73 |
) |
Intangible assets and investments |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
Other |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(8 |
) |
|
|
(53 |
) |
|
|
(24 |
) |
|
|
(85 |
) |
Impairment charges
In 2005, the Group recorded impairment charges as follows:
|
|
|
$10 million impairment of goodwill pursuant to the decision of the Group to reduce its
Access technology products for Customer Premises Equipment modem products. The Group
reports CPE business as part of the Access CGU, included in the Application Specific
Products Group (ASG) segment. Following the decision to discontinue a portion of this
CGU, the Group, in compliance with IAS 36, Impairment of Assets, re-measured using market
comparables goodwill associated with the business to be discontinued and the portion of the
CGU retained, which resulted in a $10 million goodwill impairment in 2005; |
|
|
|
|
$22 million of purchased technologies were identified without an alternative use
following the discontinuation of CPE product lines; |
|
|
|
|
$6 million for technologies and other intangible assets pursuant to the decision of the
Group to close its research and development design center in Karlsruhe (Germany), the
discontinuation of a development project in Singapore, the optimization of its EWS (wafer
testing) in the United States and other intangibles determined to be obsolete. |
During the year 2004, impairment charges were incurred relating to $5 million for purchased
technologies primarily associated with ASG product segment that were determined to be obsolete and
$3 million for financial assets with impairment losses based on a valuation used for additional
third party financing in the underlying investment.
All fabrication sites affected by the restructuring plan are owned by the Group and, with the
exception of the Rancho Bernardo, California facility, were assessed for impairment using the
held-for-use model since these facilities did not satisfy all of the criteria required for
held-for-
- 90 -
sale status, as set forth in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.
Restructuring charges and other related closure costs
Restructuring charges and other related closure costs in 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 restructuring |
|
|
|
|
|
& other related |
|
|
150mm fab plan |
|
|
|
|
|
initiatives |
|
Other |
|
closure costs |
|
|
|
|
|
|
Other related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
closure costs |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred in 2003 |
|
|
3 |
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
9 |
|
|
|
13 |
|
Amounts paid |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
(8 |
) |
Currency translation effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2003 |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
3 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred in 2004 |
|
|
52 |
|
|
|
21 |
|
|
|
73 |
|
|
|
|
|
|
|
4 |
|
|
|
77 |
|
Amounts paid |
|
|
(21 |
) |
|
|
(21 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(46 |
) |
Currency translation effect |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2004 |
|
|
34 |
|
|
|
1 |
|
|
|
35 |
|
|
|
|
|
|
|
3 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred in 2005 |
|
|
10 |
|
|
|
5 |
|
|
|
15 |
|
|
|
51 |
|
|
|
|
|
|
|
66 |
|
Reversal of provision |
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Amounts paid |
|
|
(23 |
) |
|
|
(6 |
) |
|
|
(29 |
) |
|
|
(21 |
) |
|
|
(2 |
) |
|
|
(52 |
) |
Currency translation effect |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as at December 31, 2005 |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
30 |
|
|
|
1 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150mm fab plan:
Restructuring charges incurred in 2005 amounted to $10 million, mainly related to termination
benefits, and $5 million related to other closure costs. In 2005 management decided to continue a
specific back-end fabrication line in Rennes (France), which had originally been designated for
full closure. The decision to continue arose due to unexpected difficulties in qualifying the line
at an alternative back-end facility. This decision resulted in a $6 million reversal of the
provision relating to the 2003 restructuring plan.
Restructuring charges in 2004 primarily related to $52 million in estimated one-time involuntary
termination benefits and $21 million of other charges associated with the closure of certain
production sites in Europe.
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 restructuring initiatives: |
The Group commenced several restructuring initiatives during 2005, including: |
|
|
Pursuant to the decision of reducing its Access technology products for Customer
Premises Equipment (CPE) modem products, the Group committed to an exit plan in
Zaventem (Belgium) and recorded $4 million of workforce termination benefits. |
|
|
|
In order to streamline its research and development sites, the Group decided to cease
its activities in two locations, Karlsruhe (Germany) and Malvern (USA). The Group
incurred in 2005 $1 million restructuring charges corresponding to employee |
- 91 -
|
|
termination costs and $1 million of unused lease charges relating to the
closure of these two sites. |
|
|
|
In addition, charges totaling $2 million were paid in
2005 by the Group for voluntary termination benefits
for certain employees. The Group also incurred a $2
million charge in 2005 related to additional
restructuring initiatives, mainly in the United
States and Mexico. |
|
|
|
The Group defined a plan of reorganization and
optimization of its activities. This plan focuses on
workforce reduction, mainly in Europe, but will,
whenever possible, encourage voluntary redundancy
such as early retirement measures and other special
termination arrangements with the employees. The plan
also includes the non-renewal of some temporary
positions. For the year ended December 31, 2005 the
Group recorded a total restructuring charge for its
new restructuring plan amounting to $41 million,
mainly related to termination incentives for two of
the Companys subsidiaries in Europe, who accepted
special termination arrangements. |
Other:
During the year 2004, charges totalling $4 million were paid by the Group, mainly for a voluntary
termination benefit program.
Total impairment, restructuring charges and other related closure costs:
The 2003 restructuring plan and related manufacturing initiatives are expected to be largely
completed by the second half of 2006. The 2005 restructuring plan is expected to be completed
during 2006.
In 2005, total amounts paid for restructuring and related closure costs amounted to $52 million.
The total actual costs that the Group will incur may differ from these estimates based on the
timing required to complete the restructuring plan, the number of people involved, the final agreed
termination benefits and the costs associated with the transfer of equipment, products and
processes.
- 92 -
20 EXPENSES BY NATURE
Expenses recorded as cost of sales and operating expenses other than impairment, restructuring
charges and other related closure costs and other income and expenses are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(1,948 |
) |
|
|
(1,837 |
) |
Employee benefit expense |
|
|
(2,395 |
) |
|
|
(2,329 |
) |
Purchase of materials and subcontracting services |
|
|
(3,141 |
) |
|
|
(3,106 |
) |
Changes in inventories |
|
|
170 |
|
|
|
146 |
|
Transportation |
|
|
(99 |
) |
|
|
(100 |
) |
Royalties and patents |
|
|
(98 |
) |
|
|
(95 |
) |
Advertising costs |
|
|
(14 |
) |
|
|
(17 |
) |
Other expenses |
|
|
(837 |
) |
|
|
(740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales, research and development,
and selling, general and administrative expenses. |
|
|
(8,362 |
) |
|
|
(8,078 |
) |
Employee benefit expense is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Wages and salaries |
|
|
(1,707 |
) |
|
|
(1,770 |
) |
Compensation of Sole Member of the Managing Board |
|
|
(7 |
) |
|
|
(1 |
) |
Social security costs |
|
|
(494 |
) |
|
|
(443 |
) |
Stock-based compensation expense |
|
|
(116 |
) |
|
|
(52 |
) |
Pension cost defined contribution plans |
|
|
(21 |
) |
|
|
(11 |
) |
Pension cost defined benefit plans |
|
|
(50 |
) |
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
Total employee benefit expense included in cost
of sales, research and development, and selling,
general and administrative expenses |
|
|
(2,395 |
) |
|
|
(2,329 |
) |
The Compensation of Sole Member of the Managing Board includes a $6 million bonus paid to the
former sole member of the Managing Board and President and CEO during the 2005 financial year that
was approved by the Compensation Committee and approved by the Supervisory Board in respect of 2004
financial year based on fulfillment of a number of predefined objectives for 2004 and in
recognition of his career with the Group.
- 93 -
21 FINANCE INCOME AND FINANCE COST
Total finance cost consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Interest income |
|
|
53 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
Total finance income |
|
|
53 |
|
|
|
41 |
|
|
Interest expense |
|
|
(57 |
) |
|
|
(43 |
) |
Loss on extinguishment of convertible debt |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Finance cost |
|
|
(57 |
) |
|
|
(47 |
) |
Capitalized interest was $2 million and $3 million in 2005 and 2004, respectively .
The capitalization rate used to determine the amount of borrowing costs eligible for
capitalization was approximately 2.50% for the year ended December 31, 2005. For the year ended
December 31, 2005 $38 million corresponds to the interest expense of the liability component of
the 2013 convertible debt.
In 2004, the Group repurchased on the market all of the remaining 3.75% zero coupon convertible
bonds due in 2010 for a cash amount totalling $375 million. The repurchased convertible bonds were
equivalent to 4,403,075 shares and were cancelled. In relation to this repurchase, the Group
recorded a non-operating pre-tax charge in 2004 of $4 million, of which $3 million related to the
price paid in excess of the repurchased convertible bonds accreted value and $1 million related to
the write-off of the related bond issuance costs.
22 INCOME TAX
Profit before income tax expense is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Profit (loss) recorded in The Netherlands |
|
|
(60 |
) |
|
|
12 |
|
Profit from foreign operations |
|
|
447 |
|
|
|
609 |
|
|
|
|
|
|
|
|
|
|
Profit before income tax expense |
|
|
387 |
|
|
|
621 |
|
The Company 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.
- 94 -
Income tax benefit (expense) is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
The Netherlands taxes current |
|
|
(6 |
) |
|
|
(6 |
) |
Foreign taxes current |
|
|
(49 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
Current taxes |
|
|
(55 |
) |
|
|
(82 |
) |
Foreign deferred taxes |
|
|
16 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(39 |
) |
|
|
(95 |
) |
The principal items comprising the differences in income taxes computed at The Netherlands
statutory rate and the effective income tax rate are the following:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Income tax expense computed at statutory rate |
|
|
(95 |
) |
|
|
(232 |
) |
Non deductible expenses |
|
|
(26 |
) |
|
|
(11 |
) |
Impact of final tax assessments relating to prior years |
|
|
28 |
|
|
|
3 |
|
Effects of change in tax rates on deferred taxes |
|
|
|
|
|
|
5 |
|
Current year credits |
|
|
4 |
|
|
|
4 |
|
Other tax and credits |
|
|
(2 |
) |
|
|
(3 |
) |
Benefits from tax holidays |
|
|
48 |
|
|
|
77 |
|
Earnings of subsidiaries taxed at different rates |
|
|
4 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(39 |
) |
|
|
(95 |
) |
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 $0.05 and $0.09 for the years ended December 31, 2005 and 2004 respectively. These
agreements are present in various countries and include programs that reduce up to and including
100% of taxes in years affected by the agreements. The Groups tax holidays expire at various
dates through the year ending December 31, 2013.
- 95 -
Deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Tax loss carryforwards and investment credits |
|
|
57 |
|
|
|
72 |
|
Inventory valuation |
|
|
28 |
|
|
|
16 |
|
Impairment charges and restructuring |
|
|
25 |
|
|
|
35 |
|
Fixed asset depreciation in arrears |
|
|
73 |
|
|
|
72 |
|
Receivables for government funding |
|
|
8 |
|
|
|
11 |
|
Pension service costs |
|
|
21 |
|
|
|
18 |
|
Commercial accruals |
|
|
11 |
|
|
|
15 |
|
Other temporary differences |
|
|
47 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
270 |
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
Accelerated fixed assets depreciation |
|
|
(116 |
) |
|
|
(147 |
) |
Acquired intangible assets |
|
|
(27 |
) |
|
|
(6 |
) |
Advances of government funding |
|
|
(31 |
) |
|
|
(37 |
) |
Other temporary differences |
|
|
(19 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
(193 |
) |
|
|
(219 |
) |
|
|
|
|
|
|
|
|
|
Net deferred income tax asset |
|
|
77 |
|
|
|
65 |
|
The gross movement of the deferred tax account is as follow:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
Beginning of the year |
|
|
65 |
|
|
|
78 |
|
Exchange differences |
|
|
(10 |
) |
|
|
5 |
|
Income
statement benefit (charge) |
|
|
16 |
|
|
|
(13 |
) |
Tax charge to equity |
|
|
6 |
|
|
|
(5 |
) |
End of the year |
|
|
77 |
|
|
|
65 |
|
As of December 31, 2005, the Company and its subsidiaries have net operating loss
carryforwards and investment credits that expire starting 2006, as follows:
|
|
|
|
|
Year |
|
|
|
|
2006 |
|
|
21 |
|
2007 |
|
|
|
|
2008 |
|
|
|
|
2009 |
|
|
|
|
Thereafter |
|
|
36 |
|
|
|
|
|
|
Total |
|
|
57 |
|
Deferred tax assets not recognized in the consolidated balance sheet total $761 million
and mainly relate to an agreement granting the Group certain tax credits for capital investments
purchased through the year ending December 31, 2006. Any unused tax credits granted under the
agreement will continue to increase yearly by a legal inflationary index (currently 7% per annum).
The credits may be utilized through 2020 or later depending on the
- 96 -
Group meeting certain program criteria. In addition to this agreement, the Group will continue to
receive tax credits on future years capital investments, which may be used to offset that years
tax liabilities. However, pursuant to the inability to utilize these credits currently and in
future years, the Group did not recognize any of these deferred tax assets in its consolidated
balance sheets as of December 31, 2005 and 2004.
In addition, other tax loss carryforwards for an amount of $35 million were not recognized in the
consolidated balance sheet and corresponded to net operating losses acquired in business
combinations and that will more likely than not, not be utilized against future profits.
The amount of deferred tax expense (benefit) recorded in other reserves was $6 million benefit and
$5 million expense in 2005 and 2004, respectively. This related primarily to the tax effects of
unrealized gains (losses) on derivatives (note 16.1).
23 CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Cash at bank and in hand |
|
|
438 |
|
|
|
256 |
|
Short-term bank deposits |
|
|
1,589 |
|
|
|
1,694 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
2,027 |
|
|
|
1,950 |
|
24 CASH GENERATED FROM OPERATIONS
Cash generated from operations is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Net profit |
|
|
348 |
|
|
|
526 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,948 |
|
|
|
1,837 |
|
Amortization of discount of convertible debt |
|
|
5 |
|
|
|
28 |
|
Loss on extinguishment of convertible debt |
|
|
|
|
|
|
4 |
|
Other non-cash items |
|
|
163 |
|
|
|
52 |
|
Deferred income tax |
|
|
(16 |
) |
|
|
(4 |
) |
Accrued income tax |
|
|
69 |
|
|
|
79 |
|
Share of loss of associates |
|
|
3 |
|
|
|
4 |
|
Impairment, restructuring charges and other
related closure costs, net of cash payments |
|
|
46 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
Trade receivables, net |
|
|
(117 |
) |
|
|
(119 |
) |
Inventories, net |
|
|
(170 |
) |
|
|
(146 |
) |
Trade payables |
|
|
(71 |
) |
|
|
128 |
|
Other assets and liabilities, net |
|
|
(117 |
) |
|
|
(23 |
) |
Cash generated from operations |
|
|
2,091 |
|
|
|
2,405 |
|
25 COMMITMENTS
The Groups commitments as of December 31, 2005 were as follows:
- 97 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
|
(in millions) |
Operating leases |
|
$ |
271 |
|
|
$ |
50 |
|
|
$ |
37 |
|
|
$ |
32 |
|
|
$ |
28 |
|
|
$ |
22 |
|
|
$ |
102 |
|
Purchase obligations |
|
|
1,053 |
|
|
|
940 |
|
|
|
79 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchase |
|
|
576 |
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foundry purchase |
|
|
260 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, technology licenses and design |
|
|
217 |
|
|
|
104 |
|
|
|
79 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hynix ST
Investment |
|
|
212 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other obligations |
|
$ |
112 |
|
|
$ |
59 |
|
|
$ |
44 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,648 |
|
|
|
1,261 |
|
|
|
160 |
|
|
|
69 |
|
|
|
30 |
|
|
|
23 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Group leases land, buildings, plants, and equipment under operating leases that expire at
various dates under non-cancellable lease agreements. Operating lease expense was $61 million and
$45 million in 2005 and 2004, respectively.
As described in Note 3, the Group and Hynix Semiconductor signed on November 16, 2004 an agreement
to build a front-end memory-manufacturing facility in Wuxi City, Jiangsu Province, China. The
business license was obtained in April 2005 and the Group paid $38 million of capital contributions
through December 31, 2005. The Group expects to fulfill its remaining financial obligations up to
the total agreed capital contribution of $250 million in 2006. In addition, the Group is committed to grant
long-term financing of $250 million to the new investment guaranteed by subordinated collateral of
the companys assets. Furthermore, the Group has contingent future loading obligations to purchase
products from the company, which have not been included in the table above because at this stage
the amounts remain contingent and non-quantifiable.
Other obligations primarily relate to contractual firm commitments with respect to cooperation
agreements.
Other commitments
The Company has issued guarantees totaling $204 million related to its subsidiaries debt.
26 CONTINGENCIES
The Group 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 the products of the Group not
covered by insurance, breach of contract claims, claims for unauthorized use of third party
intellectual property, assessments for past income tax exposures as well as claims for
environmental damages. In determining loss contingencies, the Group considers the likelihood of a
loss of an asset or the incurrence of a liability as well as the ability to reasonably estimate the
amount of such loss or liability. An estimated loss is recorded when it is probable that a
liability has been incurred and when the amount of the loss can be reasonably estimated. The Group
regularly reevaluates claims to determine whether provisions need to be readjusted based on the most
current information available to the Group. Changes in these evaluations could result in adverse,
material impact on the Groups results of operations, cash flows or its financial position for the
period in which they occur. The Group has no material provisions for contingencies at December 31,
2005.
The Group received a final tax assessment from the United States tax authorities, which is
currently under an appeals process. The Group believes that its current tax accruals are adequate.
The Company believes that adequate charges exist to cover any potential losses associated with the
claim.
- 98 -
27 CLAIMS AND LEGAL PROCEEDINGS
The Group has received and may in the future receive communications alleging possible
infringements, in particular in case of patents and similar intellectual property rights of others.
Furthermore, the Group may become involved in costly litigation brought against the Group regarding
patents, mask works, copyrights, trademarks or trade secrets. In the event that the outcome of any
litigation would be unfavorable to the Group, the Group may be required to license the underlying
intellectual property right at economically unfavorable terms and conditions, and possibly pay
damages for prior use and/or face an injunction, all of which individually or in the aggregate
could have a material adverse effect on the Groups results of operations, cash flows or financial
position and ability to compete.
The Group is involved in various lawsuits, claims, investigations and proceedings incidental to the
normal conduct of its operations, other than external patent utilization. These matters mainly
include the risks associated with claims from customers or other parties and tax disputes. The
Group has accrued for these loss contingencies when the loss is probable and can be estimated. The
Group regularly evaluates claims and legal proceedings together with their related probable losses
to determine whether they need to be adjusted based on the current information available to the
Group. Legal costs associated with claims are expensed as incurred. In the event of litigation
which is adversely determined with respect to the Groups interests, or in the event the Group
needs to change its evaluation of a potential third-party claim, based on new evidence or
communications, a material adverse effect could impact its operations or financial condition at the
time it were to materialize.
During 2004, the Group has settled certain disputes with respect to claims and litigation relating
to possible infringements of patents and similar intellectual property rights of others. An
accrual of $10 million was recorded as at December 31, 2004 for such claims, which was paid in 2005
in accordance with the final settlements. No additional accrual has been recorded in 2005 since no
other risks were estimated to result in a probable loss.
The Group is currently a party to legal proceedings including legal proceedings with SanDisk
Corporation (SanDisk) and Tessera, Inc. Based on managements current assumptions made with
support of the Groups outside attorneys, the Group does not believe that the SanDisk litigation
will result in a probable loss. Concerning Tessera litigation, it is difficult, if not impossible,
to predict the outcome of the litigation.
28 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Group is exposed to changes in financial market conditions in the normal course of business due
to its operations in different foreign currencies and its ongoing investing and financing
activities. Market risk is the uncertainty to which future earnings or asset/liability values are
exposed due to operating cash flows denominated in foreign currencies and various financial
instruments used in the normal course of operations.
Treasury activities are regulated by the Groups policies, which define procedures, objectives and
controls. The policies focus on the management of financial risk in terms of exposure to currency
rates and interest rates. Treasury controls 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
- 99 -
currencies. Foreign currency operations and hedging transactions are performed to cover commercial
positions.
28.1 Foreign Currency Risk
The Group conducts its business on a global basis in various major international currencies. As a
result, the Group is exposed to adverse movements in foreign currency exchange rates.
Foreign Currency Forward Contracts Not Designated as a Hedge
The Group enters into foreign currency 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
Companys subsidiaries. In addition,
forward contracts are also used by the Company to reduce its exposure to U.S. dollar fluctuations
in euro-denominated forecasted intercompany transactions that cover a large part of research and
development expenditures and certain corporate expenses incurred on the Companys behalf by
subsidiaries. These intercompany transactions are not closely linked to ultimate transactions
with third parties. Consequently, these instruments do not qualify as hedging instruments.
At December 31, 2005, only foreign currency forward contracts were outstanding. The notional amount
of these foreign currency forward contracts totalled $1,834 million and $7,013 million at December
31, 2005 and 2004, respectively. The principal currencies covered are the euro, the U.S. dollar,
the Japanese yen and the Canadian dollar.
Foreign currency forward contracts not designated as cash flow hedge outstanding as of December 31,
2005 have remaining terms of 5 days to four months, maturing on average after 49 days.
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.
Cash Flow Hedges
To further reduce its exposure to U.S. dollar exchange rate fluctuations, the Company also hedged
in 2005 and 2004 a portion of its euro-denominated forecasted intercompany purchases of products
whose underlying front-end manufacturing production costs of semi-finished goods are incurred in
euros.
For the year ended December 31, 2005 the Group recorded as cost of sales $51 million related to the
realized loss incurred on such hedged transactions. In addition, after determining that it was not
probable that certain forecasted transactions would occur by the end of the originally specified
time period, the Group discontinued in the first quarter of 2005 certain of its cash flow hedges
and reclassified a net loss of $23 million as other expenses into the statement of income from
Other reserves.
The notional amount of foreign currency forward contracts designated as cash flow hedges totaled
$372 million and $1,839 million at December 31, 2005 and 2004, respectively. The forecasted
transactions hedged at December 31, 2005 were determined to be probable of occurrence.
- 100 -
As of December 31, 2005, $8 million of deferred losses on derivative instruments, net of tax of $1
million, included in other reserves are expected to be reclassified as earnings during the next six
months based on the monthly forecasted semi-finished manufacturing costs. As of December 31, 2004,
$59 million of deferred gains on derivative instruments, net of tax of $5 million, included in
other reserves were expected to be reclassified as earnings during the next six months based on the
monthly forecasted transactions.
Foreign currency forward contracts designated as cash flow hedges outstanding as of December 31,
2005 have remaining terms of 5 days to four months, maturing on average after 58 days.
28.2 Concentration of credit risk
Financial instruments that potentially subject the Group to concentrations of credit risk consist
primarily of interest-bearing investments, foreign currency contracts and trade receivables. The
Group 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 Group invests its excess cash in accordance with its investment policy
that aims at minimizing credit risk.
The Group 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, 2005 and 2004, one
customer, the Nokia Group of companies, represented 15.7% and 15.2% 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 Group monitors the creditworthiness of its customers to which it grants credit terms in the
normal course of business. The Group does not anticipate non-performance by counterparties, which
could have a significant impact on its financial position or results of operations.
28.3 Fair value of financial instruments
The estimates of fair value were obtained using prevailing financial market information resulting
from various valuation techniques.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans (including current portion) |
|
|
412 |
|
|
|
400 |
|
|
|
521 |
|
|
|
505 |
|
Convertible debt |
|
|
1,356 |
|
|
|
1,342 |
|
|
|
1,379 |
|
|
|
1,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables and assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
|
3 |
|
|
|
3 |
|
|
|
200 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables and accrued liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
|
31 |
|
|
|
31 |
|
|
|
109 |
|
|
|
109 |
|
The methodologies used to estimate fair value are as follows:
- 101 -
Cash and cash equivalents, accounts receivable, bank overdrafts, short-term borrowings, accounts
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 Groups 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.
29 RELATED PARTY TRANSACTIONS
Transactions with significant shareholders, their affiliates and other related parties were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Sales & other services |
|
|
158 |
|
|
|
9 |
|
Research and development expenses |
|
|
(48 |
) |
|
|
(46 |
) |
Other purchases |
|
|
(16 |
) |
|
|
(23 |
) |
Other income and expenses |
|
|
(12 |
) |
|
|
(25 |
) |
Accounts receivable |
|
|
29 |
|
|
|
6 |
|
Accounts payable |
|
|
12 |
|
|
|
18 |
|
Other assets |
|
|
11 |
|
|
|
2 |
|
For the years ended December 31, 2004, the related party transactions were primarily with
Areva, France Telecom, Finmeccanica, Equant and Orange, which represent significant shareholders of
the Company, or their subsidiaries. Moreover, the related parties information presented above
also includes for the year ended December 31, 2005 transactions with Thomson. See Note 1.
In addition the Group 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 income (expense) recorded by the Group as research
and development expenses incurred by E.I.G during 2005 amounted to $5 million expense and to $3
million income in 2004. At December 31, 2005 and 2004, the Group had a net receivable amount of $1
million.
The Group contributed cash amounts totaling $1 million and $3 million for the years ended December
31, 2005 and 2004 respectively to the ST Foundation, a non-profit organization established to
deliver and coordinate independent programs in line with its mission. Certain members of the
Foundations Board are senior members of the Groups management.
- 102 -
In addition pursuant to the Supervisory Boards approval, the Group paid in 2005 a special
contribution amounting to $4 million to a non-profit charitable institution in the field of
sustainable development and social responsibility on behalf of its former President and Chief
Executive Officer.
The individual remuneration paid to the sole member and the former sole member of the Managing
Board was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
December 31, 2004 |
Wages and salaries |
|
|
1 |
|
|
|
1 |
|
Bonus |
|
|
6 |
|
|
|
|
|
The bonus paid to the former sole member of the Managing Board and President and CEO during
the 2005 financial year was approved by the Compensation Committee and approved by the Supervisory
Board in respect of 2004 financial year and in recognition of his career with the Group, based on
fulfillment of a number of predefined objectives for 2004.
The Sole member of the Managing Board was granted in 2005 for free 100,000 nonvested shares subject
to the achievement of performance objectives. The Sole member of the
Managing Board was granted 400,000 share options in 2004 at a grant price of $22.71.
The total amount paid as compensation in 2005 to the Companys 22 executive officers including the
sole Member of the Managing Board and former President and CEO was approximately $11 million before
any withholding taxes. The relative charges and non cash benefits were approximately $4 million.
Such amount also includes the amounts of EIP paid to the executive officers pursuant to a Corporate
Executive Incentive Program (the EIP) established in 1989 that entitles selected executives to a
yearly bonus based upon the individual performance of such executives. The maximum bonus awarded
under the EIP is based upon a percentage of the executives salary and is adjusted to reflect the
Groups overall performance. The participants in the EIP must satisfy certain personal objectives
that are focused on return on net assets, customer service, profit, cash and market share. The
composition of the groups executive officers has significantly changed in early 2005 following the
appointment of the new Chief Executive Officer. As a result, 2004
compensation expenses for executive officers is not comparable and is
not disclosed.
The executive officers and the Managing Board were covered in 2005 under certain Group
life and medical insurance programs provided by the Company. The aggregate additional
amount provided for by the Company in 2005 to provide pension, retirement or similar benefits
for executive officers and the Managing Board as a Group is estimated to have been
approximately $11 million (of which $2.5 million was for the former sole member of the
Managing Board and President and CEO), which includes statutory employer contributions
for state-run retirement, similar benefit programs and other miscellaneous allowances. In
2005, the Compensation Committee recommended and the Supervisory Board decided to
grant an additional pension benefit plan to the Companys former President and Chief
Executive Officer and sole member of the Managing Board and a limited number of senior
executives that have made key contributions to the Groups success. Pursuant to this plan,
the Group will make annual contributions of $200,000 to both its former and current
President and Chief Executive Officers, $150,000 to its Chief Operating Officer and $80,000
to each other beneficiary per year. In order to meet the
Groups future payment
obligations under this plan or to insure for them, the Group accrued a charge of $11 million
in 2005, of which $2.9 million will fund payments for the former President
and Chief Executive Officer and the balance for the other senior executives designated as
beneficiaries.
Individual
remuneration paid to Supervisory Board Members in 2005 was:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
US$ |
|
US$ |
B. Steve |
|
|
92,000 |
|
|
|
86,000 |
|
J.P. Noblanc |
|
|
|
|
|
|
78,000 |
|
R. Dullieux |
|
|
|
|
|
|
38,500 |
|
F. Gavois |
|
|
78,500 |
|
|
|
69,000 |
|
A. Ovi |
|
|
62,000 |
|
|
|
86,000 |
|
R. Gallo |
|
|
71,500 |
|
|
|
67,000 |
|
R. White |
|
|
88,500 |
|
|
|
86,000 |
|
T. de Waard |
|
|
92,000 |
|
|
|
90,000 |
|
G. Arbola |
|
|
68,500 |
|
|
|
|
|
D. Lombard |
|
|
48,000 |
|
|
|
|
|
D. Dunn |
|
|
64,500 |
|
|
|
67,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
665,500 |
|
|
|
667,500 |
|
30 SEGMENT INFORMATION
- 103 -
Primary Reporting Format Business Segments
The Group operates in two business areas: Semiconductors and Subsystems.
In the Semiconductors business area, the Group designs, develops, manufactures and markets a broad
range of products, including discrete, memories and standard commodity components,
application-specific integrated circuits (ASICs), full custom devices and semi-custom devices and
application-specific standard products (ASSPs) for analog, digital, and mixed-signal
applications. In addition, the Group further participates in the manufacturing value chain of
Smart card products through its Incard division, which includes the production and sale of both
silicon chips and Smart cards.
In the Semiconductors business area, effective January 1, 2005, the Group realigned its product
groups to increase market focus and realize the full potential of its products, technologies, and
sales and marketing channels. Beginning with the first quarter of 2005, the Group is now organized
in three main product segments:
|
|
Application Specific Product Groups (ASG) segment, comprised of
three product lines Home, Personal and Communication Sector
(HPC), Computer Peripherals Group (CPG) and new Automotive
Product Group (APG); |
|
|
|
Memory Products Group (MPG) segment; and |
|
|
|
Micro, Linear and Discrete Group (MLD) segment. |
The Groups principal investment and resource allocation decisions in the Semiconductor business
area are for expenditures on research and development and capital investments in front-end and
back-end manufacturing facilities. These decisions are not made by product groups, but on the basis
of the Semiconductor Business area. All these product groups share common research and development
for process technology and manufacturing capacity for most of their products.
In the Subsystems business area, the Group designs, develops, manufactures and markets subsystems
and modules for the telecommunications, 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 its business as a whole, the Subsystems segment does not
constitute a reportable segment.
The
following tables present the Groups consolidated total revenues
and consolidated net
profit by semiconductor product segment. For the computation of the product segments internal
financial measurements, the Group uses certain internal rules of allocation for the costs not
directly chargeable to the Groups, including cost of sales, selling, general and administrative
expenses and a significant part of research and development expenses. Additionally, in compliance
with its internal policies, certain cost items are not charged to the product segments, including
impairment, restructuring charges and other related closure costs, start-up costs of new
manufacturing facilities, some strategic and special research and development programs or other
corporate-sponsored initiatives, including certain corporate level operating expenses and certain
other miscellaneous charges. Starting in the first quarter of 2005, the Group allocated the
start-up costs to expand its marketing and design presence in new developing areas to each product
segment, and the Group restated prior years results accordingly. There are no intersegment sales.
- 104 -
Total consolidated revenues by product segment
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Application Specific Product Groups segment |
|
|
4,991 |
|
|
|
4,902 |
|
Memory Products Group segment |
|
|
1,948 |
|
|
|
1,887 |
|
Micro, Linear and Discrete Group segment |
|
|
1,882 |
|
|
|
1,902 |
|
|
|
|
|
|
|
|
|
|
Others (1) |
|
|
61 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues |
|
|
8,882 |
|
|
|
8,760 |
|
|
|
|
(1) |
|
Includes revenues from sales of subsystems mainly and other products not allocated to product groups. |
The product segment results for the year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application |
|
|
|
|
|
Micro, Linear and |
|
|
|
|
|
|
Specific Product |
|
Memory Product |
|
Discrete Group |
|
Other(1) |
|
|
|
|
Groups segment |
|
Group segment |
|
segment |
|
Unallocated |
|
Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
395 |
|
|
|
(118 |
) |
|
|
256 |
|
|
(139 |
|
|
|
|
394 |
|
Finance income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
Finance cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57 |
) |
Share of loss of associates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Profit before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
387 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39 |
) |
Net profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348 |
|
|
|
|
(1) |
|
Operating profit (loss) of Others includes items such as impairment,
restructuring charges and other related closure costs, start-up costs, and other unallocated
expenses, such as: strategic or special research and development programs, certain
corporate-level operating expenses, certain patent claims and litigations, and other costs
that are not allocated to the product groups, as well as operating earnings or losses of the
Subsystems and Other Products Group. Certain costs, mainly R&D, formerly in the Others
category, are now being allocated to the groups; comparable amounts reported in this category
have been reclassified accordingly in the above table. |
The product segment results for the year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application |
|
|
|
|
|
Micro, Linear and |
|
|
|
|
|
|
Specific Product |
|
Memory Product |
|
Discrete Group |
|
Other(1) |
|
|
|
|
Groups segment |
|
Group segment |
|
segment |
|
Unallocated |
|
Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
508 |
|
|
|
30 |
|
|
|
402 |
|
|
|
(309 |
) |
|
|
631 |
|
Finance income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
Finance cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47 |
) |
Share of loss of associates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Profit before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
621 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95 |
) |
Net profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526 |
|
|
|
|
(1) |
|
Operating profit (loss) of Others includes items such as impairment,
restructuring charges and other related closure costs, start-up costs, and other unallocated
expenses, such as: strategic or special research and development programs, certain
corporate-level operating expenses, certain patent claims and litigations, and other costs
that are not allocated to the product groups, as well as operating earnings or losses of the
Subsystems and Other Products Group. Certain costs, mainly R&D, formerly in the Others
category, are now being allocated to the groups; comparable amounts reported in this category
have been reclassified accordingly in the above table. |
The following tables present the Groups consolidated total assets and liabilities by
semiconductor product segment as they result from allocation keys.
Inventories, goodwill and capitalized development are directly attributed to each business segment.
Receivables are allocated by business segment revenues which represent a specific and approximate
allocation basis. However, the three product segments share the Groups significant Semiconductor
business area resources, namely manufacturing capacity and process developments, throughout the
useful life of fabs, production equipment and common
- 105 -
technologies. The majority of these assets and related liabilities are therefore Group resources
that are utilized based on short and medium term Semiconductor area manufacturing resource
planning. Such assets and liabilities cannot be directly attributed or specifically allocated to
the business segments. The Group internally adopts certain allocation methodologies to establish a
performance benchmark to measure the financial return on assets at various levels of
accountability. As a result such methodologies are not the most appropriate accounting
methodology to apply to historic financial results by product segment. A mathematical computation
has been adopted in this financial report by allocating these assets based on revenues , as
revenues enable a weighting to both volumes produced and average unit selling prices achieved.
Volume is a reasonable measure of the use of such assets and average selling prices allows some
weighting of the allocation towards more complex and recent technologies. This measure therefore
gives some account to the greater capital intensity of the modern process equipment such products
may require. The allocation key however might not accurately reflect the significant differences in
the capital intensity of the various businesses. Assets and liabilities by product segments, as
reported, might consequently be inaccurate and cannot be adopted as a basis to compute the return
on capital of each product segment. Consequently, the Company has not allocated and disclosed the depreciation and
amortization charges by product segment.
Based on a similar allocation by revenues, the 2005 capital expenditures of $1,523 million would
have been allocated as follows: 56% on ASG segment, 22% on MPG segment, 21% on MLD segment and 1%
on the Other segment. Additionally, depreciation and
amortization have been allocated to the operating profit by product
segment as follows: $1,095 million on ASG segment, $427 million on
MPG segment, $413 million on MLD segment and $13 million on the
Others segment.
Total consolidated Assets by product segment
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Application Specific Product Groups segment |
|
|
7,039 |
|
|
|
7,670 |
|
Memory Products Group segment |
|
|
2,897 |
|
|
|
3,115 |
|
Micro, Linear and Discrete Group segment |
|
|
2,526 |
|
|
|
2,832 |
|
|
|
|
|
|
|
|
|
|
Others |
|
|
181 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets |
|
|
12,643 |
|
|
|
13,736 |
|
Total consolidated Liabilities by product segment
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Application Specific Product Groups segment |
|
|
2,216 |
|
|
|
2,607 |
|
Memory Products Group segment |
|
|
865 |
|
|
|
1,004 |
|
Micro, Linear and Discrete Group segment |
|
|
835 |
|
|
|
1,012 |
|
|
|
|
|
|
|
|
|
|
Others |
|
|
27 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated liabilities |
|
|
3,943 |
|
|
|
4,660 |
|
Secondary Reporting Format Geographical Segments
- 106 -
The following is a summary of operations by entities located within the indicated geographic areas
for 2005 and 2004. Total revenues represent sales to third parties from the country in which each
entity is located. A significant portion of property, plant and equipment expenditures is
attributable to front-end and back-end facilities, located in the different countries in which the
Group operates. As such, the Group mainly allocates capital spending resources according to
geographic areas rather than along product segment areas. Consequently, depreciation and
amortization expense is also reported according to the geographic segments. In addition, the
balance sheet positions of assets and liabilities are managed and reviewed internally by geographic
segments, as reported in the tables below.
Total consolidated revenues
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
The Netherlands |
|
|
2,864 |
|
|
|
2,702 |
|
France |
|
|
268 |
|
|
|
359 |
|
Italy |
|
|
203 |
|
|
|
254 |
|
USA |
|
|
1,066 |
|
|
|
1,262 |
|
Singapore |
|
|
4,041 |
|
|
|
3,671 |
|
Japan |
|
|
306 |
|
|
|
403 |
|
Other countries |
|
|
134 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues |
|
|
8,882 |
|
|
|
8,760 |
|
Capital expenditure
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
The Netherlands |
|
|
3 |
|
|
|
1 |
|
France |
|
|
294 |
|
|
|
374 |
|
Italy |
|
|
336 |
|
|
|
442 |
|
Other European countries |
|
|
56 |
|
|
|
47 |
|
USA |
|
|
160 |
|
|
|
113 |
|
Singapore |
|
|
492 |
|
|
|
874 |
|
Malaysia |
|
|
95 |
|
|
|
103 |
|
Other countries |
|
|
87 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,523 |
|
|
|
2,061 |
|
Total consolidated Assets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
The Netherlands |
|
|
2,962 |
|
|
|
2,828 |
|
France |
|
|
2,254 |
|
|
|
2,944 |
|
Italy |
|
|
2,310 |
|
|
|
2,963 |
|
Other European countries |
|
|
372 |
|
|
|
388 |
|
USA |
|
|
737 |
|
|
|
696 |
|
Singapore |
|
|
2,946 |
|
|
|
2,904 |
|
Malaysia |
|
|
527 |
|
|
|
525 |
|
Other countries |
|
|
535 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
12,643 |
|
|
|
13,736 |
|
- 107 -
31 SIGNIFICANT CATEGORIES OF REVENUE
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Sales of goods |
|
|
8,876 |
|
|
|
8,756 |
|
License revenue and patent royalty income |
|
|
6 |
|
|
|
4 |
|
Research and development funding |
|
|
92 |
|
|
|
108 |
|
Finance income |
|
|
53 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9,027 |
|
|
|
8,909 |
|
32 SUBSEQUENT EVENTS
On February 23, 2006 the Company issued senior zero-coupon convertible bonds due 2016 totaling
gross proceeds of $928 million. The amount due to the bondholders upon redemption or at maturity
based on the accreted value of the bonds will produce a yield equivalent to 1.5% per annum on a
semi-annual bond equivalent basis. The Company granted the managers an option to increase the issue
size by up to 5%, totaling $46 million, through March 24, 2006. The notes are convertible into a
maximum of 42 million underlying ordinary shares of the Company, including the increase option. The
conversion price at issuance was $23.19, based on the closing price
of ordinary shares on the New York
Stock Exchange on February 14, 2006 plus a 30% premium.
On March 17, 2006 the Company issued 500 million floating rate senior bonds due 2013 in the Euro
Debt Capital Market. These bonds will pay interest quarterly at a rate equal to three-month Euribor
plus 40 basis points.
- 108 -
COMPANY FINANCIAL STATEMENTS
COMPANY BALANCE SHEETS AS AT DECEMBER 31, 2005 AND 2004
COMPANY STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2005 AND 2004
NOTES TO THE COMPANY FINANCIAL STATEMENTS
OTHER INFORMATION
AUDITORS REPORT
- 109 -
STMICROELECTRONICS N.V. BALANCE SHEETS AS AT DECEMBER 31
(before proposed appropriation of income)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions of U.S. dollars) |
|
Notes |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
(4 |
) |
|
|
128 |
|
|
|
138 |
|
Other intangibles assets |
|
|
(4 |
) |
|
|
413 |
|
|
|
245 |
|
Property, plant and equipment |
|
|
(5 |
) |
|
|
9 |
|
|
|
10 |
|
Investments in subsidiaries |
|
|
(6 |
) |
|
|
7,241 |
|
|
|
7,696 |
|
Investments in associates |
|
|
|
|
|
|
44 |
|
|
|
16 |
|
Investments
and other non-current assets |
|
|
|
|
|
|
12 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets |
|
|
|
|
|
|
7,847 |
|
|
|
8,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred tax assets |
|
|
|
|
|
|
2 |
|
|
|
|
|
Group companies long-term loans |
|
|
(10 |
) |
|
|
|
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets |
|
|
|
|
|
|
2 |
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
(7 |
) |
|
|
73 |
|
|
|
76 |
|
Trade account receivable |
|
|
(8 |
) |
|
|
392 |
|
|
|
419 |
|
Group companies short-term loans |
|
|
(9 |
) |
|
|
123 |
|
|
|
63 |
|
Other group companies receivable |
|
|
(11 |
) |
|
|
1,306 |
|
|
|
835 |
|
Other receivable and assets |
|
|
|
|
|
|
36 |
|
|
|
207 |
|
Cash and cash equivalents |
|
|
|
|
|
|
1,898 |
|
|
|
1,715 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
3,828 |
|
|
|
3,315 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
|
|
|
|
11,677 |
|
|
|
11,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY AND LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Issued and paid in capital |
|
|
|
|
|
|
1,118 |
|
|
|
1,283 |
|
Additional paid in capital |
|
|
|
|
|
|
1,561 |
|
|
|
1,529 |
|
Retained earnings |
|
|
|
|
|
|
5,068 |
|
|
|
4,940 |
|
Treasury stock |
|
|
|
|
|
|
(348 |
) |
|
|
(348 |
) |
Legal reserve |
|
|
|
|
|
|
(18 |
) |
|
|
344 |
|
Other Reserves |
|
|
|
|
|
|
922 |
|
|
|
757 |
|
Income for the year |
|
|
|
|
|
|
347 |
|
|
|
523 |
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
(12 |
) |
|
|
8,650 |
|
|
|
9,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
1,379 |
|
Retirement
benefit obligations |
|
|
|
|
|
|
2 |
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
25 |
|
|
|
4 |
|
Other long-term liabilities |
|
|
|
|
|
|
6 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
|
|
|
|
33 |
|
|
|
1,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
(13 |
) |
|
|
1,356 |
|
|
|
|
|
Trade accounts payable |
|
|
|
|
|
|
14 |
|
|
|
19 |
|
Group companies short term loans |
|
|
(11 |
) |
|
|
11 |
|
|
|
414 |
|
Other group companies payable |
|
|
(11 |
) |
|
|
1,511 |
|
|
|
712 |
|
Other payables and accrued liabilities |
|
|
|
|
|
|
96 |
|
|
|
156 |
|
Accrued income tax |
|
|
|
|
|
|
6 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term liabilities |
|
|
|
|
|
|
2,994 |
|
|
|
1,314 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY AND LIABILITIES |
|
|
|
|
|
|
11,677 |
|
|
|
11,732 |
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
- 110 -
STMICROELECTRONICS N.V.
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
(In millions of U.S. dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit after taxes |
|
|
208 |
|
|
|
205 |
|
Income from subsidiaries |
|
|
139 |
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
Net Profit |
|
|
347 |
|
|
|
523 |
|
The
accompanying notes are an integral part of these financial statements.
- 111 -
STMICROELECTRONICS
N.V.
NOTES TO THE FINANCIAL STATEMENTS
1 GENERAL
A description of STMicroelectronics N.V. (the Company), its activities and group structure are
included in the Consolidated Financial Statements, prepared on the basis of accounting policies
that conform with International Financial Reporting Standards (IFRS). 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.
2 BASIS OF PRESENTATION
The functional and reporting currency of the Company is the U.S. dollar.
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
In accordance with article 2:362 Part 8 of the Netherlands Civil Code, STMicroelectronics N.V.
(the Company), has prepared its company financial statements in accordance with accounting
principles generally accepted in the Netherlands applying the accounting principles as adopted in
the consolidated financial statements. Investments in subsidiaries are stated at net asset value as
the Company effectively exercises influence of significance over the operational and financial
activities of these investments. The net asset value is determined on the basis of the IFRS
accounting principles applied by the Company in its consolidated financial statements.
Inventories
Inventories are stated at the lower of cost or net realizable value. To further improve the
accuracy of its inventory valuation process, the Company changed its historical inventory valuation
method in 2005 from an approximated average-cost inventory valuation method to the first in, first
out (FIFO) method, using the intercompany price of goods purchased. The Company has determined
that this change in inventory valuation method does not have a material effect on its financial
position or results of operations.
- 112 -
4 INTANGIBLE FIXED ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technologies and |
|
|
|
|
|
|
|
|
|
|
licenses, |
|
|
|
|
|
|
|
|
|
|
internally |
|
|
|
|
|
|
|
|
|
|
developed software |
|
Capitalized |
|
|
|
|
|
|
|
|
and purchase |
|
development |
|
|
|
|
Goodwill |
|
software |
|
costs |
|
Total |
(USD in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HISTORICAL COST |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005 |
|
|
138 |
|
|
|
484 |
|
|
|
0 |
|
|
|
622 |
|
Additions |
|
|
0 |
|
|
|
50 |
|
|
|
238 |
|
|
|
288 |
|
Impairments |
|
|
(10 |
) |
|
|
(114 |
) |
|
|
(2 |
) |
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
128 |
|
|
|
420 |
|
|
|
236 |
|
|
|
784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED AMORTIZATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005 |
|
|
0 |
|
|
|
239 |
|
|
|
0 |
|
|
|
239 |
|
Charge for the year |
|
|
0 |
|
|
|
76 |
|
|
|
2 |
|
|
|
78 |
|
Impairments |
|
|
|
|
|
|
(74 |
) |
|
|
0 |
|
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
0 |
|
|
|
241 |
|
|
|
2 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET BOOK VALUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 |
|
|
128 |
|
|
|
179 |
|
|
|
234 |
|
|
|
541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 |
|
|
138 |
|
|
|
245 |
|
|
|
0 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 113 -
5 TANGIBLE FIXED ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and |
|
Computer and R&D |
|
|
|
|
(USD in millions) |
|
fixtures |
|
equipment |
|
Other |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HISTORICAL COST |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005 |
|
|
3 |
|
|
|
14 |
|
|
|
2 |
|
|
|
19 |
|
Additions |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Disposals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
3 |
|
|
|
16 |
|
|
|
2 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED DEPRECIATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005 |
|
|
2 |
|
|
|
7 |
|
|
|
|
|
|
|
9 |
|
Charge for the year |
|
|
|
|
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
Disposals |
|
|
(- |
) |
|
|
(- |
) |
|
|
(- |
) |
|
|
(- |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
2 |
|
|
|
9 |
|
|
|
1 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET BOOK VALUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 |
|
|
1 |
|
|
|
7 |
|
|
|
1 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET BOOK VALUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 |
|
|
1 |
|
|
|
7 |
|
|
|
2 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 INVESTMENTS IN SUBSIDIARIES
|
|
|
|
|
|
|
|
|
(USD in millions) |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1 |
|
|
7,696 |
|
|
|
7,147 |
|
Income from subsidiaries |
|
|
139 |
|
|
|
318 |
|
Other reserves |
|
|
(1 |
) |
|
|
5 |
|
Dividends paid |
|
|
(608 |
) |
|
|
(263 |
) |
Capital increase* |
|
|
778 |
|
|
|
51 |
|
Translation effect of exchange rates |
|
|
(763 |
) |
|
|
438 |
|
|
|
|
|
|
|
|
|
|
Balance December 31 |
|
|
7,241 |
|
|
|
7,696 |
|
|
|
|
* |
|
mainly relates to capital contribution to subsidiaries in Singapore, for a total amount of
$750 million. |
The investments in consolidated group companies as at December 31, 2005 are presented below:
- 114 -
|
|
|
|
|
|
|
|
|
|
|
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 Paolo
|
|
STMicroelectronics Ltda
|
|
|
100 |
|
Brazil Sao Paolo
|
|
Incard do Brasil Ltda
|
|
|
50 |
|
Canada Ottawa
|
|
STMicroelectronics (Canada), Inc.
|
|
|
100 |
|
China Shenzhen
|
|
Shenzhen STS Microelectronics Co. Ltd
|
|
|
60 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) Co. Ltd
|
|
|
100 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) Manufacturing Co. Ltd
|
|
|
100 |
|
China Shenzhen
|
|
STMicroelectronics (Shenzhen) R&D Co. Ltd
|
|
|
100 |
|
China Shanghai
|
|
STMicroelectronics (Shanghai) Co. Ltd
|
|
|
100 |
|
China Shanghai
|
|
STMicroelectronics (Shanghai) R&D Co. Ltd
|
|
|
100 |
|
China Shanghai
|
|
Shanghai Blue Media Co. Ltd
|
|
|
65 |
|
China Shanghai
|
|
STMicroelectronics (China) Investment Co. Ltd
|
|
|
100 |
|
China Beijing
|
|
STMicroelectronics (Beijing) R&D Co. Ltd
|
|
|
100 |
|
Czech Republic Prague
|
|
STMicroelectronics Design and Application s.r.o.
|
|
|
100 |
|
Finland Lohja
|
|
STMicroelectronics OY
|
|
|
100 |
|
France Crolles
|
|
STMicroelectronics (Crolles 2) SAS
|
|
|
100 |
|
France Montrouge
|
|
STMicroelectronics SA
|
|
|
100 |
|
France Rousset
|
|
STMicroelectronics (Rousset) SAS
|
|
|
100 |
|
France Palaiseau
|
|
Waferscale Integration Sarl
|
|
|
100 |
|
Germany Grasbrunn
|
|
STMicroelectronics GmbH
|
|
|
100 |
|
Germany Grasbrunn
|
|
STMicroelectronics Design and Application GmbH
|
|
|
100 |
|
Hong Kong Hong Kong
|
|
STMicroelectronics LTD
|
|
|
100 |
|
India Noida
|
|
STMicroelectronics Pvt Ltd
|
|
|
100 |
|
Israel Netanya
|
|
STMicroelectronics Ltd
|
|
|
100 |
|
Italy Vimercate
|
|
Accent S.r.l.
|
|
|
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 |
|
Mexico Guadalajara
|
|
STMicroelectronics Marketing, S. de R.L. de C.V.
|
|
|
100 |
|
Mexico Guadalajara
|
|
STMicroelectronics Design and Applications, S. de R.L. de C.V.
|
|
|
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 |
|
- 115 -
|
|
|
|
|
|
|
|
|
|
|
Percentage Ownership |
Legal Seat |
|
Name |
|
(Direct or Indirect) |
Switzerland Geneva
|
|
STMicroelectronics SA
|
|
|
100 |
|
Switzerland Geneva
|
|
INCARD SA
|
|
|
100 |
|
Switzerland Geneva
|
|
INCARD Sales & Marketing SA
|
|
|
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 Dover
|
|
Proton World Americas Inc.
|
|
|
100 |
|
United States Wilmington
|
|
STMicroelectronics (North America) Holding, Inc.
|
|
|
100 |
|
United States Wilsonville
|
|
The Portland Group, Inc.
|
|
|
100 |
|
|
7 INVENTORIES
The balance for inventories contains only finished goods.
8 TRADE RECEIVABLES
Trade receivables are expected to be recovered within one year.
9 SHORT-TERM INTERCOMPANY LOANS
Short-term intercompany loans consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
ST Incard Srl (Italy) |
|
|
|
|
|
|
|
|
Loan due 2006 bearing interest at
3-month LIBOR plus 0.50% |
|
|
53 |
|
|
|
|
|
STMicroelectronics Ltd. (Israel) |
|
|
|
|
|
|
|
|
Loan due 2006 bearing interest at
3-month LIBOR plus 0.50% |
|
|
5 |
|
|
|
|
|
ST Microelectronics Inc. (Canada) |
|
|
|
|
|
|
|
|
Loan due 2006 bearing interest at
3-month LIBOR plus 0.375% |
|
|
65 |
|
|
|
62 |
|
Synad
Technology |
|
|
|
|
|
|
|
|
Non-interest bearing cash advance |
|
|
|
|
|
|
1 |
|
Total short-term intercompany loans |
|
|
123 |
|
|
|
63 |
|
10 LONG-TERM INTERCOMPANY LOANS
Long-term intercompany loans consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
|
|
|
STMicroelectronics Ltd. (Israel) |
|
|
|
|
|
|
|
|
Loan due 2006 bearing interest at 3-month
LIBOR plus 0.50% |
|
|
|
|
|
|
5 |
|
STMicroelectronics Pte Ltd (Singapore) |
|
|
|
|
|
|
|
|
Loan due 2009 bearing fixed interest at 2.90% |
|
|
|
|
|
|
290 |
|
- 116 -
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Total long-term intercompany loans |
|
|
|
|
|
|
295 |
|
All loans were fully repaid in 2005.
11 GROUP COMPANIES AS AT DECEMBER 31
|
|
|
|
|
|
|
|
|
(USD in millions) |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
|
1,101 |
|
|
|
725 |
|
Other receivables |
|
|
205 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
Total group companies receivables |
|
|
1,306 |
|
|
|
835 |
|
|
|
|
|
|
|
|
|
|
Trade payables |
|
|
1,277 |
|
|
|
420 |
|
Short-term notes payable |
|
|
11 |
|
|
|
414 |
|
Other payables |
|
|
234 |
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
Total group companies payables |
|
|
1,522 |
|
|
|
1,126 |
|
Short-Term Notes Payables
On January 1, 2004, STMicroelectronics NV entered into a promissory note with STMicroelectronics
Inc. (USA) totaling $400,000,000 bearing interest at 3-month LIBOR plus 0.375%. This transaction
converted $400,000,000 of overdue intercompany payables to STMicroelectronics Inc. (USA) into a
note payable. The principal amount has been fully repaid in 2005.
12 SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and |
|
Additional |
|
|
|
|
|
|
|
|
|
Income |
|
|
|
|
paid in |
|
paid in |
|
Retained |
|
Treasury |
|
Other |
|
Legal |
|
for the |
|
|
|
|
capital |
|
capital |
|
earnings |
|
Shares |
|
Reserves |
|
Reserve |
|
year |
|
Total |
(USD in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2005 |
|
|
1,283 |
|
|
|
1,529 |
|
|
|
4,940 |
|
|
|
(348 |
) |
|
|
757 |
|
|
|
344 |
|
|
|
523 |
|
|
|
9,028 |
|
Convertible debt-equity
component |
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
60 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(523 |
) |
|
|
0 |
|
Issuance of shares |
|
|
3 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
118 |
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347 |
|
|
|
347 |
|
Development expenditures |
|
|
|
|
|
|
|
|
|
|
(234 |
) |
|
|
|
|
|
|
|
|
|
|
234 |
|
|
|
|
|
|
|
0 |
|
Adjustments on pension costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Unrealized loss on
derivatives, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
(66 |
) |
Translation adjustment* |
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(596 |
) |
|
|
|
|
|
|
(764 |
) |
Balance December 31, 2005 |
|
|
1,118 |
|
|
|
1,561 |
|
|
|
5,068 |
|
|
|
(348 |
) |
|
|
922 |
|
|
|
(18 |
) |
|
|
347 |
|
|
|
8,650 |
|
|
* |
|
The share capital of the Company is denominated in euros and the year-end balance is
translated into U.S. dollars at the year-end exchange rate (euro/USD 1.1845). The translation
differences are taken to the non-distributable cumulative translation adjustment account. |
Ordinary shares: Euro 1.04 nominal value, 1,200,000,000 shares authorized, 907,824,279 shares
issued, 894,424,279 shares outstanding, preferred shares: 540,000,000 shares authorized not issued.
The euro equivalent of the issued share capital at December 31, 2005 amounts to euro 944,137,250
(2004: euro: 941,521,356). For the changes in issued and paid in capital,
- 117 -
additional paid in capital and other reserves, see the consolidated financial statements of the
Company.
Treasury stock
As of December 31, 2005, 13,400,000 shares of ordinary shares totalling $348,335,000 (2004:
13,400,000 shares totaling $348,335,000) have been repurchased and reflected at cost as a reduction
from shareholders equity. Treasury shares of 4,100,000 have been designated to be used for the
Companys share-based remuneration programs on non vested shares as decided in 2005. For details on
the Companys stock award plans, see the consolidated financial statements of the Company.
13 LONG-TERM LOANS
In August 2003, the Company issued $1,332 million principal amount at maturity of zero coupon
unsubordinated 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 bonds are convertible at any time by the holders at the rate of 29.9144 shares of the
Companys ordinary shares for each one thousand dollar face value of the bonds. 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. As a
result of this holders redemption option in August 2006, the outstanding amount of 2013 bonds was
classified in the consolidated balance sheet as current portion of long-term debt as of December
31, 2005. At any time from August 20, 2006 the Company may redeem for cash at their negative
accreted value all or a portion of the convertible bonds subject to the level of the Companys
share price.
In application of the first-time adoption requirements as set out in IFRS 1, the Company identified
separately as of January 1, 2005, the IAS 32 / IAS 39 transition date, the two elements of equity
and liability only for the convertible debt outstanding at this date. The fair value of the
liability component and the equity conversion component were determined at issuance of the bond.
The fair value of the liability component was calculated using a market interest rate for an
equivalent non-convertible debt over the period of future probable cash flows as estimated on the
date of issuance. This was determined to be a three-year timeframe corresponding to the period to
the first date of redemption for cash at the option of the holder. The remainder of the proceeds,
representing the value of the equity conversion component, is included in shareholders equity as
Other reserves.
The convertible debt recognized in the balance sheet is calculated as follows:
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
Face value of the convertible debt issued on August 2003 |
|
|
1,400 |
|
Equity component |
|
|
(136 |
) |
Accumulated interest recognized in retained earnings |
|
|
54 |
|
Liability component at issuance |
|
|
1,318 |
|
Interest expense recognized in 2005 income statement |
|
|
38 |
|
Liability component as of December 31, 2005 |
|
|
1,356 |
|
The fair
value of the liability component of the convertible debt amounted to $1,356 million as of
December 31, 2005. The assumption made by the Group was to determine the fair value of the
liability component using a market interest rate for an equivalent non-convertible debt over the
period of future probable cash flows as estimated on the date of issuance. This was determined to be
a three-year timeframe corresponding to the period to the first date of redemption for cash at the
option of the holder. The fair value is calculated using cash flows discounted at a rate based on the
non-convertible debt rate of 2.96%. This amount is recognized as a
liability on an
amortized cost basis until
redeemed, extinguished on conversion or on the maturity of the bonds. The embedded rights of the bond
holder to extend the bond beyond the probable three year period by
not exercising their redemption
option, are measured at fair value through profit and loss. The fair value of these embedded rights
was not material at the end of 2005 and 2004. The remainder of the
proceeds is allocated to the conversion
option.
- 118 -
14 LOANS AND BANKS
The Company has revolving lines of credit agreements with several financial institutions totaling
$221,000,000 at December 31, 2005 (2004: $205,000,000). At December 31, 2005 no amounts were drawn
on these available lines of credit (2004: nil).
15 GUARANTEES
Guarantees given by the Company to banks of its subsidiaries amounted to approximately $905,553,000
at December 31, 2005 (2004: $971,451,000).
16 WAGES, SALARIES AND SOCIAL CHARGES
|
|
|
|
|
|
|
|
|
(USD in millions) |
|
2005 |
|
2004 |
Wages and salaries |
|
|
43 |
|
|
|
40 |
|
Social charges |
|
|
6 |
|
|
|
3 |
|
Stock award compensation expense |
|
|
7 |
|
|
|
3 |
|
Pension service costs |
|
|
6 |
|
|
|
4 |
|
Complementary pension scheme for executives |
|
|
9 |
|
|
|
|
|
Other employee benefits |
|
|
3 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
51 |
|
The average number of persons employed by the Company during the year ended December 31, 2005
was 259 (2004: 253).
17 REMUNERATION TO MANAGING BOARD AND SUPERVISORY BOARD MEMBERS
Individual remuneration paid to Directors in 2005:
|
|
|
|
|
|
|
USD |
P. Pistorio as former sole Director |
|
|
|
|
Wages and salaries |
|
|
372,501 |
|
Bonus |
|
|
6,000,000 |
|
|
|
|
|
|
C. Bozotti as sole Director |
|
|
|
|
Wages and salaries |
|
|
695,585 |
|
Bonus |
|
|
73,758 |
|
The bonus paid to the former sole member of the Managing Board and President and CEO during
the 2005 financial year was approved by the Compensation Committee and approved by the Supervisory
Board in respect of 2004 financial year and in recognition of his career with the Group, based on
fulfillment of a number of predefined objectives for 2004.
Stock options granted to Directors in 2005:
C. Bozotti as sole Director was granted for free 100,000 non-vested shares subject to the
achievement of performance objectives.
- 119 -
Individual remuneration paid to Supervisory Board Members in 2005:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
USD |
|
USD |
B. Steve |
|
|
92,000 |
|
|
|
86,000 |
|
J.P. Noblanc |
|
|
|
|
|
|
78,000 |
|
R. Dullieux |
|
|
|
|
|
|
38,500 |
|
F. Gavois |
|
|
78,500 |
|
|
|
69,000 |
|
A. Ovi |
|
|
62,000 |
|
|
|
86,000 |
|
R. Gallo |
|
|
71,500 |
|
|
|
67,000 |
|
R. White |
|
|
88,500 |
|
|
|
86,000 |
|
T. de Waard |
|
|
92,000 |
|
|
|
90,000 |
|
G. Arbola |
|
|
68,500 |
|
|
|
|
|
D. Lombard |
|
|
48,000 |
|
|
|
|
|
D. Dunn |
|
|
64,500 |
|
|
|
67,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
665,500 |
|
|
|
667,500 |
|
Stock awards granted to Supervisory Board Members: