SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1995
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File number: 33-86320
SGS-THOMSON Microelectronics N.V.
(Exact name of Registrant as specified in its charter)
N/A The Netherlands
(Translation of Registrant's (Jurisdiction of incorporation
name into English) or organization)
Technoparc du Pays de Gex - B.P. 112
165, rue Edouard Branly
01630 Saint Genis Pouilly
France
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange
on which registered
Common Shares, nominal value New York Stock Exchange
NLG 13.75 per Common Share
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report:
Common Shares, nominal value NLG 13.75
per Common Share 138,208,680
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the registrant
has elected to follow:
Item 17 |_| Item 18 |X|
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TABLE OF CONTENTS
PART I
Page
----
Item 1. Description of Business........................................ 1
Item 2. Description of Property........................................ 35
Item 3. Legal Proceedings.............................................. 38
Item 4. Control of Registrant.......................................... 40
Item 5. Nature of Trading Market....................................... 47
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders*..................................................... 47
Item 7. Taxation....................................................... 47
Item 8. Selected Consolidated Financial Data........................... 51
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 52
Item 10. Directors and Officers of Registrant........................... 52
Item 11. Compensation of Directors and Officers......................... 61
Item 12. Options to Purchase Securities from Registrant or Subsidiaries. 61
Item 13. Interest of Management in Certain Transactions................. 62
PART II
Item 14. Description of Securities to be Registered*.................... 63
PART III
Item 15. Defaults upon Senior Securities*............................... 63
Item 16. Changes in Securities and Changes in Security for Registered
Securities*.................................................. 63
PART IV
Item 17. Financial Statements*.......................................... 63
Item 18. Financial Statements........................................... 63
Item 19. Financial Statements and Exhibits.............................. 64
Signature
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* Omitted because item is not applicable.
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PART I
Item 1: Description of Business
The Company
SGS-THOMSON is a global independent semiconductor company that
designs, develops, manufactures and markets a broad range of semiconductor
integrated circuits and discrete devices used in a wide variety of
microelectronic applications, including telecommunications systems, computer
systems, consumer products, automotive products and industrial automation and
control systems. On the basis of 1995 revenues, SGS-THOMSON was the world's
leading supplier of analog ICs, mixed-signal ICs, power ICs and MPEG-2 decoder
ICs. The Company currently offers more than 3,000 main types of products to more
than 1,500 customers including Alcatel, Bosch, Creative Technology, Ford,
Hewlett-Packard, IBM, Motorola, Nokia, Northen Telecom, Philips, Seagate
Technology, Siemens, Sony, Thomson Multimedia and Western Digital.
The Company offers a diversified product portfolio and
develops products for a wide range of market applications to reduce its
dependence on any single product, industry or application market. The Company
has focused on developing products that exploit its technological strengths,
including differentiated ICs (which the Company defines as being its dedicated
products, semicustom devices and microcontrollers). Differentiated ICs foster
close relationships with customers, resulting in early knowledge of their
evolving requirements and opportunities to access their markets for other
products, and are less vulnerable to competitive pressures than standard
commodity products. Differentiated ICs accounted for just over 51% of the
Company's net revenues in 1995 compared to approximately 48% in 1994. SGS-
THOMSON also targets applications that require substantial analog and
mixed-signal content and can exploit the Company's system level expertise. In
1995, analog ICs (including mixed-signal ICs), the majority of which are also
differentiated ICs, accounted for approximately 46% of the Company's net
revenues (compared to approximately 43% in 1994), while discrete devices
accounted for approximately 17% of the Company's net revenues (compared to
approximately 15% in 1994). In recent years, analog ICs and discrete devices
have experienced less volatility in sales growth rates and average selling
prices than the overall semiconductor industry.
In 1995, the Company introduced a number of important new
products, such as the STG2000 multimedia accelerator, the single-chip MPEG-2
decoder family, ST20 32-bit micro cores, as well as a digital processor (DSP
950) and 4 Mbit flash memory family. Most of these products address the rapidly
growing markets for multimedia personal computers, television set top boxes and
digital cellular telephones. The Company has also signed a licensing agreement
with Bosch that grants the automotive component manufacturer the right to
develop and manufacture smart power ICs using the Company's latest generation
bipolar-CMOS-DMOS (1.2 micron, 60 volt) process. The Company entered into a
multi-year agreement with Western Digital, pursuant to which the Company is to
supply Western Digital with ICs based on CMOS standard cell methodologies (0.7
micron migrating to 0.5 micron by year end 1995). This agreement provides for
the Company to supply products for disc controllers as well as new products
under development.
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In July 1995, the Company announced that the research and
development center jointly operated by the Company and CNET, the research
laboratory of France Telecom, had completed the development of the 0.35 micron
CMOS process, only one year after the qualification of the 0.5 micron process.
The 0.35 micron process, currently used in the assembly and development of a
complex evaluation circuit of several million transistors, consists of five
metal layers and involves more than 140 elementary operations. Other complex
prototypes are being developed to further validate the process and accelerate
the introduction of products based on this process, in particular a systolic
processor for the estimation of movement in images, and a programmable video
processor for the coding of images in accordance with the MPEG 4 standard
(currently undergoing standardization).
In 1995, the Company established a design center in India, the
Company's largest design center outside of Europe, which will principally
cooperate in the design of advanced macrocells and libraries for the Company's
analog, digital and mixed signal technologies.
In 1995, SGS-THOMSON adopted a plan to increase its
manufacturing capacity through the addition of new 8-inch submicron fabrication
plants that will be designed to meet the growing demand for VLSI devices. The
Company also approved the building and equipping of a new 8-inch 0.5 micron
front-end wafer fabrication plant (which will also be capable of 0.35 and 0.25
micron production) in Rousset, France.
The Company's business is organized into five principal
product groups:
The Dedicated Products Group produces application-specific
semiconductor products using advanced bipolar, CMOS, BiCMOS,
mixed-signal and power technologies. The Group's dedicated products are
used in all major end-user applications, including such new
applications as mobile communications networks, asynchronous transfer
mode communications systems and digital video compression systems. The
breadth of the Group's customer and application base provides it with a
source of stability in the cyclical semiconductor market, while its
position as a strategic supplier of application-specific products
provides it with opportunities to supply its customers' requirements
for other products, including discrete devices, programmable products
and memories.
The Discrete and Standard ICs Group produces discrete power
devices, power transistors, standard linear and logic ICs and radio
frequency ("RF") products. The Group's discrete and standard products
are manufactured using mature technological processes that are less
capital intensive than the Company's other principal products. The
Group has a diverse customer base and broad product portfolio.
The Memory Products Group produces a broad range of memory
products, including EPROMs, flash memories, EEPROMs, SRAMs, and chips
for smartcards. The Company was the leading supplier of EPROMs in 1995,
accounting for approximately 21.6% of worldwide EPROM sales. The
Company is using its EPROM and EEPROM know-how to develop and produce a
broad portfolio of flash memory devices. The Group does not produce
DRAMS, a commodity memory product.
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The Programmable Products Group produces microcomponents
(including microcontrollers, microprocessors and digital signal
processors), digital semicustom devices and mixed analog/digital
semicustom devices.
The New Ventures Group identifies and develops new business
opportunities to complement the Company's existing businesses and
exploit its technological know-how, manufacturing capabilities and
global marketing team. The Group was formed in May 1994, and its
initial activities have focused on the manufacture and sale by the
Company's wholly owned subsidiary in the United States, SGS-THOMSON
Microelectronics, Inc. ("SGS-THOMSON U.S."), of x86 microprocessors
designed by Cyrix Corporation ("Cyrix").
As part of its activities outside the five principal products
groups, the Company also produces subsystems for industrial and other
applications.
SGS-THOMSON's products are manufactured and designed using a
broad range of manufacturing processes and proprietary design methods.
SGS-THOMSON uses all of the prevalent function-oriented process technologies,
including CMOS, bipolar and non-volatile memory technologies. In addition, by
combining basic processes, the Company has developed advanced systems-oriented
technologies that enable it to produce differentiated and application-specific
products, including BiCMOS technologies (bipolar and CMOS) for mixed-signal
applications and BCD technologies (bipolar, CMOS and DMOS) for intelligent power
applications. This broad technology portfolio, a cornerstone of the Company's
strategy for many years, enables the Company to meet the increasing demand for
"systems-on-a-chip" solutions. To complement this depth and diversity of process
and design technology, the Company also possesses a broad intellectual property
portfolio that it has used to enter into cross-licensing agreements with many
major semiconductor manufacturers.
In 1995, SGS-THOMSON has expanded its diversified
manufacturing infrastructure while improving the cost, quality and versatility
of its operations. SGS-THOMSON has applied 1994 and 1995 investments to build
and equip two 8-inch front-end manufacturing facilities in Crolles, France and
Phoenix, Arizona currently in operation, is applying 1995 investments to build
and equip an additional 8-inch front-end manufacturing facility in Catania,
Italy, not yet in operation, and to build a new back-end facility and design
center in Shenzhen, China through its joint venture created in 1994 with a
subsidiary of the Shenzhen Electronics Group. The Company also converted 4-inch
and 5-inch water fabs to 5-inch and 6-inch production and is commencing the
conversion and expansion from 6-inch to 8-inch production of a front-end
fabrication facility in Agrate, Italy. In addition, the Company has identified
two other 8-inch front-end wafer fabrication facilities, one of which will be in
Singapore, with the other one in Italy now under consideration. In 1995, the
Company approved the building and equipping of a new 8-inch 0.5 micron front-end
wafer fabrication plant (which will also be capable of 0.35 and 0.25 micron
production) in Rousset, France. The Company has many back-end manufacturing
activities in large and modern facilities in lower-cost areas in the
Mediterranean and Asia Pacific regions and has focused on continually improving
the productivity of all of its manufacturing facilities. SGS-THOMSON has also
centralized the management of its manufacturing operations and implemented
computer-integrated manufacturing systems and statistical process control
techniques. The Company is fostering a corporate-wide Total Quality Management
("TQM") culture that defines a common set of objectives and
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performance measurements for employees in all geographic regions, at every stage
of product design, development and production for all product lines.
SGS-THOMSON is international in scope, operating front-end
and/or back-end manufacturing facilities in Europe, the United States, the
Mediterranean and Asia Pacific regions, and conducting research and development
primarily in France and Italy, and design, marketing and sales activities in
each of the electronic industry's major economic regions: Europe, the United
States, the Asia Pacific region and Japan. In 1995, approximately 46% of the
Company's net revenues originated in Europe (compared to approximately 46% in
1994), approximately 24% in the Americas (compared to approximately 26% in
1994), 26% in the Asia Pacific region (compared to approximately 23% in 1994)
and approximately 4% in Japan (compared to approximately 5% in 1994). In 1995,
approximately one-third of the 6-inch equivalent wafers manufactured by the
Company were manufactured outside of Europe and more than one-half of the
Company's employees were located outside of Europe.
SGS-THOMSON believes that strategic alliances are critical to
success in the semiconductor industry, and has entered into strategic alliances
with customers, other semiconductor manufacturers and a major supplier of design
software. The Company has entered into several strategic customer alliances,
including alliances with Alcatel, Seagate Technology and Thomson Multimedia.
Customer alliances provide the Company with valuable systems and application
know-how and access to markets for key products, while allowing the Company's
customers to share some of the risks of product development with the Company and
gain access to the Company's process technologies and manufacturing
infrastructure. Alliances with other semiconductor manufacturers permit costly
research and development and manufacturing resources to be shared to mutual
advantage for joint technology development. The Company has also entered into
technology development alliances with customers and other manufacturers,
including Northern Telecom in North America to develop advanced 0.5 micron
BiCMOS mixed-signal technologies and Mitsubishi Electric Corporation
("Mitsubishi") in Japan to develop a family of 16 Mbit flash memories for mass
storage applications. The Company has also entered into an agreement with
Philips Semiconductors to jointly develop sub-micron CMOS logic processes in
Crolles, France through 1997.
History
The Company was formed in June 1987 as a result of the
combination of the non-military business of Thomson Semiconducteurs, the
microelectronics business of the French state-controlled defense electronics
company Thomson-CSF, and SGS Microelettronica, the microelectronics business
owned by STET-Societa Finanziaria Telefonica S.p.A. ("STET"), the Italian
state-controlled telephone company. Since its formation, the Company has
significantly broadened and upgraded its range of products and technologies and
has strengthened its manufacturing and distribution capabilities in Europe,
North America, and the Asia Pacific region, while at the same time restructuring
its operations to improve efficiency.
At the time of the Company's formation, SGS Microelettronica
was the 20th largest semiconductor company in the world by revenues and the
non-military semiconductor business of Thomson Semiconducteurs was of comparable
size. At its inception, the Company was among the world's leading suppliers of
intelligent power devices and bipolar power transistors and a leading supplier
to the telecommunications industry. SGS Microelettronica's
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strengths in power products, industrial products and
automotive products and its presence in the emerging Asia Pacific market
complemented Thomson Semiconducteurs' strengths in mixed-signal processing,
telecommunications devices and consumer electronics, its presence in the North
American market and its strong intellectual property portfolio, which included
patents acquired when Thomson Semiconducteurs purchased substantially all of the
assets of Mostek Corporation in 1985. The combination of the two European-based
semiconductor businesses provided opportunities to realize operating
efficiencies, consolidate global operations and better withstand downturns in
the cyclical semiconductor industry, and facilitated the financing of research
and development and capital expenditures necessary to compete effectively with
the world's leading semiconductor companies.
Following the Company's formation, management implemented a
comprehensive plan to rationalize the Company's operations, pursuant to which a
variety of measures were taken to reduce fixed costs, improve product quality
and increase yields. Between 1987 and 1992, the Company closed or sold ten
manufacturing plants, and certain back-end and front-end production processes
were shifted to lower cost facilities in the Mediterranean and Asia Pacific
regions. Although it maintained a broad product line, the Company rationalized
its product offerings and process technologies and focused on increasing its
production of differentiated products. Management also standardized the
Company's management information systems and consolidated management,
administrative and sales staffs for the combined group.
To increase its presence in the microprocessor market, in
April 1989 SGS-THOMSON acquired Inmos Ltd. ("Inmos"), a British semiconductor
company that was founded in 1978 and purchased by Thorn EMI plc ("Thorn EMI") in
1984. In connection with its sale of Inmos to the Company, Thorn EMI and an
affiliate acquired a 10% interest in SGS-THOMSON which has since been sold. In
October 1989, the Company purchased the former microwave semiconductor business
of Microwave Semiconductor Corporation, and in March 1993, SGS-THOMSON acquired
the low current thyristors and triacs business of Tag Semiconductors Limited, a
subsidiary of Raytheon Company.
Since its formation in 1987, the Company has maintained its
commitment to research and development despite significant cost reductions
during the Company's restructuring, particularly in 1990 and 1991 when the
Company experienced losses. Management initially combined the research and
development staffs of the predecessor companies and focused its expanded
research and development resources on strategic products, applications and
technologies. Beginning in 1993, the Company significantly increased its capital
investments as part of a long-term program to upgrade and increase its
manufacturing capabilities at existing plants and to build new facilities.
To provide the Company with a stronger capital structure, the
Company's shareholders contributed capital totalling $800 million between 1988
and 1993. The Company used these funds in part to finance restructuring costs
and to reduce net debt (total debt less cash and cash equivalents and marketable
securities) from a high of approximately $905 million at December 31, 1991 to a
positive financial position of approximately $65 million at December 31, 1995.
In December, 1994, the Company completed a registered public offering of Common
Shares (the "Initial Public Offering") with net proceeds to the Company of
approximately $198.7 million. In the Initial Public Offering, the Company sold
9,606,240 shares and the selling shareholders sold 11,393,760 shares at the
initial price to public of $22.25 a share. In October
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1995, the Company completed a secondary public offering of Common Shares in the
U.S. and in France (the "Offering") with net proceeds to the Company of
approximately $371.6 million. In the Offering, the Company sold 8,960,000 shares
and the selling shareholders sold 11,740,000 shares at a price to public of
$43.5 a share. See Item 4: "Control of Registrant". In February 1996, the
Company also completed an offering of Common Shares to certain of its employees
worldwide (the "Employee Offering"). Common Shares offered in the Employee
Offering were offered at a 5% discount to the market price as of January 5,
1996. In addition, eligible employees who purchased shares in the Employee
Offering ("Participating Employees") and who hold those shares at least until
the first anniversary of the day on which such shares were issued to such
Participating Employees, will be entitled to purchase, for each lot of ten
shares purchased in the Employee Offering, one additional share (a "Bonus
Share") at a discounted price. The purchase price of each Bonus Share will be
the $ or FF equivalent of NLG 13.75, which is the nominal value per share.
Participating Employees purchased an aggregate of 243,710 Common Shares in the
Employee Offering, at a price per share of U.S. $33.72 or FF169.10.
Industry Background
Semiconductors are the basic building blocks used to create an
increasing variety of electronic products and systems. Since the invention of
the transistor in 1948, continuous improvements in semiconductor process and
design technologies have led to smaller, more complex and more reliable devices
at a lower cost per function. As performance has increased and size and cost
have decreased, semiconductors have expanded beyond their original primary
applications, computer systems, to applications such as telecommunications
systems, automotive products, consumer goods and industrial automation and
control systems. In addition, system users and designers have demanded systems
with more functionality, higher levels of performance, greater reliability and
shorter design cycle times, all in smaller packages at lower costs. These
demands have resulted in increased semiconductor content as a percentage of
system cost. Calculated on the basis of TAM (as defined below) as a percentage
of worldwide revenues from production of electronic equipment according to
published industry data (which for purposes of this annual report are data
published by Dataquest, Inc. ("Dataquest")), semiconductor pervasiveness has
increased from 9.0% in 1991 to 19.0% in 1995. The demand for electronic systems
has also expanded geographically with the emergence of new markets, particularly
in the Asia Pacific region.
Semiconductor sales have increased significantly over the long
term but have experienced significant cyclical variations in growth rates.
According to trade association data (which for all purposes of this annual
report are World Semiconductor Trade Statistics ("WSTS")), worldwide sales of
all semiconductor products (the total available market or "TAM") increased from
$17.8 billion in 1983 to an estimate of $144.4 billion in 1995 (growing at a
compound annual rate of approximately 19%, according to trade association data),
while the market for products produced by the Company (the serviceable available
market, or "SAM" which, prior to 1995 consisted of the TAM without DRAMS,
microprocessors and opto-electronic products and commencing in 1995 and for all
prior periods compared therewith includes microprocessors as a result of the
Company's production of x86 products) increased from approximately $15.0 billion
in 1983 to an estimate of $97.5 billion in 1995 (growing at a compound annual
rate of approximately 17.0%). The TAM increased 42.0% in 1995, with sales in the
Asia Pacific region, the Americas, Europe and Japan increasing by 54.0%, 40.0%,
43.0%
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and 35.0%, respectively. In 1995, approximately 32.5% of all semiconductors were
shipped to the Americas, 27.5% to Japan, 19.5% to Europe, and 20.5% to the Asia
Pacific region.
Historically, cyclical changes in production capacity in the
semiconductor industry and demand for electronic systems have resulted in
pronounced cyclical changes in the level of semiconductor sales and fluctuations
in prices and margins for semiconductor products from time to time. However,
certain significant changes in the industry could contribute to continued growth
over the long term notwithstanding cyclical variations from period to period.
Such changes include the development of new semiconductor applications,
increased semiconductor content as a percentage of total system cost, emerging
strategic partnerships, growth in the electronic systems industry in the Asia
Pacific region.
Business Outlook
Historically, cyclical changes in production capacity in the
semiconductor industry and demand for electronic systems have resulted in
pronounced cyclical changes in the level of semiconductor sales and fluctuations
in prices and margins for semiconductor products from time to time. However,
certain significant changes in the industry could contribute to continued growth
over the long term notwithstanding cyclical variations from period to period.
Such changes include the development of new semiconductor applications,
increased semiconductor content as a percentage of total system cost, emerging
strategic partnerships and growth in the electronic systems industry in the Asia
Pacific region.
The Company is entering 1996 in a healthy financial and
business condition, with demand exceeding its capacity in the majority of its
product portfolio. It is, however, evident that the industry has started a
correction from the extraordinary growth of recent years.
Certain industry analysts expect a growth rate for 1996 well
below that of 1995, with disparities in growth among different product families.
Based on information available to date, the Company believes that the market has
already experienced a strong correction in the first half of 1996, and the
Company expects this correction to continue at least into the second half of the
year. The Company cannot anticipate how deep or how long this correction phase
will be. The Company is confident, however, that the heavy emphasis on
differentiated products in its portfolio, its strong customer base and strategic
alliances, together with its well diversified sales base, both in terms of
applications and geography, should allow SGS-THOMSON to again outpace the rate
of growth in its served market.
The above statements contained in this "Business Outlook" are
forward looking statements that involve a number of risks and uncertainties. In
addition to the factors discussed above, among the other factors that could
cause actual results to differ materially are the following: the cyclicality of
the semiconductor and electronic systems industries; capital requirements and
the availability of funding; competition; new product development and
technological change; manufacturing risks; order cancellations or reduced
bookings by key customers or distributors; intellectual property developments,
international events, currency fluctuations; problems in obtaining adequate raw
materials on a timely basis; and the loss of key personnel. Unfavorable changes
in the above or other factors discussed under "Risk Factors" listed from time to
time in the Company's SEC reports, including in the Company's Prospectus dated
October 18, 1995 (pages 9 through 16), could materially affect the Company.
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Semiconductor Classifications
The process technologies, levels of integration, design
specificity, functional technologies and applications for different
semiconductor products vary significantly. As differences in these
characteristics have increased, the semiconductor market has become highly
diversified as well as subject to constant and rapid change. Semiconductor
product markets may be classified according to each of these characteristics.
Semiconductors can be manufactured using different process
technologies, each of which is particularly suited to different applications.
Since the mid-1970s, the two dominant processes have been bipolar (the original
technology used to produce integrated circuits) and CMOS (complementary
metal-oxide-silicon). Bipolar devices typically operate at higher speeds than
CMOS devices, but CMOS devices consume less power and permit more transistors to
be integrated on a single IC. While bipolar semiconductors were once used
extensively in large computer systems, CMOS has become the most prevalent
technology, particularly for devices used in personal computer systems. In
connection with the development of new semiconductor applications and the
demands of system designers for more integrated semiconductors, advanced
technologies have been developed during the last decade that are particularly
suited to more systems-oriented semiconductor applications. For mixed-signal
applications, BiCMOS technologies have been developed to combine the high speed
and high voltage characteristics of bipolar technologies with the low power
consumption and high integration of CMOS technologies. For intelligent power
applications, BCD technologies have been developed that combine bipolar, CMOS
and DMOS technologies. Such systems-oriented technologies require more process
steps and mask levels, and are more complex than the basic function-oriented
technologies. The use of systems-oriented technologies requires knowledge of
system design and performance characteristics (in particular, analog and
mixed-signal systems and power systems) as well as expertise and experience with
several semiconductor process technologies.
Semiconductors are often classified as either discrete devices
(such as individual diodes or transistors) or integrated circuits (in which
thousands of functions are combined on a single "chip" of silicon to form a more
complex circuit). Compared to the market for ICs, there is typically less
differentiation among discrete products supplied by different semiconductor
manufacturers. Also, discrete markets have generally grown at slower, but more
stable, rates than IC markets.
Semiconductors may also be classified as either standard
components or application-specific ICs ("ASICs"). Standard components are used
by a large group of systems designers for a broad range of applications, while
ASICs are designed to perform specific functions in specific applications.
Generally, there are three types of ASICs: full-custom devices, semicustom
devices and application-specific standard products ("ASSPs"). Full custom
devices are typically designed to meet the particular requirements of one
specific customer. Semicustom devices are more standardized ICs that can be
customized with efficient CAD tools within a short design cycle time to perform
specific functions. ASSPs are standardized ASICs that are designed to perform
specific functions in a specific application, but are not proprietary to a
single customer.
The two basic functional technologies for semiconductor
products are analog and digital. Analog (or linear) devices monitor, condition,
amplify or transform analog signals, which
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are signals that vary continuously over a wide range of values. Analog circuits
are critical as an interface between electronic systems and a variety of real
world phenomena such as sound, light, temperature, pressure, weight or speed.
Electronics systems continuously translate analog signals into digital data, and
vice versa.
The analog semiconductor market consists of a large and
growing group of specific markets that serve numerous and widely differing
applications, including applications for automotive systems, instrumentation,
computer peripheral equipment, industrial controls, communications devices,
video products and medical systems. Because of the varied applications for
analog circuits, manufacturers typically offer a greater variety of devices to a
more diverse group of customers. Compared to the market for commodity digital
devices such as standard memory and logic devices, the analog market is
characterized by longer product life cycles, products that are less vulnerable
to technological obsolescence, and lower capital requirements due to the use of
mature manufacturing technologies. Such characteristics have resulted in growth
rates that have been less volatile than growth rates for the overall
semiconductor industry.
Digital devices perform binary arithmetic functions on data
represented by a series of on/off states. Historically, the digital IC market
has been primarily focused on the fast growing markets for computing and
information technology systems. Increasing demands for high-throughput computing
and networking and the proliferation of more powerful personal computers and
workstations in recent years have led to dramatic increases in digital device
density and integration. As a result, significant advances in electronic system
integration have occurred in the design and manufacture of digital devices.
There are two major types of digital ICs: memory products and
logic devices. Memory products, which are used in electronic systems to store
data and program instructions, are generally classified as either volatile
memories (which lose their data content when power supplies are switched off) or
nonvolatile memories (which retain their data content without the need for
constant power supply). Volatile memories are used to store data in virtually
all computer systems, from large and mid-range computers to personal computers
and workstations. The primary volatile memory devices are DRAMs, which accounted
for more than 76.0% of semiconductor memory sales in 1995. Nonvolatile memories
are typically used to store program instructions that control the operation of
microprocessors and electronic systems. The primary nonvolatile memory devices
are EPROMs, flash memories and EEPROMs. Memory products are typically standard,
general purpose ICs that can be manufactured in high volumes using basic CMOS
processes, and they are generally differentiated by cost and physical and
performance characteristics, including data capacity, die size, power
consumption and access speed.
Logic devices process digital data to control the operation of
electronic systems. The largest segment of the logic market, standard logic
devices, include microprocessors, microcontrollers and digital signal
processors. Microprocessors are the central processing units of computer
systems. Microcontrollers are complete computer systems contained on single
integrated circuits that are programmed to control the operation of
electromechanical systems by processing input data from electronic sensors and
generating electronic control signals. Digital signal processors ("DSPs") are
parallel processors used for high complexity, high speed real-time computations
in a wide variety of applications, including digital cellular telephone systems
and data compression systems. Standard devices are intended to be utilized by a
large group of systems designers for a broad range of applications.
Consequently, standard devices usually
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contain more functions than are actually required and, therefore, may not be
cost-effective for certain specific applications. In addition to standard logic
devices, a broad range of full-custom, semicustom and ASSP logic devices has
been developed for a wide variety of applications. These devices are typically
designed to meet particular customer requirements. Compared to memory markets,
logic device markets are much more differentiated and dependent upon
intellectual property and advanced product design skills.
Analog/digital (or "mixed-signal") ICs combine analog and
digital devices on a single chip to process both analog signals and digital
data. Historically, analog and digital devices have been developed separately as
they are fundamentally different and it has been technically difficult to
combine analog and digital devices on a single IC. System manufacturers have
generally addressed mixed-signal requirements using printed circuit boards
containing many separate analog and digital circuits acquired from multiple
suppliers. However, system designers are increasingly demanding system level
integration in which complete electronic systems containing both analog and
digital functions are integrated on a single IC.
Mixed-signal ICs are typically characterized as analog ICs due
to their similar market characteristics, including longer product life cycles,
diverse applications and customers and more stable growth through economic
cycles as compared to digital devices. However, certain parts of the
mixed-signal market are becoming higher volume markets as the increasing use of
mixed-signal devices has enhanced the options of system designers and
contributed to the development of new applications, including multimedia, video
conferencing, automotive, mass storage and personal communications.
- 10 -
<PAGE>
The Semiconductor Market
The following tables set forth information with respect to
worldwide semiconductor sales by type of semiconductor and geographic region:
<TABLE>
<CAPTION>
Worldwide Semiconductor Sales (1) Compound Annual Growth Rates(2)
--------------------------------------------------------------------------------------
1983 1988 1993 1995 83-88 88-93 83-93 93-95
---- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions)
Integrated Circuits........ $13,335 $35,893 $66,018 $126,056 21.9% 13.0% 17.3% 38.2%
Analog (linear and mixed-
signal)................. 2,875 7,228 10,673 16,646 20.2 8.1 14.0 24.6
Digital
Logic................. 6,712 17,750 34,079 55,953 21.5 13.9 17.6 28.2
Memory
DRAM................ 1,741 6,390 13,140 40,833 29.7 15.5 22.4 76.3
Others.............. 2,007 4,524 8,127 12,624 17.7 12.4 15.0 24.6
----- ----- ----- ------ ---- ---- ---- ----
Total Memory.... 3,748 10,914 21,267 53,457 23.8 14.3 19.0 58.5
----- ------ ------ ------ ---- ---- ---- ----
Total digital......... 10,460 28,664 55,346 109,410 22.3 14.1 18.1 40.6
Discrete................... 3,696 6,999 8,637 14,004 13.6 4.3 8.9 27.3
Opto-electronics........... 736 2,113 2,654 4,344 23.5 4.7 13.7 27.9
--- ----- ----- ---- --- ---- ----
TAM..................... $17,767 $45,005 $77,309 144,404 20.4% 11.4% 15.8% 36.7%
======= ======= ======= ======= ==== ==== ==== ====
Europe..................... $3,320 $8,104 $14,599 $28,199 19.5% 12.5% 15.9% 39.0%
Americas................... 7,761 13,418 24,744 46,998 11.6 13.1 12.3 37.8
Asia Pacific............... 1,150 5,374 14,168 29,540 36.1 21.4 28.5 44.4
Japan...................... 5,536 18,109 23,798 39,667 26.7 5.6 15.7 16.1
----- ------ ------ ------ ---- --- ---- ----
TAM................... $17,767 $45,005 $77,309 $144,404 20.4% 11.4% 15.8% 36.7%
======= ======= ======= ======== ==== ==== ==== =====
<FN>
- ----------
(1) Source: WSTS.
(2) Calculated using end points of the periods specified.
</FN>
</TABLE>
During the 1960s and 1970s, the development of semiconductor
process technologies was critical to the success of participants in the
industry. As process technologies matured, manufacturing sciences became
important; in the 1980s, the emphasis shifted to increasing production volumes
and yields and lowering production costs. The large capital expenditures and
other resources required during this period to develop advanced manufacturing
capabilities resulted in a stratification of the industry between broad range
suppliers operating multiple front-end and back-end manufacturing facilities and
specialty niche players operating small wafer fabs or subcontracting wafer
production.
With the continuing development of new semiconductor
applications and increasing demands of system designers for more integrated
systems-oriented products, semiconductor manufacturers must continually improve
their core technology and manufacturing competencies.
- 11 -
<PAGE>
In addition, the increasing diversity and complexity of semiconductor products,
the demands of technological change, and the costs associated with keeping pace
with industry developments have contributed to the growth of cooperative product
design and development and manufacturing alliances with customers as well as
among semiconductor suppliers. Alliances with customers provide the manufacturer
with valuable systems and application know-how and access to markets for key
products, while allowing the manufacturer's customers to share some of the risks
and benefits of product development. Customers also gain access to the
manufacturer's process technologies and manufacturing infrastructure. Alliances
with other semiconductor manufacturers permit costly research and development
and manufacturing resources to be shared to mutual advantage for joint
technology development.
To compete as a broadline semiconductor manufacturer,
management believes that it is important to have: (i) a broad and diverse
customer base; (ii) a diversified product portfolio (including analog, digital
mixed-signal and power products) and experience in several application markets;
(iii) a broad range of process technologies (including basic function-oriented
and advanced systems-oriented technologies); (iv) an efficient, quality, global
manufacturing infrastructure; (v) global marketing and technical support; and
(vi) a worldwide network of strategic alliances with customers and other
semiconductor manufacturers.
Strategy
Since the Company's formation in 1987, management's objectives
have been to become one of the world's top ten semiconductor suppliers and to
achieve operating results better than the average of the top ten semiconductor
suppliers. To achieve these objectives, the Company has focused on using its
core technology and manufacturing competencies to produce innovative, quality
and cost-effective products. The key elements of the Company's strategy are set
forth below.
Maintain Broad Customer Base and Increase Customer
Penetration. The Company works with its key customers to identify evolving needs
and new applications and to develop innovative products and product features.
The Company also seeks to use its access to key customers as a supplier of
application-specific products to establish itself as a supplier across a broad
range of products. The Company maintains a geographically diverse customer base
across a broad range of market applications. Regional sales and marketing
organizations operate in each of Europe, the United States, the Asia Pacific
region and Japan. In addition, the Company's central strategic marketing team
and key account management teams serve selected multinational customers.
Offer Diversified Product Portfolio in Evolving Application
Markets. The Company offers a diversified product portfolio and develops
products for a wide range of market applications to reduce its dependence on any
single product, industry or application market. As a broad range supplier, the
Company provides its customers with a single source of supply for multiple
product needs. In the telecommunications market, the Company is developing
advanced BiCMOS and high frequency bipolar processes and focusing on products
for the switching equipment and new, fast-growing telecommunications markets,
including the digital cellular telephone market. In the computer market, the
Company produces dedicated products, memories, microcontrollers, semicustom
devices and microprocessors for use in all types of computer systems. The
Company is focusing particularly on the development of a family of flash memory
- 12 -
<PAGE>
products and dedicated products for computer monitors, disk drives and printers.
In addition, the Company has started to manufacture and market x86
microprocessors. In the consumer products market, the Company is developing
dedicated products for television and home entertainment systems and devices for
new multimedia applications, including digital video decoders. In the automotive
market, management is using its BCD processes to develop dedicated products for
a wide range of automotive applications, and is currently focusing on developing
strategic relationships with U.S. automobile manufacturers. In the industrial
market, the Company is developing innovative power products, particularly for
use in lighting systems and switch mode power supplies.
Emphasize Differentiated and Analog ICs. Within its
diversified product portfolio, the Company has focused on developing products
that exploit its technological strengths, including differentiated ICs (which
the Company defines as being its dedicated products, semicustom devices and
microcontrollers). Differentiated ICs foster close relationships with customers,
resulting in early knowledge of their evolving requirements and opportunities to
access their markets for other products, and are less vulnerable to competitive
pressures than standard commodity products. Differentiated ICs accounted for
just over 51% of the Company's net revenues in 1995 compared to approximately
48% in 1994. The Company also targets applications that require substantial
analog and mixed-signal content and can exploit the Company's system level
expertise. Analog ICs (including mixed-signal ICs), the majority of which are
also differentiated ICs, accounted for approximately 46% of the Company's 1995
net revenues (compared to approximately 43% in 1994), while discrete devices
accounted for approximately 17% of the Company's 1995 net revenues (compared to
approximately 15% in 1994). In recent years, analog ICs and discrete devices
have experienced less volatility in sales growth rates and average selling
prices than the overall semiconductor industry.
Expand Strategic Alliances. Consistent with its belief that
strategic alliances are critical to success in the semiconductor industry, the
Company has entered into such alliances with customers, other semiconductor
manufacturers and a major supplier of design software. The Company has entered
into several customer strategic alliances, including with Alcatel, Seagate
Technology and Thomson Multimedia. Alliances with customers provide the Company
with valuable systems and application know-how and access to markets for key
products, while allowing the Company's customers to share some of the risks of
product development with SGS-THOMSON and to gain access to the Company's process
technologies and manufacturing infrastructure. Alliances with other
semiconductor manufacturers are generally designed to permit costly research and
development and manufacturing resources to be shared to mutual advantage for
joint technology development. Technology development alliances have been formed
with customers and other manufacturers, including Philips Semiconductors in
Europe to develop sub-micron CMOS technologies and Northern Telecom in North
America to develop advanced 0.5 micron BiCMOS mixed-signal technologies and
Mitsubishi in Japan to develop a family of 16 Mbit flash memories for mass
storage applications. The Company has also entered into an alliance with Cadence
Design Systems Inc. for the development of advanced CAD tools. Such design tools
are critical to the timely and cost-effective development of new and advanced
products.
Expand and Improve Manufacturing Capabilities. One of the
Company's principal goals is to expand its diversified manufacturing
infrastructure while seeking to achieve further improvements in the cost,
quality and versatility of its operations. To expand capacity, SGS-
- 13 -
<PAGE>
THOMSON has applied 1994 and 1995 investments to build and equip two 8-inch
front-end manufacturing facilities in Crolles, France and Phoenix, Arizona
currently in operation, is applying 1995 investments to build and equip an
additional 8-inch front-end manufacturing facility in Catania, Italy, not yet in
operation, and to build a new back-end facility and design center in Shenzhen,
China through its joint venture created in 1994 with a subsidiary of the
Shenzhen Electronics Group. The Company also converted 4-inch and 5-inch water
fabs to 5-inch and 6-inch production and is starting the conversion and
expansion from 6-inch to 8-inch production of a front-end fabrication facility
in Agrate, Italy. In addition, the Company has identified two other 8-inch
front-end wafer fabrication facilities, one of which will be in Singapore, with
the other one in Italy now under consideration. In 1995, the Company approved
the building and equipping of a new 8-inch 0.5 micron front-end wafer
fabrication plant (which will also be capable of 0.35 and 0.25 micron
production) in Rousset, France. In 1995, approximately 76.0% of the wafers
manufactured by SGS-THOMSON were manufactured on 5-inch or larger wafers. The
Company is fostering a corporate-wide Total Quality Management ("TQM") culture
that defines a common set of objectives and performance measurements for
employees in all geographic regions, at every stage of product design,
development and production for all product lines. SGS-THOMSON has established
front-end and back-end manufacturing facilities in each of Europe, the United
States and the Mediterranean and Asia Pacific regions. The Company's
geographically diverse facilities allow it to shift production to accommodate
variable production requirements.
Develop Advanced Process and Design Technologies. The Company
intends to continue to exploit its expertise and experience with a wide range of
process and design technologies to develop more advanced technologies. The
Company is committed to continuing to increase research and development
expenditures in the future. Despite significant cost reductions following the
Company's formation in 1987 and particularly during 1990 and 1991 when the
Company experienced losses, management did not reduce research and development
spending. The Company is using its memory products as the focal point of its
process development efforts due to their standardized design features,
manufacturability and potential high volumes. Technological advances in the
areas of transistor performance and interconnection technologies are being
developed through the Company's logic products and semicustom devices. The
Company is currently producing 0.6 micron 16 Mbit EPROMs and three volt,
triple-metal layer semicustom devices with densities of up to one million gates.
It is also working closely with many of its key customers on developing
easy-to-use design equipment for specific applications. The Company is
developing advanced and standardized design tools for its CMOS processes as well
as libraries of macrofunctions and megafunctions for many of its products, and
is focusing on improving its concurrent engineering practices to better
coordinate design activities and reduce overall time-to-market.
- 14 -
<PAGE>
Customers and Applications
SGS-THOMSON designs, develops, manufactures and markets over
3,000 main types of products that it sells to more than 1,500 customers. To many
of its key customers the Company provides a wide range of products, including
dedicated products, discrete devices, memory products and programmable products.
The Company's position as a strategic supplier of application-specific products
to certain customers fosters close relationships that provide it with
opportunities to supply such customers' requirements for other products,
including discrete devices, programmable products and memory products.
- 15 -
<PAGE>
The following table sets forth certain of the Company's
customers in 1995 and certain applications for its products:
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Telecommunications
Customers: Alcatel Fujitsu Italtel Philips
AT&T Gemplus Motorola Racal-Milgo
Daewoo Goldstar Nokia Samsung
Ericsson Hayes Northern Telecom Siemens
------------------------------------------------------------------------------------------
Applications: Answering machines ISDN controllers
Central office switching systems Modems
Chips for smartcards PBX systems
Digital cellular telephones Telephone sets (corded and cordless)
- -------------------------------------------------------------------------------------------------------------------
Computer Systems
Customers: ACER Cyrix Matsushita Smith-Corona
Bull DEC Olivetti Tatung
Canon Epsom Quantum Western Digital
Compaq Hewlett-Packard Seagate Technology Xerox
Conner Peripherals IBM
------------------------------------------------------------------------------------------
Applications: Chips for smartcards Optical scanners
Disk drives Photocopiers
Monitors Printers
Network controllers
Automotive
Customers: BMW Daimler-Benz Ford Marelli
Bosch Delco Hyundai Valeo
Chrysler Fiat
------------------------------------------------------------------------------------------
Applications: Alternator regulators Ignition circuits
Airbags Injection circuits
Antiskid braking systems Instrument
Automotive entertainment systems Electric Motor Controllers
Body and chassis electronics Multiplex wiring kits
Central locking systems Transmission control systems
Engine management systems
- -------------------------------------------------------------------------------------------------------------------
Consumer Products
Customers: Canal Plus Goldstar Philips Sony
Canon Grundig Pioneer Thomson Multimedia
Creative Technology Kenwood Samsung Zenith
Daewoo Matsushita Sanyo
General Instrument Nokia Sharp
------------------------------------------------------------------------------------------
Applications: Audio power amplifiers Graphic equalizers
Audio processors Pay television decoders
Cable television systems Satellite receiver decoding circuits
Compact disc players Set up boxes
Digital video encoders and decoders Televisions and monitors
Video cassette recorders
- -------------------------------------------------------------------------------------------------------------------
Industrial and
Other Applications
Customers: Astec Emerson Philips Siemens
Asea Brown Boveri Mannesman Schlumberger
------------------------------------------------------------------------------------------
Applications: Battery chargers Motor controllers
Industrial automation and control systems Power supplies
Intelligent power switches Smartcard readers
Lighting systems (lamp ballasts) Switch mode power supplies
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- 16 -
<PAGE>
No customer accounted for more than 5% of the Company's net
revenues in 1995 and sales to the Company's top ten customers accounted for
approximately 34% of the Company's net sales in 1995, the Company has several
large customers, certain of whom have entered into strategic alliances with the
Company. Many of the Company's key customers operate in cyclical businesses and
have in the past, and may in the future, vary order levels significantly from
period to period. In addition, approximately 22.7% of the Company's net revenues
in 1995 were made through distributors. There can be no assurance that such
customers or distributors, or any other customers, will continue to place orders
with the Company in the future at the same levels as in prior periods. The loss
of one or more of the Company's customers or distributors, or reduced bookings
by its key customers or distributors, could adversely affect the Company's
operating results. In addition, in a declining market the Company has in the
past and may in the future be requested to reduce prices to limit the level of
order cancellations. Despite price reductions, however, in an industry downturn
order cancellations may be expected, particularly by distributors and for
commodity products.
Products and Technology
SGS-THOMSON designs, develops, manufactures and markets a
broad range of products used in a wide variety of microelectronic applications,
including telecommunications systems, computer systems, consumer goods,
automotive products and industrial automation and control systems. The Company's
products include standard commodity components, full custom devices, semicustom
devices and ASSPs for analog, digital and mixed-signal applications.
Historically, the Company has not produced DRAMs or, until recently, x86
microprocessors. The SAM represented approximately 67.5% of the TAM in 1995,
compared to 84% of the TAM in 1983. While the TAM increased at a compound annual
growth rate of approximately 19% from $17.8 billion in 1983 to an estimate of
$144.4 billion in 1995, the SAM increased at a compound annual growth rate of
approximately 17% from $15.0 billion to an estimate of $97.5 billion during the
same period.
The Company's products are organized into five principal
product groups: Dedicated Products, Discrete and Standard ICs, Memory Products,
Programmable Products and the New Ventures Group.
Dedicated Products Group
The Dedicated Products Group designs, develops and
manufactures application-specific products using advanced bipolar, CMOS,
mixed-signal and power technologies. The Group offers complete system solutions
to customers in several application markets. As the largest of SGS-THOMSON's
product groups, the Dedicated Products Group generated revenues of $1,350.5
million in 1995 (an increase of 38.9% over 1994 revenues), representing
approximately 38% of SGS-THOMSON's 1995 revenues. Approximately 37.0% of the
Group's revenues in 1995 were generated in Europe, while approximately 22.4%,
36.7%, and 3.9% were generated in the Americas, the Asia Pacific region, and
Japan, respectively. Many of the dedicated products sold to the Asia Pacific
region are sold to U.S.-based original equipment manufacturers located in the
region. All of the Group's products are ASSPs or full custom devices.
- 17 -
<PAGE>
The Dedicated Products Group works closely with customers to
develop application-specific products using SGS-THOMSON's technologies and
manufacturing capabilities. The breadth of the Group's customer and application
base provides it with a source of stability in the cyclical semiconductor
market. In addition, the Company's position as a strategic supplier of
application-specific products fosters close relationships that provide it with
opportunities to supply such customers' requirements for other products,
including discrete devices, programmable products and memory products.
The Group particularly emphasizes dedicated ICs for
telecommunications, audio, automotive, power and computer applications.
The Group is organized into the following four product
divisions: (i) telecommunications; (ii) computer and industrial; (iii) audio and
automotive; and (iv) video. In addition, the Company created a business unit to
design and manufacture products for the emerging digital video processing
industry.
Telecommunications Products. According to published industry
data, in 1995 SGS-THOMSON was the world's second largest supplier of dedicated
telecommunications ICs (1995 total market of $2.5 billion). The Company's
telecommunications products are used primarily in telephone sets, modems and
subscriber line interface cards (SLICs) for digital central office switching
equipment. The Group is targeting applications in mobile communications networks
and telephone sets and asynchronous transfer mode ("ATM") communication systems.
Computer and Industrial Products. SGS-THOMSON's computer and
industrial products include components for computer peripheral equipment,
facsimile machines, photocopiers, industrial automation systems and lighting
applications. Its key products are power ICs for motor controllers and
read/write amplifiers, intelligent power ICs for spindle motor control and head
positioning in computer disk drives and battery chargers for portable electronic
systems, particularly mobile telephone sets.
Audio and Automotive Products. SGS-THOMSON's audio products
include audio power amplifiers, audio processors and graphic equalizer ICs. The
Company has sold more than 1.2 billion audio power amplifier ICs since 1972.
The Company's automotive products include alternator
regulators, antiskid braking systems, ignition circuits, injection circuits,
multiplex wiring kits and products for body and chassis electronics, engine
management and instrumentation systems.
Video Products. SGS-THOMSON produces ICs for television sets,
videocassette recorders, satellite receivers and pay-tv decoders. The Company is
focusing on developing products for applications in the growing U.S. satellite
and cable television markets.
Image Processing. SGS-THOMSON has recently created a business
unit to design and manufacture products for the emerging digital video
processing industry. Emerging digital video technologies offer a number of
advantages over traditional analog video, including the ability to compress
video data for transmission and storage, to transmit and reproduce video data
without perceptible image degradation and to randomly access and edit video
data.
- 18 -
<PAGE>
Despite the advantages of digital video, its widespread
adoption has been constrained by the lack of high-performance, cost-effective
compression devices and by the absence of digital video compression standards.
Video compression, which uses complicated mathematical algorithms operating at
high speeds to encode the large amounts of data that result from digitizing
video signals, is both highly complex and technically challenging. Digital video
compression technology is expected to contribute to the development of a number
of new or enhanced applications in the consumer electronics, computer and
communications markets, including video CD players, interactive game consoles
and video conferencing systems.
The Company's image processing business unit is delivering
large volumes of Motion Picture Experts Group ("MPEG") decoder ICs suitable for
video CD products, personal computers, multimedia and digital TV applications.
These products implement the MPEG 1 standard for CD ROM, video CD and personal
computer applications and the MPEG 2 standard for digital TV applications (both
cable and satellite digital TV). This unit is also developing products for
emerging video phone applications.
Discrete and Standard ICs Group
The Discrete and Standard ICs Group designs, develops, and
manufactures discrete power devices, power transistors, standard logic and
linear ICs, and RF products (which were transferred to the Discrete and Standard
ICs Group in May 1994). Including revenues from RF products, the Group generated
revenues of $838.0 million in 1995 (an increase of 31.7% over 1994 revenues),
representing approximately 24% of SGS-THOMSON's net revenues. Approximately
52.6% of the Group's 1995 revenues were generated in Europe, while approximately
21.1%, 25.2%, and 1.1% were generated in the Americas, the Asia Pacific region,
and Japan, respectively. According to published industry data, based on 1995
revenues SGS-THOMSON is among the top three suppliers of power transistors (1995
total market of $5.2 billion) and thyristors (1995 total market of $807
million).
The Group's discrete and standard products are manufactured
using mature technological processes. Although such products are less capital
intensive than the Company's other principal products, the Company is
continuously improving product performance and developing new product features.
The Group has a diverse customer base, and a large percentage of the Group's
products are sold through distributors.
Discrete Power Devices. SGS-THOMSON manufactures and sells a
variety of discrete power devices, including rectifiers, protection devices and
thyristors (SCRs and triacs). The Company's devices are used in various
applications, including in particular telecommunications systems (telephone
sets, modems and line cards), household appliances and industrial systems (motor
control and power control devices). More specifically, rectifiers are used in
voltage converters and voltage regulators, protection devices are used to
protect electronic equipment from power supply spikes or surges, and thyristors
are used to vary current flows through a variety of electrical devices,
including lamps and household appliances.
Power Transistors. SGS-THOMSON designs, manufactures and sells
power transistors, which (like the Company's discrete power devices) operate at
high current and voltage levels in a variety of switching and pulse mode
systems. The Company has three power
- 19 -
<PAGE>
transistor divisions: bipolar transistors, power MOSFETs (metal-oxide-silicon
field effect transistors) and new power transistors such as IGBTs.
The Company's bipolar power transistors are used in a variety
of high-speed, high-voltage applications, including SMPS (switch mode power
supply) system, television/monitor deflection circuits and lighting systems.
According to published industry data, on the basis of 1995 revenues, SGS-THOMSON
is among the leading suppliers of bipolar transistors, including RF power
transistors, (1995 total market of $2.6 billion). The Company introduced power
MOSFETs in 1991 to extend the use of power transistors to new high-frequency,
high-voltage applications, including automotive components, crowbar protection
devices, resonant converters and power factor correction devices. According to
industry data, the Company has been ranked number five worldwide in the fast
growing segment of the power MOSFETs.
The Company also offers a family of VIPower (vertical
integration power) products, as well as omnifets and application-specific
devices. VIPower products exhibit the operating characteristics of power
transistors while incorporating full thermal, short circuit and overcurrent
protection and allowing logic level input. VIPower products are used in consumer
goods (lamp ballasts) and automotive products (ignition circuits, central
locking systems and transmission circuits). Omnifets are power MOSFETs with
fully-integrated protection devices that are used in a variety of sophisticated
automotive and industrial applications. Application-specific devices are
semicustom ICs that integrate diodes, rectifiers and thyristors on the same
chip, thereby providing cost-effective and space-saving components with a short
design time.
Standard Logic and Linear ICs. The Company produces a variety
of bipolar and HCMOS logic devices, including clocks, registers, gates and
latches. Such devices are used in a wide variety of applications, including
increasingly in portable computers, computer networks and telecommunications
systems.
The Company also offers standard linear ICs covering a variety
of applications, including amplifiers, comparators, decoders, detectors,
filters, modulators, multipliers and voltage regulators.
Radio Frequency Products. The Company supplies components for
RF transmission systems used in television broadcasting equipment, radar
systems, telecommunications systems and avionic equipment. At present, most of
the Company's RF products are sold in the United States. The Company is
targeting new applications for its RF products, including two-way wireless
communications systems (in particular, cellular telephone systems) and
commercial radio communication networks for business and government
applications.
- 20 -
<PAGE>
Memory Products Group
The Memory Products Group designs, develops and manufactures a
broad range of semiconductor memory products. The Memory Products Group
generated revenues of $662.5 million in 1995 (an increase of 15% over 1994
revenues), representing approximately 19% of SGS-THOMSON's 1995 revenues.
Approximately 44.5% of the Group's 1995 revenues were generated in Europe, while
approximately 25.4%, 16.6%, and 13.5% were generated in the Americas, the Asia
Pacific region, and Japan, respectively. According to published industry data,
on the basis of 1995 revenues, SGS-THOMSON was the leading producer of EPROMs
(1995 total market of $1.4 billion) and the leading supplier of EEPROMs (1995
total market of $1.3 million).
There are two basic types of memory devices, random access
memories ("RAMs") and read-only memories ("ROMs"). Data can be both read from
and written to RAMs, whereas data can only be read from, but not written to,
ROMs. RAMs are typically used in microprocessor systems to store data used in
the operation of such systems, whereas ROMs are typically used to store program
instructions that control the operation of microprocessors and electronic
systems.
The most common types of RAMs are DRAMs (dynamic RAMs) and
SRAMs (static RAMs). DRAMs are volatile memories that lose their data content
when power supplies are switched off, whereas SRAMs are volatile memories that
allow the storage of data in the memory array but without the need for clock or
refresh logic circuitry. SRAMs are roughly four times as complex as DRAMs (four
transistors per bit of memory compared to one transistor) and are significantly
more expensive than DRAMs per unit of storage. DRAMs are used in a computer's
main memory to temporarily store data retrieved from low cost external mass
memory devices such as hard disk drives. SRAMs are principally used as caches
and buffers between a computer's microprocessor and its DRAM-based main memory.
There are several types of read-only memories that offer
varying degrees of functionality at varying costs. ROMs are permanently
programmed when they are manufactured while programmable ROMs (PROMs) can be
programmed by system designers or end-users after they are manufactured.
Erasable PROMs (EPROMs) may be erased and reprogrammed several times, but to do
so EPROMs must be physically removed from electronic systems, exposed to
ultraviolet light, reprogrammed using an external power supply and then returned
to the systems. Electrically erasable PROMs (EEPROMs) can be erased byte by byte
and reprogrammed "in-system" without the need for removal. Using EEPROMs, a
system designer or user can program or reprogram systems at any time.
Programmable erasable ROMs ("flash" memories) are relatively
new products that represent an intermediate solution for system designers
between EPROMs and EEPROMs based on their cost and functionality. Flash memories
are typically less expensive than EEPROMs, but may be erased and rewritten. The
entire contents of a flash memory or large blocks of data (not individual bytes)
can be erased with a "flash" of current. Because flash memories can be erased
and reprogrammed electrically and in-system, they are more flexible than EPROMs
and, therefore, may replace EPROMs in many of their current applications. Flash
memories may also be used for solid state mass storage of data, a potentially
high volume application, and in other applications, including, in particular
mobile telephone systems. Flash memories are
- 21 -
<PAGE>
smaller and use less power than the hard disk drives now commonly used for mass
data storage, and, therefore, are considered candidates to replace disk drives,
particularly in portable computers.
According to published industry data, the TAM for memory
devices in 1995 was approximately $53.4 billion, with DRAMs, SRAMs, ROMs,
EPROMs, flash and EEPROMs accounting for approximately 76.4%, 11.3%, 3.7%, 2.6%,
3.5% and 2.5% of the total, respectively.
The Company's Memory Products Group is organized into the
following divisions: (i) EPROMs; (ii) flash memories; (iii) EEPROMs and
application-specific memories; (iv) SRAMs; and (v) smartcard products.
EPROMs. SGS-THOMSON produces a broad range of EPROMs, from 16
Kbit to 16 Mbit. According to published industry data, SGS-THOMSON was the
world's leading supplier of EPROMS in 1995, with revenues of $337.3 million (a
decrease of 3% over 1994 revenues) or approximately 21.6% of worldwide EPROM
sales. The Company currently produces EPROMs using 0.5 micron CMOS technologies.
The EPROM market is a relatively mature, commodity-like
market. To compete in such market, the Company has focused on reducing die
sizes, improving manufacturing yields and reducing costs. SGS-THOMSON has been
successful in the world EPROM market primarily due to its non-volatile CMOS
manufacturing technologies, its assembly plants in Singapore and Malaysia, and
its large sales and distribution channels around the world.
Due to industry capacity limitations in 1993, EPROM prices
rose and backlog increased. With additional industry capacity coming on-line in
early 1994, EPROM prices and backlogs began declining in the second quarter of
1994 and continued declining during the remainder of the year. Prices remained
low in 1995 but improved in the beginning of 1996.
Flash Memories. The Company is using its EPROM and EEPROM
know-how to develop advanced flash memory products, and currently produces flash
memories up to 4 Mbit in size. The Company intends to develop a broad portfolio
of flash memory devices to cover all EPROM-like market needs, including 0.5
micron dual voltage and single voltage devices up to 16 Mbit. The Company also
intends to develop specific processes based on current technology to produce 64
Mbit 0.35 micron devices for the mass storage market. The Company is using its
flash memories and fast SRAMs as the focal point of its process development
efforts due to their standardized design features, manufacturability and
potential high volumes.
In May 1993, the Company entered into a strategic alliance
with Mitsubishi to jointly develop a family of compatible 16 Mbit dual voltage
flash memories for mass storage applications using 0.5 micron CMOS wafer process
technology and to standardize specific manufacturing processes. In addition, in
December 1994, SGS-THOMSON signed an agreement with Advanced Micro Devices Inc.
("AMD"), the supplier of approximately 24% of flash memories sold in 1994, to
cooperate in the definition of standards for future EPROM-like flash memory
products based on AMD's single-voltage architecture. The cooperation is intended
to help create an alternative industry standard to Intel's standard for flash
memory products and
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thereby accelerate growth in the worldwide flash memory market. SGS-THOMSON and
AMD currently plan to independently develop compatible products around the
standard. The Company currently produces the 4 Mbit single voltage flash memory
device which is designed to the same specifications as the equivalent device
from AMD, with which it is pin-compatible, although built with a proprietary 0.6
um double-metal CMOS technology.
EEPROMs and Application-Specific Memories. The Company offers
1.2 micron serial EEPROMs up to 16 Kbit and parallel EEPROMs up to 64 Kbit.
Serial EEPROMs are the most popular type of EEPROMs and are generally used in
computer, automotive and consumer applications. Parallel EEPROMs account for a
smaller portion of the EEPROM market, being used mainly in telecommunications
equipment. SGS-THOMSON entered the parallel EEPROM market in late 1993. The
Company intends to work closely with its key customers and strategic allies to
identify and develop new application-specific memory devices using mixed
technologies.
SRAMS. The Company focuses on producing fast SRAMs and
specialty low power SRAMs, but not other more standardized types of SRAMs. The
Company's fast SRAMS are used as cache memories in computer systems and as main
memories in telecommunications systems. The Company produces fast SRAMs up to 1
Mbit with access speeds of 9 to 20 nanoseconds. The Company's low power SRAMs
are used as main memories in portable computers and telecommunications
equipment. The Company produces low power SRAMs up to 1 Mbit with access speeds
of 35 to 70 nanoseconds.
Smartcard Products. Smartcards are credit-card like devices
containing integrated circuits that store data and provide an array of security
capabilities. They are used in a wide and growing variety of applications,
including public pay telephone systems (primarily in France and Germany),
cellular telephone systems (primarily in Europe), bank cards (primarily in
France) and pay television systems (primarily in the United Kingdom and France).
Other potential applications include medical record applications, card-access
security systems and toll-access applications. SGS-THOMSON shipped more than 207
million units in 1995.
Smartcards incorporate a variety of products manufactured by
the Company, including microcontrollers, EPROMs, EEPROMs and flash memory
components. A key smartcard customer of the Company is Gemplus, a French company
that was formed in 1988 as a spinoff from the Company. The Company retained a
32% interest in Gemplus until 1992.
Programmable Products Group
The Programmable Products Group designs, develops and
manufactures microcomponents (including microcontrollers, microprocessors and
digital signal processors), digital semicustom devices, mixed analog and digital
semicustom devices. The Group generated revenues of $535.5 million in 1995 (an
increase of 40.4% over 1994), representing approximately 15% of SGS-THOMSON's
1995 revenues. Approximately 51.4% of the Group's 1995 revenues were generated
in Europe, while approximately 27.0%, 20.0%, and 1.6% were generated in the
Americas, the Asia Pacific region and Japan, respectively.
Microcomponents. The Company's microcomponents division
manufactures and sells microcontrollers, microprocessors and digital signal
processors.
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<PAGE>
Microcontrollers are complete computer systems contained on
single integrated circuits that are programmed to specific customer
requirements. They contain microprocessor cores as well as logic circuitry and
memory capacity. Microcontrollers control the operation of electronic and
electromechanical systems by processing input data from electronic sensors and
generating electronic control signals, and are used in a wide variety of
consumer products (alarm systems, household appliance controls and video
products), automotive systems (engine control and dashboard instrumentation),
computer peripheral equipment (disk drives, facsimile machines, printers and
optical scanners), industrial applications (motor drives and process
controllers), and telecommunications systems (telephones, answering machines and
digital cellular phones).
Based on its experience with a variety of second-sourced
microcontrollers, the Company has developed its complete "ST" family of
proprietary microcontroller products, ranging from the 8-bit ST6
microcontrollers to the 32-bit ST20 devices. The ST20 family is designed to
address the full spectrum of embedded processor applications, from computer
peripherals such as hard disk drives and laser beam printers to high volume
consumer appliances such as digital telephone handsets and digital satellite
receivers. SGS-THOMSON's microcontrollers draw on the Company's large product
and technology portfolios to combine logic devices, EPROMs, EEPROMs, flash
memories and various macrofunctions around a range of second-sourced and
proprietary cores. The Company has also developed a line of starter kits and
code generators and compilers that permit system designers to quickly and easily
implement the Company's microcontrollers into their electronic systems. The
Company is targeting emerging applications for microcontrollers, including
televisions, monitors, cable television and satellite receivers and cellular
telephones.
Microprocessors are the central processing units of computer
systems. The Company second-sources a variety of microprocessors developed by
other semiconductor manufacturers. The Company is currently developing a 64-bit
RISC microprocessor.
Digital signal processors ("DSPs") are parallel processors
used for high complexity, high speed real-time computations. DSPs are used in a
wide variety of applications, including answering machines, modems, digital
cellular telephone systems, audio processors and data compression systems.
SGS-THOMSON and its predecessors have been producing DSPs for more than ten
years. The Company recently introduced the D950-CORE, a fixed point DSP core
based upon the Company's 0.5 micron/3.3V triple-level-metal HCMOS5 technology
for a wide range of applications in the computer, telecommunications and
consumer markets. Examples of applications include mobile phones, telephone
answering machines, fax machines, modems, disk drives, video conferencing
systems and speech, sound, music and other multimedia functions.
Digital Semicustom Devices. Semicustom devices are ICs
containing standardized lines or arrays of transistors that can be configured or
interconnected to perform specific functions after a short design cycle time.
SGS-THOMSON manufactures a wide range of digital semicustom devices, including
high-speed low-voltage 0.5 micron CMOS triple-metal layer gate arrays, standard
cells and embedded arrays.
SGS-THOMSON's semicustom devices are supported by libraries of
cells, macro functions and design tools. SGS-THOMSON supports popular CAD tools
and platforms, and has strategic alliances with Cadence Design Systems, Inc. and
Synopsys, Inc. to develop
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<PAGE>
semicustom CAD tools. SGS-THOMSON is developing proprietary libraries for
semicustom devices for telecommunications, computer and consumer applications.
Mixed-Signal Semicustom Devices. SGS-THOMSON and its
predecessor companies have also manufactured mixed-signal BiCMOS semicustom gate
arrays, standard cells and embedded arrays since 1985. Mixed-signal devices
combine standard cells of digital gates and analog devices on the same
semicustom IC. Such devices can be used in a wide variety of analog/digital
applications, including computer peripherals, telecommunications products and
industrial systems.
New Ventures Group
SGS-THOMSON established the New Ventures Group in May 1994 to
bring together various major product initiatives that would otherwise have been
coordinated within and across individual product groups. The Group identifies
and develops new business opportunities to complement the Company's existing
businesses and exploit its technological know-how, manufacturing capabilities
and global marketing team. The Group's first activities have been the
manufacture and sale of x86 microprocessors designed by Cyrix. The Group is also
evaluating other business opportunities.
x86 microprocessors are the central processing units of
IBM-compatible personal computer systems (which accounted for more than 84% of
worldwide personal computer sales in 1995). SGS-THOMSON U.S. has manufactured
Cyrix-designed x86 chips since 1992 as a foundry for Cyrix. In 1995, SGS-THOMSON
U.S. produced x86 chips for the original equipment manufacturer market. The
Company is also focusing on developing improvements to its x86 products,
including size reduction and speed improvement, as well as future generations
such as the Cyrix 6x86.
The Company expects to be able to use microprocessor
technology, its broad range of other products and technologies and its strengths
in developing and marketing application-specific products to produce powerful
x86 core-based embedded applications and derivative products.
Sales, Marketing and Distribution
In 1995, the Company derived approximately 77% of its revenues
from sales directly to customers through its regional sales organizations
(compared to approximately 75% in 1994) and 23% of its revenues from sales
through distributors (compared to approximately 25% in 1994). SGS-THOMSON
operates regional sales organizations in Europe, North America, the Asia Pacific
region and Japan. In 1995, approximately 46% of the Company's revenues
originated in Europe (compared to approximately 46% in 1994), while 24%
originated in the United States (compared to approximately 26% in 1994), 26%
originated in the Asia Pacific Region (compared to approximately 23% in 1994)
and 4% originated in Japan (compared to approximately 5% in 1994). In 1995, no
customer accounted for more than 5% of the Company's net revenues.
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<PAGE>
The European region is divided into five main sales and
services districts: Central Europe (Germany and Austria), Northern Europe
(United Kingdom, Ireland and Scandinavia), Western Europe (France and the
Benelux countries), Southern Europe (Italy, Spain, Portugal) and Export Group.
The sales organization in each district is segmented by application market
(i.e., telecommunications, computer, consumer, automotive and industrial), while
marketing is segmented by product groups.
In North America, the sales and marketing team is organized
into six business units that are located near major centers of activity for
either a particular application or geographic region: automotive (Detroit,
Michigan), industrial and consumer (Chicago, Illinois), computer and peripheral
equipment (San Jose, California), communications (Dallas, Texas), distribution
(Boston, Massachusetts), and Latin America (Phoenix, Arizona). Each business
unit has a sales force that specializes in the relevant business sector. Each
business unit also provides product-related marketing and application support.
This structure allows SGS-THOMSON to monitor emerging applications, to provide
local design support, and to develop new products in conjunction with the
various product divisions as well as to develop new markets and applications
with its current product portfolio. A central marketing operation in Boston
provides market communications, data processing and customer quality services to
the whole region, while a logistics center in Phoenix supports the distribution
network in North America.
In the Asia Pacific region, sales and marketing is organized
by country and is managed from the Company regional sales headquarters in
Singapore. The Company has sales offices in Taiwan, Korea, China, Hong Kong,
India, Malaysia, Thailand and Australia. The Singapore sales organization
provides central marketing, customer service, technical support, shipping,
laboratory and design services for the entire region. In addition, there are
design centers in Taiwan, Korea and Hong Kong. In 1995, the Company established
a design center in India, the Company's largest design center outside of Europe,
which will principally cooperate in the design of advanced macrocells and
libraries for the Company's analog, digital and mixed signal technologies.
In Japan, substantially all of the Company's sales are made
through distributors, as is typical for foreign suppliers to the Japanese
market. Each distributor serves specific territories or customers and is
responsible for maintaining the minimum inventories required by Japanese
customers. The Company provides marketing and technical support services to
distributors through sales offices in Tokyo and Osaka. In addition, the Company
has established a design center and application laboratory in Tokyo. The design
center designs custom ICs for Japanese clients, while the application laboratory
allows Japanese customers to test SGS-THOMSON products in specific applications.
The Company's central marketing efforts are organized into a
central strategic marketing organization and a key account management
organization. The strategic marketing organization is organized by application
market. In addition, in July 1992 the Company created a series of initiatives
that it refers to as Golden Programs. These programs focus the Company's
multi-divisional and multi-area organizations on 13 key application markets
worldwide. Each Golden Program includes a team of personnel from corporate
strategic marketing, the product groups and divisions and the regional sales
offices. The Golden Program teams work closely with the Company's strategic
allies in each application market. The current Golden Programs
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<PAGE>
include television/terminals, memory disk drives, digital cellular telephones,
color television, power supply, line card, multimedia graphics, automobile
radio, monitors, satellite and cable television systems, lighting, engine
management and asynchronous transfer mode data communications.
In addition to the central strategic marketing team, the
Company has established key account management teams to serve key multinational
customers. The key account management teams work with the Company's regional and
divisional managers to provide a broad range of products to its major accounts
and to develop complete systems solutions for customers. The teams build
strategic relationships with the Company's major accounts that can lead to the
development of new products, increased access to evolving technologies and
enhanced knowledge of customer requirements.
Each of the four regional sales organizations operate
dedicated distribution organizations. To support the distribution network,
SGS-THOMSON operates logistic centers in Saint Genis, France, Phoenix, Arizona
and Singapore, and has made considerable investments in warehouse
computerization and logistics support.
The Company also uses distributors and representatives to
distribute its products around the world. Typically, distributors handle a wide
variety of products, including products that compete with SGS-THOMSON products,
and fill orders for many customers. Most of the Company's sales to distributors
are made under agreements allowing for price protection and/or the right of
return on unsold merchandise. The Company recognizes revenues when it ships
products to distributors. Sales representatives generally do not offer products
that compete directly with the Company's products, but may carry complementary
items manufactured by others. Representatives do not maintain a product
inventory; instead their customers place large quantity orders directly with
SGS-THOMSON and are referred to distributors for smaller orders.
Research and Development
Management believes that research and development is critical
to the Company's success and is committed to increasing research and development
expenditures in the future. Despite significant cost reductions following the
Company's formation in 1987, and particularly in 1990 and 1991 when the Company
experienced losses, management did not reduce research and development spending.
The table below sets forth information with respect to the Company's research
and development spending since 1991 (not including design center, process
engineering, pre-production or industrialization costs):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(in millions, except percentages)
<S> <C> <C> <C> <C> <C>
Expenditures ........................... $245.3 $260.9 $270.9 $338.3 440.3
as a percentage of net revenues....... 17.9% 16.6% 13.3% 12.8% 12.4%
</TABLE>
As a result of the history of the Company, approximately 89% of the Company's
research and development expenses in 1995 were incurred in Europe, primarily in
France and Italy. See
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<PAGE>
"-- State Support for the Semiconductor Industry". As of December 31, 1995,
approximately 2,540 employees were employed in research and development
activities.
Central research and development units conduct research on the
basic VLSI technologies, packaging technologies and design tools that are used
by all product groups and the front-end manufacturing organization.
SGS-THOMSON'S central research and development activities are conducted in
Crolles, France, Agrate, Italy, and Carrollton, Texas. The central research and
development units participate in several strategic partnerships. The Company's
manufacturing facility at Crolles, France houses a research and development
center that is operated pursuant to a partnership agreement between the Company
and CNET, the research laboratory of France Telecom, an indirect shareholder of
the Company in 1993. This center is developing submicron process technologies.
The Company has also entered into an agreement with Philips Semiconductors to
jointly develop sub-micron CMOS logic processes in Crolles, France through 1997.
A technical center in New Delhi, India, develops design software and CAD
libraries and tools.
The Company has signed an agreement providing for a research
and development cooperation with GRESSI, the research and development Groupement
d'Interet Economique ("GIE") formed by the Centre National d'Etudes et des
Telecommunications ("CNET"), a research laboratory wholly owned by France
Telecom, and the Laboratoire d'Electronique de Technologie d'Instrumentation
("LETI"), a research laboratory of CEA, the parent of one of the indirect
shareholders of the Company. The objectives of the cooperation is to develop
know-how on innovative aspects of VLSI technology evolution which can be
transferred to industrial applications, and to address the development of
innovative process steps and process modules to be used in future generations of
VLSI products. The cooperation agreement is based upon a pluriannual plan
through 1998, and the Company is expected to bear half of the program's total
cost. See Item 13: "Management's Interest in Certain Transactions".
In addition to central research and development, each
operating division also independently conducts research and development
activities on specific processes and products.
State Support for the Semiconductor Industry
Due to the importance of the semiconductor industry, various
government authorities in the world, including the European Commission and
individual countries in Europe, have established programs for the funding of
research and development, innovation, industrialization and training in the
industry. In addition, many countries grant various forms of tax relief, direct
grants and other incentives to semiconductor companies as well as other
industries to encourage investment. The Company has structured its operations to
benefit from such programs and incentives and expects to continue to do so in
the future. Unlike certain of its competitors, however, the Company does not
receive significant direct or indirect financing from defense development
programs.
The main European programs in which the Company is involved
include: (i) the joint European research program called JESSI, (ii) European
Union research and development projects such as ESPRIT (European Strategic
Programme for Information Technology) and RACE (Research and Development in
Advanced Communications Technologies for Europe), (iii)
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<PAGE>
national programs for research and development and industrialization in the
electronics industries, and (iv) investment incentive programs for the economic
development of certain regions. The pan-European programs are generally open to
eligible companies operating and investing in Europe and cover an extended
period. In Italy, both electronics and economic development programs are open to
eligible companies regardless of their ownership or country of incorporation.
JESSI is a European cooperative project in microelectronics
among several countries that covers the period 1988 through 1996 and involves
more than 80 companies. ESPRIT started in 1983 and is being extended through
1998 within the fourth framework program of the European Commission on
Information and Communication Technologies (ICT). In Italy, the "Programma
Nazionale per la Microelettronica" has 18 participants, and various programs for
intervention in the "Mezzogiorno" (southern Italy) are open to eligible
companies, including non-European companies, operating in the region and
regulated by specific laws. Italian programs often cover several years, but
funding is typically subject to annual budget appropriation. In France, support
for microelectronics is provided to over 30 companies manufacturing or using
semiconductors. The amount of support under French programs is decided annually
and subject to budget appropriation.
In addition, management expects to have the opportunity to
take part in the future in European "structural funds" that are intended to
furnish important support through 1999 to dedicated regions in many European
countries, and provide priorities in funding for productive investment, training
and job creation. These funds are available to eligible companies, including
non-European companies, operating in the dedicated regions.
As a result of the history of the Company, its research and
development facilities and activities are mainly concentrated in France and
Italy, and the substantial majority of the Company's state funding has been
derived from programs in such countries. Umbrella agreements with the Republics
of France and Italy, which set forth the parameters of state support under the
national programs, currently run from 1992 through 1996 and require, among other
things, compliance with EC regulations and annual and project-by-project reviews
and approvals. The agreements are based on the maintenance of an equilibrium in
the levels of research and development and related expenditures between the two
countries.
Public authority funding for research and development are
reported in "Other Income and Expenses" in the Company's consolidated statements
of income. See Note 20 to the Consolidated Financial Statements. Such funding
has totalled $84.2 million, $80.1 million and $89.6 million in the years 1993,
1994 and 1995, respectively. Public funding for industrialization costs (which
include certain costs incurred to bring prototype products to the production
stage) is offset against expenses in computing cost of sales, and has the effect
of increasing the Company's gross profit. Such funding of industrialization
costs has totalled $20.4 million, $19.3 million and $11.8 million in 1993, 1994
and 1995, respectively. See Note 20 to the Consolidated Financial Statements.
Government support for capital expenditures funding has totalled $24.5 million,
$40.4 million and $64.5 million in the years 1993, 1994 and 1995, respectively.
Such funding has been used to support the Company's capital investment; while
receipt of these funds is not directly reflected in the Company's results of
operations, the resulting lower amounts recorded in property, plant and
equipment reduce the level of depreciation recognized by the Company.
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<PAGE>
Low interest financing has been made available (principally in
Italy) under programs such as the Italian Republic's Fund for Applied Research,
established in 1968 for the purpose of supporting Italian research projects
meeting specified program criteria. At year-end 1994 and 1995, the Company had
$133.2 million and $115.4 million, respectively, of indebtedness outstanding
under state-assisted financing programs at an average interest cost of 2.9% and
2.64%, respectively. See Note 15 to the Consolidated Financial Statements.
Funding for programs in France and Italy is subject to annual
appropriation, and if such governments were unable to provide anticipated
funding on a timely basis or if existing government-funded programs were
curtailed or discontinued, such an occurrence could have a material adverse
effect on the Company's business, operating results and financial condition.
From time to time the Company has experienced delays in the receipt of funding
under these programs. As the availability and timing of such funding are
substantially outside the Company's control, there can be no assurance that the
Company will continue to benefit from such government support, that funding will
not be delayed from time to time, that sufficient alternative funding would be
available if necessary or that any such alternative funding would be provided on
terms as favorable to the Company as those previously provided.
Various programs that provide different forms of financial
support and incentives (such as research and development grants, low interest
loans, capital investment support and tax incentives) for companies in the
semiconductor industry are offered in a number of countries. In connection with
its long term expansion plans, management believes that opportunities for such
financial support and incentives may be available to it in countries outside
France and Italy.
Intellectual Property
Intellectual property rights which apply to various Company
products include patents, copyrights, trade secrets, trademarks and maskwork
rights. SGS-THOMSON owns more than 1,000 original invention patents or pending
patent applications, most of which have been registered in several countries
around the world. In 1995, the Company filed 420 original patent applications
around the world. Management believes that its intellectual property represents
valuable property and intends to protect the Company's investment in technology
by enforcing all of its intellectual property rights.
The Company has entered into several patent cross-licenses
with several major semiconductor companies, consisting primarily of most of the
major Japanese semiconductor companies.
Pursuant to a 1977 license agreement (the "Intel License
Agreement"), SGS-THOMSON U.S. is licensed to make, have made, use and sell (in
addition to other rights) products that practice all Intel patents filed prior
to 1999 for the life of such patents. The Intel License Agreement was originally
entered into by Mostek Corporation ("Mostek") and Intel. Thomson
Semiconducteurs, one of the constituent companies of the current Company,
acquired Mostek assets in 1985 and SGS-THOMSON U.S. succeeded to the interest of
Mostek under the Intel License Agreement upon the Company's formation in 1987.
SGS-THOMSON U.S.'s succession rights under the Intel License Agreement were
upheld in a court judgment rendered
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<PAGE>
in July 1992 which is now final as well as in a court judgement dated December
30, 1994 which has been confirmed in appeal.
In January 1994, SGS-THOMSON U.S. and Cyrix entered into a
non-exclusive production and license agreement (the "Cyrix License Agreement")
pursuant to which SGS-THOMSON U.S. agreed to produce Cyrix-designed x86 chips to
sell to Cyrix for resale as Cyrix-branded products. In addition, Cyrix granted
SGS-THOMSON U.S. a licence to sell (as SGS-THOMSON products) a proportion of the
chips that it makes available to Cyrix and to use Cyrix architecture to produce
application-specific ICs. The Cyrix License Agreement extends to future
generations of x86 products. Cyrix and SGS-THOMSON U.S. signed an amendment to
the Cyrix License Agreement in July 1995 that allows SGS-THOMSON U.S. to
manufacture and sell to third parties additional quantities of Cyrix products at
least through 1997. SGS-THOMSON U.S. may continue to manufacture and sell
application-specific ICs using Cyrix architecture after termination of the
agreement. In April 1994, Cyrix entered into x86 production and license
agreements with IBM.
The Company's success depends in part on its ability to obtain
patents, licenses and other intellectual property rights covering its products
and manufacturing processes. To that end, the Company has acquired certain
patents and patent licenses and intends to continue to seek patents on its
inventions and manufacturing processes. The process of seeking patent protection
can be long and expensive, and there can be no assurance that patents will issue
from currently pending or future applications or that, if patents are issued,
they will be of sufficient scope or strength to provide meaningful protection or
any commercial advantage to the Company. In addition, effective copyright and
trade secret protection may be unavailable or limited in certain countries.
Litigation, which could demand financial and management resources, may be
necessary to enforce patents or other intellectual property rights of the
Company.
Also, there can be no assurance that litigation will not be
commenced in the future against the Company regarding patents, mask works,
copyrights, trademarks or trade secrets, or that any licenses or other rights to
necessary intellectual property could be obtained on acceptable terms. The
failure to obtain licenses or other intellectual property rights, as well as the
expense or outcome of litigation, could adversely affect the Company's results
of operations or financial condition. The Company has from time to time
received, and it may in the future receive, communications alleging possible
infringement of certain patents and other intellectual property rights of others
and it is currently the defendant in a lawsuit charging the Company with patent
infringement. Regardless of the validity or the successful assertion of such
claims, the Company could incur significant costs with respect to the defense
thereof which could have a material adverse effect on the Company's results of
operations or financial condition. See Item 3: "Legal Proceedings".
Backlog
The Company's sales are made primarily pursuant to standard
purchase orders that are generally booked from one to twelve months in advance
of delivery. Quantities actually purchased by customers, as well as prices, are
subject to variations between booking and delivery to reflect changes in
customer needs or industry conditions.
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<PAGE>
Although the Company's backlog has increased significantly in
1995 in an improved semiconductor market, in a declining market the Company has
in the past and may in the future be requested to reduce prices to limit the
level of order cancellations. Despite price reductions, however, in an industry
downturn order cancellations may be expected, particularly by distributors and
for commodity products. The Company's level of backlog is therefore not
necessarily a reliable indicator of the level of future billings.
SGS-THOMSON also sells certain products to key customers
pursuant to frame contracts. Frame contracts are annual fixed-price contracts
with customers setting forth the terms of purchase and sale of specific
products. These contracts allow the Company to schedule production capacity in
advance and allow customers to manage their inventory levels consistent with
just-in-time principles while shortening the cycle times required to produce
ordered products. Orders under frame contracts are also subject to risks of
price reduction and order cancellation.
Competition
Markets for the Company's products are highly competitive.
While only a few companies compete with SGS-THOMSON in all of the Company's
product lines, the Company faces significant competition in each of its product
lines. SGS-THOMSON competes with major international semiconductor companies,
some of which have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. Smaller niche semiconductor companies are also
increasing their participation in the semiconductor market. Competitors include
manufacturers of standard semiconductors, application-specific ICs and fully
customized ICs, including both chip and board-level products, as well as
customers who develop their own integrated circuit products.
Some of the Company's competitors are also its customers.
The Company's primary competitors include Advanced Micro
Devices, Inc., Hitachi, Intel Corporation, Motorola, Inc., National
Semiconductor Corporation, Nippon Electric Company, Ltd., Philips
Semiconductors, Samsung, Siemens, Texas Instruments Incorporated and Toshiba.
The market for the Company's new x86 microprocessors is currently dominated by
Intel Corporation.
The Company competes in different product lines to various
degrees on the basis of price, technical performance, product features, product
system compatibility, customized design, availability, quality and sales and
technical support. The Company's ability to compete successfully depends on
elements both within and outside of its control, including successful and timely
development of new products and manufacturing processes, product performance and
quality, manufacturing yields and product availability, customer service,
pricing, industry trends and general economic trends.
The market for the Company's products is characterized by
rapidly changing technology. Therefore, the Company's success is highly
dependent upon its ability to develop complex new products on a cost-effective
basis, to introduce them in the marketplace on a timely basis, and to have them
selected for design into products of leading systems manufacturers. SGS-THOMSON
has committed and intends to continue to commit substantial resources to the
- 32 -
<PAGE>
development of new products. Because new product development commitments must be
made well in advance of sales, however, new product decisions must anticipate
both future demand and the technology that will be available to supply such
demand. Delays in developing new products with anticipated technological
advances or in commencing volume shipments of new products may have an adverse
effect on the Company's business. In addition, there can be no assurance that
new products, if introduced, will gain market acceptance or will not be
adversely affected by new technological changes or new product announcements by
others. See "-- Research and Development".
In recent years the Company has introduced, among other new
products, dedicated products for several applications, including, in particular,
telecommunications, computer peripheral, and automotive applications, power
MOSFETS for high-frequency and high-voltage applications, Omnifets (power
MOSFETS with fully integrated protection devices). In 1995, the Company
introduced a multimedia accelerator (co-designed and developped by NVIDIA
Corporation) for the high volume multimedia personal computer market, a digital
signal processing core for 0.5 micron ASICs (DSP 950) and the ST20 family of
compatible 0.5 micron 32-bit microprocessor cores. The Company also continually
strives to improve the operating performance and design features of many of its
products.
According to published industry data, SGS-THOMSON was the
world's leading supplier of EPROMs in 1995 with revenues of $337.3 million, a
decrease of 3% over 1994 revenues. The EPROM market is a relatively mature
commodity market. Flash memory products may replace EPROMs in many applications
in the second half of the 1990s. The Company currently supplies flash memory
products up to 4 Mbit, and has entered into an agreement with Mitsubishi to
jointly develop a family of 16 Mbit flash memories. The Company is also
developing a new generation of digital video decompression chips, a 64-bit RISC
microprocessor and a 0.7 micron BiCMOS mixed-signal standard cell. There can be
no assurance, however, that the Company's flash memories, x86 microprocessors or
other new products will be successfully developed or produced or that they will
achieve market acceptance or contribute significantly to the Company's revenues.
The market for the Company's new x86 microprocessors is dominated by Intel
Corporation.
The Company's future success is also dependent in part upon
its ability to develop and implement new design and process technologies.
Semiconductor design and process technologies are subject to rapid technological
change, and require large expenditures for capital investment and research and
development. The Company is developing advanced and standardized design tools
for its CMOS processes as well as libraries of macrofunctions and megafunctions
for many of its products, and is focusing on improving its concurrent
engineering practices to better coordinate design activities and reduce overall
time-to-market. If the Company experiences substantial delays in developing new
design or process technologies or inefficiently implements production increases
or transitions, the Company's results of operations could be adversely affected.
Employees
As of December 31, 1995, the Company employed approximately
25,468 people, of whom approximately 5,035 were employed in France, 5,117 were
employed in Italy, 575
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<PAGE>
were employed in the rest of Europe, 2,439 were employed in the United States,
4,370 were employed in Malta and Morocco and 7,933 were employed in Singapore,
Malaysia and Japan. As of December 31, 1995, approximately 2,540 employees were
engaged in research and development, 1,300 in marketing and sales, 17,954 in
manufacturing, 1,522 in administration and general services and 2,152 in
divisional functions.
The Company's future success will depend, in part, on its
ability to continue to attract, retain and motivate highly qualified technical,
marketing, engineering and management personnel. Unions are present in France,
Italy, Malta, Morocco and Singapore. The Company has not experienced any
significant strikes or work stoppages in recent years, other than in connection
with national strikes in Italy, and management believes that the Company's
employee relations are good.
Environmental Matters
The Company's manufacturing operations use many chemicals and
gases and the Company is subject to a variety of governmental regulations
related to the use, storage, discharge and disposal of such chemicals and gases
and other emissions and wastes. Consistent with the Company's TQM principles,
the Company has established proactive environmental policies with respect to the
handling of such chemicals and gases and emissions and waste disposals from its
manufacturing operations. The Company has engaged outside consultants to audit
its environmental activities and has created environmental management teams,
information systems, education and training programs, and environmental
assessment procedures for new processes and suppliers. In 1995, four of the
Company's plants, Kirkop, Malta, Toa Payoh, Singapore, Rancho Bernardo, United
States and Rennes, France, were certified for the Eco-Management and Audit
Source Standard ("EMAS").
Although the Company has not suffered material environmental
claims in the past and believes that its activities conform to presently
applicable environmental regulations, in all material respects, environmental
claims or the failure to comply with present or future regulations could result
in the assessment of damages or imposition of fines against the Company,
suspension of production or a cessation of operations.
Item 2: Description of Property
SGS-THOMSON currently operates 17 manufacturing facilities
around the world. The table below sets forth certain information with respect to
SGS-THOMSON's current manufacturing facilities, products and technologies.
Front-end manufacturing facilities are wafer fabrication plants and back-end
facilities are assembly, packaging and final testing plants.
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<PAGE>
<TABLE>
<CAPTION>
Location Products Technologies
-------- -------- ------------
<S> <C> <C> <C>
Front-end Facilities:
Crolles, France Semicustom devices and dedicated 8-inch 0.7/0.35 micron CMOS and
products 1.2/0.35 micron BiCMOS; and R&D
on submicron technologies in
conjunction with CNET and Philips
Semiconductors
Phoenix, Arizona x86 microprocessors and other VLSI 8-inch 0.5/0.35 micron CMOS
products
Agrate, Italy EPROMSs, EEPROMs, semicustom Fab 1 - 6-inch 0.8/0.6 micron CMOS
devices, microprocessors and Fab 2 - 6-inch 2.0/1.2 micron BiCMOS and
dedicated products BCD
Fab 3- 6-inch
0.65/0.35 micron CMOS
pilot line being
converted to 8-inch
Rousset, France Microcontrollers, EEPROMs and 6-inch 0.8 micron CMOS
smartcard products
Catania, Italy Power transistors, smart devices and Fab 1 - 5-inch 3 micron bipolar power
audio and automotive dedicated Fab 2 - 5-inch 3/4 micron power MOS/BCD
products (being converted to 6-inch)
Fab 3 - 6-inch 4/6/1 micron pilot line
Rennes, France Dedicated and power products 5-inch 2.0 micron BiCMOS, BCD
and bipolar
Grenoble, France(1) Dedicated products and semicustom 4-inch 2.0/1.2 micron BiCMOS
devices
Castelletto, Italy Smart power BCD 5-inch 4.0/1.2 micron bipolar and
mixed BCD pilot line (being
converted to 6-inch)
Tours, France Thyristors, diodes and application- Fab 1 - 4-inch discrete
specific discretes Fab 2 - 4-inch discrete
Ang Mo Kio, Singapore Dedicated products, microcontrollers Fab 1 - 5-inch 2 micron CMOS
and commodity products Fab 2 - 5-inch 6 micron bipolar standard
Fab 3 - 5-inch 3 micron bipolar complex
Carrollton, Texas Memories, microprocessors and Fab 1 - 4-inch 1.2 micron CMOS and
semicustom devices BiCMOS (being converted to 6-inch)
Fab 2 - 6-inch 0.6 micron CMOS
Rancho Bernardo, California(2) CMOS/BiCMOS telecommunications 4-inch 3 micron CMOS/BiCMOS
ICs
Back-end Facilities:
Muar, Malaysia Broad range
Kirkop, Malta Broad range
Toa Payoh, Singapore Broad range
Ain Sebaa, Morocco Discrete semiconductors
Bouskoura, Morocco Subsystems
<FN>
- ----------
(1) The closure of the Grenoble front-end facility (originally scheduled to be
closed after the Crolles facility became fully operational) has been
postponed due to capacity requirements in light of current market
conditions.
(2) This facility was acquired by the Company from Northern Telecom on January
1, 1994 in connection with entering into a strategic alliance with Northern
Telecom.
</FN>
</TABLE>
In 1995, approximately 63.0% of the 6-inch equivalent wafers
manufactured by SGS-THOMSON were manufactured in Europe, 25.0% in the Asia
Pacific region, and 12.0% in the United States. The major hubs for European
manufacturing and product design and
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<PAGE>
development are located in Agrate, Italy and Crolles, France. In the United
States, the Company's main manufacturing facility is located in Carrollton,
Texas. In the Asia Pacific region, the Company operates a front-end wafer fab in
Singapore and back-end facilities in Singapore and Muar, Malaysia.
To expand capacity, SGS-THOMSON has applied 1994 and 1995
investments to build and equip two 8-inch front-end manufacturing facilities in
Crolles, France and Phoenix, Arizona currently in operation, is applying 1995
investments to build and equip an additional 8-inch front-end manufacturing
facility in Catania, Italy, not yet in operation, and to build a new back-end
facility and design center in Shenzhen, China through its joint venture created
in 1994 with a subsidiary of the Shenzhen Electronics Group. The Company also
converted 4-inch and 5-inch water fabs to 5-inch and 6-inch production and is
starting the conversion and expansion from 6-inch to 8-inch production of a
front-end fabrication facility in Agrate, Italy. In addition, the Company has
identified two other 8-inch front-end wafer fabrication facilities, one of which
will be in Singapore, with the other one in Italy now under consideration. In
1995, the Company approved the building and equipping of a new 8-inch 0.5 micron
front-end wafer fabrication plant (which will also be capable of 0.35 and 0.25
micron production) in Rousset, France. In 1995, approximately 76.0% of the
wafers manufactured by SGS-THOMSON were manufactured on 5-inch or larger wafers.
In 1994, the Company created a joint venture with a subsidiary
of the Shenzhen Electronics Group ("SEG") that is building and will operate a
back-end manufacturing facility and design center in the Futian free-trade zone
of Shenzhen in southern China. SGS-THOMSON owns a 60% interest in the joint
venture, with a subsidiary of SEG owing the remaining 40%. Construction of the
plant is being completed and equipment installation is scheduled to begin in
1996. The Company and SEG plan to invest initially approximately $77 million in
the joint venture. SEG is a diversified export-oriented electronics company
controlled by the Shenzhen Municipal Government that manufactures communications
equipment, computers and electronic products and components and engages in
import-export trading, financial investment management and real estate.
Although each fabrication plant is dedicated to specific
processes, the Company's strategy is to have multiple plants for key process
families. The Company subcontracts some back-end assembly and testing
operations.
Manufacturing Risks
The Company's manufacturing processes are highly complex,
require advanced and costly equipment and are continuously being modified in an
effort to improve yields and product performance. Impurities or other
difficulties in the manufacturing process can lower yields. Although the
Company's increased manufacturing efficiency has been an important factor in its
improved results of operations, as is common in the semiconductor industry, the
Company has from time to time experienced production difficulties that have
caused delivery delays and quality control problems. No assurance can be given
that the Company will be able to increase manufacturing efficiency in the future
to the same extent as in the past or that the Company will not experience
production difficulties in the future.
- 36 -
<PAGE>
In addition, during the recent period of high revenue growth
for the Company, the Company's manufacturing facilities, particularly back-end
assembly, packaging and testing facilities, have been operating at high
capacity. SGS-THOMSON has applied 1994 and 1995 investments to build and equip
two 8-inch front-end manufacturing facilities in Crolles, France and Phoenix,
Arizona currently in operation, is applying 1995 investments to build and equip
an additional 8-inch front-end manufacturing facility in Catania, Italy, not yet
in operation, and to build a new back-end facility and design center in
Shenzhen, China through its joint venture created in 1994 with a subsidiary of
the Shenzhen Electronics Group. The Company also converted 4-inch and 5-inch
water fabs to 5-inch and 6-inch production and is starting the conversion and
expansion from 6-inch to 8-inch production of a front-end fabrication facility
in Agrate, Italy. In addition, the Company has identified two other 8-inch
front-end wafer fabrication facilities, one of which will be in Singapore, with
the other one in Italy now under consideration. In 1995, the Company approved
the building and equipping of a new 8-inch 0.5 micron front-end wafer
fabrication plant (which will also be capable of 0.35 and 0.25 micron
production) in Rousset, France. As is common in the semiconductor industry, the
Company has from time to time experienced difficulty in ramping up production at
new facilities or effecting transitions to new manufacturing processes and,
consequently, has suffered delays in product deliveries or reduced yields. There
can be no assurance that the Company will not experience manufacturing problems
in achieving acceptable yields and/or product delivery delays in the future as a
result of, among other things, capacity constraints, construction delays,
ramping up production at new facilities, upgrading or expanding existing
facilities or changing its process technologies, any of which could result in a
loss of future revenues. The Company's operating results could also be adversely
affected by the increase in fixed costs and operating expenses related to
increases in production capacity if revenues do not increase commensurately.
SGS-THOMSON's principal executive office is located in Saint
Genis, France, near Geneva, Switzerland. The Company also operates nine research
and development centers and 26 design centers. The Company maintains regional
sales headquarters in Saint Genis, France, Boston, Massachusetts, Singapore and
Tokyo, Japan, and has 44 sales offices in 22 countries throughout Europe, North
America and the Asia Pacific region. In general, the Company owns its
manufacturing facilities and leases most of its sales offices.
Item 3: Legal Proceedings
As is the case with many companies in the semiconductor
industry, the Company has from time to time received communications alleging
possible infringement of certain intellectual property rights of others.
Irrespective of the validity or the successful assertion of such claims, the
Company could incur significant costs with respect to the defense thereof which
could have a material adverse effect on the Company's results of operations or
financial condition.
The Company is currently involved in certain legal
proceedings, including litigation charging the Company with patent infringement.
The Company does not believe that the ultimate resolution of pending legal
proceedings will have a material adverse effect on its financial condition.
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<PAGE>
In May 1995, an investigation was ordered by the prosecutor of
the court of Catania, Italy of the research and development consortium CORIMME.
SGS-THOMSON Microelectronics s.r.l. holds a 662/3% voting interest in the
consortium with the University of Catania holding the remaining 331/3% voting
interest. A notice (Informazione di Garanzia) of the commencement of a criminal
investigation was served on the President of CORIMME and to the Board of
Directors and Statutory Auditors of CORIMME. Under Italian law, criminal
liability cannot be attributed to a company and therefore notices relating to
investigation of acts or events generally attributable to a company are sent to
the legal representative of such company (i.e. the president or the statutory
bodies). Investigations are still on going with regard to the dispute concerning
value-added-tax ("VAT") between CORIMME and the Italian tax authority, and with
regard to alleged misuse of public funds by SGS-THOMSON Microelectronics s.r.l.
In order to become eligible for government research and development funding, the
CORIMME consortium was required to submit detailed plans specifying the
objectives of a program and the manner in which the funding would be used. The
Company's management believes that the inquiry to date has focused on whether
part of the funds and other resources designated for research were used for
production or otherwise in violation of applicable requirements and on the
proper use of, and allocation of expenses (such as rent and utilities) for,
resources and the allocation of revenues between CORIMME and the Company. In
another matter concerning a dispute on VAT deductions, CORIMME was granted a
favorable ruling by the Commissione Tributaria di Primo Grado in Catania which
has been confirmed by The Commissione Tributaria di Secunda Grado in Catania.
The Company's management believes that CORIMME's contractual and other
requirements have been honored in all material respects. The Company's
management further believes that the management of CORIMME programs has been in
all material respects in accordance with those plans and with applicable
financial procedures provided by the Italian government. It is cooperating in
full with the authorities in the conduct of the inquiry. Due to the preliminary
nature of the inquiry it is impossible to determine the ultimate scope or
outcome of the inquiry. Although the investigation is at a preliminary stage,
management believes based on information available to the Company to date and
based on the advice of legal counsel that the outcome of the investigation will
not have a material effect on the financial condition or results of operations
of the Company.
- 38 -
<PAGE>
Item 4: Control of Registrant
Principal Shareholders
In October, 1995, the Company completed a second public offering of the
Common Shares. In the Offering, the Company sold 8,960,000 shares and the
selling shareholders sold 11,740,000 shares at a price to public of $43.5 a
share. The following table sets forth certain information with respect to the
ownership of the Company's Common Shares, as of June 3, 1996.
Common Shares Owned
-------------------
Number of
Shareholders Common Shares %
- ------------ ------------- -
SGS-THOMSON Microelectronics
Holding II B.V.................. 95,863,880 69.4
- 39 -
<PAGE>
THIS INFORMATION WAS REPRESENTED BY AN ORGANIZATIONAL CHART IN THE ORIGINAL
Description of Shareholding Structure:
SGS-THOMSON Microelectronics N.V. is owned 69.4% by SGS-THOMSON
Microelectronics Holding II B.V. a wholly-owned subsidiary of SGS-THOMSON
Microelectonics Holding N.V. SGS-THOMSON Microelectronics Holding N.V. is 50%
owned by a consortium of French shareholders and 50% owned by a consortium of
Italian shareholders. The French shareholders, FT2CI is owned 49.9% by
Thomson-CSF and FT1CI, respectively. Thomson-CSF is owned 58.0% by Thomson S.A.
FT1CI is owned 51.0% and 49% by CEA-Industrie and France Telecom, respectively.
The Italian shareholders, MEI, is owned 50.1% and 49.9% by I.R.I. and Comitato
SIR, respectively.
- 40 -
<PAGE>
SGS-THOMSON Microelectronics Holding II B.V. ("SGS-THOMSON
Holding II") is a wholly owned subsidiary of SGS-THOMSON Microelectronics
Holding N.V. ("SGS-THOMSON Holding"). SGS-THOMSON Holding is 50% owned by a
consortium of French shareholders that are indirectly controlled by the French
government and 50% owned by a consortium of Italian shareholders that are
indirectly controlled by the Italian government. The consortium of French
shareholders is comprised of Thomson-CSF, a subsidiary of the French
state-controlled electronics company Thomson S.A., France Telecom, the French
state-controlled telephone company, CEA-Industrie, a corporation controlled by
the French atomic energy commission, and FT1CI and FT2CI, two French holding
companies. The consortium of Italian shareholders is comprised of Istituto per
la Ricostruzione Industriale S.p.A. ("I.R.I."), the holding company for Italian
state-owned industrial and commercial interests, Comitato per l'Intervento nella
SIR ed in settori ad Alta Technologia ("Comitato SIR") and MEI-Microelettronica
Italiana s.r.l. ("MEI"), an Italian holding company. In December 1994,
Finmeccanica, a subsidiary of I.R.I., transferred its interest in SGS-THOMSON
Holding to MEI. Shares of Thomson-CSF are listed on the Bourse de Paris and
Frankfurt Stock Exchange and American Depositary Receipts for its shares are
quoted on Nasdaq. Certificats d'investissement of CEA-Industrie are listed on
the Bourse de Paris.
SGS-THOMSON Holding II is a holding company whose only asset
is the common stock of the Company. It has no Supervisory Board, and its
Management Board is SGS-THOMSON Holding.
Shareholder Agreements
In connection with the formation of the Company, Thomson-CSF
and STET, as shareholders of the Company, entered into a shareholders agreement
on April 30, 1987. In connection with the formation of SGS-THOMSON Holding in
1989, which coincided with the acquisition by Thorn EMI of its interest in the
Company, the shareholders agreement (as amended, the "Holding Shareholders
Agreement") was amended to apply to the parties' ownership in SGS-THOMSON
Holding. The rights and obligations of Thomson-CSF and STET under the Holding
Shareholders Agreement were subsequently transferred to or assumed by, as the
case may be, FT2CI for Thomson-CSF, and Finmeccanica and MEI for STET. In
connection with the transfer by Finmeccanica of its interest in SGS-THOMSON
Holding to MEI, the rights and obligations of Finmeccanica under the Holding
Shareholders Agreement were subsequently transferred to or assumed by, as the
case may be, MEI.
Pursuant to the terms of the Holding Shareholders Agreement
and for the duration of such agreement, FT2CI (the "French Owner"), on the one
hand, and MEI (the "Italian Owner"), on the other hand, have agreed to maintain
equal interests in the share capital of SGS-THOMSON Holding and maintain,
together, ownership of the majority of SGS-THOMSON Holding's issued voting
shares. The admission of a third party to the share capital of SGS-THOMSON
Holding, whether through the sale of SGS-THOMSON Holding's outstanding shares or
through the issue by SGS-THOMSON Holding of new shares, or by any other means,
must be unanimously agreed upon. In the event of a new shareholder, the parties
undertake to ensure that the balance between the French and Italian
shareholdings shall be maintained.
The Holding Shareholders Agreement contemplates that the
parties shall agree upon common proposals and jointly exercise their powers of
decision and their full control of
- 41 -
<PAGE>
the strategies and actions of SGS-THOMSON Holding and the Company. Under the
Holding Shareholders Agreement, the Supervisory Board of SGS-THOMSON Holding,
which is composed of three representatives of the French Owner and three
representatives of the Italian Owner, must give its prior approval before
SGS-THOMSON Holding, the Company, or any subsidiary of the Company may: (i)
modify its articles of incorporation; (ii) change its authorized share capital,
issue, acquire or dispose of its own shares, change any shareholder rights or
issue any instruments granting an interest in its capital or profits; (iii) be
liquidated or dispose of all or a substantial and material part of its assets or
any shares it holds in any of its subsidiaries; (iv) enter into any merger,
acquisition or joint venture agreement (and, if substantial and material, any
agreement relating to intellectual property) or form a new company; (v) approve
such company's draft consolidated balance sheets and financial statements or any
profit distribution by such company; or (vi) enter into any agreement with any
of the direct or indirect French or Italian Owners outside the normal course of
business. The Holding Shareholders Agreement also provides that long-term
business plans and annual budgets of the Company and its subsidiaries, as well
as any significant modifications thereto, shall be approved in advance by the
Supervisory Board of SGS-THOMSON Holding. In addition, the Supervisory Board of
SGS-THOMSON Holding shall also decide upon operations of exceptional importance
contained in the annual budget even after financing thereof shall have been
approved.
Such agreement also provides that similar and adequate levels
of research, development and technological innovation shall be achieved by the
Company and its subsidiaries in France and Italy and that there shall be no
substantial discrepancy in the percentage of state financing compared to
research, development and technological innovation expenditures by the Company
and its subsidiaries in each such country. See "Item 1: Description of Business
State Support for the Semiconductor Industry." Pursuant to the terms of the
Holding Shareholders Agreement, SGS-THOMSON Holding is not permitted, as a
matter of principle, to operate outside the field of semiconductor products. The
parties to the Holding Shareholders Agreement also undertake to refrain directly
or indirectly from competing with the Company in the area of semiconductor
products, subject to certain exceptions, and to offer the Company opportunities
to commercialize or invest in any semiconductor product developments by them.
Any financing or capital provided by the parties to SGS-THOMSON Holding or the
Company is intended to be provided pro rata based on the parties' respective
shareholdings in SGS-THOMSON Holding. In the Holding Shareholders Agreement, the
parties state that it is of the utmost importance that the French and Italian
governments grant sufficient and continuous financial support for research and
development, and undertake to take suitable actions with a view to obtaining
such funding.
In the event of a disagreement that cannot be resolved between
the parties as to the conduct of the business and actions contemplated by the
Holding Shareholders Agreement, each party has the right to offer its interest
in SGS-THOMSON Holding to the other, which then has the right to acquire, or to
have a third party acquire, such interest. If neither party agrees to acquire or
have acquired the other party's interest, then together the parties are
obligated to try to find a third party to acquire their collective interests, or
such part thereof as is suitable to change the decision to terminate the
agreement. The Holding Shareholders Agreement otherwise terminates in the event
that one of the parties thereto ceases to hold shares in SGS-THOMSON Holding.
- 42 -
<PAGE>
The Company has been informed that the shareholders of FT2CI
as well as the shareholders of FT1CI (the majority shareholder of FT2CI) have
also entered into separate shareholder agreements that require the consent of
the Board of Directors of each such company to certain actions taken by
SGS-THOMSON Holding, the Company and its subsidiaries. These agreements provide
for the management of the interests of CEA-Industrie, France Telecom and
Thomson-CSF in SGS-THOMSON Holding and the Company, with the object of defining
among them the positions, strategies and decisions to be taken by the French
Owner in SGS-THOMSON Holding affecting the management of SGS-THOMSON Holding,
and the Company and its subsidiaries. The Company is not a party to either of
these agreements.
In particular, the agreement between the shareholders of FT2CI
(FT1CI and Thomson-CSF) provides that, subject to the fulfillment of their
duties as Supervisory Board members in accordance with Dutch law,
representatives of FT2CI on the Supervisory Board of SGS-THOMSON Holding and the
Company can only take positions on specified matters at meetings of such
Supervisory Boards if such positions are approved in advance by a majority (or
in certain circumstances three-quarters) of the Board of Directors of FT2CI
(which consists of nine members, six of whom are chosen by FT1CI and three of
whom are chosen by Thomson-CSF). Such matters requiring majority approval
include: (i) adoption and changes to long-term business plans of SGS-THOMSON
Holding and the Company, (ii) approval of annual budgets prior to their adoption
by the Supervisory Board of the Company, (iii) approval of the annual financial
statements of SGS-THOMSON Holding and the Company, (iv) modification of the
articles of association or capital increases of any of the Company's
subsidiaries, (v) dissolution or sale of all or a substantial part of the assets
of any of the Company's subsidiaries, (vi) any equity investment by SGS-THOMSON
Holding, the Company or any of its subsidiaries in another company or group,
(vii) any agreement between SGS-THOMSON Holding and/or the Company and any
shareholder of FT1CI or FT2CI outside the ordinary course of business, (viii)
any technology transfer agreement allowing the Company to create new families of
technology or allowing competitors access to major technologies of the Company,
and (ix) any major modification to the geographic distribution of industrial
sites of the Company in Europe or the United States. Such matters requiring
three-quarters' approval include: (i) any modification of the amount or
breakdown of the capital of SGS-THOMSON Holding or the Company not constituting
a strategic alliance or any issuance or repurchase by SGS-THOMSON Holding or the
Company of their shares or any modification of the rights attached thereto, (ii)
any issue by SGS-THOMSON Holding or the Company of shares giving rights to a
minimum number of shares of capital stock, with the effect of or leading to a
change in the ownership of share capital of SGS-THOMSON Holding or the Company,
(iii) any distribution of profits of SGS-THOMSON Holding and/or the Company,
(iv) any liquidation or dissolution of SGS-THOMSON Holding or the Company, or
any sale of all or a substantial part of the assets of either company, (v) any
modification of the articles of association of SGS-THOMSON Holding or the
Company, and (vi) any sale of assets or business likely to have a significant
negative impact on the shareholders' equity of the Company. In addition, any
modification of the Holding Shareholders Agreement requires the approval of
three-quarters of the members of FT2CI's Board of Directors. The FT2CI
shareholders agreement provides that the three representatives of the French
Owner on the Supervisory Boards of SGS-THOMSON Holding and the Company shall be
members of the FT2CI Board of Directors and will consist of two members chosen
by FT1CI and one member chosen by Thomson-CSF. The FT2CI shareholders agreement
also requires the consent of Thomson-CSF for the transfer of any shares in
FT1CI. Under certain circumstances, FT1CI is required to acquire Thomson-CSF's
interest in FT2CI, including if (i)
- 43 -
<PAGE>
CEA-Industrie and France Telecom no longer hold a majority of FT1CI's capital,
(ii) FT1CI no longer holds a majority of FT2CI's capital, (iii) FT2CI and the
Italian shareholders together no longer hold a majority of SGS-THOMSON Holding's
capital, (iv) SGS-THOMSON Holding no longer holds a majority of the Company's
share capital or (v) FT2CI obtains more than a 50% interest in SGS-THOMSON
Holding. Under the FT2CI shareholders agreement, Thomson-CSF has agreed not to
compete with the Company in the area of non-military semiconductor products
until February 15, 1998. The FT2CI shareholders agreement terminates in 30 years
or in the event one of the parties ceases to hold shares in FT2CI.
The agreement between the shareholders of FT1CI (CEA-Industrie
and France Telecom) provides that the following acts of FT2CI with respect to
SGS-THOMSON Holding or the Company must be approved by three-quarters of the
Board of Directors of FT1CI (which consists of five directors, three of whom are
chosen by CEA-Industrie and two of whom are chosen by France Telecom): (i) any
modification of the articles of association of SGS-THOMSON Holding or the
Company, (ii) any change in the capital of SGS-THOMSON Holding or the Company,
or issuance, purchase or sale by SGS-THOMSON Holding or the Company of their
shares or rights attached thereto, or the issuance of any securities giving
rights to a share in the capital or profits of SGS-THOMSON Holding or the
Company, (iii) the liquidation or dissolution of SGS-THOMSON Holding or the
Company or the sale of all or an important and material part of the business or
assets of SGS-THOMSON Holding or the Company representing at least $10,000,000
of the consolidated shareholders' equity of the Company, (iv) any merger,
acquisition, partnership in interest or the execution of any material agreement
relating to intellectual property rights, in each case in which SGS-THOMSON
Holding or the Company participates or in which a proposal is made to
participate, or the establishment by SGS-THOMSON Holding or the Company of new
companies or groups, (v) approval of the balance sheets and consolidated
accounts of SGS-THOMSON Holding, the Company and its subsidiaries as well as the
policies of distributions of profits among the group, (vi) any agreement between
SGS-THOMSON Holding and/or the Company and the shareholders of FT1CI which is
out of the ordinary course of business, (vii) the approval of, or material
modifications to, shareholders agreements with the Italian Owner with respect to
SGS-THOMSON Holding or the Company and (viii) approval of strategic multi-year
plans and annual consolidated budgets of SGS-THOMSON Holding and the Company.
Transfers of shares in FT1CI to third parties are subject to the approval of at
least four members of the Board of Directors, and are subject to a right of
first refusal of the other shareholders, as well as other provisions. In the
event CEA-Industrie proposes to sell its interest in FT1CI, in whole or in part,
France Telecom has the right to require the acquiror to purchase its interest as
well. The FT1CI shareholders agreement terminates upon the termination of FT1CI.
As is the case with other companies controlled by the French
Government, the French Government has appointed for each of FT1CI and FT2CI a
Commissaire du Gouvernement and a Controleur d 'Etat. Pursuant to decree No.
94-214, dated March 10, 1994, these Government representatives have the right
(i) to attend any board meeting of FT1CI and FT2CI, and (ii) to veto any board
resolution or any decision of the president of FT1CI and FT2CI within 10 days of
such board meeting (or, if they have not attended the meeting, within 10 days of
the receipt of the board minutes or the notification of such president's
decision); such veto lapses if not confirmed within one month by the Ministry of
the Economy or the Ministry of Industry. FT1CI and FT2CI are subject to certain
points of the arrete of August 9, 1953 pursuant to which the Ministry of the
Economy and any other relevant ministries (a) have the
- 44 -
<PAGE>
authority to approve decisions of FT1CI and FT2CI relating to budgets or
forecasts of revenues, operating expenses and capital expenditures, and (b) may
set accounting principles and rules of evaluation of fixed assets and
amortization.
In connection with the Initial Public Offering, SGS-THOMSON
Holding II and the Company entered into a registration rights agreement pursuant
to which the Company agreed that, upon request from SGS-THOMSON Holding II, the
Company will file a registration statement under the Securities Act of 1933, as
amended, to register Common Shares held by SGS-THOMSON Holding II, subject to a
maximum number of five requests in total as well as a maximum of one request in
any twelve-month period. Subject to certain conditions, the Company will grant
SGS-THOMSON Holding II the right to include its Common Shares in any
registration statements covering offerings of Common Shares by the Company.
SGS-THOMSON Holding II will pay a portion of the costs of any requested or
incidental registered offering based upon its proportion of the total number of
Common Shares being registered, except that SGS-THOMSON Holding II will pay any
underwriting commissions relating to Common Shares that it sells in such
offerings and any fees and expenses of its separate advisors, if any. Such
registration rights agreement will terminate upon the earlier of December 15,
2004 and such time as SGS-THOMSON Holding II and its affiliates own less than
10% of the Company's outstanding Common Shares.
The Company has been informed by SGS-THOMSON Holding II that,
although there may be additional offering by SGS-THOMSON Holding II of its
shares in the Company, SGS-THOMSON Holding II does not currently have any plans
to reduce its ownership interest to less than a controlling interest in the
Company for the foreseeable future. The timing and size of any future primary
and secondary offerings will depend upon a variety of factors, including in
particular market conditions.
The French and Italian shareholders of SGS-THOMSON Holding
have agreed that they will continue to manage their interest in the Company
through SGS-THOMSON Holding at least until the end of 1996 or early 1997, and
accordingly, for so long as they hold their interest in SGS-THOMSON Holding,
they have undertaken (i) to jointly hold 100% of SGS-THOMSON Holding's capital
and voting rights, (ii) to maintain equality between the interests of the French
and Italian shareholders, (iii) to ensure that SGS-THOMSON Holding maintains
more than 51% of the Company's share capital and voting rights, and (iv) to
jointly exercise their decision-making powers and monitor strategies and actions
as part of SGS-THOMSON Holding's management bodies.
Item 5: Nature of Trading Market
General
The Company's Common Shares are listed on the New York Stock
Exchange, which is the principal trading market for the Common Shares, under the
symbol "STM" and on the Bourse de Paris. Common Shares are also quoted on SEAQ
International.
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<PAGE>
Trading Markets
The table below sets forth, for the period indicated, the
reported high and low sales prices in U.S. dollars for the Common Shares on the
New York Stock Exchange and the high and low sales prices in French francs for
the Common Shares on the Bourse de Paris.
<TABLE>
<CAPTION>
New York Stock Exchange Bourse de Paris
Price per Common Share Price per Common Share
---------------------- ----------------------
Calendar Period High Low High Low
- --------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1995
First quarter.................. $32 1/2 $22 3/4 FRF 160 FRF 119
Second quarter............... $41 7/8 $29 3/4 FRF 205.5 FRF 142.0
Third quarter................ $57 1/2 $40 3/8 FRF 288.0 FRF 197.0
Fourth quarter............... $48 3/8 $28 3/8 FRF 279.0 FRF 138.0
</TABLE>
At December 31, 1995, there were 138,208,680 Common Shares
issued and outstanding, of which 24,772,537 or 17.9% were registered in the
Common Share registry maintained on the Company's behalf in New York.
Item 6: Exchange Controls and Other Limitations Affecting Security Holders
None.
Item 7: Taxation
The following is a summary of certain tax consequences of the
acquisition, ownership and disposition of the Company's Common Shares based on
tax laws of The Netherlands and the United States as in effect on the date of
this annual report on Form 20-F, and is subject to changes in Netherlands or
U.S. law, including changes that could have retroactive effect. The following
summary does not take into account or discuss the tax laws of any country other
than The Netherlands or the United States, nor does it take into account the
individual circumstances of an investor. Prospective investors in the Company's
Common Shares in all jurisdictions are advised to consult their own tax advisers
as to Netherlands, U.S. or other tax consequences of the purchase, ownership and
disposition of the Company's Common Shares.
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<PAGE>
Netherlands Taxation
The following summary of Netherlands tax considerations is
based on present Netherlands tax laws as interpreted under officially published
case law. The description is limited to the tax implications for an owner of
Common Shares who is not, or is not deemed to be, a resident of The Netherlands
for purposes of the relevant tax codes (a "non-resident Shareholder" or
"Shareholder") and who owns less than 10% of the Company's Common Shares.
Dividend Withholding Tax
General. Dividends distributed by the Company are subject to a
withholding tax imposed by The Netherlands at a rate of, generally, 25%.
Dividends include dividends in cash or in kind, constructive dividends,
repayment of paid-in capital not recognized for Netherlands tax purposes and
liquidation proceeds in excess of, for Netherlands tax purposes, recognized
paid-in capital. Stock dividends are also subject to withholding tax on the
nominal value unless sourced out of the Company's paid-in share premium
recognized for Netherlands tax purposes.
No withholding tax applies on the sale or disposition of
Common Shares to persons other than the Company and affiliates of the Company.
A Shareholder can be eligible for a reduction or a refund of
Netherlands dividend withholding tax under a tax convention which is in effect
between the country of residence of the Shareholder and The Netherlands. The
Netherlands has concluded such a convention with, among others, the United
States, Canada, Switzerland, Japan and all EC Member States except Portugal.
Under all of those conventions, Netherlands dividend withholding tax is reduced
to 15% or a lower rate.
U.S. Shareholders. Under the Tax Convention of December 18,
1992, concluded between the United States and The Netherlands (the
"Convention"), the withholding tax on dividends paid by the Company to a
resident of the United States (as defined in the Convention) who is entitled to
the benefits of the Convention under Article 26 may be reduced to 15% pursuant
to Article 10 of the Convention. Dividends paid by the Company to U.S. pension
funds and U.S. exempt organizations may be eligible for an exemption from
dividend withholding tax.
Relief/refund Procedure. If the 15% rate, or an exemption in
case of a qualifying U.S. pension fund, is applicable pursuant to the
Convention, the Company is allowed to pay out a dividend under deduction of 15%,
or respectively without any deduction, if, at the payment date, the relevant
shareholders have submitted the duly signed form IB 92 USA, which form includes
a banker's affidavit. Holders of Shares through DTC will initially receive
dividends subject to a withholding rate of 25%. An additional 10% of the
dividend will be paid to holders upon receipt by the dividend disbursing agent
of notification from the Participants in DTC that such holders are eligible for
the reduced rate under the Convention. Only where the applicant has not been
able to claim full or partial relief at source, will he be entitled to a refund
of the excess tax withheld. In that case he should mention in the Form IB 92 USA
the circumstances that prevented him from claiming relief at source.
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<PAGE>
Qualifying U.S. exempt organizations can only ask for a full
refund of the tax withheld by using the Form IB 95 USA, which form also includes
a banker's affidavit.
Income Tax and Corporate Income Tax
A non-resident individual or corporate Shareholder will not be
subject to Netherlands income tax with respect to dividends distributed by the
Company on the Common Shares or with respect to capital gains derived from the
sale or disposition of Common Shares in the Company, provided that:
(a) the non-resident Shareholder does not own a business which
is, in whole or in part, carried on through a permanent establishment or a
permanent representative in The Netherlands to which or to whom the Common
Shares are attributable;
(b) the non-resident Shareholder does not have a direct or
indirect substantial or deemed substantial interest in the share capital of the
Company as defined in The Netherlands tax code or, in the event the Shareholder
does have such a substantial interest, such interest is a business asset; and
(c) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise effectively managed in The Netherlands other than
by way of securities or through an employment contract, the Common Shares being
attributable to that enterprise.
In general terms, a substantial interest in the share capital
of the Company does not exist if the Shareholder alone or together with certain
relatives does not own, and has not owned in the preceding five years, one-third
or more of the nominal paid-in capital of any class of shares in the Company.
Net Wealth Tax
A non-resident individual Shareholder is not subject to
Netherlands net wealth tax with respect to the Shares, provided that:
(a) the non-resident Shareholder does not own a business which
is, in whole or in part, carried on through a permanent establishment or a
permanent representative in The Netherlands to which or to whom the Common
Shares are attributable; and
(b) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise effectively managed in The Netherlands other than
by way of securities or through an employment contract, the Common Shares being
attributable to that enterprise.
Corporations are not subject to Netherlands net wealth tax.
Gift and Inheritance Tax
A gift or inheritance of Common Shares from a non-resident
Shareholder will not be subject to a Netherlands gift and inheritance tax,
provided that:
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<PAGE>
(a) the non-resident Shareholder does not own a business which
is, in whole or in part, carried on through a permanent establishment or a
permanent representative in The Netherlands to which or to whom the Common
Shares are attributable; and
(b) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise effectively managed in The Netherlands other than
by way of securities or through an employment contract, the Common Shares being
attributable to that enterprise.
United States Taxation
The following discussion addresses the U.S. federal income
taxation of a beneficial owner of the Company's Common Shares that is an
individual who is a citizen or resident of the United States, or a corporation,
partnership or other entity created or organized under the laws of the United
States or any other state or political subdivision thereof, or an estate or
trust that is subject to U.S. federal income taxation without regard to the
source of its income (a "U.S. Investor"). The following summary does not address
the U.S. tax treatment of certain types of U.S. Investors subject to special
rules (e.g., dealers in securities, financial institutions, U.S. Investors whose
functional currency is not the U.S. dollar, individual retirement and other tax
deferred accounts, life insurance companies, tax-exempt organizations and
investors owning 10% or more of the Common Shares) or of other U.S. federal
taxes, such as U.S. federal estate tax, or of state or local tax laws.
Prospective U.S. Investors are advised to consult their own tax advisers to
ascertain the tax effect of ownership and disposition of the Common Shares with
respect to their particular circumstances.
Taxation of Dividends
To the extent paid out of current or accumulated earnings and
profits of the Company, as determined for United States federal income tax
purposes, the gross amount of dividends (including the amount of Netherlands
taxes withheld therefrom) paid with respect to the Common Shares (other than
certain pro rata distributions of capital stock of the Company or rights to
subscribe for shares of capital stock of the Company) will be included in the
gross income of a U.S. Investor as ordinary foreign source income on the date of
receipt. For foreign tax credit purposes, such dividends will generally
constitute "passive income", or in the case of certain U.S. Investors,
"financial services income". Such dividends will not be eligible for the
dividends received deduction allowed to United States corporations. Any
distribution that exceeds the Company's current and accumulated earnings and
profits will be treated as a nontaxable return of capital to the extent of the
U.S. Investor's tax basis in the Common Shares and thereafter as a capital gain.
The amount of any cash distribution paid in any currency other than U.S. dollars
("foreign currency") will be equal to the U.S. dollar value of such foreign
currency distribution on the date of receipt, regardless of whether a U.S.
Investor converts the payment into U.S. dollars. Gain or loss, if any,
recognized by a U.S. Investor on the sale or disposition of such foreign
currency will be U.S. source ordinary income or loss.
Netherlands withholding tax imposed on dividends paid to a
U.S. Investor by the Company at the Convention rate of 15% will be treated as a
foreign income tax eligible, subject to certain limitations, for credit against
such U.S. Investor's U.S. federal tax liability.
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<PAGE>
Taxation on Sale or Exchange
A U.S. Investor will generally recognize a gain or a loss for
U.S. federal income tax purposes on the sale, exchange or other disposition of
Common Shares equal to the difference, if any, between the amount realized on
such sale, exchange or other disposition and the U.S. Investor's adjusted tax
basis in the Common Shares. In general, a U.S. Investor's adjusted tax basis in
Common Shares will be equal to the amount paid by the U.S. Investor for such
Common Shares. Such gain or loss will be capital gain or loss if the Common
Shares are held as a capital asset and will be long-term capital gain or loss if
at the time of sale, exchange or other disposition the Common Shares have been
held for more than one year. Gain, if any, will generally be U.S. source income.
Backup Withholding and Information Reporting
In general, information reporting will apply to certain
dividends paid on the Common Shares and to the proceeds of sale of the Common
Shares paid to U.S. Investors other than certain exempt recipients (such as
corporations). A 31% backup withholding tax may apply to such payments if the
U.S. Investor fails to provide an accurate taxpayer identification number or
certification of exempt status or fails to report in full dividend and interest
income.
Item 8: Selected Consolidated Financial Data
Reference is made to the information appearing under the
caption "Selected Consolidated Financial Data" on page 25 of the Registrant's
1995 Annual Report to Shareholders, which information is hereby incorporated by
reference.
Item 9: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Reference is made to the information appearing under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 26 through 36 of the Registrant's 1995 Annual Report to
Shareholders, which information is hereby incorporated by reference.
Item 10: Directors and Officers of Registrant
Supervisory Board
The management of the Company is entrusted to the Management
Board under the supervision of the Supervisory Board. The Supervisory Board
advises the Management Board and is responsible for supervising the policies
pursued by the Management Board and the general course of affairs of the Company
and its business. In fulfilling their duties, the members of the Supervisory
Board must serve the interests of the Company and its business.
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<PAGE>
The Supervisory Board shall consist of such number of members
as resolved by the general meeting of shareholders upon proposal of the
Supervisory Board, with a minimum of six members. The members of the Supervisory
Board are appointed upon proposal of the Supervisory Board by the general
shareholders' meeting by a majority of the votes cast at a meeting where at
least one-half of the outstanding share capital is present or represented. On
June 24, 1996 the annual general meeting of shareholders approved a resolution
of the Supervisory Board to increase the size of the Supervisory Board from six
to seven members and appointed Robert M. White as a new member of the
Supervisory Board. The Supervisory Board intends to propose a further increase
in the size of the Supervisory Board to up to eight members, two of which would
not be affiliated with the Company or its direct or indirect shareholders.
SGS-THOMSON Holding II has informed the Company that it intends to concur with
this proposal.
Pursuant to various shareholders agreements, the members of
the Supervisory Board of the Company are required to include three members
designated by the French shareholders from the Board of Directors of FT2CI (of
whom Thomson-CSF has the right to appoint one member and FTlCI, a corporation
owned by CEA-Industrie and France Telecom, has the right to appoint two
members), and three members designated by the Italian shareholders (of whom
I.R.I. has the right to appoint two members and Comitato SIR has the right to
appoint one member). See Item 4: "Control of Registrant -- Shareholder
Agreements".
The members of the Supervisory Board shall appoint a chairman
and vice chairman of the Supervisory Board from among the members of the
Supervisory Board (with approval of at least three-quarters of the members of
the Supervisory Board) and may appoint one or more members as a delegate
supervisory director to communicate on a regular basis with the Management
Board. Resolutions of the Supervisory Board require the approval of at least
three-quarters of its members. The Supervisory Board must meet upon request by
two or more of its members or by the Management Board. The Supervisory Board has
adopted internal regulations to clarify the manner by which it carries out the
supervisory duties imposed upon it by law, the Company's Articles of Association
and resolutions of the shareholders and the Supervisory Board itself. By such
resolution the Supervisory Board: (x) authorized (i) the establishment of a
secretariat headed by an individual approved by it and appointed for a one-year
renewable term (a) to assist the Chairman and Vice Chairman of the Supervisory
Board in the operations of the board, (b) to implement and oversee the execution
within the Company of decisions adopted by the Supervisory Board and (c) to
cooperate in and contribute to the execution of the functions of the designated
Secretary and Assistant Secretary of the Supervisory Board, (ii) (a) the
possibility of the appointment by each member of the Supervisory Board of an
assistant and (b) the appointment by such board of two controllers to exercise
operational and financial control over the operations of the Company who, with
assistants, will also review operation reports and the implementation of
Supervisory Board decisions, and (iii) the establishment by the Supervisory
Board of advisory committees; and (y) established the procedure for the
preparation of Supervisory Board resolutions and the setting of such board's
calendar.
Members of the Supervisory Board must retire no later than at
the ordinary general meeting of shareholders held after a period of three years
following their appointment, but may be reelected. A member of the Supervisory
Board shall retire at the ordinary general meeting of shareholders held in the
year in which he reaches the age prescribed by law for
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<PAGE>
retirement of a supervisory director. Members of the Supervisory Board may be
suspended or dismissed by the general meeting of shareholders. The Supervisory
Board may make a proposal to the general meeting of shareholders for the
suspension or dismissal of one or more of its members. The members of the
Supervisory Board may receive compensation if authorized by the general meeting
of shareholders.
The shareholders agreement between the consortium of French
shareholders and the consortium of Italian shareholders, as shareholders of
SGS-THOMSON Holding, also includes certain provisions requiring the approval of
the Supervisory Board of SGS-THOMSON Holding for certain actions by SGS-THOMSON
Holding, the Company and its subsidiaries. In addition, pursuant to certain
other shareholders agreements among the consortium of French shareholders and a
decree issued by certain Ministries of The Republic of France, the approval by
members of the Supervisory Board appointed by the French shareholders of certain
actions to be taken by the Company or its subsidiaries requires the approval of
the Board of Directors of certain companies in the consortium of French
shareholders and is subject to a veto by certain Ministries of The Republic of
France. See Item 1: "Description of Business -- Competition" and Item 4:
"Control of Registrant -- Shareholder Agreements". These requirements for the
prior approval of various actions to be taken by the Company and its
subsidiaries may give rise to a conflict of interest between the interests of
the Company and the individual shareholders approving such actions, and may
result in a delay in the ability of the Management Board to respond as quickly
as may be necessary in the rapidly changing environment of the semiconductor
industry. Such approval process is subject to the provisions of Dutch law
requiring members of the Supervisory Board to act independently in the
supervision of the management of the Company.
As of the date of this report, the members of the Supervisory
Board were:
Name Position Year Appointed Age
---- -------- -------------- ---
Bruno Steve Chairman 1989 54
Jean-Pierre Noblanc Vice Chairman 1994 57
Remy Dullieux Member 1993 45
Alessandro Ovi Member 1994 52
Giovanni Ruoppolo Member 1993 60
Henri Starck Member 1987 67
Robert M. White Member 1996 58
Bruno Steve has been a member of the Company's Supervisory
Board since 1989. He served as Vice Chairman of the Supervisory Board from 1989
to July 1990. From July 1990 to March 1993, Mr. Steve served as Chairman of the
Supervisory Board. He has been with I.R.I., Finmeccanica's parent company,
Finmeccanica and other affiliates of I.R.I. in various senior positions for over
15 years. He has been the Chief Operating Officer of Finmeccanica since 1988 and
Chief Executive Officer since May 1995. He was Senior Vice President of
Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior to 1984, Mr.
Steve served in several key executive positions at STET, I.R.I.s holding company
for the telecommunications sector.
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<PAGE>
Jean-Pierre Noblanc has been a member of the Supervisory Board
since 1994 and its Chairman until June 1996. Mr. Noblanc is presently General
Manager of the Components Sector of CEA Industrie. Prior to joining CEA
Industrie, Mr. Noblanc served at CNET, the Research Center of France Telecom, as
Director of the Applied Research Center of Bagneux and of the Microelectronics
Center of Grenoble, successively. Mr. Noblanc holds a degree in engineering from
the Ecole Superieure d'Electricite and a doctoral degree in the Physical
Sciences from the University of Paris. Mr. Noblanc is an Associate Member of the
Committee on Applications of the French Academy of Sciences and a director of
Thomson S.A. Mr. Noblanc also serves on the board of Pixtech Inc. and Picogiga
S.A..
Remy Dullieux has been a member of the Supervisory Board since
1993. He is a graduate of the Ecole Polytechnique. Since June 1996, Mr. Dullieux
has served as a France Telecom Executive Manager for the Northern and Eastern
areas of France. From 1991 to June 1996, Mr. Dullieux served as Group Executive
Vice President for Strategic Procurement and Development of France Telecom. From
1985 to 1988, Mr. Dullieux served as Regional Manager of Creteil.
Alessandro Ovi has been a member of the Supervisory Board
since 1994. He received a doctoral degree in Nuclear Engineering from the
Politecnico of Milan and a master degree of science in Operations Research from
Massachusetts Institute of Technology. He is currently the Chief Executive
Officer of Tecnitel S.p.A., a subsidiary of STET, and President of MEI. Prior to
joining Tecnitel S.p.A., Mr. Ovi was the Senior Vice President of International
Affairs and Communications at I.R.I. He currently serves on the boards of
Alitalia, STET, Italtel, a STET and Siemens Company, Sirti, Zambon and Carnegie
Mellon University.
Giovanni Ruoppolo has served as a member of the Supervisory
Board since 1993 and is currently a member of the Central Tax Committee. Mr.
Ruoppolo has previously served as President of the Board of Auditors of Ente
Nazionale Idrocarburi S.p.A., the Italian national oil and gas company and as
Chief of Staff in several Italian ministries. Mr. Ruoppolo, as President of the
consortium of banks and as President of Comitato SIR, is overseeing the
restructuring and liquidation of the SIR group, a major Italian petrochemical
business, and oversaw the restructuring and liquidation of Ente Gestione Aziende
Minerarie e Metallurgiche - ("EGAM"). Mr. Ruoppolo has published numerous books
and articles in the fields of law and economics.
Henri Starck has been a member of the Supervisory Board since
1987. Mr. Starck served as Chairman and Vice Chairman of the Supervisory Board
from June 1987 to June 1990 and from June 1990 to January 1993, respectively,
during which time he was General Manager of Thomson-CSF. Mr. Starck is currently
an adviser to the President of Thomson-CSF and a director of Sextant Avionique.
Mr. Starck is a graduate of the Ecole Polytechnique and the Ecole Nationale
Superieure du Genie Maritime.
Robert M. White was appointed to the Supervisory Board in June
1996. Mr. White is currently a Professor and Department Head at Carnegie Mellon
University and serves as a member of several academic and corporate boards,
including those of Ontrack Computer Systems, Inc., Zilog, Inc., Foundation for
the National Medals of Science and Technology, Industrial Advisory Board,
Lawrence Livermore National Laboratory and NEA Academic. From 1990 to 1993, Mr.
White served as Under Secretary of Commerce for
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<PAGE>
Technology in the United States Government. Prior to 1990, Mr. White served in
several key executive positions at Xerox Corporation, Control Data Corporation
and MCC. He received a doctoral degree in Physics from Stanford University and
graduated with a degree in Science from the Massachusetts Institute of
Technology. Mr. White has published four books, three of which have been
translated into foreign languages, and over a hundred articles in the field of
Physics.
Management Board
The management of the Company is entrusted to the Management
Board under the supervision of the Supervisory Board. Under the Articles of
Association, the Management Board shall obtain prior approval (x) from the
Supervisory Board for (i) all proposals to be submitted to a vote at the general
meeting of shareholders, (ii) the formation of all companies, acquisition or
sale of any participation, and conclusion of any cooperation and participation
agreement, (iii) all pluriannual plans of the Company and the budget for the
first coming year, covering investment policy, policy regarding research and
development, as well as commercial policy and objectives, general financial
policy, and policy regarding personnel, and (iv) all acts, decisions or
operations covered by the foregoing and constituting a significant change with
respect to decisions already taken by the Supervisory Board and (y) from the
general meeting of shareholders for decisions relating to (i) the sale of all or
of an important part of the Company's assets or concerns, and (ii) all mergers,
acquisitions or joint ventures which the Company wishes to enter into. In
addition, under the Articles of Association, the Supervisory Board may specify
by resolution certain actions by the Management Board that require its prior
approval. Following the adoption of such a resolution, the actions by the
Management Board with respect to the Company and all direct or indirect
subsidiaries of the Company requiring such prior approval include the following:
(i) modification of its Articles of Association; (ii) change in its authorized
share capital, issue, acquisition or disposal of its own shares, change in any
shareholder rights or issue of any instruments granting an interest in its
capital or profits; (iii) liquidation or disposal of all or a substantial and
material part of its assets or any shares it holds in any of its subsidiaries;
(iv) entering into any merger, acquisition or joint venture agreement (and, if
substantial and material, any agreement relating to intellectual property) or
formation of a new company; (v) approval of such company's draft consolidated
balance sheets and financial statements or any profit distribution by such
company; (vi) entering into any agreement with any of the direct or indirect
French or Italian Owners outside the normal course of business; (vii) submission
of documents reporting on (a) approved policy, expected progress and results and
(b) strategic long-term business plans and consolidated annual budgets or any
modifications to such; (viii) preparation of long-term business plans and annual
budgets; (ix) adoption and implementation of such long-term business plans and
annual budgets; (x) approval of all operations outside the normal course of
business, including operations already provided for in the annual budget; and
(xi) approval of the quarterly, semi-annual and annual consolidated financial
statements prepared in accordance with internationally accepted accounting
principles. Such resolution also requires that the Management Board obtain prior
approval from the Supervisory Board for (i) the appointment of the members of
the statutory management, administration and control bodies of SGS-THOMSON
Microelectronics S.A. and SGS-THOMSON Microelectronics s.r.l.; and (ii) the
nomination of the statutory management, administration and control bodies of the
Company and each of the Company's other direct and indirect subsidiaries
followed by confirmation to the Supervisory Board of such nominees'
appointments. The general meeting of shareholders may also specify certain
actions of the
- 54 -
<PAGE>
Management Board that require shareholder approval. The shareholders have
resolved that the Management Board must obtain shareholder approval prior to:
(i) the sale of all or of an important part of the Company's assets and concerns
and (ii) all mergers, acquisitions or joint ventures which the Company wishes to
enter into. See "Item 1: Description of Business -Competition" and "Item 13:
Interest of Management in Certain Transactions".
The Management Board shall consist of such number of members
as resolved by the general meeting of shareholders upon the proposal of the
Supervisory Board. The members of the Management Board are appointed for three
year terms upon proposal by the Supervisory Board by the general shareholders'
meeting by a majority of the votes cast at a meeting where at least one-half of
the outstanding share capital is present or represented. The Supervisory Board
appoints one of the members of the Management Board to be chairman of the
Management Board (upon approval of at least three-quarters of the members of the
Supervisory Board). Resolutions of the Management Board require the approval of
a majority of its members. Mr. Pasquale Pistorio, the Company's President and
Chief Executive Officer, is currently the sole member of the Management Board.
The general meeting of shareholders may suspend or dismiss one
or more members of the Management Board at a meeting at which at least one-half
of the outstanding share capital is present or represented. No quorum is
required if a suspension or dismissal is proposed by the Supervisory Board. The
Supervisory Board may suspend members of the Management Board, but a general
meeting of shareholders must be convened within three months after such
suspension to confirm or reject the suspension. The Supervisory Board shall
appoint one or more persons who shall at any time in the event of absence or
inability to act of all the members of the Management Board be temporarily
responsible for the management of the Company. The Supervisory Board determines
the compensation and other terms and conditions of employment of the members of
the Management Board.
Executive Officers
As a legal matter, the executive officers of the Company
support the Management Board in its management of the Company. In practice, the
executive officers and the Management Board share management responsibilities.
The Company is organized in a matrix structure with geographical regions
interacting with product divisions, bringing all levels of management closer to
the customer and facilitating communication among research and development,
production, marketing and sales organizations.
The executive officers of the Company are (as of the date of
this report):
<TABLE>
<CAPTION>
Years in
Years with Semiconductor
Name Position the Company(1) Industry Age
---- -------- -------------- -------- ---
<S> <C> <C> <C> <C>
Pasquale Pistorio President and Chief Executive 16 32 60
Officer
Laurent Bosson Corporate Vice President, 13 13 54
Front-end Manufacturing
and Americas Region
Carlo Bozotti Corporate Vice President, 19 19 43
European and
</TABLE>
- 55 -
<PAGE>
<TABLE>
<CAPTION>
Years in
Years with Semiconductor
Name Position the Company(1) Industry Age
---- -------- -------------- -------- ---
<S> <C> <C> <C> <C>
Headquarters Region
Salvatore Castorina Corporate Vice President, 14 30 60
Discrete and Standard
ICs Group
Murray Duffin Corporate Vice President, 9 36 62
Total Quality Management
Alain Dutheil Corporate Vice President, 13 26 51
Strategic Planning and
Human Resources
Ennio Filauro Corporate Vice President, 27 36 64
Memory Products Group
Philippe Geyres Corporate Vice President, 12 20 44
Programmable Products Group
Maurizio Ghirga Corporate Vice President, Chief 13 13 58
Financial Officer
Jean-Claude Marquet Corporate Vice President 10 29 54
Asia Pacific Region
Pier Angelo Martinotti Corporate Vice President, New 15 28 54
Ventures Group
Joel Monnier Corporate Vice President, Central 13 22 51
Research and Development
Piero Mosconi Corporate Vice President, 32 32 56
Treasurer
Aldo Romano Corporate Vice President, 30 30 56
Dedicated Products Group
Giordano Seragnoli Corporate Vice President, 31 33 59
Back-end Manufacturing
and Subsystems
Keizo Shibata Corporate Vice President, 4 31 59
Japan Region
<FN>
(1) Including years with Thomson Semiconducteurs or SGS Microelettronica.
</FN>
</TABLE>
Pasquale Pistorio has more than 30 years of experience in the
semiconductor industry. After graduating in Electrical Engineering from the
Polytechnical University of Turin in 1963, he started his career selling
Motorola products. Mr. Pistorio joined Motorola in 1967, becoming Director of
World Marketing in 1977 and General Manager of the International Semiconductor
Division in 1978. Mr. Pistorio joined SGS Microelettronica as President and
Chief Executive Officer in 1980 and became President and Chief Executive Officer
of the Company upon its formation in 1987.
Laurent Bosson has served as Corporate Vice President, Central
Manufacturing and VLSI Fabs since 1989 and in 1992 he was given additional
responsibility as President and Chief Executive Officer of the Company's
operations in the Americas. Mr. Bosson received a Masters degree in Chemistry
from the University of Dijon in 1969. He joined Thomson-CSF in 1964 and has held
several positions in engineering and manufacturing. In 1982, Mr. Bosson was
appointed General Manager of the Tours and Alencon facilities of Thomson
Semiconducteurs. In 1985, he joined the French subsidiary of SGS
Microelettronica as General Manager of the Rennes, France manufacturing
facility.
Carlo Bozotti has served as Corporate Vice President, Europe
and Headquarters Region since 1994. Mr. Bozotti joined SGS Microelettronica in
1977 after graduating in Electronic Engineering from the University of Pavia.
Mr. Bozotti served as Product Manager for the Industrial, Computer Peripheral
and Telecom divisions and as Product Manager for the Monolithic Microsystems'
Telecom business unit from 1986 to 1987. He was appointed Director
- 56 -
<PAGE>
of Corporate Strategic Marketing and Key Accounts for the Headquarters Region in
1988 and became Vice President, Marketing and Sales, Americas Division in 1991.
Salvatore Castorina has served as Corporate Vice President,
Discrete and Standard ICs Group since 1989. Mr. Castorina received his
engineering degree in Electronics from the Polytechnical University of Turin and
began his career as a teacher of electrical and electronic technologies prior to
joining Thomson-CSF in Milan in 1965. In 1967, he joined Motorola Semiconductors
and held various positions in sales and marketing. In 1981, Mr. Castorina joined
the Company as Transistor General Manager in Catania and became the General
Manager of the Company's Discrete Division in 1989.
Murray Duffin has served as Corporate Vice President, Total
Quality Management since 1992. Mr. Duffin graduated from the University of
Manitoba in Electrical Engineering and later studied Semiconductor Physics and
Computer Logic at the University of California Los Angeles and received an MBA
from Arizona State University. Mr. Duffin started his career in 1959 as an RF
Applications Engineer and thereafter held numerous managerial positions within
most of the departments at TRW and Motorola Semiconductors prior to joining the
Company in 1986. From 1986 to 1992, Mr. Duffin was in charge of the quality and
service organization.
Alain Dutheil has served as Corporate Vice President,
Strategic Planning and Human Resources since 1994 and 1992, respectively. Mr.
Dutheil is also President of the Company's French subsidiary, SGS-THOMSON S.A.
After graduating in Electrical Engineering from the Ecole Superieure
d'Ingenieurs de Marseilles (ESIM), Mr. Dutheil joined Texas Instruments in 1969
as a Production Engineer, becoming Director for Discrete Products in France and
Human Resources Director for Texas Instruments, France in 1980 and Director of
Operations for Texas Instruments, Portugal in 1982. He joined Thomson
Semiconducteurs in 1983 as General Manager of a plant in Aix-en-Provence, France
and then became General Manager of the Company's Discrete Products Division.
From 1989 to 1994, Mr. Dutheil served as Director for Worldwide Back-end
Manufacturing in addition to serving as Corporate Vice President for Human
Resources from 1992 until the present.
Ennio Filauro has served as Corporate Vice President, General
Manager Memory Products Group since 1990. After graduating with a degree in
Electrical Engineering from the University of Palermo, Mr. Filauro began his
career in 1958 as a member of the Engineering and Quality Control Group of
Raytheon Italia. In 1968, Mr. Filauro joined SGS Microelettronica as head of
Quality Control Services at the research and development center in Castelletto,
and was subsequently responsible for the Central Production Direction of the
facilities in Rennes, Falkirk and Catania. From 1974 to 1979, Mr. Filauro served
as General Manager of the facility in Catania, and thereafter served as Director
of the Corporate Engineering Group in Agrate. He became General Manager of the
VLSI Division of SGS Microelettronica in 1985.
Philippe Geyres has served as Corporate Vice President,
General Manager Programmable Products Group since 1990. Mr. Geyres graduated
from the Ecole Polytechnique in 1973 and began his career with IBM in France
before joining Schlumberger Group in 1980 as Data Processing Director. He was
subsequently appointed Deputy Director of the IC Division at Fairchild
Semiconductors. Mr. Geyres joined Thomson Semiconducteurs in 1983 as Director of
the Bipolar Integrated Circuits Division. He was appointed Strategic Programs
Director in 1987, and later the same year, became Corporate Vice President,
Strategic Planning of the Company.
- 57 -
<PAGE>
Maurizio Ghirga became Corporate Vice President, Chief
Financial Officer in 1987, after having served as chief financial controller of
SGS Microelettronica since 1983. Mr. Ghirga has a degree in Business
Administration from the University of Genoa. He spent more than ten years of his
career in various financial capacities at ESSO Company (an Exxon subsidiary in
Italy) and prior to joining the Company was Financial Controller of one of the
largest refinery plants in Italy and of an ESSO chemical subsidiary.
Jean-Claude Marquet has served as Corporate Vice President,
Asia Pacific Region since July 1995. After graduating in Electrical and
Electronics Engineering from the Ecole Breguet Paris, Mr. Marquet began his
career in the National French Research Organisation and later joined Alcatel. In
1969, he joined Philips Components. He remained at Philips until 1978, when he
joined Ericsson, eventually becoming President of Ericsson's French operations.
In 1985, Mr. Marquet joined Thomson Semiconducteurs as Vice President Sales and
Marketing, France. Thereafter, Mr. Marquet served as Vice President Sales and
Marketing for France and Benelux, and Vice President Asia Pacific and Director
of Sales and Marketing for the region.
Pier Angelo Martinotti has served as Corporate Vice President,
General Manager New Ventures Group since 1994. A graduate in Electronic
Engineering from the Polytechnical University of Turin, Mr. Martinotti began his
career at the Company in 1965 as an Application and Marketing Engineer. In 1968,
he joined Motorola Semiconductors in the area of strategic marketing in Europe,
and in 1975 became the Marketing (Sales) Director for Europe. From 1986 to 1990,
Mr. Martinotti was Chief Executive Officer of Innovative Silicon Technology, a
former subsidiary of the Company. Mr. Martinotti was appointed Director of
Corporate Strategic Planning in 1990.
Joel Monnier has served as Corporate Vice President, Director
of Central Research and Development since 1989. After graduating in Electrical
Engineering from the Institut National Polytechnique of Grenoble, Ecole
Nationale Superieure de Radio Electricite, Mr. Monnier obtained a doctoral
degree in microelectronics at LETI/CENG. He began his career in the
semiconductor industry in 1968 as a researcher with CENG, and subsequently
joined the research and development laboratories of Texas Instruments in
Villeneuve Loubet, France and Houston, Texas, eventually becoming Engineering
Manager and Operation Manager at Texas Instruments. Mr. Monnier joined
Thomson-CSF in 1983 as head of the research and manufacturing unit of Thomson
Semiconducteurs. In 1987, he was appointed Vice President and Corporate Director
of Manufacturing.
Piero Mosconi has served as Corporate Vice President,
Treasurer since 1987. After graduating in accounting from Monza in 1960, Mr.
Mosconi joined the faculty at the University of Milan. Mr. Mosconi worked with
an Italian bank before joining the Foreign Subsidiaries Department at SGS
Microelettronica in 1964 and becoming Corporate Director of Finance in 1980.
Aldo Romano has served as Corporate Vice President, General
Manager Dedicated Products Group since 1987. Mr. Romano is also Managing
Director of the Company's Italian subsidiary, SGS-THOMSON Microelectronics
s.r.l. A graduate in Electronic Engineering from the University of Padova in
1963, Mr. Romano joined SGS Microelettronica in 1965 as a designer of linear
ICs, becoming head of the linear IC design laboratory in 1968 and head of
Marketing
- 58 -
<PAGE>
and Applications in 1976. Mr. Romano became Director of the Bipolar IC Division
(which has evolved into the Dedicated Products Group) in 1980.
Giordano Seragnoli has served as Corporate Vice President,
General Manager Subsystems since 1987 and since 1994, Director for Worldwide
Back-end Manufacturing. After graduating in Electrical Engineering from the
University of Bologna, Mr. Seragnoli joined the Thomson Group as RF Application
Designer in 1962 and joined SGS Microelettronica in 1965. Thereafter, Mr.
Seragnoli served in various capacities within the Company, including Strategic
Marketing Manager and Subsystems Division Manager, Subsystems Division Manager
(Agrate), Technical Facilities Manager, Subsystems Division Manager and Back-End
Manager.
Keizo Shibata has served as Corporate Vice President and
President of the Company's Japanese subsidiary, SGS-THOMSON Microelectronics
K.K., since 1992. Mr. Shibata obtained bachelors and masters degrees in
Engineering from Osaka University and has 31 years of experience in the
semiconductor industry. Prior to joining SGS-THOMSON, Mr. Shibata was employed
with Toshiba Corporation since 1964 in various capacities. From 1987 to 1988,
Mr. Shibata served as Chairman of both World Semiconductor Trade Statistics and
the Trade Policy Committee of the Electric Industry Association of Japan.
As is common in the semiconductor industry, the Company's
success depends to a significant extent upon, among other factors, the continued
service of its key senior executives and research and development, engineering,
marketing, sales, manufacturing, support and other personnel, and on its ability
to continue to attract, retain and motivate qualified personnel. The competition
for such employees is intense, and the loss of the services of any of these key
personnel without adequate replacement or the inability to attract new qualified
personnel could have a material adverse effect on the Company. The Company does
not maintain insurance with respect to the loss of any of its key personnel.
Item 11: Compensation of Directors and Officers
The aggregate cash compensation offered for 1995 to the
members of the Supervisory Board by the Company was approximately $252,000. The
amount of cash compensation for 1995 to the executive officers of the Company
and members of the Management Board as a group by the Company and its
subsidiaries was approximately $6.0 million.
In 1989, the Company established a Corporate Executive
Incentive Program (the "EIP") that entitles selected executives and members of
the Management Board to a yearly bonus based upon the individual performance of
such executives. The maximum bonus awarded under the EIP is based upon a
percentage of the executive's or member's salary and is adjusted to reflect the
overall performance of the Company. The participants in the EIP must satisfy
certain personal objectives that are focused on customer service, profit, cash
flow and market share.
The executive officers and members of the Management Board
were also covered in 1995 under certain group life and medical insurance
programs provided by the Company. The aggregate additional amount set aside by
the Company in 1995 to provide pension, retirement or similar benefits for
executive officers and members of the Management Board of the Company as a group
was approximately $2.4 million.
- 59 -
<PAGE>
Item 12: Option to Purchase Securities from Registrant or Subsidiaries
As of May 22, 1996, options to purchase up to an aggregate of
692,350 Common Shares were outstanding under the Company's first stock option
plan (the "1989 Stock Option Plan"). Such options are fully vested and are
exercisable at the original issue price, as adjusted to reflect the 40:1 stock
split effected in connection with the Initial Public Offering, of NLG 25 per
share ($14.51 based on the noon buying rate in New York City for cable transfers
in Dutch guilders as certified for customs purposes by the Federal Reserve Bank
of New York of US$1=NLG 1.7225 on May 22, 1996 (the "Noon Buying Rate")) or at
the price of NLG 17.50 per share ($10.15 based on the Noon Buying Rate). Such
options, of which 942,050 have been exercised, are held by executive officers of
the Company as a group and expire on December 18, 1999.
On October 20, 1995, the Shareholders of the Company approved
resolutions authorizing the Supervisory Board for a period of five years to
adopt and administer a new stock option plan which provides for the granting to
managers and professionals of the Company of options to purchase up to a maximum
of 5.5 million Common Shares (the "1995 Stock Option Plan"). The Company
currently intends to grant options pursuant to the 1995 Stock Option Plan to
purchase up to 1,200,000 Common Shares at a price per Common Share of $36.25.
Such options are exercisable for a period of eight years following the date of
grant.
On June 24, 1996 the general meeting of shareholders approved
the granting of options to purchase up to 72,000 Common Shares to members and
professionals of the Supervisory Board over a period of three consecutive years,
beginning in 1996. Options granted thereunder will be exercisable until the
eighth anniversary date following the date of grant at the closing price of the
Common Shares on the New York Stock Exchange on the date such options are
exercised.
Item 13: Interest of Management in Certain Transactions
One of the Company's key customers is Thomson Multimedia.
Thomson Multimedia and Thomson-CSF, one of the indirect shareholders of the
Company (see "Item 4: Control of Registrant"), are both controlled by Thomson
S.A. The Company sells a broad range of products to Thomson Multimedia,
including dedicated products, microcontrollers and semicustom devices, for use
in televisions, video cassette recorders and satellite receiver systems. The
Company believes that all of the products that it sells to Thomson Multimedia
are sold on commercial terms no less favorable to the Company than could be
obtained with non-affiliated parties. The Company has also formed a joint
venture with Thomson Multimedia to conduct joint research and development on
advanced television products, including digital television products. The Company
and Thomson Multimedia share the funding of the joint venture's designers,
engineers and managers.
The Company has formed a joint venture research and
development center with CNET in the form of a Groupement d'Interet Economique
("GIE"). CNET is a research laboratory that is wholly owned by France Telecom,
one of the indirect shareholders of the Company. See "Item 4: Control of
Registrant". The research center is housed at the Company's Crolles, France
- 60 -
<PAGE>
manufacturing facility. It is developing submicron process technologies. The
joint venture between the Company and CNET was created before France Telecom
became an indirect shareholder of the Company.
The Company participated in a joint research and development
project with LETI with respect to high-density silicium integrated circuits.
LETI is a research laboratory that is a department of CEA, the parent of one of
the indirect shareholders of the Company. See "Item 4: Control of Registrant".
In 1995, the Company has signed an agreement providing for a research and
development cooperation with GRESSI, the research and development GIE formed by
CNET and LETI. The objectives of the cooperation are to develop know-how on
innovative aspects of VLSI technology evolution which can be transferred to
industrial applications, and to address the development of innovative process
steps and process modules to be used in future generations of VLSI products. The
cooperation agreement is based upon a pluriannual plan through 1998, of which
the Company is expected to bear half of the program's total cost.
The Company participates in certain programs sponsored by the
French and Italian governments for the funding of research and development and
industrialization through direct grants as well as low interest financing. See
"Item 1: Description of Business -- State Support for the Semiconductor
Industry". The shareholders of SGS-THOMSON Holding, the corporate parent of the
Company's majority shareholder, are controlled, directly or indirectly, by the
governments of the Republics of France and Italy. See "Item 4: Control of
Registrant".
Sales to shareholders of the Company and their affiliates
totalled $195.4 million in 1995. At December 31, 1995 there was no outstanding
indebtedness guaranteed by indirect shareholders.
From time to time, the Company may deposit with its direct or
indirect shareholders, or their affiliates, available funds for investment on a
short-term basis at market interest rates.
PART II
Item 14: Description of Securities to be Registered
Not applicable.
PART III
Item 15: Defaults upon Senior Securities
None.
Item 16: Changes in Securities and Changes in Security for Registered Securities
- 61 -
<PAGE>
None.
PART IV
Item 17: Financial Statements
Not applicable.
Item 18: Financial Statements
Consolidated financial statements of SGS-THOMSON
Microelectronics N.V. for each of the three years in the period ended December
31, 1995 are incorporated by reference from the Registrant's 1995 Annual Report
to Shareholders, on pages 37 through 55.
On January 26, 1996, the Supervisory Board determined that,
after nine consecutive years of service from a single auditor, a change of
auditors would be in the best interest of the Company and, consequently, decided
not to renew Arthur Andersen & Co. The appointment of Price Waterhouse as the
Company's new auditors was approved by the annual general meeting held on June
24, 1996. The letter from Arthur Andersen & Co. indicating that there has been
no cause for disagreement between the parties during the course of their
relationship is filed as Exhibit 1 hereto.
Item 19: Financial Statements and Exhibits
(a) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements and Financial Statement Schedule are filed
or incorporated by reference as part of this annual report.
2. Financial Statement Schedule
The financial statement schedule listed in the accompanying index
is filed as part of this annual report.
(b) Exhibits
The exhibits listed in the accompanying index are filed or incorporated
by reference as part of this annual report.
- 62 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(Item 19(a))
<TABLE>
<CAPTION>
Reference Page
--------------
1995 Annual
Report to
Form 20-F Shareholders
--------- ------------
<S> <C> <C>
SGS-THOMSON Microelectronics N.V. and Subsidiaries
Independent Public Accountant's Report..................... 55
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993......................... 37
Consolidated Balance Sheets as of December 31, 1995,
1994 and 1993............................................ 38
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993................... 39
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993............. 40
Notes to Consolidated Financial Statements as of
December 31, 1995, 1994 and 1993......................... 41
Schedule -Valuation and Qualifying Accounts for
the Years Ended December 31, 1995, 1994 and 1993........... 66
Independent Public Accountant's Report on Schedule............ 67
</TABLE>
- 63 -
<PAGE>
Schedule
SGS-THOMSON MICROELECTRONICS N.V.
VALUATION AND QUALIFYING ACCOUNTS
(Currency - Thousands of U.S. dollars)
<TABLE>
<CAPTION>
Charged
Balance at to costs Balance at
beginning Translation and end of
of period adjustment expenses Deductions period
--------- ---------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
</TABLE>
-66-
<PAGE>
Valuation and qualifying accounts
deducted from the related asset
accounts
<TABLE>
<S> <C> <C> <C> <C> <C>
1995
Inventories............................ 29,982 ---- 36,500 29,982 36,500
Accounts Receivable.................... 14,018 691 3,467 295 17,881
1994
Inventories............................ 28,121 ---- 29,982 28,121 29,982
Accounts receivable.................... 12,181 893 3,198 2,254 14,018
1993
Inventories............................ 6,748 ---- 28,121 6,748 28,121
Accounts receivable.................... 10,835 (815) 2,835 674 12,181
Long-term liabilities
1995
Claims and litigation.................. ---- ---- 16,000 ---- 16,000
1994
Loss on operating lease................ 13,949 ---- ---- 13,949 0
1993
Restructuring.......................... ---- ---- 19,500 ---- 19,500
Loss on operating lease................ 10,949 ---- 3,000 13,949
Patents litigation..................... ---- ---- 5,000 ---- 5,000
</TABLE>
-67-
<PAGE>
INSERT REPORT ON SCHEDULE
-68-
<PAGE>
SIGNATURE
Pursuant to the Requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SGS-THOMSON Microelectronics N.V.
Date: June 27, 1996 By: /s/ Pasquale Pistorio
---------------------
Name: Pasquale Pistorio
Title: President and Chief Executive Officer
-69-
<PAGE>
INDEX TO EXHIBITS
(Item 19(b))
Exhibit
Number Description
- ------ -----------
1. Letter of Arthur Andersen & Co.
2. SGS-THOMSON Microelectronics N.V. 1995 Annual Report to Shareholders
3. Amended and Restated Articles of Association of the Company
<PAGE>
ARTICLES OF ASSOCIATION
of:
SGS-THOMSON Microelectronics N.V.
established in Amsterdam
dated December 11, 1995
NAME, SEAT AND DURATION.
Article 1.
1.1. The name of the company is: SGS-THOMSON
Microelectronics N.V.
1.2. The company is established at Amsterdam.
1.3. The company will continue for an indefinite period.
OBJECTS.
Article 2.
The objects of the company shall be to participate or take in any manner any
interests in other business enterprises, to manage such enterprises, to carry on
the business in semiconductors and electronic devices, to take and grant
licenses and other industrial property interests, assume commitments in the name
of any enterprises with which it may be associated within a group of companies,
to take financial interests in such enterprises and to take any other action
which in the broadest sense of the term, may be related or contribute to the
aforesaid objects.
SHARE CAPITAL.
Article 3.
3.1. The authorized capital of the company amounts to two billion seven
hundred and fifty million Dutch
<PAGE>
2
guilders (NLG 2,750,000,000) and is divided into two hundred million
(200,000,000) shares of thirteenDutch guilders and seventy-five cents
(NLG 13.75) each.
3.2. The supervisory board shall have the power to issue shares and to
determine the terms and conditions of such issue if and in so far as
the supervisory board has been designated by the general meeting of
shareholders as the authorized body for this purpose. A designation
as referred to above shall only take place for a specific period of
no more than five years and may not be extended by more than five
years on each occasion.
3.3. If a designation as referred to in the second paragraph is not in
force, the general meeting of shareholders shall have the power, upon
the proposal of and on the terms and conditions set by the
supervisory board to resolve to issue shares.
3.4. In the event of a share issue, shareholders shall have a pre-emptive
right in proportion to the number of shares which they own,
notwithstanding the provisions of the law. In respect of the issue of
shares there shall be no pre-emptive right to shares issued against a
contribution other than in cash or issued to employees of the company
or of a group company. The supervisory board shall have the power to
limit or debar the preferential right accruing to shareholders, if
and in so far as the supervisory board has also been designated by
the general meeting of shareholders for this purpose as the
authorized body for the period of such designation. The provisions in
the second sentence of the second paragraph shall equally apply.
3.5. If a designation as referred to in the fourth paragraph is not in
force, the general meeting of shareholders shall have the power, upon
the proposal of the supervisory board to limit or debar the
preferential
<PAGE>
3
right accruing to shareholders.
3.6. A resolution of the general meeting of shareholders in accordance
with the fourth or fifth paragraph of this article requires a
majority of at least two-thirds of the votes cast in a meeting of
shareholders in which at least fifty per cent (50 %) of the issued
capital is present or represented.
3.7. Without prejudice to what has been provided in section 80, paragraph
2, Civil Code:2, shares shall at no time be issued below par and be
fully paid up upon issue.
3.8. Payment must be made in cash to the extent that no other contribution
has been agreed upon. If the company so allows, payment in cash can
be made in a currency other than Dutch currency.
In the event of payment in a foreign currency the obligation to pay
is for the amount which can be freely exchanged into Dutch currency.
The decisive factor is the rate of exchange on the day of payment, or
as the case may be after application of the next sentence, on the day
mentioned therein.
The company can require payment at the rate of exchange on a certain
day within two months prior to the last day when payment shall have
to be made provided the shares or depositary receipts for shares
after having been issued - shall immediately be incorporated in the
price list of an exchange abroad.
3.9. This article shall equally apply to the granting of rights to take
shares, but shall not apply to the issue of shares to someone who
exercises a previously acquired right to take shares.
3.10 All notifications to shareholders will be made in accordance with the
provisions relating to giving of notice to convene a general meeting
as set out in article 26.2.
Article 4.
<PAGE>
4
4.1. The company may acquire, for valuable consideration, shares in its
own share capital if and in so far as:
a. its equity less the purchase price of these shares is not less
than the aggregate amount of the paid up and called up capital
and the reserves which must be maintained pursuant to the law;
b. the par value of the shares in its capital which the company
acquires, holds or holds in pledge, or which are held by a
subsidiary company, amounts to no more than one-tenth of the
issued share capital; and
c. the general meeting of shareholders has authorized the managing
board to acquire such shares, which authorization may be given
for no more than eighteen months on each occasion,
notwithstanding the further statutory provisions.
4.2. Shares thus acquired may again be disposed of. The managing board
shall not acquire shares in the company's own share capital as
referred to above - if an authorization as referred to above is in
force - or dispose of such shares without the prior approval of the
supervisory board.
If depositary receipts for shares in the company have been issued,
such depositary receipts shall for the application of the provisions
of this paragraph and the preceding paragraph be treated as shares.
4.3. In the general meeting no votes may be cast in respect of (a)
share(s) held by the company or a subsidiary company; no votes may be
cast in respect of a share the depositary receipt for which is held
by the company or a subsidiary company. However, the holders of a
right of usufruct and the holders of a right of pledge on shares held
by the company and its subsidiary companies, are nonetheless not
excluded from the right to vote such shares, if the right of usufruct
or the right of pledge was granted prior to the time such
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5
share was held by the company or a subsidiary company. Neither the
company nor a subsidiary company may cast votes in respect of a share
on which it holds a right of usufruct or a right of pledge.
Shares in respect of which voting rights may not be exercised by law
or by the articles of association shall not be taken into account,
when determining to what extent the shareholders cast votes, to what
extent they are present or represented or to what extent the share
capital is provided or represented.
4.4. Upon the proposal of the supervisory board the general meeting of
shareholders shall have the power to decide to cancel shares acquired
by the company from its own share capital, subject however to the
statutory provisions concerned.
SHARES, SHARE CERTIFICATES, SHARE REGISTER.
Article 5.
5.1. Shares shall be in registered form.
5.2. Shares shall be available:
- in the form of an entry in the share register without issue of a
share certificate; shares of this type are referred to in these
articles as type I shares;
- and - should the supervisory board so decide - in the form of an
entry in the share register with issue of a certificate, which
certificate shall consist of a main part without dividend
coupon; shares of this type and share certificates of this type
are referred to in these articles as type II shares.
5.3. The supervisory board can decide that the registration of type I
shares may only take place for one or more quantities of shares which
quantities are to be specified by the supervisory board - at the same
time.
5.4. Type II share certificates shall be available in such
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6
denominations as the supervisory board shall determine.
5.5. All share certificates shall be signed by or on behalf of a managing
director; the signature may be effected by printed facsimile.
Furthermore type II share certificates shall, and all other share
certificates may, be countersigned by one or more persons designated
by the managing board for that purpose.
5.6. All share certificates shall be identified by numbers and/or letters.
5.7. The supervisory board can determine that for the purpose of effecting
trading or transfer of shares at foreign exchanges share certificates
shall be issued in such form as the supervisory board may determine,
complying with the requirements set by said foreign exchange(s) and
not provided with any dividend sheet.
5.8. The expression "share certificate" as used in these articles shall
include a share certificate in respect of more than one share.
Article 6.
6.1. Upon written request from a shareholder, missing or damaged share
certificates, or parts thereof, may be replaced by new certificates
or by duplicates bearing the same numbers and/or letters, provided
the applicant proves his title and, in so far as applicable, his loss
to the satisfaction of the supervisory board, and further subject to
such conditions as the managing board may deem fit.
6.2. In appropriate cases, at its own discretion, the managing board may
stipulate that the identifying numbers and/or letters of missing
documents be published three times, at intervals of at least one
month, in at least three newspapers to be indicated by the managing
board announcing the application made; in such a case new
certificates or duplicates may not be issued until six months have
expired since the last
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7
publication, always provided that the original documents have not
been produced to the managing board before that time.
6.3. The issue of new certificates or duplicates shall render the original
document invalid.
Article 7.
7.1. Notwithstanding the statutory provisions in respect of registered
shares a register shall be kept by or on behalf of the company, which
register shall be regularly updated and, at the discretion of the
managing board, may, in whole or in part, be kept in more than one
copy and at more than one place. A part of the register may be kept
abroad in order to meet requirements set out by foreign statutory
provisions or provisions of the foreign exchange.
7.2. Each shareholder's name, his address and such further data as the
managing board deems desirable, whether at the request of a
shareholder or not, shall be entered in the register.
7.3. The form and the contents of the share register shall be determined
by the managing board with due regard to the provisions of paragraphs
1 and 2 of this article. The managing board may determine that the
records shall vary as to their form and contents according to whether
they relate to type I shares or to type II shares.
7.4. Upon request a shareholder shall be given free of charge a
declaration of what is stated in the register with regard to the
shares registered in his name, which declaration may be signed by one
of the specially authorized persons to be appointed by the managing
board for this purpose.
7.5. The provisions of the last four paragraphs shall equally apply to
those who hold a right of usufruct or of pledge on one or more
registered shares, with the proviso that the other data required by
law must be
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8
entered in the register.
Article 8.
8.1. Subject to the provisions of article 5, the holder of an entry in the
share register for one or more type I shares may, upon his request
and at his option, have issued to him one or more type II share
certificates for the same nominal amount.
8.2. Subject to the provisions of article 5, the holder of a type II share
certificate registered in his name may, after lodging the share
certificate with the company, upon his request and at his option,
either have one or more type I shares entered in the share register
for the same nominal amount.
8.3. A request as mentioned in this article shall, if the supervisory
board so requires, be made on a form obtainable from the company free
of charge, which shall be signed by the applicant.
TRANSFER OF SHARES.
Article 9.
9.1. The transfer of a registered share shall be effected either by
service upon the company of the instrument of transfer or by written
acknowledgement of the transfer by the company, subject however to
the provisions of the following paragraphs of this article.
9.2. Where a transfer of a type II share is effected by service of an
instrument of transfer on the company, the company shall, at the
discretion of the managing board, either endorse the transfer on the
share certificate or cancel the share certificate and issue to the
transferee one or more new share certificates registered in his name
to the same nominal amount.
9.3. The Company's written acknowledgement of a transfer of a type II
share shall, at the discretion of the managing board, be effected
either by endorsement of the transfer on the share certificates or by
the issue
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9
to the transferee of one or more new share certificates registered in
his name to the same nominal amount.
9.4. The provisions of the foregoing paragraphs of this article shall
equally apply to the allotment of registered shares in the event of a
judicial partition of any community of property or interests, the
transfer of a registered share as a consequence of a judgement
execution and the creation of limited rights in rem on a registered
share.
If a share certificate has been issued, the acknowledgement can only
be effected either by putting an endorsement to that effect on this
document, signed by or on behalf of the company, or by replacing this
document by a new certificate in the name of the acquirer.
9.5. The submission of requests and the lodging of documents referred to
in articles 6 to 9 inclusive shall be made at a place to be indicated
by the managing board and in any case the places where the company is
admitted to a stock exchange.
Different places may be indicated for the different classes and types
of shares and share certificates.
9.6. The company is authorized to charge amounts to be determined by the
managing board not exceeding cost price to those persons who request
any services to be carried out by virtue of articles 6 up to and
including 9.
USUFRUCTUARIES, PLEDGEES, HOLDERS OF DEPOSITARY RECEIPTS.
Article 10.
10.1. The usufructuary, who in conformity with the provisions of section
88, Civil Code:2 has no right to vote, and the pledgee who in
conformity with the provisions of section 89, Civil Code:2 has no
right to vote, shall not be entitled to the rights which by law have
been conferred on holders of depositary receipts for shares
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10
issued with the cooperation of the company.
10.2. Where in these articles of association persons are mentioned,
entitled to attend meetings of shareholders, this shall include to
holders of depositary receipts for shares issued with the cooperation
of the company, and persons who in pursuance of paragraph 4 in
section 88 or section 89, Civil Code:2 have the rights that by law
have been conferred on holders of depositary receipts for shares
issued with the cooperation of the company.
MANAGING BOARD.
Article 11.
11.1. The company shall be managed by a managing board consisting of one or
more managing directors under the supervision of the supervisory
board. The number of members of the managing board shall be resolved
upon by the general meeting of shareholders upon the proposal of the
supervisory board. The members of the managing board shall be
appointed for three years, a year being understood as meaning the
period between two Annual General Meetings of Shareholders adopting
the Accounts of the previous fiscal year or the meeting in which a
postponement of this is granted.
11.2. Managing directors shall be appointed by the general meeting of
shareholders upon the proposal of the supervisory board for each
vacancy to be filled.
11.3. Without prejudice to the provisions of article 27, paragraph 2, a
proposal to make one or more appointments to the managing board may
be placed on the agenda of a general meeting of shareholders by the
supervisory board.
11.4. The supervisory board shall determine the salary, the bonus, if any,
and the other terms and conditions of employment of the managing
directors.
11.5. The general meeting of shareholders shall decide in
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11
accordance with the provisions of article 31,
paragraph 1.
Votes in respect of persons who have not been so nominated shall be
invalid.
Article 12.
12.1. The general meeting of shareholders shall be entitled to suspend or
dismiss one or more managing directors, provided that at least half
of the issued share capital is represented at the meeting. No such
quorum shall be required where the suspension or dismissal is
proposed by the supervisory board.
12.2. Where a quorum under paragraph 1 is required but is not present, a
further meeting shall be convened, to be held within four weeks after
the first meeting, which shall be entitled, irrespective of the share
capital represented, to pass a resolution in regard to the suspension
or dismissal.
12.3. The managing directors can be jointly or individually suspended by
the supervisory board. After suspension a general meeting of
shareholders shall be convened within three months, at which meeting
it shall be decided whether the suspension shall be cancelled or
maintained.
The person involved shall be given the opportunity to account for
his actions at that meeting.
REPRESENTATION.
Article 13.
13.1. The entire managing board as well as each managing director may
represent the company.
13.2. The managing board may grant powers of attorney to persons, whether
or not in the service of the company, to represent the company and
shall thereby determine the scope of such powers of attorney and the
titles of such persons.
13.3. The managing board shall have power to perform legal
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12
acts as specified in section 2:94, paragraph 1, Civil Code in so far
as such power is not expressly excluded or limited by any provision
of these articles or by any resolution of the supervisory board.
Article 14.
14.1. The supervisory board shall appoint one of the managing directors as
chairman of the managing board. Appointment of the chairman shall be
resolved with the majority mentioned in article 21, paragraph 1.
14.2. Resolutions of the managing board shall be passed by simple majority
of votes. In the event of a tie of votes the chairman of the managing
board shall have a casting vote.
Article 15.
15.1. Without prejudice to provisions made elsewhere in these articles, the
managing board shall require the prior express approval:
(i) From the supervisory board for decisions relating to:
1. all proposals to be submitted to a vote at the general
meeting of the shareholders;
2. the formation of all companies, acquisition or sale of any
participation, and conclusion of any cooperation and
participation agreement;
3. all pluriannual plans of the company and the budget for
the first coming year, covering the following matters:
- investment policy;
- policy regarding research and development, as well as
commercial policy and objectives;
- general financial policy;
- policy regarding personnel;
4. all acts, decisions or operations covered by the above list
and constituting a significant change with respect to
decisions already adopted
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13
by the supervisory board or not provided for in the above
list and as specifically laid down by the supervisory board
by resolution passed by it to that effect.
(ii) From the general meeting of the shareholders for
decisions relating to:
- sale of all or of an important part of the
company's assets or concerns;
- all mergers, acquisitions, or joint ventures
which the company wishes to make.
The absence of the approval provided for above may not be raised by
or against third parties.
15.2. Without prejudice to provisions made elsewhere in these articles, the
managing board shall require the approval of the general meeting of
shareholders according to the law and the provisions of these
articles as well as such resolutions as are clearly defined by a
resolution of the general meeting of shareholders to that effect.
Article 16.
In the event of the absence or inability to act of one of more managing
directors the remaining managing directors or managing director shall
temporarily be responsible for the entire management. In the event of the
absence or inability to act of all managing directors, one or more persons
appointed by the supervisory board for this purpose at any time shall be
temporarily responsible for the management.
SUPERVISORY BOARD.
Article 17.
17.1. The supervisory board shall be responsible for supervising the policy
pursued by the managing board and the general course of affairs of
the company and the business enterprise which it operates. The
supervisory board shall assist the managing board with advice
relating to the general policy aspects connected with the activities
of the company. In fulfilling their
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14
duties the supervisory directors shall serve the interests of the
company and the business enterprise which it operates.
17.2. The managing board shall provide the supervisory board in good time
with all relevant information as well as the information the
supervisory board requests, in connection with the exercise of its
duties.
Article 18.
18.1. The supervisory board shall consist of at least six members, to be
appointed by the general meeting of shareholders upon the proposal of
the supervisory board for each vacancy to be filled. The number of
supervisory directors shall without prejudice to the preceding
sentence be resolved upon by the general meeting of shareholders upon
the proposal of the supervisory board.
18.2. The general meeting of shareholders shall decide in accordance with
the provisions of article 31 paragraph 1.
18.3. Without prejudice to the provisions of article 27, paragraph 2, a
proposal to make one or more appointments to the supervisory board
may be placed on the agenda of the general meeting of shareholders by
the supervisory board.
18.4. The supervisory board shall appoint from their number a chairman and
a vice-chairman of the supervisory board with the majority mentioned
in article 21, paragraph 1.
18.5. Upon the appointment of the supervisory directors the particulars as
referred to in section 142, paragraph 3, Civil Code:2 shall be made
available for prior inspection.
Article 19.
19.1. The supervisory board may appoint one or more of its members as
delegate supervisory director in charge of supervising the managing
board on a regular basis. They
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15
shall report their findings to the supervisory board. The offices of
chairman of the supervisory board and delegate supervisory director
are compatible.
19.2. With due observance of these articles of association, the supervisory
board may adopt rules regulating the division of its duties among its
various supervisory directors.
19.3. The supervisory board may decide that one or more of its members
shall have access to all premises of the company and shall be
authorized to examine all books, correspondence and other records and
to be fully informed of all actions which have taken place, or may
decide that one or more of its supervisory directors shall be
authorized to exercise a portion of such powers.
19.4. At the expense of the company, the supervisory board may obtain such
advice from experts as the supervisory board deems desirable for the
proper fulfilment of its duties.
19.5. If there is only one supervisory director in office, such supervisory
director shall have all rights and obligations granted to and imposed
on the supervisory board and the chairman of the supervisory board by
law and by these articles of association.
Article 20.
20.1. A supervisory director shall retire no later than at the ordinary
general meeting of shareholders held after a period of three years
following his appointment. A retired supervisory director may
immediately be re-elected.
20.2. A supervisory director shall retire at the annual general meeting of
the year in which he reaches the age prescribed by law for retirement
of a supervisory director.
20.3. The supervisory board may establish a rotation
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16
scheme.
20.4. The supervisory directors may be suspended or dismissed by the
general meeting of shareholders. The supervisory board may make a
proposal to the general meeting of shareholders for the suspension or
dismissal of one or more of its supervisory directors.
Article 21.
21.1. The supervisory board may pass resolutions by at least three quarters
of the votes of the members in office. Each supervisory director has
the right to cast one vote. In case of absence a supervisory director
may issue a proxy, however, only to another supervisory director. The
proxy should explicitly indicate in which way the vote must be cast.
The supervisory board may pass resolutions in writing without holding
a meeting provided that the proposals for such resolutions have been
communicated in writing to all supervisory directors and no
supervisory director is opposed to this method of passing a
resolution.
21.2. A certificate signed by two supervisory directors to the effect that
the supervisory board has passed a particular resolution shall
constitute evidence of such a resolution in dealings with third
parties.
21.3. The managing directors shall attend meetings of the supervisory board
at the latter's request.
21.4. The supervisory board shall meet whenever two or more of its members
or the managing board so requests. Meetings of the supervisory board
shall be convened by the chairman of the supervisory board, either on
request of two or more supervisory directors or on request of the
managing board, or by the supervisory directors requesting the
meeting to be held. If the chairman fails to convene a meeting to be
held within four weeks of the receipt of the request, the supervisory
board members making the request are
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17
entitled to convene the meeting.
21.5. The supervisory board shall draw up standing orders regulating inter
alia the manner of convening board meetings and the internal
procedure at such meetings. These meetings may be held by telephone
as well as by video.
Article 22.
The General Meeting of the Shareholders determines the compensation
to the members of the Supervisory Board or to one or more of its
members. The meeting shall have authority to decide whether such
compensation will consist of a fixed amount and/or an amount that is
variable in proportion to profits or any other factor. The
Supervisory Board members shall be reimbursed for their expenses.
INDEMNIFICATION.
Article 23.
23.1. The company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the
company) by reason of the fact that he is or was a supervisory
director, managing director, officer or agent of the company, or was
serving at the request of the company as a supervisory director,
managing director, officer or agent of another company, a
partnership, joint venture, trust or other enterprise, against all
expenses (including attorneys' fees) judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was
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18
unlawful or out of his mandate. The termination of any action, suit
or proceeding by a judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and
not in a manner which he reasonably believed to be in or not opposed
to the best interests of the company, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful.
23.2. The company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or proceeding by or in the right of the company to procure a
judgment in its favor, by reason of the fact that he is or was a
supervisory director, managing director, officer or agent of the
company, or is or was serving at the request of the company as a
supervisory director, managing director, officer or agent of another
company, a partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such
action or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of
the company and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for gross negligence or wilful
misconduct in the performance of his duty to the company, unless and
only to the extent that the court in which such action or proceeding
was brought or any other court having appropriate jurisdiction shall
determine upon application that, despite the adjudication of
liability but in view of all the
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19
circumstances of the case, such person is fairly and reasonably
entitled to indemnification against such expenses which the court in
which such action or proceeding was brought or such other court
having appropriate jurisdiction shall deem proper.
23.3. To the extent that a supervisory director, managing director, officer
or agent of the company has been successful on the merits or
otherwise in defense of any action, suit of proceeding, referred to
in paragraphs 1 and 2, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including
attorney's fees) actually and reasonable incurred by him in
connection therewith.
23.4. Any indemnification by the company referred to in paragraphs 1 and 2
shall (unless ordered by a court) only be made upon a determination
that indemnification of the supervisory director, managing director,
officer or agent is proper in the circumstances because he had met
the applicable standard of conduct set forth in paragraphs 1 and 2.
Such determination shall be made:
a. either by the supervisory board by a majority vote in a meeting
in which a quorum as mentioned in article 21, paragraph 1, and
consisting of supervisory directors who where not parties to
such action, suit or proceeding, is present;
b. or, if such a quorum is not obtainable or although such a quorum
is obtained if the majority passes a resolution to that effect,
by independent legal counsel in a written opinion;
c. or by the general meeting of shareholders.
23.5. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the company in advance of the final
disposition of such action, suit or proceeding upon a resolution of
the supervisory board with respect to the specific case upon receipt
of
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20
an undertaking by or on behalf of the supervisory director, managing
director, officer or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
company as authorized in this article.
23.6. The indemnification provided for by this article shall not be deemed
exclusive of any other right to which a person seeking
indemnification may be entitled under any by-laws, agreement,
resolution of the general meeting of shareholders or of the
disinterested supervisory directors or otherwise, both as to actions
in his official capacity and as to actions in another capacity while
holding such position, and shall continue as to a person who has
ceased to be a supervisory director, managing director, officer or
agent and shall also inure to the benefit of the heirs, executors and
administrators of such a person.
23.7. The company shall have the power to purchase and maintain insurance
on behalf of any person who is or was a supervisory director,
managing director, officer or agent of the company, or is or was
serving at the request of the company as a supervisory director,
managing director, officer, employee or agent of another company, a
partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such
capacity or arising out of his capacity as such, whether or not the
company would have the power to indemnify him against such liability
under the provisions of this article.
23.8. Whenever in this article reference is being made to the company, this
shall include, in addition to the resulting or surviving company also
any constituent company (including any constituent company of a
constituent company) absorbed in a consolidation or merger which, if
its separate existence had continued,
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21
would have had the power to indemnify its supervisory directors,
managing directors, officers and agents, so that any person who is or
was a supervisory director, managing director, officer or agent of
such constituent company, or is or was serving at the request of such
constituent company as a supervisory director, managing director,
officer or agent of another company, a partnership, joint venture,
trust or other enterprise, shall stand in the same position under the
provisions of this article with respect to the resulting or surviving
company as he would have with respect to such constituent company if
its separate existence had continued.
GENERAL MEETING OF SHAREHOLDERS.
Article 24.
24.1. The ordinary general meeting of shareholders shall be held each year
within six months after the close of the financial year.
24.2. At this general meeting shall be dealt with:
a. the written report of the managing board on the course of
business of the company and the conduct of its affairs during
the past financial year, and the report of the supervisory board
on the annual accounts;
b. adoption of the annual accounts and the declaration of dividend
in the manner laid down in article 35;
c. filling vacancies on the managing board in accordance with the
provisions of article 11;
d. filling vacancies on the supervisory board in accordance with
the provisions of article 18;
e. the proposals placed on the agenda by the managing board or by
the supervisory board, together with proposals made by
shareholders in accordance with the provisions of these
articles.
Article 25.
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22
25.1. Extraordinary general meetings of shareholders shall be held as often
as deemed necessary by the supervisory board and shall be held if one
or more shareholders and other persons entitled to attend the
meetings of shareholders jointly representing at least one-tenth of
the issued share capital make a written request to that effect to the
managing board or supervisory board, specifying in detail the
business to be dealt with.
25.2. If the managing board or supervisory board fail to comply with a
request under paragraph 1 above in such manner that the general
meeting of shareholders can be held within six weeks after the
request, the persons making the request may be authorized by the
President of the Court within whose jurisdiction the company is
established to convene the meeting themselves.
Article 26.
26.1. General meetings of shareholders shall be held at Amsterdam,
Haarlemmermeer (Schiphol Airport), Rotterdam or The Hague; the notice
convening the meeting shall inform the shareholders and other persons
entitled to attend the meetings of shareholders accordingly.
26.2. The notice convening a general meeting of shareholders shall be
published by advertisement which shall at least be published in a
national daily newspaper and abroad in at least one daily newspaper
appearing in each of these countries other than the United States,
where, on the application of the company, the shares have been
admitted for official quotation. In addition, holders of registered
shares shall be notified by letter that the meeting is being
convened.
26.3. The notice convening the meeting shall be issued by the managing
board, by the supervisory board or by those who according to the law
or these articles are entitled thereto.
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23
Article 27.
27.1. The notice convening the meeting referred to in the foregoing article
shall be issued no later than on the twenty-first day prior to the
meeting.
27.2. The agenda shall contain such business as may be placed thereon by
the person(s) entitled to convene the meeting, and furthermore such
business as one or more shareholders, representing at least one-tenth
of the issued share capital, have requested the managing board or
supervisory board to place on the agenda at least five days before
the date on which the meeting is convened. Nominations for
appointment to the managing board and the supervisory board cannot be
placed on the agenda by the managing board. No resolution shall be
passed at the meeting in respect of matters not on the agenda.
27.3. Without prejudice to the relevant provisions of law, dealing with
withdrawal of shares and amendments to articles of association, the
notice convening the meeting shall either mention the business on the
agenda or state that the agenda is open to inspection by the
shareholders and other persons entitled to attend the meetings of
shareholders at the office of the company.
Article 28.
28.1. General meetings of shareholders shall be presided over by the
chairman of the supervisory board or in his absence by the
vice-chairman of the supervisory board. In case of absence of the
chairman and the vice-chairman of the supervisory board the meeting
shall be presided by any other person nominated by the supervisory
board.
28.2. Minutes shall be kept of the business transacted at a general meeting
of shareholders, which minutes shall be drawn up and signed by the
chairman and by a person appointed by him immediately after the
opening of the
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meeting.
28.3. Where the minutes are drawn up before a civil law notary, the
chairman's signature, together with that of the civil law notary,
shall be sufficient.
Article 29.
29.1. All shareholders and other persons entitled to vote at general
meetings of shareholders are entitled to attend the general meetings
of shareholders, to address the general meeting of shareholders and
to vote. The general meeting of shareholders may lay down rules
regulating, inter alia, the length of time for which shareholders may
speak. In so far as such rules are not applicable, the chairman may
regulate the time for which shareholders may speak if he considers
this to be desirable with a view to the orderly conduct of the
meeting.
29.2. In order to exercise the rights mentioned in paragraph 1, the holders
of registered shares shall notify the company in writing of their
intention to do so no later than on the day and at the place
mentioned in the notice convening the meeting, and also - in so far
as type II shares are concerned - stating the serial number of the
shares certificate.
They may only exercise the said rights at the meeting for the shares
registered in their name both on the day referred to above and on the
day of the meeting.
29.3. The company shall send a card of admission to the meeting to holders
of registered shares who have notified the company of their intention
in accordance with the provision in the foregoing paragraph.
29.4. The provisions laid down in paragraphs 2 up to and including 4 are
mutatis mutandis applicable to shares from which usufructuaries and
pledgees who do not have the voting right attached to those shares
derive their rights.
<PAGE>
25
Article 30.
30.1. Shareholders and other persons entitled to attend meetings of
shareholders may be represented by proxies with written authority to
be shown for admittance to a meeting.
30.2. All matters regarding the admittance to the general meeting, the
exercise of voting rights and the result of votings, as well as any
other matters regarding the affairs at the general meeting shall be
decided upon by the chairman of that meeting, with due observance of
the provisions of section 13, Civil Code:2.
Article 31.
31.1. Unless otherwise stated in these articles, resolutions shall be
adopted by simple majority of votes of the shareholders having the
right to vote in a meeting of shareholders where at least fifty
percent (50%) of the issued capital is present or represented. Blank
and invalid votes shall not be counted. The chairman shall decide on
the method of voting and on the possibility of voting by acclamation.
31.2. Where the voting concerns appointments, further polls shall, if
necessary, be taken until one of the nominees has obtained a simple
majority, such with due observance of the provision of paragraph 1 of
this article. The further poll or polls may, at the chairman's
discretion, be taken at a subsequent meeting.
31.3. Except as provided in paragraph 2, in case of an equality of the
votes cast the relevant proposal shall be deemed to have been
rejected.
Article 32.
At the general meeting of shareholders each share shall confer the right to cast
one vote.
ANNUAL ACCOUNTS, REPORT OF THE BOARD OF MANAGEMENT AND DISTRIBUTIONS.
<PAGE>
26
Article 33.
33.1. The financial year shall run from the first day of January up to and
including the thirty-first day of December.
33.2. Each year the managing board shall cause annual accounts to be drawn
up, consisting of a balance sheet as at the thirty-first day of
December, of the preceding year and a profit and loss account in
respect of the preceding financial year with the explanatory notes
thereto.
33.3. The managing board shall be bound to draw up the aforesaid annual
accounts in accordance with established principles of business
management.
33.4. Upon proposal of the managing board, the supervisory board shall
determine what portion of the profit - the positive balance of the
profit and loss account - shall be retained by way of reserve, having
regard to the legal provisions relating to obligatory reserves.
33.5. The supervisory board shall cause the annual accounts to be examined
by one or more registered accountant(s) designated for the purposes
by the general meeting of shareholders or other experts designated
for the purpose in accordance with section 393, Civil Code:2, and
shall report to the general meeting of shareholders on the annual
accounts, notwithstanding the provisions of the law.
33.6. Copies of the annual accounts which have been made up, of the report
of the supervisory board, of the report of the managing board and of
the information to be added pursuant to the law shall be deposited
for inspection by shareholders and other persons entitled to attend
meetings of shareholders, at the office of the company as from the
date of serving the notice convening the general meeting of
shareholders at which meeting those items shall be discussed, until
the close
<PAGE>
27
thereof.
Article 34.
Adoption by the general meeting of shareholders of the annual accounts, referred
to in article 33, shall fully discharge the managing board and the supervisory
board from liability in respect of the exercise of their duties during the
financial year concerned, unless a proviso is made by the general meeting of
shareholders, and without prejudice to the provisions of sections 138 and 149,
Civil Code:2.
Article 35.
35.1. The portion of the profit that remains after application of article
33, paragraph 4, shall be at the disposal of the general meeting of
shareholders, with due observance of the provisions of article 36,
paragraph 2.
35.2. The general meeting of shareholders is empowered either to distribute
the profits in cash or in kind or to withhold distribution of the
said portion of the profit in whole or in part.
35.3. The company only makes distributions in so far as its own equity
exceeds the amount of paid up and called portion of the share
capital, plus the reserves that must be maintained pursuant to the
law.
Article 36.
36.1. Upon the proposal of the supervisory board, the general meeting of
shareholders shall be entitled to resolve to make distributions
charged to the share premium reserve or charged to the other reserves
shown in the annual accounts not prescribed by the law, with due
observance of the provisions of paragraph 2.
36.2. The supervisory board shall be entitled to resolve that
distributions, the amount of which distributions has been resolved
upon by the general meeting of shareholders, to shareholders under
article 35, article 36, paragraph 1, and article 37 may be made in
full or
<PAGE>
28
partially in the form of the issue of shares in the share capital of
the company.
The distribution to a shareholder according to the preceding sentence
shall be made to a shareholder in cash or in the form of shares in
the share capital of the company, or partially in cash and partially
in the form of shares in the share capital of the company, such, if
the supervisory board so resolves, at the option of the shareholders.
Article 37.
At its own discretion and subject to section 105, paragraph 4, Civil Code:2, the
supervisory board may resolve to distribute one or more interim dividends on the
shares before the annual accounts for any financial year have been approved and
adopted at a general meeting of shareholders.
Article 38.
38.1. Distributions under articles 35, 36 or 37 shall be payable as from a
date to be determined by the supervisory board. The date of payment
set in respect of shares for which certificates are outstanding or in
respect of type I shares may differ from the date of payment set in
respect of shares for which type II share certificates are
outstanding.
38.2. Distributions under articles 35, 36 or 37 shall be made payable at a
place or places, to be determined by the supervisory board; at least
one place shall be designated thereto in The Netherlands.
38.3. The supervisory board may determine the method of payment in respect
of cash distributions on type I shares.
38.4. Cash distributions under articles 35, 36 or 37 in respect of shares
for which a type II share certificate is outstanding shall, if such
distributions are made payable only outside the Netherlands, be paid
in the currency of a country where the shares of the company
<PAGE>
29
are listed on a stock exchange, converted at the rate of exchange
determined by the Dutch Central Bank at the close of business on a
day to be fixed for that purpose by the supervisory board. If and in
so far as on the first day on which a distribution is payable, the
company is unable, in consequence of governmental action or other
exceptional circumstances beyond its control, to make payment at the
place designated outside the Netherlands or in the relevant foreign
currency, the supervisory board may in that event designate one or
more places in the Netherlands instead. In such event the provisions
of the first sentence of this paragraph shall no longer apply.
38.5. The person entitled to a distribution under articles 35, 36 or 37 on
registered shares shall be the person in whose name the share is
registered at the date to be fixed for that purpose by the
supervisory board in respect of each distribution for the different
types of shares.
38.6. Notice of distributions and of the dates and places referred to in
the preceding paragraphs of this article shall at least be published
in a national daily newspaper and abroad in at least one daily
newspaper appearing in each of those countries other than the United
States, where the shares, on the application of the company, have
been admitted for official quotation, and further in such manner as
the supervisory board may deem desirable.
38.7. Distributions in cash under articles 35, 36 or 37 that have not been
collected within five years after they have become due and payable
shall revert to the Company.
38.8. In the case of a distribution under article 36, paragraph 2, any
shares in the company not claimed within a period to be determined by
the supervisory
<PAGE>
30
board shall be sold for the account of the persons entitled to the
distribution who failed to claim the shares. The period and manner of
sale to be determined by the supervisory board, as mentioned in the
preceding sentence, shall be notified according to paragraph 9. The
net proceeds of such sale shall thereafter be held at the disposal of
the above persons in proportion to their entitlement; distributions
that have not been collected within five years after the initial
distributions in shares have become due and payable shall revert to
the Company.
38.9. In the case of a distribution in the form of shares in the company
under article 36, paragraph 2, on registered shares, those shares
shall be added to the share register. A type II share certificate for
a nominal amount equal to the number of shares added to the register
shall be issued to holders of type II shares.
38.10. The provisions of paragraph 5 shall apply equally in respect of
distributions - including pre-emptive subscription rights in the
event of a share issue made otherwise than under articles 35, 36 or
37, provided that in addition thereto in the "Staatscourant" (Dutch
Official Gazette) shall be announced the issue of shares with a
pre-emptive subscription right and the period of time within which
such can be exercised.
Such pre-emptive subscription right can be executed during at least
two weeks after the day of notice in the "Staatscourant" (Dutch
Official Gazette).
ALTERATIONS TO ARTICLES OF ASSOCIATION, WINDING UP,
LIQUIDATION.
Article 39.
A resolution to alter the articles of association or to wind up the company
shall be valid only provided that:
<PAGE>
31
a. the proposal to such a resolution has been proposed to the
general meeting of shareholders by the supervisory board;
b. the full proposals have been deposited for inspection by
shareholders and other persons entitled to attend meetings of
shareholders, at the office of the company as from the day on
which the notice is served until the close of that meeting.
Article 40.
40.1. If the company is wound up, the liquidation shall be carried out by
any person designated for the purpose by the general meeting of
shareholders, under the supervision of the supervisory board.
40.2. In passing a resolution to wind up the company, the general meeting
of shareholders shall upon the proposal of the supervisory board fix
the remuneration payable to the liquidators and to those responsible
for supervising the liquidation.
40.3. The liquidation shall take place with due observance of the
provisions of the law. During the liquidation period these articles
of association shall, to the extent possible, remain in full force
and effect.
40.4. After settling the liquidation, the liquidators shall render account
in accordance with the provisions of the law.
40.5. After the liquidation has ended, the books and records of the company
shall remain in the custody of the person designated for that purpose
by the liquidators during a ten-year period.
Article 41.
After all liabilities have been settled, including those incident to the
liquidation, the balance shall then be distributed among the shareholders in
proportion to the par value of their ownership of shares.
Article 42.
<PAGE>
32
Any amounts payable to shareholders or due to creditors are not claimed within
six months after the last distribution was made payable, shall be deposited with
the Public Administrator of Unclaimed Debts.
SGS-THOMSON
MICROELECTRONICS
[GRAPHIC] 1995 ANNUAL REPORT
<PAGE>
SGS-THOMSON Microelectronics N.V. is a global independent semiconductor company
that produces a broad range of semiconductor integrated circuits (ICs) and
discrete devices. Its products are used in high growth applications in the
telecommunications, computer, consumer, automotive and industrial sectors. Based
on the most recent available industry data, the Company is the world's leading
supplier of analog ICs, mixed signal ICs, smart power ICs and MPEG decoder ICs.
It serves customers in a variety of markets worldwide, including North America,
Europe, Asia Pacific and Japan. The common stock of SGS-THOMSON is traded on the
New York Stock Exchange under the symbol "STM". The common stock is also listed
on the Bourse de Paris and quoted on SEAQ International.
CONTENTS
Financial Highlights 1
Message from the President 2
Product Groups At a Glance 5
High Growth Applications
Automotive 8
Computer 10
Telecommunications 12
Consumer 14
Industrial 16
Manufacturing 18
Research and Development 22
Customer Relationships and Alliances 23
Financial Report 24
Supervisory Board and Executive Officers 56
Corporate Information 56
<PAGE>
Financial Highlights SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
Twelve months ended December 31,
--------------------------------------------------------------------
(in millions, except per share data) 1991(1) 1992 1993(1) 1994(1) 1995(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
NET REVENUES $1,374.0 $1,568.1 $2,037.5 $2,644.9 $3,554.4
Cost of sales(2) (995.2) (1,051.6) (1,248.4) (1,528.7) (2,096.0)
- -------------------------------------------------------------------------------------------------------------------------
Gross profit(2) 378.8 516.5 789.1 1,116.2 1,458.4
- -------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES(3) (410.7) (464.7) (573.6) (683.2) (807.4)
- -------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) (31.9) 51.8 215.5 433.0 651.0
Net interest expenses/other(4) (68.2) (46.5) (37.8) (21.0) (16.8)
- -------------------------------------------------------------------------------------------------------------------------
PROFIT (LOSS) BEFORE TAX (100.1) 5.3 177.7 412.0 634.2
Income tax (2.5) (2.3) (17.6) (49.5) (108.3)
- -------------------------------------------------------------------------------------------------------------------------
Profit (loss) before minority interests (102.6) 3.0 160.1 362.5 525.9
Minority interests(5) 0 0 0 0 0.6
Net earnings (loss) $ (102.6) $ 3.0 $ 160.1 $ 362.5 $ 526.5
- -------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share(6) $ (1.93) $ 0.06 $ 1.92 $ 3.04 $ 4.03
- -------------------------------------------------------------------------------------------------------------------------
Weighed average shares outstanding 53.3 53.6 83.5 119.4 130.6
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA (END OF PERIOD):
Cash, cash equivalents and marketable securities $ 48.4 $ 99.5 $ 327.4 $ 461.5 $ 758.4
Working capital 549.7 467.7 390.0 291.1 417.4
TOTAL ASSETS 1,896.5 1,842.3 2,240.9 3,224.7 4,486.0
Short-term debt
(including current portion of long-term debt) 340.8 360.6 231.1 322.5 492.8
Long-term debt (excluding current portion)(1) 612.6 547.6 374.8 277.2 200.7
Shareholders' equity(1) 479.9 412.9 1,004.0 1,680.0 2,661.7
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In October 1995, the Company completed a second public offering with
net proceeds to the Company of approximately $371.6 million. In
December 1994, the Company completed an Initial Public Offering with
net proceeds to the Company of approximately $198.7 million. In 1993,
the Company received a $500 million capital contribution that was
effected in two steps, $250 million in May and $250 million in
September. The Company also received a $100 million capital
contribution in each of 1988, 1989 and 1991.
(2) Cost of sales is net of certain third-party funding for
industrialization costs (which include certain costs incurred to bring
prototype products to the production stage) included therein. See Note
20 to the Consolidated Financial Statements. For a discussion of
certain significant charges reflected in cost of sales in 1993, 1994
and 1995, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
(3) Includes, among other things, third-party funding for research and
development, the expenses for which are reflected in research and
development expenses, as well as foreign currency gains and losses, fab
start-up costs, patent license payments received and patent costs
incurred. For a discussion of third-party funding (principally by the
French and Italian governments) and low interest financing for research
and development and other matters, see "Description of Business--State
Support for the Semiconductor Industry." The Company's reported
research and development expenses do not include design center, process
engineering, pre-production or industrialization costs.
(4) Includes mainly net interest expenses, plus a gain on disposal of an
investment in 1992.
(5) In 1994, the Company created a joint venture with a subsidiary of the
Shenzhen Electronics Group ("SEG"). the Company owns a 60% interest in
the joint venture, with a subsidiary of SEG owning the remaining 40%.
(6) Net earnings (loss) per share amounts have been restated to reflect a
40:1 stock split effected in connection with the Initial Public
Offering.
In the original document the following tables were represented by bar graphs:
Net Revenues (in $US millions)
- ------------------------------
1991 - 1,374
1992 - 1,568
1993 - 2,038
1994 - 2,645
1995 - 3,554
Net Earnings/Loss (in $US millions)
- -----------------------------------
1991 - (102.6)
1992 - 3.0
1993 - 160.1
1994 - 362.5
1995 - 526.5
Shareholders' Equity ($US millions)
- -----------------------------------
1991 - 479.9
1992 - 412.9
1993 - 1,004.0
1994 - 1,680.0
1995 - 2,661.7
1
<PAGE>
MESSAGE FROM THE PRESIDENT
- - We took major steps to ensure our continued industry leadership into the next
century. -
[PHOTO]
I am pleased to report that SGS-THOMSON enjoyed excellent business and financial
results in 1995. Our strong performance is evident, first of all, in the
Company's record sales and earnings. In addition, we gained market share in our
served market, according to preliminary industry estimates. Just as important as
our accomplishments of the past year, however, are the steps we took to ensure
our continued industry leadership as we approach a new century. Toward that end,
we continued to invest in the expansion of our global manufacturing capacity,
accelerated the pace of our research and development efforts, and strengthened
our financial position through a second public offering of common stock. These
initiatives -- along with our continuing drive to increase our focus on
differentiated products, concentrate on high growth applications, and form
constructive partnerships with our customers -- have given the Company a solid
platform for new achievements and successes.
1995 FINANCIAL HIGHLIGHTS
Net revenues for 1995 increased over 34% to a historical high of $3.55 billion.
Gross profit was $1.46 billion, representing an increase of nearly 31%.
Operating profit for 1995 rose more than 50%, to $651.0 million. While the gross
profit margin went from 42.2% in 1994 to 41.0% in 1995, the operating profit
margin moved upward to 18.3% from 16.4%. Net earnings for 1995 reached $526.5
million, a 45% increase over 1994's figure of $362.5 million. Earnings per share
for 1995 rose almost 33%, to $4.03, based on 130.6 million weighted average
shares outstanding. In 1994, earnings per share were $3.04 based on 119.4
million weighted average shares outstanding.
Reflecting our commitment to investing in the continued growth of the
Company, capital expenditures for 1995 totalled $1.0 billion, up from $779.7
million in 1994. Research and development expenses were $440.3 million for the
last year, an increase of over 30% from the 1994 R&D figure.
We ended 1995 with an extremely solid balance sheet. At the end of the
year, cash, cash equivalents and marketable securities totalled $758.4 million,
exceeding by $64.9 million our total debt of $693.5 million, while working
capital stood at $417.4 million. Shareholders' equity at December 31, 1995 was
$2.66 billion.
OPERATING PERFORMANCE
Our record performance was the result of strong growth across SGS-THOMSON's wide
range of product groups, geographic regions and end markets. In keeping with our
successful product strategy, sales of differentiated products (dedicated/ASSPs,
semicustom ICs and microcontrollers) during 1995 rose 43% to total $1.8 billion,
or 51% of net revenues. The strong growth in differentiated products was the
result of rising customer demand, especially for chips with high system content,
to which we allocated significant
2
<PAGE>
capacity. In terms of our primary product groups, sales of Dedicated Products
rose 38.9%, Programmable Products increased 40.4%, and Discrete and Standard ICs
advanced 31.7%. Memory Products revenues were up 15%, despite the limitations
caused by our decision to allocate capacity to differentiated products for which
we were often the sole source.
Sales trends by geographic region confirmed the Company's status as a
global force in the semiconductor industry. Revenues derived from the Asia
Pacific region increased 49.8% in 1995, followed by Europe at 33.5%, North
America at 25.7%, and Japan with 15.4%. In 1995, Europe accounted for 46% of net
revenues, Asia/Pacific was 26%, the Americas were 24%, and Japan represented 4%.
However, if sales to Asian divisions of U.S. customers are combined with their
parent companies, our American revenues would be approximately one-third of our
total business.
The Company's emphasis on developing and manufacturing products for
high growth applications was rewarded in 1995. Sales of industrial products rose
nearly 37%, with a similar rate of increase for telecommunications. Both
automotive and computer applications experienced revenue increases in the area
of 36%. Consumer-related products posted a 28% growth rate.
One important result of our strong growth in product sales was that
SGS-THOMSON maintained or increased its share in many of our key markets.
According to available industry data and current estimates, we believe that we
once again held the #1 position in total analog ICs, mixed-signal ICs and smart
power ICs for 1995. We also were among the leaders in non-volatile memories and
dedicated telecom ICs.
MANUFACTURING AND R&D ACTIVITIES
During 1995, we continued to build up SGS-THOMSON's manufacturing capacity. We
announced plans for a fourth 8-inch fab, to be based in Rousset, France, and we
are in the process of upgrading and expanding six facilities around the world.
In addition, we have identified two other 8-inch facilities, one of which will
be in Singapore with the other one -- in Italy -- now under consideration. Our
second 8-inch fab in Phoenix, Arizona, began volume production ahead of schedule
in July 1995. It will soon start manufacturing next generation x86
microprocessors, and is qualified for several other product families including
MPEG decoders. The first wafers should be available from our M5 8-inch module in
Catania, Italy, in the third quarter of 1996, with ramp-up starting in the
fourth quarter. Also, the construction of the Shenzhen assembly facility in
Southern China is nearing completion. This new plant, which is a joint venture
with the Shenzhen Electronics Group of China, together with the investments that
are being made at other existing facilities, will contribute new back-end
capacity to serve increased front-end output.
Our R&D effort, which over the years has provided SGS-THOMSON with many
leading edge technologies, was even stronger in 1995. We made important progress
in virtually every area of technology, from power devices to 16 Megabit Flash
memories. Among the recent achievements of our R&D team were the creation of the
Company's first engineering samples of CMOS 0.35 micron and BiCMOS 0.5 micron
technology, and the first silicon of BCD 5 high-power technology with integrated
0.6 micron CMOS logic.
INDUSTRY DYNAMICS AND DIRECTION
Over the long term, several dynamic trends will present significant
opportunities for our industry in general, and for SGS-THOMSON in particular.
The first trend is technological change or, more specifically, the
changing role of microchip makers. Today, we have the ability to create a single
chip combining VLSI or ULSI technologies with mixed-signal or mixed-power,
together with the whole variety of memory blocks, to replicate the functions of
an electronic system.
This trend is revolutionary, since it moves our industry into the era
of complete "system-solutions" on silicon.
There are three important implications of this changing environment.
First, there will be tremendous economic opportunities for those companies that
are positioned to meet the need for system-on-a-chip technology. Second, to take
advantage of these opportunities, a semiconductor maker must be able to master a
vast breadth of technologies, possess strong financial resources to support R&D
at a very high level, and control ample manufacturing resources. Third, because
designing systems on silicon is by nature a collaborative process, the
successful semiconductor companies will be those with the demonstrated ability
to form close
- - Our record performance reflected strong growth across a wide range of product
groups, regions and end markets. -
3
<PAGE>
- Our R&D effort has provided many leading edge technologies. -
strategic alliances with their customers. These are the qualities which we have
worked hard to foster at SGS-THOMSON, and which are discussed in greater detail
in this annual report.
Geographic change is the second major trend I wish to highlight, and in
particular the fact that regionalized economies will continue to prevail in the
near-term, while the world is proceeding with the trend of a long-term shift to
a truly globalized economy. In recent years, the most explosive growth in our
business (and, indeed, in many industries) has taken place in Asia. This region
offers enormous resources, a strong cost advantage and high productivity. Thus,
it appears that Asia will lead the pack in terms of growth for the near future.
Fortunately, SGS-THOMSON has made the investment to establish an integrated
presence in this region, consisting of over 10 years of front-end activity,
extensive back-end operations (including a new presence in China), and
meaningful R&D, design, marketing and sales resources. Over time, however, we
believe that the environmental differences between the various macro-economic
systems will tend to become more compatible. The boundary conditions for a truly
global economy will be in place and the growth momentum will tend to equalize
between Asia and other regions, such as North America and Europe. When this
occurs, we will be well-positioned to benefit from our strong operations and
integrated presence in those areas, as well.
The other changes of note will occur in the cultural fabric of
companies. To grow and prosper, a corporate organization must become more agile,
responsive and decentralized, yet all parts of the entity must function together
as a coherent whole. The company must foster a culture that encourages a
commitment to continuous improvement, total quality management and environmental
stewardship, and which empowers its members to achieve these goals. This is the
corporation we have been striving to build at SGS-THOMSON.
OUTLOOK FOR 1996; VISION 2000
We are entering 1996 in a healthy financial and business condition, with demand
exceeding our capacity in the majority of our product portfolio. It is, however,
evident that the industry has started a correction from the extraordinary growth
of recent years to a much more modest rate.
The most respected industry analysts expect a growth rate for 1996 well
below that of last year, with disparities in growth among different product
families. We cannot anticipate how deep or how long this correction phase will
be. We are confident, however, that the heavy emphasis on differentiated
products in our portfolio, our strong customer base and strategic alliances,
together with our well diversified sales base, both in terms of applications and
geography, should allow SGS-THOMSON to again outpace the rate of growth in our
served market.
Looking further ahead, SGS-THOMSON will continue to follow the three
main strategic guidelines that have served as our road map since the Company's
foundation: innovation, driven by market needs as expressed through our
alliances; globalization, which for us means an integrated presence in the major
macroeconomic systems; and productivity, which results from a work-force that is
educated and empowered to achieve total quality management. By following these
strategic guidelines, we are aiming to:
- - Become a solid member of the top ten worldwide semiconductor
manufacturers,
- - Demonstrate financial performance superior to the average of our 10
largest peer companies, and
- - Be best-in-class in customer service, product quality and environmental
protection.
These are the core elements of our "Vision 2000". By working to realize
this vision, we look forward to producing continued value for our shareholders,
customers and associates.
/s/ Pasquale Pistorio
Pasquale Pistorio
President and Chief Executive Officer
4
<PAGE>
SGS-THOMSON At a Glance
- - 1995 Revenues: US$ 3.55 Billion
- - 25,000 Employees
- - 17 Manufacturing Sites
- - 9 Advanced Research and Development Sites
- - 31 Design and Application Centers
- - 57 Sales Offices in 23 Countries
In the original document the following tables were represented by pie charts:
1995 Revenues by Region
- -----------------------
Europe - 46%
Americas - 24%
Asia Pacific - 26%
Japan - 4%
1995 Revenues by Product Family
- -------------------------------
Differentiated Products - 51%
Logic and Memories - 24%
Discretes - 17%
Standard Commodities - 8%
1995 Revenues by Application
- ----------------------------
Telecommunications - 23%
Computer - 27%
Automotive - 9%
Consumer - 20%
Industrial - 21%
5
<PAGE>
- --------------------------------------------------------------------------------
PRODUCT GROUPS
AT A GLANCE
DSG [GRAPHIC]
DISCRETE AND STANDARD ICS GROUP
Produces discrete power devices, such as power transistors (power bipolar, power
MOS), rectifiers, protection devices, thyristors and application-specific
discrete products. Also produces standard linear and logic ICs and radio
frequency (RF) products. The Group has a diverse customer base and broad product
portfolio.
DPG [GRAPHIC]
DEDICATED PRODUCTS GROUP
Produces application-specific semiconductor products using advanced bipolar,
CMOS, BiCMOS, mixed-signal and power technologies. The Group's dedicated
products are used in all major end-user applications, including mobile
communications networks, asynchronous transfer mode communications systems and
digital video compression systems.
SPG [GRAPHIC]
SUBSYSTEMS PRODUCTS GROUP
Produces electronic subsystems that
provide complete solutions for OEM customer applications. Products include
converters and complete power supplies, motor control modules, hands-free
systems and battery chargers.
6
<PAGE>
PPG [GRAPHIC]
PROGRAMMABLE PRODUCTS GROUP
Produces microcomponents (including microcontrollers, microprocessors and
digital signal processors), as well as digital semicustom devices and mixed
analog/digital semicustom devices. PPG also produces PC graphic devices and
multimedia acceleration ICs.
MPG [GRAPHIC]
MEMORY PRODUCTS GROUP
Produces a broad range of memory products, including EPROMs, Flash memories,
EEPROMs, SRAMs and chips for smartcards. The Group does not produce DRAMs. MPG
has been the leading supplier of EPROM memories since 1993, and is using its
EPROM and EEPROM expertise to develop and manufacture a broad portfolio of Flash
memory devices.
NVG [GRAPHIC]
NEW VENTURES GROUP
Identifies and develops new business opportunities to complement the Company's
existing activities and fully exploit its advanced technological expertise,
manufacturing capabilities and global marketing team. NVG was formed in May 1994
and its initial activities have focused on manufacturing and marketing x86
microprocessors through a wholly-owned subsidiary in the U.S.
7
<PAGE>
AUTOMOTIVE
[GRAPHIC]
ST is a leading provider of chips for audio and comfort
systems, from the highest end car stereos to the new,
state-of-the-art navigation systems (GPS).
8
<PAGE>
The pervasiveness of semiconductors in automotive applications has grown more
than ten-fold in the past 15 years, as car makers have introduced more
sophisticated systems and new consumer options. According to industry analysts,
this market is projected to continue to expand at a compound annual growth rate
of approximately 12% through the year 2000. SGS-THOMSON, with its ability to
command a broad range of technologies and form strong working relationships with
customers, provides products for such diverse automotive applications as fuel
injection, powertrain, anti-lock braking, airbag, car audio, climate control,
suspension and lighting systems.
Sales of SGS-THOMSON products for automotive applications rose 36% in 1995, and
represented 9% of net revenues. Automotive customers include many of the leading
international manufacturers, including BMW, Chrysler, Daimler-Benz, Fiat, Ford
and Peugeot. SGS-THOMSON products are also used by such prominent makers of
automotive systems and components as Bosch, Delco, Marelli, Nippondenso and
Valeo. The Company offers these and other automotive customers such advances as
mixed technologies, superintegration in signal and power, and specialized
packaging for new, more complex microchips.
SGS-THOMSON is continually working on the next generation of advanced automotive
products. The Company's new products include engine management systems,
featuring Bipolar-CMOS-DMOS control circuits that comply with anti-pollution
diagnostic requirements. Other new products include monolithic alternator
regulators and single-chip control systems for airbag, braking and other safety
features. Customer demands for ultra-compact powertrain control systems,
sophisticated navigation devices and instrumentation, and more stringent
emission controls are also driving new product development.
[GRAPHIC]
SGS-THOMSON is continually working on the next generation of
advanced automotive products.
ST products are featured in the most sophisticated driver safety devices,
including ABS and airbag systems.
9
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COMPUTER
[GRAPHIC]
From read-write channels to spindle and head positioning motor drives to
controllers, SGS-THOMSON is the undisputed leader in hard disk drive components.
10
<PAGE>
The computer industry has continued to be an important and growing factor in
SGS-THOMSON's business. Overall, the market for semiconductors in computer
applications is anticipated by industry experts to increase at a compound annual
rate of 16% through the end of this century.
At SGS-THOMSON, sales of products for computer applications increased nearly 36%
in the last year, and accounted for 27% of net revenues in 1995. For an example
of the Company's market leadership in computer applications, consider that seven
out of every ten PCs manufactured today use SGS-THOMSON smart power chips in
their hard disk drives. Some typical customers include: Acer, Bull, Canon,
Compaq, Conner, DEC, Epson, Hewlett Packard, IBM, Olivetti, Quantum, Seagate and
Xerox.
The Company's success in the computer market is evident from the great diversity
of products it provides. For personal computers, SGS-THOMSON manufactures x86
microprocessors; Flash, EPROM and fast or specialty SRAM memories; and graphics
processors, including state-of-the-art 3-D multimedia accelerators. Hard drives
use multichannel combos for motor drives and read-write circuits. Products
employed in monitors include multisynch processors, vertical amplifiers and
processors, and microcontrollers for power management and on-screen display.
Printers utilize the Company's power drivers, microcontrollers and memories.
Continuing its growth in the computer sector, the Company is developing new
products to satisfy industry demand for such applications as higher capacity
disk drives, photo-quality printers, and power management for notebook and
palmtop computers.
[GRAPHICS]
Seven out of every ten PCs manufactured today use SGS-THOMSON chips.
SGS-THOMSON is a major player in multimedia PCs. The Company is the world's
largest provider of MPEG decoders, and its STG 2000 is the industry's first
integrated multimedia accelerator.
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TELECOMMUNICATIONS
[GRAPHIC]
SGS-THOMSON has been a major participant in both analog and digital terminals
and exchanges and is helping to advance new technologies such as ISDN and ATM.
12
<PAGE>
Products for telecommunications customers represent one of the Company's largest
and fastest growing application areas, increasing nearly 37% in sales and
accounting for 23% of total revenues in 1995. With a projected compound annual
growth rate of 17% through the year 2000, the opportunities in this sector
should continue to expand.
To a great extent, the explosive growth in the telecommunications segment is the
result of the increasing popularity of cellular phones. The list of Company
products employed in cellular phones is lengthy, and growing rapidly. It
includes advanced digital signal processor cores, ICs used in supply management
and subscriber identification interface, Flash and EEPROM memories, and various
radio frequency products. Key customers include such industry giants as Motorola
and Nokia.
SGS-THOMSON products are widely used in many telecom applications other than
cellular phones, however, including line cards, modems, and central office or
PABX equipment. The Company's products are featured in high speed modems and
audio processors made by US Robotics, Sierra, Racal, PC-Tel and Acer. In
addition, it is a major supplier of dedicated interface ICs to three of the
leading switch manufacturers: Alcatel, Siemens and Northern Telecom. It is also
a major provider of ISDN interface ICs for expanding digital networks.
The continued growth of the telecommunications segment is being driven by
developments such as the renewal of line card equipment, ramp-up of ISDN and
wireless technologies, and the general expansion of the industry as a
consequence of deregulation. SGS-THOMSON is moving to capitalize on these trends
by creating new products, including a modem analog front-end for PCs, a high
speed link IC for ISDN, and a line card using advanced BCD technology.
[GRAPHIC]
The portfolio of Company products employed in cellular phones is lengthy and
growing rapidly.
Over the years, SGS-Thomson has built a technological and commercial leadership
position in the area of subscriber line interface circuits.
13
<PAGE>
CONSUMER
[GRAPHIC]
The recent boom in set top boxes for advanced services such as direct satellite
broadcasting has been made possible by ST's ability to produce state-of-the-art
devices in volume.
14
<PAGE>
SGS-THOMSON semiconductors are widely used in such common consumer products as
televisions, VCRs, audio systems and other home entertainment applications. The
increasing sophistication of such products, and the demand of consumers for the
latest technologies, continue to drive the growth of this segment. Industry
analysts expect the consumer market for semiconductors to expand at a compound
annual rate of 14% over the next five years. In 1995, the Company's sales of
semiconductors for consumer applications rose 28%, and were equivalent to 20% of
net revenues. Among SGS-THOMSON's major customers in this area are General
Instrument, Goldstar, Kenwood, Matsushita, Philips, Pioneer, Samsung, Sanyo,
Sharp, Sony and Thomson Multimedia. Included in the Company's products for the
consumer segment are: a complete set of ICs (other than DRAMs) for use in
digital satellite decoders; one-chip controllers for monitors; a teletext
decoder with on-board memory; audio-video matrix switching devices; VCR head
amplifiers; and encoders for video game consoles. It also supplies
microcontrollers for a wide variety of household appliances.
The Company's contribution to the consumer market has become even more evident
with the development of MPEG chips, which are essential to the creation of
products offering full-motion video features. MPEG technology is at the heart of
such diverse applications as multi-media PCs, the emerging digital and direct
broadcast satellite TVs, and video CD players. SGS-THOMSON has been a pioneer in
this area, and its established position as the world's #1 supplier of MPEG-2
video-audio decoders will help ensure a major role in the consumer category as
new and exciting full-motion products are introduced.
[GRAPHIC]
MPEG technology is at the heart of such diverse applications as multi-media PCs,
the emerging digital and direct broadcast satellite TVs and Digital Video Disk
(DVD) players.
SGS-THOMSON continues to innovate in the area of television, and plays a major
role in advancing image quality through such programs as Improved Quality TV.
15
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INDUSTRIAL
[GRAPHIC]
With a market share of over 40%, SGS-THOMSON is a worldwide supplier of discrete
and IC devices for the new generation of compact fluorescent lamps featuring low
energy consumption and long operating life.
16
<PAGE>
In the industrial market segment, SGS-THOMSON supplies semiconductor products
for a great variety of applications. Among the Company's most widely used
products are intelligent power circuits, which can be found in robots, motor
controls and other control systems, automation systems, power supply equipment,
lighting products and battery chargers. Significant customers include Asea Brown
Boveri, Mannesman, Philips, Schlumberger and Siemens.
In the past year, the industrial products category generated 21% of the
Company's net revenues, an increase of almost 37% over the prior twelve months.
This segment is projected by industry analysts to grow at a compound annual rate
of 16% through the year 2000. The factors driving the growth of this category
include the need to retrofit older plants for new processes, the trend among
corporations to seek greater production efficiencies through technology
upgrades, and the construction of new industrial facilities to meet burgeoning
demand for capacity in developing countries.
One industrial application with tremendous potential for growth is the "smart
card", for which the Company is the leading producer of chips. These plastic,
credit card-sized devices are embedded with powerful microchips that integrate
logic, microcontrollers and sophisticated cryptographics. SGS-THOMSON technology
enables the smart card to store personal or financial data, allowing access
while securing the information from unauthorized use. Smart cards are employed
throughout Europe to pay for public telephone service, to provide records of
bank accounts or health care data, and for many other uses. As they become more
widely accepted in the U.S., it will open up an even more significant market.
Smart cards are just one example of the Company's use of innovative technologies
to serve the needs of the industrial segment. It is also developing such
products as a system-on-a-chip for a new generation of "super smart" battery
chargers, and high voltage ICs for specialized lighting applications.
[GRAPHIC]
SGS-THOMSON technology enables the smart card to store personal or financial
data, allowing access while securing the information from unauthorized use.
ST's technological and manufacturing leadership, which enables such diverse
functions as a microcontroller, non-volatile memory and power and sensing
functions to be integrated on the same device, makes "system on a chip" devices
like the Smart Battery Charger a reality.
17
<PAGE>
OPERATIONS
MANUFACTURING
[GRAPHIC]
Today, there are 17 manufacturing sites in Europe, Asia and North America, and a
new facility will be opened in China.
SGS-THOMSON's position as one of the leading semiconductor companies is
supported by its global "manufacturing machine". Today, there are 17
manufacturing sites in Europe, Asia and North America, and a new facility will
be opened in China. This combination of manufacturing resources supports the
Company's broad semiconductor product line, providing customers in virtually
every major region with controlled access to essential products, and meeting the
highest standards for quality and cost-effectiveness.
This manufacturing machine operates on a large scale. Company-wide there are a
total of five Class 1 clean areas. Approximately 18,000 employees are involved
in the manufacturing processes. There are currently three facilities with the
capacity to manufacture wafers up to 8-inch diameter, and three plants with the
capability for 0.35 micron or smaller processes.
18
<PAGE>
[GRAPHIC]
The Company continues to strengthen its manufacturing resources. Six facilities
around the world are being expanded and upgraded. A new ULSI 8-inch front-end
facility is ready to begin activity in Catania, designs are underway for a new
8-inch fab in Rousset, and two other 8-inch facilities, one in Singapore and one
in Italy, are respectively being planned or are under consideration.
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<PAGE>
Manufacturing Facilities
Front-end / / Crolles, France / / Agrate, Italy / / Rousset, France / / Catania,
Italy / / Rennes, France / / Grenoble, France / / Castelletto, Italy
/ / Tours, France / / Ang Mo Kio, Singapore / / Carrollton, TX, USA / / Phoenix,
AZ, USA / / Rancho Bernardo,
CA, USA
Back-end
/ / Muar, Malaysia
/ / Kirkop, Malta
/ / Toa Payoh, Singapore
/ / Ain Sebaa, Morocco
/ / Bouskoura, Morocco
[GRAPHIC]
Tours, France
Ang Mo Kio, Singapore
Agrate, Italy
Muar, Malaysia
Catina, Italy
Toa Payoh, Singapore
Castelletto, Italy
20
<PAGE>
[GRAPHIC]
Carrollton, TX, USA
Phoenix, AZ, USA
Crolles, France
Rousset, France
Ain Sebaa, Morocco
Rancho Bernardo,
CA, USA
Bouskoura, Morocco
Kirkop, Malta
Rennes, France
Grenoble, France
Catania, Italy
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OPERATIONS
RESEARCH
AND DEVELOPMENT
SGS-THOMSON operates 31 advanced R&D or design sites worldwide.
[GRAPHIC]
<TABLE>
<CAPTION>
Technology Roadmap
PROTOTYPING/PRODUCTION START '91/'92 '93/'94 '95/'96 '97/'98 '99/'2000
<S> <C> <C> <C> <C> <C>
High Performance Logic 0.8/0.7u 0.5u 0.35u 0.25u 0.18u
(2/3 ML) (3 ML) (5 ML) (5 ML) (5-6 ML)
BiCMOS LOGIC/ANALOG 1.2u 0.7u 0.5u 0.35u 0.25u
BCD (Bipolar/CMOS/DMOS) 2.5u 1.2u 0.6u 0.5u 0.5u
EPROMs 16 M -- 16M -- --
5V 3V
FLASH Memories 256 K/1M 4M 8M/16M 64M 256M
5V 5V 3V 3V 2.5V
SRAMs (Fast/N.V.) 1M 1M 1M 1M/4 16M
5V 5V 3V 3V 2.5V
PROGRAMMABLE LOGIC 0.8u 0.7u 0.6u/0.5u 0.35u 0.25u
N.V. Memory Capability
</TABLE>
[PHOTO]
The R&D program at SGS-THOMSON is extensive and dynamic, enabling the Company to
maintain its technological leadership. Today, there are 31 advanced research and
development or design sites worldwide, employing 2,500 people. Total expenses
for R&D in 1995 were over $440 million, representing 12.4% of net revenues.
R&D milestones for 1995 included the first engineering samples of such products
as 0.35 micron VLSI CMOS, 0.5 micron BiCMOS and 16 Megabit Flash. Also, the
first silicon has been produced for BCD 5, the Company's exclusive 0.6 micron
Bipolar/CMOS/DMOS technology.
To maximize the benefits of the R&D effort, the Company relies on both
centralized and decentralized operations. That is, there are two main centers
for VLSI platform development, in Crolles, France and Agrate, Italy, along with
diverse process/design centers for specific technological competencies.
Extending the scope of its R&D program, SGS-THOMSON conducts some activities
jointly with major corporate, academic and government research centers. A key
advantage is the use of pilot lines closely allied with the Company's R&D
facilities, such as the non-volatile memory and programmable logic line in
Agrate or the high performance logic CMOS/BiCMOS line at Crolles. The pilot
lines allow early prototyping of technologies and help ramp-up for
manufacturing, thus reducing time-to-market while enhancing yield.
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<PAGE>
STRATEGIC ALLIANCES
SGS-THOMSON has long recognized the importance of working in close cooperation
with its customers to ensure that its technologies anticipate and satisfy
emerging needs, and to share some of the risks and costs of product development.
Toward those ends, the Company has formed a network of worldwide strategic
alliances with key customers and other participants in the semiconductor
marketplace.
Strategic alliances with customers in the automotive sector include Bosch and
Fiat/Marelli. In telecommunications, the Company is allied with Alcatel, Nokia
and Northern Telecom. Computer industry leaders such as Seagate Technology and
Western Digital, and consumer products maker Thomson Multimedia, are also
involved in constructive alliances with SGS-THOMSON. The Company also has
technology or product development alliances with Philips Semiconductors,
Mitsubishi Electric Corporation, Siemens and a major design software company.
Furthermore, there are a number of other strategic alliances that for
confidentiality reasons cannot be mentioned here.
The Company's strong relationships and alliances have had a direct, positive
impact on financial performance. In 1995, sales to alliance "partners" totalled
nearly $1 billion, a large and especially stable component of net revenues.
[GRAPHIC]
Customers
Semiconductor
Manufacturers
Research Institutes
and Universities
Suppliers
Multinational R&D
Organizations
23
<PAGE>
FINANCIAL CONTENTS
Selected Consolidated Financial Data 25
Management's Discussion and Analysis
of Financial Condition and Results of Operations 26
Consolidated Statements of Income 37
Consolidated Balance Sheets 38
Consolidated Statements of Cash Flows 39
Consolidated Statements of Shareholders' Equity 40
Notes to Consolidated Financial Statements 41
Auditor's Report 55
24
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
The Company was formed in 1987 as a result of the combination of the
non-military business of Thomson Semiconducteurs, the microelectronics business
of the French state-controlled defense electronics company Thomson-CSF, and SGS
Microelettronica, the microelectronics business owned by STET, the Italian
state-controlled telephone company. Since its formation, the Company has
significantly broadened and upgraded its range of products and technologies and
has strengthened its manufacturing and distribution capabilities in Europe,
North America, and the Asia Pacific region, while at the same time restructuring
its operations to improve efficiency.
From 1991 to 1995, the Company's net revenues increased from $1,374.0 million to
$3,554.4 million, with strongest revenue growth occurring in 1993, 1994 and
1995. Such revenue gains were achieved despite the Company's absence during that
period from the market for DRAMs (a commodity memory product) and, until the
second half of 1994, from the market for personal computer microprocessors (such
as the x86 family of products) and DRAMs. According to trade association data,
the TAM (total available market) increased from $54.6 billion in 1991 to a
preliminary estimate of $144.4 billion in 1995, while the SAM (serviceable
available market, which prior to 1995 consisted of the TAM without DRAMs,
microprocessors and opto-electronic products and commencing in 1995 and for all
prior periods compared therewith includes microprocessors as a result of the
Company's production of x86 products) increased from $45.6 billion in 1991 to a
preliminary estimate of $99.2 billion in 1995. The Company's share of the TAM
remained relatively constant at 2.5% during this period, while the Company's
share of the SAM increased from 3.0% in 1991 to 3.6% in 1995. Revenue growth
within the Company from 1991 through 1995 was particularly significant for
dedicated products, EPROMs and semicustom devices. The Company has also
succeeded in becoming a more global semiconductor supplier--the proportion of
the Company's revenues derived outside Europe increased from approximately 42%
in 1991 to approximately 54% in 1995.
Differentiated ICs (which the Company defines as being its dedicated
products, semicustom devices and microcontrollers) accounted for just over 51%
of the Company's net revenues in 1995, compared to approximately 48% in 1994.
Such products foster close relationships with customers, resulting in early
knowledge of their evolving requirements and opportunities to access their
markets for other products, and are less vulnerable to competitive pressures
than standard commodity products. In 1995, analog ICs (including mixed signal
ICs), the majority of which are also differentiated ICs, accounted for
approximately 46% of the Company's net revenues (compared to approximately 43%
in 1994), while discrete devices accounted for approximately 17% of the
Company's net revenues (compared to approximately 15% in 1994). In recent years,
analog ICs and discrete devices have experienced less volatility in sales growth
rates and average selling prices than the overall semiconductor industry.
In addition to increasing revenues, management's efforts to rationalize
operations and increase manufacturing and other efficiencies have generated
significant improvements in profitability. The Company's gross profit margin
increased from 27.6% in 1991 to 41.0% in 1995. Such increases in gross profit
margins have combined with significant reductions in selling, general and
administrative expenses as a percentage of net revenues and reduced interest
costs to significantly increase profitability in an improved industry
environment in 1993, 1994 and 1995. In 1995, the gross profit margin decreased
to 41.0% from 42.2% in 1994 due primarily to costs associated with the
conversion of certain manufacturing facilities from the production of 4-inch and
5-inch wafers to production of 5-inch and 6-inch wafers, the increase in the
cost of sales attributable to the new plant in Phoenix, Arizona, which completed
the start-up phase at the end of the 1995 second quarter and whose costs, as of
the 1995 third quarter, are therefore included in the cost of sales and, in the
second and third quarters of 1995, the negative impact of the weakening of the
U.S. dollar, and to a lesser extent due to higher depreciation resulting from
increased capital spending.
According to preliminary estimated trade association data, in 1995 TAM
revenues increased approximately 42% over 1994 while SAM revenues increased
approximately 32%. Such growth rates have exceeded the historical TAM compound
annual growth rates since 1983 (19%, according to preliminary estimated trade
association data). Although it cannot predict the timing or degree of any
softening in the semiconductor market, management believes that the industry
growth rates and average selling prices in the period from 1993 through 1995 are
unlikely to be sustained. In less favorable industry environments, the Company
has in the past been requested to reduce prices to limit the level of order
cancellations. As only a portion of the Company's expenses varies with its
revenues, there can be no
26
<PAGE>
royalty income) decreased from $42.7 million in 1994 to $33.7 million in 1995
due primarily to such reclassification. Net revenues increased 34.4%, from
$2,644.9 million to $3,554.4 million in 1995 compared to 1994.
The Dedicated Products Group's net revenues increased 38.9% primarily
as a result of significant volume growth in computer products, video/image
processing products and audio and automotive products. The Discrete and Standard
ICs Group's net revenues increased 31.7%, due principally to sales increases in
transistors such as Power MOS and power transistors and discrete devices. Sales
of standard commodities such as standard linears and voltage regulators also
increased compared to 1994. The Memory Products Group's revenues grew by 15.0%
as increased volumes of flash memory products and increased sales of EEPROMs and
smartcard ICs used in European telephone and bank cards were offset by declining
EPROM sales due to lower prices. Net revenues of the Programmable Products Group
increased 40.4% principally from growth in sales of microcontroller products and
higher sales of digital semicustom products (which benefited from the
introduction of advanced submicron product lines). In the second half of 1994,
the Company commenced shipments of its own x86 microprocessor product family.
Although it cannot predict the timing or degree of any softening in the
semiconductor market, management believes that the rate of growth in revenues
experienced by the Company in its principal product groups in 1995 compared to
1994 is unlikely to be sustained.
GROSS PROFIT. The Company's gross profit increased 30.7%, from $1,116.2 million
in 1994 to $1,458.4 million in 1995, primarily as a result of significant volume
growth in all the Company's principal product groups except the Memory Products
Group, which also experienced a slower growth rate in net sales due to declining
EPROM prices. As a percentage of net revenues, gross profit decreased from 42.2%
to 41.0% due primarily to costs associated with the conversion of certain
manufacturing facilities from the production of 4-inch and 5-inch wafers to
production of 5-inch and 6-inch wafers and to a lesser extent due to higher
depreciation resulting from increased capital spending.
Increases in cost of sales from $1,528.7 million in 1994 to $2,096.0
million in 1995 were due primarily to higher variable costs associated with
significantly increased volume, the addition of the new fabrication plant in
Crolles, France, which has started to reach a significant volume of production,
and to certain manufacturing facilities which were in the process of being
upgraded in the 1995 period. Increases in the cost of sales were also
attributable to the new plant in Phoenix, Arizona, which completed the start-up
phase at the end of the 1995 second quarter and whose costs, as of the 1995
third quarter, are therefore included in cost of sales, and higher depreciation
resulting from increased capital spending in recent periods.
The exchange rate impact on gross profit in 1995 compared to 1994 was
negative, as the negative impact of the depreciation of the U.S. dollar on cost
of sales was greater than the positive impact on net revenues. However, this
impact was not material. Cost of sales in 1995 and 1994 was net of $11.8 million
and $19.3 million, respectively, of funds received from governmental agencies to
offset industrialization costs (which include certain costs incurred to bring
prototype products to the production stage) included in cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 21.6% from $339.9 million to $413.2 million.
As a percentage of net revenues, selling, general and administrative expenses
decreased from 12.9% to 11.6% due primarily to higher net revenues. However 1994
included a $15 million provision for potential patent infringements and 1995
included a $10 million provision related to one time charges to cover the
possible financial impact related to legal proceedings in one of the Company's
subsidiaries. Excluding these provisions the increase in selling, general and
administrative expenses was primarily due to a strengthening in the Company's
marketing efforts as well as in general and administrative functions.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses continued
to represent a substantial amount of the Company's net revenues, increasing
30.2% to $440.3 million in 1995 from $338.3 million in 1994. Due to the strong
growth in net revenues attained in 1995, research and development expenses as a
percentage of net revenues decreased slightly from 12.8% to 12.4%. However, the
Company continued to invest heavily in research and development and plans to
continue increasing its research and development
27
<PAGE>
activities. The Company's reported research and development expenses do not
include design center, process engineering, pre-production or industrialization
costs.
RESTRUCTURING COSTS. Restructuring costs decreased significantly to $13.0
million in 1995 from $37.0 million in 1994. The 1995 period included costs
associated with certain personnel lay-offs and relocations. The 1994 period
included primarily costs associated with the closure of certain older fab
facilities and certain personnel lay-offs.
OTHER INCOME AND EXPENSES. Other income and expenses of the Company resulted in
income of $59.1 million in 1995 compared to income of $32.0 million in 1994.
Other income and expenses include primarily funds received from government
agencies in connection with the Company's research and development programs, the
costs of new plant start-ups, as well as foreign currency gains and losses,
patent license payments, the costs of certain activities relating to
intellectual property, and miscellaneous revenues and expenses. Other income and
expenses in the 1994 period included a charge for stock option compensation of
$18.1 million, while 1995 included increased contributions to research and
development activities and start-up costs. In addition, in 1995 there were
several nonrecurring items affecting income and expenses, which taken together
were not material. These include the reversal of the provision for the
restructuring of the Rancho Bernardo plant in connection with the recent
decision to retain and upgrade this facility.
OPERATING PROFIT (LOSS). The Company's operating profit increased 50.3% from
1994 to 1995, increasing by $218.0 million to $651.0 million, primarily as a
result of the reduction of provisions for restructuring costs and increased
revenues.
NET INTEREST EXPENSES. The Company decreased its net interest expenses from
$21.0 million in 1994 to $16.8 million in 1995, primarily as a result of the
temporary reduction in debt due to application of the proceeds received by the
Company in December 1994 from the Initial Public Offering, and in October 1995
from the second public offering, which substantially decreased the financial
debt.
INCOME TAX. Provision for income tax was $108.3 million in 1995 compared to
$49.5 million in 1994, primarily as a result of the substantial increase in
profit before tax. In 1995 the accrued effective tax rate was approximately 17%,
compared to 12% for 1994. The still favorable 1995 rate is mainly due to the
application of benefits in certain countries associated with new capital
expenditure programs. As such benefits may not be available after 1995, the
Company expects to register an increase in the effective tax rate in the coming
years.
1994 VS. 1993
The growth that the worldwide semiconductor market experienced in 1993 continued
in 1994, with the markets in Europe, the Americas, the Asia Pacific region and
Japan all showing strong growth. According to trade association data, the TAM
increased by approximately 32% in 1994 over 1993. The estimated SAM increased by
approximately 22% over the same period. The Company experienced strong increases
in both revenues and profitability in 1994, caused by significant increases in
volume and increased sales of new products. Prices were slightly lower in 1994
than in 1993, and were particularly lower for EPROMs commencing in the second
quarter of 1994.
NET REVENUES. Net sales increased 29.6%, from $2,007.7 million to $2,602.2
million, in 1994 compared to 1993. This increase was primarily as a result of
significantly increased volume of sales of existing products in each of the
Company's principal product groups. Higher volumes accounted for the greatest
part of the $594.5 million total increase in net sales, but increased sales of
new products also contributed to the sales increase. Prices registered a
marginally declining trend, mainly in memory products. There was no significant
impact on sales due to changes in the value of the U.S. dollar in 1994 compared
to 1993. Other revenues (consisting primarily of co-development contract fees,
certain contract indemnity payments and patent royalty income) increased from
$29.8 million to $42.7 million in the same period, reflecting primarily payments
from certain strategic partners and patent royalty income. As a result, net
revenues increased 29.8%, from $2,037.5 million to $2,644.9 million.
The Dedicated Products Group's net revenues increased 39.5% primarily
as a result of significant growth in computer products (primarily higher sales
of disk drive controller ICs), audio and automotive products,
28
<PAGE>
SGS-THOMSON Microelectronics N.V.
video/image processing products and telecommunications products (primarily
additional business secured from a strategic alliance with Northern Telecom that
became effective in January 1994). The Discrete and Standard ICs Group's net
revenues increased 23.6% due principally to volume increases in standard logic
and linear devices, which were facilitated in part by increased back-end
manufacturing capacity. Sales of power MOS transistors also increased over 1993.
The Memory Products Group increased net revenues by 23.4% primarily through
increased volumes of flash memory products and increased sales of EEPROMs,
smartcard ICs used in European telephone and bank cards, and also EPROMs
(notwithstanding a decline in pricing commencing in the second quarter of 1994
from historically high levels). Net revenues of the Programmable Products Group
increased 19.0% principally from higher sales of digital semicustom products
(which benefited from the introduction of advanced submicron product lines) and
growth in sales of microcontroller products. In the second half of 1994, the
Company commenced shipments of the x86 microprocessor product family.
Net revenues in Europe increased primarily as a result of increased
sales of memory products, in particular flash memories, and automotive and audio
products. Standard commodities, such as standard linear and voltage regulator
products, some memory products, such as EEPROM and flash memory products, and
microcontroller products also contributed to this growth. In the Americas, the
35.9% increase in net revenues was attributable to an improved economy in the
United States, increased sales of image processing products as well as the
alliance with Northern Telecom. Significant growth rates were also registered by
microcontroller, flash memories and standard commodities. In the Asia Pacific
region, the revenue increase was primarily due to a strong increase in sales of
devices for computer peripherals (disk drive) and in the personal computer
business in Singapore and Taiwan. A strong increase was also shown by digital
semicustom products. The Company is expanding its business in China principally
in the telecommunications and consumer (television and radio) segments. Despite
difficult general economic conditions in Japan, the region managed good growth
in net revenues fueled by sales of memory products, such as SRAMs, flash
memories and EPROMs, and dedicated products for office equipment. In 1994, the
Company opened a sales office in Osaka and a dedicated products design center in
Tokyo.
GROSS PROFIT. The Company's gross profit increased 41.5%, from $789.1 million in
1993 to $1,116.2 million in 1994, primarily as a result of significantly
increased net revenues. Although gross profit increased as a result of volume
growth in all the Company's principal product groups, gross profit was
particularly affected in 1994 by increased sales in the Dedicated Products Group
of differentiated ICs, which generally have higher margins than standard
commodity products. In addition, gross profit benefited from increased
profitability in the Discrete and Standard ICs Group. As a percentage of net
revenues, gross profit increased from 38.7% to 42.2%.
Increases in cost of sales from $1,248.4 million in 1993 to $1,528.7
million in 1994 were due primarily to higher variable costs associated with
significantly increased volume and higher depreciation resulting from increased
capital spending in recent periods. Increases in cost of sales were also
attributable to the addition of the new fabrication plant in Crolles, France,
which has recently commenced manufacturing. Cost of sales decreased as a
percentage of revenues due primarily to manufacturing efficiencies resulting
from increased production volume, and to a lesser extent to improved yields and
labor productivity.
The exchange rate impact on gross profit in 1994 compared to 1993 was
negligible, as the comparative positive impact on net revenues was partially
offset by a negative impact on cost of sales. Cost of sales in 1994 and 1993 was
net of $19.3 million and $20.4 million, respectively, of funds received to
offset industrialization costs (which include certain costs incurred to bring
prototype products to the production stage) included in cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 12.4%, from $302.5 million to $339.9 million.
Approximately $28 million of this increase was due to increases in the Company's
sales force and marketing efforts. In addition, a $15.0 million provision for
patent risks was included. As a percentage of net revenues, selling, general and
administrative expenses decreased from 14.8% to 12.9% due primarily to a higher
sales rate.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development continued to receive
a substantial amount of the Company's net revenues, reaching $338.3 million
29
<PAGE>
in 1994 and $270.9 million in 1993, a 24.9% increase. As a result of the strong
growth in net revenues attained in 1994, research and development expenses as a
percentage of net revenues fell slightly from 13.3% in 1993 to 12.8% in 1994.
The Company plans to continue to increase its research and development staff so
as to increase research and development activities. The Company's reported
research and development expenses do not include design center, process
engineering, pre-production or industrialization costs.
RESTRUCTURING COSTS. Restructuring costs decreased significantly from $49.9
million in 1993 to $37.0 million in 1994. The restructuring costs in 1994 were
primarily charges incurred for fixed asset write-offs and other costs associated
with the restructuring and upgrading of certain manufacturing activities. The
restructuring costs for 1994 include provisions for activities for which
management decisions have been made; some have occurred in 1994 and others were
originally scheduled to occur during 1995, but have been postponed due to
capacity requirements in light of current market conditions. Management believes
these restructuring activities will contribute to its manufacturing capabilities
and improve efficiency.
OTHER INCOME AND EXPENSES. Other income and expenses resulted in income of $32.0
million in 1994 compared to income of $49.7 million in 1993. Other income and
expenses include primarily funds received from government agencies in connection
with the Company's research and development programs, as well as foreign
currency gains and losses, patent license payments, the costs of certain
activities relating to intellectual property, and miscellaneous revenues and
expenses. In 1994 other income and expenses included the charge for stock option
compensation of $18.1 million. See Note 12 to the Consolidated Financial
State-ments. In addition, in 1994 there was a significant increase in the cost
of new plant start-ups, from $1.6 million to $8.8 million, principally
associated with the new fabrication facility in Phoenix.
OPERATING PROFIT (LOSS). The Company's operating profit registered a record
increase of 100.9% from 1993 to 1994, increasing by $217.5 million to $433.0
million primarily as a result of the increased net revenues. Changes in exchange
rates did not have a material impact on operating profit.
NET INTEREST EXPENSES. The Company decreased its net interest expenses from
$37.8 million in 1993 to $21.0 million in 1994, primarily as a result of the
$500 million capital stock increase in 1993 (which substantially decreased
financial debt).
INCOME TAX. Provision for income tax was $49.5 million in 1994 compared to $17.6
million in 1993, primarily as a result of the substantial increase in profit
before tax. In 1994, the Company took advantage of certain tax benefits which
allowed an effective tax rate of approximately 12.0%. As such benefits will no
longer be available, the Company is expecting a significant increase in the
effective tax rate in the coming years beginning in 1995.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain financial information for the years 1995,
1994 and 1993. Such information is derived from unaudited consolidated financial
statements, prepared on a basis consistent with the audited financial
statements, that include, in the opinion of management, only normal recurring
adjustments necessary for a fair presentation of the information set forth
therein. Operating results for any quarter are not necessarily indicative of
results for any future period. In addition, in view of the significant growth
experienced by the Company in recent years as well as the changes in the
composition of sales and production among different geographic regions, the
Company believes that period-to-period comparisons of its operating results
should not be relied upon as an indication of future performance.
30
<PAGE>
SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
Quarter Ended
=============================================================================================
(in millions, except percentages Apr. 3, July 3, Oct. 2, Dec.31 , Apr. 2, July 2, Oct. 1,
and per share data) 1993 1993 1993 1993 1994 1994 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of
Income Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 438.9 $ 526.1 $ 521.3 $ 551.3 $ 599.3 $ 672.4 $ 657.2
Cost of sales (281.1) (329.6) (309.0) (328.8) (346.8) (389.4) (380.5)
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 157.8 196.5 212.3 222.5 252.5 283.0 276.7
- ---------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative (72.8) (71.3) (67.5) (91.0) (91.3) (82.1) (81.5)
Research and development (64.0) (69.6) (68.3) (68.9) (72.5) (82.7) (83.4)
Restructuring cost (0.6) (1.8) (16.9) (30.6) (0.2) (22.9) (10.7)
Other income and expenses 18.6 17.5 3.1 10.5 13.8 15.3 3.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (118.8) (125.2) (149.6) (180.0) (150.2) (172.4) (172.3)
Operating profit (loss) 39.0 71.3 62.7 42.5 102.3 110.6 104.4
Net interest expenses (13.6) (10.5) (10.1) (3.7) (4.8) (5.6) (5.6)
- ---------------------------------------------------------------------------------------------------------------------------------
Profit (loss) before tax 25.4 60.8 52.6 38.8 97.5 105.0 98.8
Income tax (1.0) (2.1) (7.1) (7.3) (18.0) (18.5) (11.5)
Profit (loss) before
minority interests 24.4 58.7 45.5 31.5 79.5 86.5 87.3
Minority interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 24.4 $ 58.7 $ 45.5 $ 31.5 $ 79.5 $ 86.5 $ 87.3
=================================================================================================================================
Net earnings (loss) per share $ 0.46 $ 0.78 $ 0.52 $ 0.27 $ 0.67 $ 0.73 $ 0.73
=================================================================================================================================
Weighted average
shares outstanding 53.6 75.4 87.2 119.0 119.0 119.0 119.0
=================================================================================================================================
As a Percentage of Net
Revenues:
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (64.0) (62.6) (59.3) (59.6) (57.9) (57.9) (57.9)
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 36.0 37.4 40.7 40.4 42.1 42.1 42.1
- ---------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative (16.6) (13.6) (12.9) (16.5) (15.2) (12.2) (12.4)
Research and development (14.6) (13.2) (13.1) (12.5) (12.1) (12.3) (12.7)
Restructuring costs (0.1) (0.3) (3.2) (5.6) 0.0 (3.4) (1.6)
Other income and expenses 4.2 3.3 0.6 1.9 2.3 2.3 0.5
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (27.1) (23.8) (28.7) (32.7) (25.1) (25.6) (26.2)
Operating profit (loss) 8.9 13.6 12.0 7.7 17.1 16.4 15.9
Net interest expenses (3.1) (2.0) (1.9) (0.7) (0.8) (0.8) (0.9)
- ---------------------------------------------------------------------------------------------------------------------------------
Profit (loss) before tax 5.8 11.6 10.1 7.0 16.3 15.6 15.0
Income tax (0.2) (0.4) (1.4) (1.3) (3.0) (2.8) (1.7)
Profit before minority interests 5.6 11.2 8.7 5.7 13.3 12.9 13.3
Minority interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings loss 5.6% 11.2% 8.7% 5.7% 13.3% 12.9% 13.3%
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
================================================================
(in millions, except percentages Dec.31 , Apr. 1, July 1, Sept.30, Dec.31,
and per share data) 1994 1995 1995 1995 1995
- ----------------------------------------------------------------------------------------------------
Consolidated Statement of
Income Data:
<S> <C> <C> <C> <C> <C>
Net revenues $ 716.0 $ 778.6 $ 878.5 $ 922.6 $ 974.7
Cost of sales (412.0) (451.8) (526.9) (552.3) (565.1)
- ----------------------------------------------------------------------------------------------------
Gross profit 304.0 326.8 351.6 370.3 409.6
- ----------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative (85.0) (90.7) (99.8) (103.6) (119.0)
Research and development (99.7) (97.5) (105.1) (109.3) (128.4)
Restructuring cost (3.2) (0.3) (0.8) (6.8) (5.1)
Other income and expenses (0.4) 3.4 11.8 15.7 28.3
- ----------------------------------------------------------------------------------------------------
Total operating expenses (188.3) (185.1) (193.9) (204.0) (224.2)
Operating profit (loss) 115.7 141.7 157.7 166.3 185.4
Net interest expenses (5.0) (2.9) (5.1) (6.7) (2.1)
- ----------------------------------------------------------------------------------------------------
Profit (loss) before tax 110.7 138.8 152.6 159.6 183.3
Income tax (1.5) (31.9) (30.1) (30.7) (15.7)
Profit (loss) before
minority interests 109.2 106.9 122.5 128.9 167.6
Minority interests 0.0 0.0 0.1 0.1 0.4
- ----------------------------------------------------------------------------------------------------
Net earnings (loss) $ 109.2 $ 106.9 $ 122.6 $ 129.0 $ 168.0
====================================================================================================
Net earnings (loss) per share $ 0.90 $ 0.83 $ 0.95 $ 1.00 $ 1.24
====================================================================================================
Weighted average
shares outstanding 120.6 128.6 128.8 129.1 135.9
====================================================================================================
As a Percentage of Net
Revenues:
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (57.5) (58.0) (60.0) (59.9) (58.0)
- ----------------------------------------------------------------------------------------------------
Gross profit 42.5 42.0 40.0 40.1 42.0
- ----------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative (11.9) (11.6) (11.4) (11.2) (12.2)
Research and development (13.9) (12.5) (12.0) (11.8) (13.2)
Restructuring costs (0.4) (0.0) (0.1) (0.7) (0.5)
Other income and expenses (0.1) 0.4 1.3 1.7 2.9
- ----------------------------------------------------------------------------------------------------
Total operating expenses (26.3) (23.8) (22.1) (22.1) (23.0)
Operating profit (loss) 16.2 18.2 18.0 18.0 19.0
Net interest expenses (0.7) (0.4) (0.6) (0.7) (0.2)
- ----------------------------------------------------------------------------------------------------
Profit (loss) before tax 15.5 17.8 17.4 17.3 18.8
Income tax (0.2) (4.1) (3.4) (3.3) (1.6)
Profit before minority interests 15.3 13.7 13.9 14.0 17.2
Minority interests 0.0 0.0 0.0 0.0 0.0
- ----------------------------------------------------------------------------------------------------
Net earnings loss 15.3% 13.7% 14.0% 14.0% 17.2%
====================================================================================================
</TABLE>
31
<PAGE>
In 1995, approximately 46% of the Company's net revenues originated in
Europe, compared to 58% in 1991. The Company's third quarter revenues in Europe
have averaged less than average revenues during other quarters due to production
slowdowns by its European customers in July and August. During strong industry
conditions, including in 1995, the negative impact of third quarter seasonality
in Europe has generally been offset by increased sales in other regions.
Quarterly results have also been and may be expected to continue to be
substantially affected by the cyclicality of the semiconductor and electronic
systems industries, the timing and success of new product introductions and the
levels of provisions and other unusual charges incurred.
Gross profit as a percentage of net revenues in the last quarter of
1995 returned to the 42.0% level registered in the first quarter of 1995 after
decreasing to 40.0% and 40.1% in the second and third quarters of 1995,
respectively. The decrease registered in the second quarter of 1995 was due
primarily to the weakening of the U.S. dollar registered against the principal
European and Asian currencies and due to costs associated with the conversion of
certain manufacturing facilities from the production of 4-inch and 5-inch wafers
to production of 5-inch and 6-inch wafers. The decrease registered in the third
quarter of 1995 was due primarily to the increase in the cost of sales
attributable to the new plant in Phoenix, Arizona, which completed the start-up
phase at the end of the 1995 second quarter and whose costs, as of the 1995
third quarter, are therefore included in cost of sales, and to a lesser extent
due to costs associated with the conversion of certain manufacturing facilities
from the production of 4-inch and 5-inch wafers to production of 5-inch and
6-inch wafers and to the weakening of the U.S. dollar registered against the
principal European and Asian currencies.
The Company's quarterly and annual operating results are also affected
by a wide variety of other factors that could materially and adversely affect
revenues and profitability or lead to significant variability of operating
results, including, among others, capital requirements and the availability of
funding, competition, new product development and technological change and
manufacturing. In addition, a number of other factors could lead to fluctuations
in operating results, including order cancellations or reduced bookings by key
customers or distributors, intellectual property developments, international
events, currency fluctuations, problems in obtaining adequate raw materials on a
timely basis, and the loss of key personnel. As only a portion of the Company's
expenses varies with its revenues, there can be no assurance that the Company
will be able to reduce costs promptly or adequately in relation to revenue
declines to compensate for the effect of any such factors. As a result,
unfavorable changes in the above or other factors have in the past and may in
the future adversely affect the Company's operating results.
The Company believes that inflation has not had a material effect on
the results of its operations during the periods presented.
IMPACT OF CHANGES IN EXCHANGE RATES
The Company's results of operations and financial condition can be significantly
affected by changes in exchange rates between the U.S. dollar and other
currencies, particularly the Italian lira, the French franc, the English pound,
the German mark and the Singapore dollar.
Revenues for certain products (primarily dedicated products sold in
Europe) that are quoted in currencies other than the U.S. dollar are directly
affected by fluctuations in the value of the U.S. dollar. Revenues for all other
products, which are quoted in U.S. dollars and translated into local currencies
for payment, tend not to be affected significantly by fluctuations in exchange
rates except to the extent that there is a lag between changes in currency rates
and adjustments in the local currency equivalent price paid for such products.
Certain significant costs incurred by the Company, such as direct
labor, selling, general and administrative expenses, and research and
development expenses, are incurred in the currencies of jurisdictions where the
Company's operations are located. Fluctuations in the value of these currencies,
particularly the Italian lira and the French franc, compared to the U.S. dollar
can affect the Company's costs and therefore its profitability.
The strong depreciation which the U.S. dollar registered in the first
six months of 1995 against the principal European and Asian currencies which
have a material impact on the Company resulted in a negative impact on results
of operations for the period. In the third quarter of 1995 the slight
appreciation of the U.S. dollar against the principal European and Asian
currencies which have a material impact on the Company resulted in a marginal
impact on the Company's results of operations. In 1994,
32
<PAGE>
SGS-THOMSON Microelectronics N.V.
the Company estimates that the beneficial net impact of a stronger U.S. dollar
compared to 1993 accounted for a marginal amount of the Company's improvement in
operating profit. In 1993, the positive impact of the depreciation in the value
of the Italian lira compared to the U.S. dollar significantly decreased selling,
general and administrative expenses and research and development expenses as a
percentage of net revenues. The Company estimates that the net exchange rate
effect accounted for approximately 29% of its improvement in operating profit in
1993 over 1992. The net exchange rate impact in 1992 compared to 1991, however,
was negligible. In 1991 and earlier periods, the net exchange rate impact was
negative, and in some cases materially adversely affected results of operations.
The Company's principal strategies to reduce the risks associated with
exchange rate fluctuations have been (i) to purchase certain raw materials and
equipment in transactions denominated in dollars (thereby reducing the exchange
rate risk for costs relative to revenues, which are principally denominated or
determined by reference to the U.S. dollar), and (ii) to manage certain other
costs, such as financial costs, to maintain an appropriate balance between U.S.
dollars and other currencies based upon the currency environment at the time.
Although from time to time the Company purchases or sells currencies forward to
hedge currency risk in obligations or receivables, the Company's policy is not
to take speculative positions through forward currency contracts. The Company
has not experienced significant gains or losses as a result of hedging
activities. Its management strategies to reduce exchange rate risks have served
to mitigate, but not eliminate, the positive or negative impact of exchange rate
fluctuations.
Assets, shareholders' equity and liabilities of non-Dutch subsidiaries
are for consolidation purposes translated into U.S. dollars at the year-end
exchange rate. See Note 2.3 to the Consolidated Financial Statements. Income and
expenses are translated at the average exchange rate for the period. Adjustments
resulting from the translation are recorded directly in shareholders' equity,
and are shown as "translation adjustment" in the consolidated statements of
shareholders' equity. The balance sheet impact of such translation adjustments
has been, and may be expected to continue to be, material from period to period.
The Company's outstanding indebtedness is denominated principally in
Italian lire, U.S. dollars, Singapore dollars and French francs. See
"Liquidity and Capital Resources" and Note 15 to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash generated from operations totalled $825.1 million in
1995, compared to $728.1 million in 1994 and $460.9 million in 1993.
In 1993, 1994 and 1995, significantly increased net cash from
operations and cash from a two-step $500 million capital stock increase in May
and September 1993, and the net proceeds of $198.7 million and $371.6 million
resulting from the Initial Public Offering and the second public offering,
respectively, enabled the Company to substantially reduce its indebtedness,
finance capital expenditure and improve its balance sheet. As a result, the
Company has passed from net indebtedness of approximately $905 million and a net
financial debt-to-equity ratio of 1.89:1 at December 31, 1991 to a positive net
financial position (cash, cash equivalents and marketable debt securities net of
total debt) of $64.9 million at December 31, 1995. As the average interest cost
on the Company's outstanding indebtedness is approximately equal to its
investment return on short-term investments, the Company has elected not to make
any further pre-payments on its indebtedness. Including the $371.6 million in
net proceeds from the second public offering completed in October 1995, the
Company had approximately $758.4 million in cash, cash equivalents and
marketable securities at December 31, 1995. Cash and cash equivalents increased
from $263.5 million at December 31, 1993 to $457.2 million at December 31, 1994
and to $754.0 million at December 31, 1995. At December 31, 1995, the aggregate
amount of the Company's long-term credit facilities was approximately $289
million, all of which was outstanding, and the aggregate amount of the Company's
unconfirmed short-term facilities was approximately $784 million, under which
approximately $405 million of indebtedness was outstanding. The Company has
approximately $88 million of long-term indebtedness that will become due within
one year, and expects to fund such debt repayments from available cash. The
Company enters into interest rate swap agreements from time to time.
33
<PAGE>
The Company's capital expenditures totalled $181.2 million in 1991,
$196.0 million in 1992, $445.9 million in 1993, $779.7 million in 1994 and
$1,001.9 million in 1995. Capital spending prior to 1994 was used primarily to
increase capacity with market growth and to modify existing manufacturing
facilities to improve efficiency. Commencing in 1993, however, the Company began
a more substantial capital expenditure program intended to enable the Company to
increase manufacturing capacity through the construction of new manufacturing
facilities. Capital expenditures for 1994 were principally devoted to completion
of the Crolles facility, expansion of certain 5-inch facilities, conversion of
certain facilities to 6-inch production, and expansion of certain back-end
assembly and test facilities. Capital expenditures for 1995 were principally
devoted to completion of the first phase of the Phoenix 8-inch front-end
manufacturing facility, completion of the 8-inch wafer equipment installation in
Crolles, conversion of existing facilities to 5-inch and 6-inch wafer
fabrication and equipping of an 8-inch front-end manufacturing facility in
Catania.
The Company currently expects that capital spending for the foreseeable
future will continue to be at high levels, as in 1994 and 1995. Specifically, in
light of the currently expected market trends and conditions, for 1996 the
Company has again planned a significant amount for capital expenditures that
will be used for a variety of projects. The most significant of the Company's
1996 capital expenditure projects are expected to be (i) the completion of the
8-inch front-end wafer fabrication plant in Crolles, France (currently budgeted
at approximately $150 million), (ii) the completion of phase two of its project
to ramp up production at its Phoenix, Arizona 8-inch front-end facility for
wafer fabrication (currently budgeted at approximately $120 million), (iii) the
completion of phase two of its project to equip its 8-inch front-end facility
located in Catania, Italy (currently budgeted at approximately $100 million) and
(iv) the extension and the conversion of an existing facility in Agrate, Italy
to 8-inch wafer fabrication (currently budgeted at approximately $40 million).
Other individual projects scheduled for 1996, involving both front-end and
back-end facilities, are budgeted to require further amounts. In 1995, the
Company's receivables from government agencies increased to $184.7 million from
$178.0 million at December 31, 1994, due primarily to the execution of contracts
for research and development and capital expenditure grants. See Note 7 to the
Consolidated Financial Statements. In 1995, the Company's advances from
government agencies increased to $11.2 million from $6.8 million at December 31,
1994. See Note 16 to the Consolidated Financial Statements. Although the timing
of receipt of funds under government contracts had been delayed from time to
time, in the past the Company has always received the full amounts recorded in
such receivables.
The Company expects to have significant capital requirements in the
coming years and intends to continue to devote a substantial portion of its net
revenues to research and development. The Company plans to fund its capital
requirements from cash from operations, available funds, available support from
third parties (including state support, principally from the French and Italian
governments) and may make recourse to borrowings under available credit lines
and, to the extent necessary or attractive based on market conditions prevailing
at the time, the sale of debt or additional equity securities. There can be no
assurance that additional financing will be available as necessary to fund the
Company's working capital requirements, research and development,
industrialization costs or expansion plans, or that any such financing, if
available, will be on terms acceptable to the Company.
The Company believes that its available funds, the proceeds of the
offering completed in October 1995, available support from third parties and
additional borrowings will be sufficient to meet its anticipated needs for
liquidity through at least 1996.
34
<PAGE>
Consolidated Statements of Income SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
Twelve months ended December 31,
==============================================
(Currency-thousands of U.S. dollars except per share amounts) 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 2,007,669 2,602,205 3,520,670
Other revenues (Note 17) 29,864 42,736 33,749
- ---------------------------------------------------------------------------------------------------------------
Net revenues 2,037,533 2,644,941 3,554,419
Cost of sales (1,248,420) (1,528,694) (2,096,039)
- ---------------------------------------------------------------------------------------------------------------
Gross profit 789,113 1,116,247 1,458,380
Selling, general and administrative (302,495) (339,858) (413,148)
Research and development (270,904) (338,361) (440,334)
Restructuring costs(Note 19) (49,900) (37,032) (12,975)
Other income and expenses(Note 20) 49,673 31,984 59,107
- ---------------------------------------------------------------------------------------------------------------
Operating profit 215,487 432,980 651,030
Net interest expenses (Note 21) (37,787) (21,022) (16,854)
- ---------------------------------------------------------------------------------------------------------------
Profit before tax 177,700 411,958 634,176
Income tax (17,613) (49,464) (108,282)
- ---------------------------------------------------------------------------------------------------------------
Profit before minority interests 160,087 362,494 525,894
- ---------------------------------------------------------------------------------------------------------------
Minority interests -- -- 584
- ---------------------------------------------------------------------------------------------------------------
Net earnings 160,087 362,494 526,478
===============================================================================================================
Net earnings per share (Note 12) 1.92 3.04 4.03
===============================================================================================================
Number of shares at the end of the period 118,997,640 128,603,880 138,208,680
Number of weighted average shares 83,537,518 119,392,417 130,647,079
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these income statements.
35
<PAGE>
Consolidated Balance Sheets SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
As at December 31,
==========================================
(Currency-thousands of U.S. dollars) 1993 1994 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents (Note 4) 263,536 457,234 754,046
Marketable debt securities (Note 4) 63,910 4,249 4,354
Trade accounts and notes receivable (Note 5) 350,615 449,855 595,419
Inventories, net (Note 6) 283,514 343,037 450,649
Other receivables and assets (Note 7) 269,514 320,685 360,262
- ------------------------------------------------------------------------------------------------------------
Total current assets 1,231,089 1,575,060 2,164,730
- ------------------------------------------------------------------------------------------------------------
Fixed assets
Goodwill, net (Note 8) 3,189 1,752 315
Other intangible assets, net (Note 9) 9,965 15,480 13,071
Property, plant and equipment (Note 10) 2,185,778 3,125,079 4,180,495
Less-Accumulated depreciation (Note 10) (1,205,628) (1,503,739) (1,880,993)
Investments and other non-current assets (Note 11) 16,535 11,059 8,388
- ------------------------------------------------------------------------------------------------------------
Total fixed assets, net 1,009,839 1,649,631 2,321,276
- ------------------------------------------------------------------------------------------------------------
Total assets 2,240,928 3,224,691 4,486,006
============================================================================================================
Liabilities and shareholders' equity
Current liabilities
Bank overdrafts and current portion of long-term debt (Note 15) 231,056 322,456 492,788
Trade accounts and notes payable 285,619 470,894 507,889
Other debts and accrued liabilities (Note 16) 221,361 280,144 342,738
Accrued and deferred income tax 6,626 71,469 138,256
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 744,662 1,144,963 1,481,671
- ------------------------------------------------------------------------------------------------------------
Long-term debt (Note 15) 374,845 277,219 200,660
Reserves for pension and termination indemnities (Note 13) 67,906 81,992 94,956
Other non-current liabilities (Note 14) 49,504 40,478 37,462
- ------------------------------------------------------------------------------------------------------------
Total liabilities 492,255 399,689 333,078
- ------------------------------------------------------------------------------------------------------------
Minority interests -- -- 9,542
- ------------------------------------------------------------------------------------------------------------
Capital stock (1995: 138,208,680 shares;
1994: 128,603,880 shares; 1993:118,997,640
shares) (Note 12) 906,451 981,500 1,066,528
Capital surplus 484,009 625,906 922,065
Accumulated result (304,778) 57,716 584,039
Translation adjustments (81,671) 14,917 89,083
- ------------------------------------------------------------------------------------------------------------
Shareholders' equity 1,004,011 1,680,039 2,661,715
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 2,240,928 3,224,691 4,486,006
============================================================================================================
</TABLE>
For commitments and contingencies: Note 26
The accompanying notes are an integral part of these balance sheets.
36
<PAGE>
Consolidated Statements of Cash Flows SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
Twelve months ended December 31,
=======================================
(Currency-thousands of U.S. dollars) 1993 1994 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Profit (loss) 160,087 362,494 525,894
Add (deduct):
- Depreciation and amortization of fixed assets 229,404 287,985 392,390
- Other non-cash items 35,581 94,108 23,246
- Minority interest in net income of subsidiaries -- -- 584
Change in:
- Trade receivable (61,106) (71,290) (126,603)
- Inventories (2,382) (35,031) (91,412)
- Trade payables 21,689 78,144 17,005
- Other assets and liabilities, net 77,585 11,718 84,025
- -------------------------------------------------------------------------------------------------
Net cash from operating activities 460,858 728,128 825,129
- -------------------------------------------------------------------------------------------------
Payments for purchase of tangible assets(Note 10) (445,881) (779,696) (1,001,936)
Proceeds from sales of tangible assets 5,775 1,455
Payment for purchases of intangible assets (11,103) (5,951) 2,868
- -------------------------------------------------------------------------------------------------
Net cash used in operational investing activities (451,209) (784,192) (999,068)
- -------------------------------------------------------------------------------------------------
Net operating cash-flows 9,649 (56,064) (173,939)
- -------------------------------------------------------------------------------------------------
Investment in marketable debt securities (net) (63,910) 59,618 5
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (515,119) (724,574) (999,063)
- -------------------------------------------------------------------------------------------------
Proceeds from issuance of long-term debt 44,707 13,702 11,741
Repayment of long-term debt (151,789) (148,554) (96,202)
Increase (decrease) in short-term facilities (162,724) 101,224 165,298
Capital increase 500,000 202,836 391,321
- -------------------------------------------------------------------------------------------------
Net cash from financing activities 230,194 169,208 472,158
- -------------------------------------------------------------------------------------------------
Effect of changes in exchange rates (11,880) 20,936 (1,412)
- -------------------------------------------------------------------------------------------------
Net cash total 164,053 193,698 296,812
=================================================================================================
Cash and cash equivalents at beginning of the period 99,483 263,536 457,234
=================================================================================================
Cash and cash equivalents at end of the period 263,536 457,234 754,046
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
Consolidated Statements of Shareholders' Equity
SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
Accumulated
Capital Capital earnings Translation Shareholders'
(Currency-thousands of U.S. dollars) stock* surplus (deficits) adjustment equity
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1993 674,340 216,120 (464,865) (12,705) 412,890
Capital stock adjustment (267,889) 267,889 0
Capital increase in cash 500,000 500,000
Net earnings for the year 160,087 160,087
Translation adjustment (68,966) (68,966)
- -------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1993 906,451 484,009 (304,778) (81,671) 1,004,011
Capital increase in cash 75,049 123,772 198,821
Stock option compensation 18,125 18,125
Net earnings for the year 362,494 362,494
Translation adjustment 96,588 96,588
- -------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1994 981,500 625,906 57,716 14,917 1,680,039
Capital increase in cash 85,028 294,455 379,483
Deferred compensation 1,704 (155) 1,549
Net earnings for the year 526,478 526,478
Translation adjustment 74,166 74,166
- -------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1995 1,066,528 922,065 584,039 89,083 2,661,715
=============================================================================================================
</TABLE>
*138,208,680 shares of NLG 13.75 par value each at December 31, 1995;
128,603,880 shares of NLG 13.75 par value each at December 31, 1994; 2,974,941
shares of NLG 550 par value each at December 31, 1993.
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
Notes to Consolidated Financial Statements SGS-THOMSON Microelectronics N.V.
As of December 31, 1995, 1994 and 1993 (Currency -- Thousands of U.S. dollars)
1. THE COMPANY
SGS-THOMSON Microelectronics N.V. (the "Company") was formed in 1987 by the
combination of the semiconductor business of SGS Microelettronica (then owned by
Societa Finanziaria Telefonica S.p.A. (S.T.E.T.), an Italian corporation) and
the non-military business of Thomson Semiconducteurs (then owned by Thomson-CSF,
a French corporation), whereby each company contributed their respective
semiconductor businesses in exchange for a 50% interest in the Company.
The Company is registered in the Netherlands with its statutory
domicile in Amsterdam.
As of December 31, 1995, the Company was 69.36% (December 31, 1994:
80.89%) owned by SGS-THOMSON Microelectronics Holding II B.V., 0% by Thorn Emi
plc (December 31, 1994: 2.78%) and 30.64% by the public (December 31, 1994:
16.33%).
At December 31, 1995, SGS-THOMSON Microelectronics Holding II B.V. was
100% owned by SGS-THOMSON Microelectronics Holding N.V.
At December 31, 1995 and at December 31, 1994, SGS-THOMSON
Microelectronics Holding N.V. was owned:
- - 50% by FT2CI, a French holding company, whose shareholders in turn are FT1CI
(50.1%) and Thomson-CSF (49.9%); FT1CI, a French holding company, is owned by
CEA-Industrie (51%) and France Telecom (49%);
- - 50%, (48.14% in 1993) by M.E.I.-Microelettronica Italiana s.r.l. ("M.E.I."),
an Italian Holding company, whose shareholders are Comitato per l'intervento
nella SIR ed in settori ad alta tecnologia ("Comitato SIR") (49.9%) and Istituto
per la Ricostruzione Industriale S.p.A. (I.R.I.) (50.1%).
The Company operates in an environment subjected to the following risks and
factors:
- - the highly cyclical nature of the semiconductor industry,
- - the need for significant amounts of capital and funding to undertake the
research and development necessary to meet the rapidly changing technological
needs of customers,
- - intense competition,
- - costs of obtaining, protecting and enforcing essential patents and other
intellectual property rights,
- - a high sensibility to the U.S. dollar exchange rate,
- - a certain dependence toward raw material suppliers, mainly for silicium
purchases.
2. SUMMARY OF ACCOUNTING POLICIES
2.1) Principles of consolidation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (U.S.
GAAP).
The Company maintains its books and presents its financial statements in
accordance with Dutch accounting principles, which have been restated to conform
with U.S. GAAP.
The financial statements of the consolidated subsidiaries, when
prepared in accordance with the accounting principles generally accepted in
their local country, have been restated to conform with U.S. GAAP.
The initial combination of the SGS Microelettronica and Thomson
Semiconducteurs civilian semi-conductor businesses was accounted for as the
creation of a joint venture. Accordingly, the assets and liabilities of the
combined entities were recorded in the books of the joint venture at their
carrying amounts at the date of combination.
All significant intercompany balances and transactions were eliminated
upon consolidation.
2.2) Income recognition
- - Sales: Revenues on sales of semiconductor products are recognized upon
shipment of the products. A portion of the Company's sales are made to
distributors who participate in certain programs common to the semiconductor
industry whereby the distributors are allowed to return merchandise under
certain circumstances and may receive future price reductions. Provision for
estimated future returns and allowances is made at the time the revenue is
recognized.
- - Subsidies: Government subsidies are recognized as related costs are incurred
commencing when the subsidies' contract is signed with the relevant government
department or agency. Government subsidies for research and development are
included in "other income and expenses". Government subsidies for
industrialization costs are offset against related expenses in "cost of sales".
Government subsidies for capital expenditures are deducted from the cost of the
related fixed assets.
2.3) Translation of foreign subsidiaries' financial statements
The United States dollar is the reporting currency for the Company because the
Company does not have any operations in the Netherlands and the dollar is the
currency
39
<PAGE>
of reference in terms of market pricing in the worldwide semiconductor industry.
Furthermore, there is no currency in which the majority of transactions are
denominated, and revenues from external sales in U.S. dollars exceed revenues in
any other currency.
The functional currency used by each significant subsidiary throughout
the group is the local currency.
Financial statements of foreign subsidiaries are translated into U.S.
dollar equivalents as follows:
- - balance sheet items are translated at the exchange rate prevailing at balance
sheet date,
- - income statement items are translated at the average exchange rate for the
period.
Translation gains or losses are recorded directly in shareholders'
equity under "Translation adjustment".
2.4) Foreign currency transactions
Assets, liabilities, revenue, expenses, gains or losses arising from foreign
currency transactions are recorded in the functional currency of the recording
entity at the exchange rate in effect at the date of the transaction. At each
balance sheet date, recorded balances denominated in a currency other than the
recording entity's functional currency are translated at the exchange rate
prevailing at that date. The related exchange gains and losses are recorded in
the income statement.
2.5) Marketable debt securities
Prior to 1994, marketable debt securities were stated at the lower of cost or
market value. Any variation in the carrying amount is recorded in the income
statement.
As of January 1, 1994, the Company applied the provisions of FASB
Statement N(degree)115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Under SFAS 115, the Company accounts for its
investments in marketable debt securities as "available for sale" securities.
"Available for sale" securities are stated at market value with changes in
market value recognized in shareholders' equity.
The cumulative effect of adopting SFAS 115 was immaterial.
2.6) Goodwill
Goodwill acquired in a business combination is amortized over its estimated
useful life. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related acquired
business' undiscounted net income over the remaining life of the goodwill in
measuring whether the goodwill is recoverable.
2.7) Other intangible assets
Other intangible assets include the cost of technologies and licenses purchased
from third parties. They are amortized over a period ranging from five to
eighteen years.
2.8) Property, plant and equipment
Property, plant and equipment are stated at acquisition cost, net of equipment
subsidies. Depreciation is computed under the straight-line method over the
following estimated useful lives:
================================================
Buildings 33 years
Leasehold improvements 10 years
Machinery and equipment 6 years
EDP and R&D equipment 3-6 years
Other 2-5 years
================================================
Assets subject to leasing agreements and classified as capital leases
are included in property, plant and equipment and depreciated as described
above, except for some buildings in the United Kingdom which are amortized over
the lease term (20 years). The related lease obligation is recorded as a
liability.
2.9) Investments
The equity accounting method is used when the Company has a 20% to 50% equity
interest and the ability to exercise significant influence over the investee. As
of January 1, 1994, under the requirements of SFAS 115, other equity investments
are classified as "available for sale" securities and stated at market value,
with changes in market value recognized in shareholders' equity. Prior to 1994,
those investments were stated at the lower cost and market value.
The Company's share in the two French Research & Development interest
groups' results ("G.I.E. Centre Commun CNET SGS-THOMSON Microelectronics S.A."
and "G.I.E. Thomson Consumer Electronic Components") is recorded in research and
development expenses and the Company's share in the French manufacturing groups'
result ("Groupement Europeen d'Assemblage Automatique G.I.E.") is recorded in
cost of sales.
40
<PAGE>
SGS-THOMSON Microelectronics N.V.
2.10) Inventory
Raw materials and supplies are stated at the lower of cost (using the average
cost method) and market value. Finished goods and work in process are stated at
the lower of production cost and market value. Production cost includes direct
material and labor costs and indirect overhead. No administrative and general
costs are included in inventories. Market value for raw materials is based on
replacement cost and for other inventory classifications on net realizable
value.
2.11) Accounts receivable
Accounts receivable are stated at face value, less an allowance for possible
uncollectible accounts.
2.12) Research and development
Research and development costs are charged to expenses as incurred. For some of
its research and development programs, the Company receives grants from
governmental agencies; these grants are recognized in the income statement in
"Other income and expenses".
2.13) Pension and termination indemnities
- - Pension: Upon retirement, the Company's employees receive such benefits as are
provided by pension plan arrangements; these plans conform with local
regulations and practices of the countries in which the Company operates.
The Company follows the requirements of FASB Statement N(degree) 87
("SFAS 87") in accounting for pension costs and obligations.
- - Termination indemnities:
Italy
Italian law provides for an indemnity to be paid to personnel upon termination
of employment. The amount of indemnity is based upon the number of years of
service.
As provided for by EITF N(degree) 88-1 the undiscounted value of the
vested benefit obligation at the balance sheet date is recorded as a liability.
That vested benefit obligation exceeds the amount that would be provided under
the actuarial approach of FASB 87.
France
In France, an indemnity is paid to personnel only upon retirement from the
Company. The French entity recognizes the related cost and liability in
accordance with SFAS 87, with the prior years' liability being amortized over
the average remaining service period until retirement age.
2.14) Restructuring costs
Restructuring costs include incremental costs to be incurred as a result of the
adoption by management of a formal plan to reorganize its manufacturing
activities. Such costs may include severance payments, moving costs and fixed
asset write-offs.
2.15) Income taxes
Since January 1, 1993, the Company accounts for income taxes in accordance with
the requirements of FASB Statement N(degree) 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, the provision for current taxes represents the
income taxes payable based on the tax return for the period. Deferred tax assets
and liabilities are recorded for all temporary differences arising between the
tax and book basis of assets and liabilities and for the benefits of tax credits
and loss carryforwards.
Those deferred tax assets and liabilities are measured using the
enacted tax rates at which they are expected to be realized or paid. A valuation
allowance is provided for deferred tax assets that are more "likely than not" to
be realized in the future.
The cumulative effect of adopting SFAS 109 in 1993 was immaterial.
Prior to 1993, the Company followed the requirements of APB 11.
2.16) Financial instruments
- - Interest rate swap agreements: The Company enters into interest swap
agreements with the purpose of changing the floating rates of certain loans into
fixed rates.
The differential to be paid or received is recognized over the life of
the agreements.
- - Forward exchange contracts: The Company enters into foreign exchange contracts
as a hedge against accounts payable and receivable in foreign currencies and
against firm sale commitments (ranging from one to six months from the balance
sheet date). Premiums or discounts on those contracts are recognized in the
income statement over the life of the contract. Unrealized gains or losses are
matched against the corresponding asset or liability.
- - Sale of receivables with recourse: In accordance with SFAS 77, receivables
sold with recourse to banks are removed from the balance sheet when the
transaction purports to be a sale and the recourse obligations can be reasonably
estimated.
41
<PAGE>
2.17) New statements of accounting principles.
In 1995, the Financial Accounting Standards Board issued a statement, SFAS 121,
"Impairment of long lived assets". The cumulative effect of adopting SFAS 121 in
1995 is not material.
3. CONSOLIDATED ENTITIES
The consolidated financial statements include the accounts of SGS-THOMSON
Microelectronics N.V. and the following entities as of December 31, 1995:
<TABLE>
<CAPTION>
Percentage
Common Ownership
Stock (Direct or
Legal Seat Name (Thousands) Indirect)
<S> <C> <C> <C> <C>
United Kingdom London SGS-THOMSON Microelectronics LTD 9,900 GBP 100
London Thomson Components LTD 1,150 GBP 100
Bristol SGS-THOMSON E.E.I.G. 0 GBP 100
Sweden Stockholm SGS-THOMSON Microelectronics A.B. 16,000 SEK 100
Germany Munich SGS-THOMSON Microelectronics GmbH 12,901 DEM 100
Switzerland Geneva SGS-THOMSON Microelectronics S.A. 500 CHF 100
Malta Malta SGS-THOMSON Microelectronics LTD 21,590 MTP 100
Spain Madrid SGS-THOMSON Microelectronics S.A. 55,000 ESP 100
France Paris SGS-THOMSON Microelectronics S.A. 2,027,939 FRF 100
Paris Thomson Composants Distribution S.A. 6,850 FRF 100
Paris SGS-THOMSON Microelectronics S.N.C. 0 FRF 100
Italy Milano SGS-THOMSON Microelectronics SRL 424,888,000 ITL 100
Catania CORIMME 14,000,000 ITL 100
Singapore Singapore SGS-THOMSON Microelectronics PTE LTD 179,997 SGD 100
Singapore SGS-THOMSON Microelectronics ASIA PACIFIC PTE LTD 13,982 SGD 100
Malaysia Muar SGS-THOMSON Microelectronics SDN BHD 196,805 MYR 100
Muar SGS-THOMSON (Malaysia) SDN BHD 0,002 MYR 100
Japan Tokyo SGS-THOMSON Microelectronics KK 68,000 JPY 100
Hong Kong Hong Kon g SGS-THOMSON Microelectronics LTD 780 HKD 100
Australia Sydney SGS-THOMSON Microelectronics PTY LTD 185 AUD 100
United States Dallas SGS-THOMSON Microelectronics Inc. 22,000 USD 100
Dallas SGS-THOMSON Microelectronics Leasing Co Inc. 1 USD 100
Brazil Sao Paulo SGS-THOMSON Microelectronics Ltda 8,925,300 BRN 100
Morocco Casablanca SGS-THOMSON Microelectronics S.A. 66,000 MAD 100
Casablanca Electronic Holding S.A. 3,110 MAD 100
China Shenzhen Shenzhen STS Microelectronics Co LTD 211,118 CNY 60
India New Delhi SGS-THOMSON Microelectronics PTE LTD 62,000 INR 100
</TABLE>
In January 1994, Northern Telecom and SGS-THOMSON Microelectronics
signed an agreement for joint technology development and manufacturing of custom
integrated circuit components. Under this agreement SGS-THOMSON Microelectronics
has acquired a manufacturing plant located in Rancho Bernardo, California,
U.S.A.
In December 1994, INMOS Ltd (U.K.) and SGS-THOMSON Microelectronics
Ltd (U.K.) were merged. The merged Company is named SGS-THOMSON
Microelectronics Ltd.
In 1994, the Company created a joint venture with a subsidiary of the
Shenzhen Electronics Group ("SEG") that is building and will operate a back-end
manufacturing facility and design center in the Futian free-trade zone of
Shenzhen in southern China. SGS-THOMSON Microelectronics owns a 60% interest in
the joint venture, with a subsidiary of SEG owning the remaining 40%.
42
<PAGE>
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
December 31,
1994 1995
---- ----
<S> <C> <C>
Cash 6,007 801
Bank accounts 396,669 748,591
Marketable securities (with
maturity under 3 months) 54,558 4,654
Total 457,234 754,046
Marketable securities (with
maturity over 3 months) 4,249 4,354
</TABLE>
Marketable securities consist mainly of certificates of deposit not
traded. There was no significant difference between the book value of traded
marketable debt securities and their fair market value as of December 31, 1995.
5. TRADE ACCOUNTS AND NOTES RECEIVABLE
Trade accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
1994 1995
---- ----
<S> <C> <C>
Trade accounts and
notes receivable, gross 463,873 613,300
Less valuation allowance (14,018) (17,881)
Total 449,855 595,419
</TABLE>
During 1995, no customer represented individually over 5% of
consolidated net revenues.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1994 1995
---- ----
<S> <C> <C>
Raw materials 70,851 126,756
Work-in-process 177,789 202,817
Finished products 94,397 121,076
Total 343,037 450,649
</TABLE>
7. OTHER RECEIVABLES AND CURRENT ASSETS
<TABLE>
<CAPTION>
December 31,
1994 1995
---- ----
<S> <C> <C>
Receivables from
government agencies* 177,989 184,670
Taxes and other
government receivables 73,483 53,996
Down payments to suppliers 1,883 7,577
Loans to employees 4,910 5,201
Prepaid expenses 16,108 21,685
Sundry debtors 13,597 18,419
Deferred tax (note 22) 14,572 43,331
Other 18,143 25,383
Total 320,685 360,262
</TABLE>
* Related to research and development contracts, industrialization contracts and
capital expenditures.
8. GOODWILL
Goodwill consists of the following:
<TABLE>
<CAPTION>
December 31,
Gross Depreciation 1995, net 1994, net
----- ------------ --------- ---------
<S> <C> <C> <C> <C>
INMOS 17,888 (17,888) 0 0
MSC 2,423 (2,423) 0 0
TAG 4,311 (3,996) 315 1,752
Total 24,622 (24,307) 315 1,752
</TABLE>
9. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1994 1995
---- ----
<S> <C> <C>
Pension transition obligation 4,166 2,142
Technologies and licenses, gros 68,762 61,806
Less--accumulated amortization (57,448) (50,877)
Total 15,480 13,071
</TABLE>
43
<PAGE>
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
=======================================
Gross Depreciation Net
---------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1993
Land and building 195,517 (39,807) 155,710
Machinery and
equipment 1,755,535 (1,078,117) 677,418
Other tangible
fixed assets 119,561 (87,544) 32,017
Prepayments and
construction
in progress 115,165 (160) 115,005
---------------------------------------
TOTAL 2,185,778 (1,205,628) 980,150
DECEMBER 31, 1994
Land and building 259,690 (50,196) 209,494
Machinery and
equipment 2,444,442 (1,350,180) 1,094,262
Other tangible
fixed assets 163,747 (103,203) 60,544
Prepayments and
construction
in progress 257,200 (160) 257,040
---------------------------------------
TOTAL 3,125,079 (1,503,739) 1,621,340
DECEMBER 31, 1995
Land and building 344,439 (63,957) 280,482
Machinery
and equipment 3,414,102 (1,689,923) 1,724,179
Other tangible
fixed assets 197,375 (127,113) 70,262
Prepayments and
construction
in progress 224,579 -- 224,579
---------------------------------------
TOTAL 4,180,495 (1,880,993) 2,299,502
=======================================
</TABLE>
The increase in capital expenditures in 1995, 1994 and 1993 was mainly due to
capacity expansions in the manufacturing plants in order to support the strong
billing increase and to significant investments in research and development
facilities. Major investments were made in European plants (Agrate, Catania,
Crolles, Rennes, Rousset), in Asia/Pacific (Malaysia and Singapore), in the
United States (Dallas and Phoenix), and in the People's Republic of China
(Shenzhen).
In 1993, the Company decided to change prospectively the useful lives for
purposes of depreciation of workstations and office automation equipment from 5
to 3 years. The effect of this change for 1993 amounted to $12,068 and was
reflected partly in research and development expenses and partly in selling,
general and administrative expenses in the income statement.
11. INVESTMENTS AND OTHER NON-CURRENT ASSETS
Investments and other non-current assets consist of the following:
<TABLE>
<CAPTION>
December 31,
=================
1994 1995
-----------------
<S> <C> <C>
Investments carried at fair value 577 578
Long-term deposits and receivables 10,482 7,810
-----------------
TOTAL 11,059 8,388
=================
</TABLE>
In December 1992, SGS-THOMSON Microelectronics (through its subsidiary INMOS
Ltd) acquired 30% of "Newport Wafer Fab Ltd.", a company incorporated in the
United Kingdom which manufactures and sells wafers to the semiconductor
industry. Newport Wafer Fab Ltd. was acquired through a contribution in kind and
its net equity amounted to $11,997 as of December 31, 1993. SGS-THOMSON
Microelectronics sold its shares in Newport Wafer Fab. Ltd. for $4,157 in
December 1994.
Long-term deposits and receivables consist of indemnities receivable from third
parties on the sale of businesses, which bear interest or are discounted to
reflect their present value, and of loans to Newport Wafer Fab Ltd. and its
parent company amounting to $772 at December 31, 1995 ($1,976 in 1994; $8,500 in
1993).
12. SHAREHOLDERS' EQUITY
CAPITAL STOCK
In May 1993, the Company's net equity structure was modified through a par value
reduction of each share from NLG 1,000 to NLG 550. The financial effect of the
reduction ($267,889) was initially applied against accumulated deficit (at that
date ($464,865)) and the remainder to capital surplus ($196,976). As this
operation was not a quasi-reorganization, the net effect of the par value
reduction was applied against capital surplus.
During 1993, the Company issued 1,634,318 Common Shares with a par value of NLG
550 each, representing a capital stock increase of $500,000.
In 1994, the Shareholders decided to effect a stock split from one share with a
par value of NLG 550 to 40 shares with a par value of NLG 13.75. Consequently,
except as otherwise indicated, all per share amounts included in these financial
statements reflect this split.
44
<PAGE>
SGS-THOMSON Microelectronics N.V.
In connection with the public sale of SGS-THOMSON Microelectronics N.V.'s shares
by the Shareholders in December, 1994, (the "Initial Public Offering"), the
Company also increased the capital stock through the issuance of 9,606,240
shares with a par value of NLG 13.75 each. These shares were also sold to the
public. As a result, the capital stock increased $75,049 and the capital surplus
by $123,772.
As of December 31, 1994, the capital stock was made up of 128,603,880 shares
with a par value of NLG 13.75 each.
In connection with the public sale of SGS-THOMSON Microelectronics N.V.'s shares
by the Shareholders in October 1995, the Company also increased the capital
stock through the issuance of 8,960,000 shares with a par value of NLG 13.75
each. These shares were also sold to the public at a price of $42.09 net of
underwriting discounts and commissions. As a result, the capital stock increased
$79,356 and the capital surplus by $292,075.
In connection with the exercise of stock options (see below), the Capital stock
increased by 644,800 shares with a par value of NLG 13.75 each. As a result, the
capital stock increased by $5,672 and capital surplus by $2,380.
As of December 31, 1995, the capital stock was made up of 138,208,680 shares
with a par value of NLG 13.75 each.
Weighted average number of shares used to determine the earning per share
amounts are as follows:
<TABLE>
<CAPTION>
<S> <C>
==========================
1995: 130,647,079
1994: 119,392,417
1993: 83,537,518
==========================
</TABLE>
STOCK OPTION PLAN
The Shareholders' general meeting held on June 30, 1989 approved the issuance of
1,634,400 options (after the effect of the 40:1 share split to be effected in
connection with the Initial Public Offering) granted to 136 individuals. These
options may be exercised until December 18, 1999. As of December 31, 1995,
644,800 options had been exercised.
At the time these options were granted, the Company determined the exercise
price based on the nominal value of the Common Stock (NLG 25), which was higher
than estimated fair value. In 1994, the minimum exercise price for the existing
plan was reduced to NLG 17.50. As a result, the Company incurred a compensation
charge in the fourth quarter of 1994, amounting to $18,125.
The shares corresponding to the options will be created through capital
increase.
The Company expects that any future stock options will be granted at an exercise
price at least equal to the fair market value of the Common Stock at the date of
grant.
EMPLOYEE OFFERING PLAN
Pursuant to a resolution of the Supervisory Board of the Company dated November
24, 1995, the Company offered to certain of its employees worldwide to acquire
up to a maximum number of 1,000 shares of Common Stock of the Company per
employee, at a price of $33.725 per share. Participating employees having
purchased shares in the Employee Share Offering and having held such shares at
least until the first anniversary of the day on which such shares were issued
will be entitled to purchase, for each lot of ten shares purchased in the
Employee Share Offering, one additional share (a bonus share) at a discounted
price of $9. Upon completion of the Employee Share Offering, a total of 243,710
shares were sold to participating employees worldwide.
This plan resulted in compensation expenses amounting to $1,549 in 1995.
RETAINED EARNINGS
At December 31, 1995, the amount of retained earnings available to pay dividends
under Dutch law was approximately $1,595,000 (1994: $698,000). Retained earnings
for purposes of this calculation are based upon generally accepted accounting
principles in The Netherlands.
13. RESERVES FOR PENSION AND TERMINATION INDEMNITIES
Reserves for pension and termination indemnities consist of the following:
<TABLE>
<CAPTION>
December 31,
=================
1994 1995
- -------------------------------------------------------
<S> <C> <C>
Italy (a) 75,237 86,733
Other countries (b) 6,755 8,223
- -------------------------------------------------------
TOTAL 81,992 94,956
=======================================================
</TABLE>
45
<PAGE>
(A) ITALY
In Italy, an indemnity for personnel termination is payable immediately upon
termination. The accrued undiscounted value of the benefit payable (the
"Undiscounted Benefit") exceeds the actuarial present value of the benefit if
payment is estimated to occur at the employee's expected termination date. The
Company has elected to record the Undiscounted Benefit in accordance with EITF
88-1.
Changes in the Undiscounted Benefit consist of the following:
<TABLE>
<CAPTION>
December 31,
=================
1994 1995
- ------------------------------------------------------------
<S> <C> <C>
Accrual at the beginning
of the period 65,275 75,237
Accrued benefits 11,901 14,533
Payments (5,091) (5,044)
Translation adjustment 3,152 2,007
- ------------------------------------------------------------
TOTAL 75,237 86,733
============================================================
</TABLE>
(B) OTHER COUNTRIES (FRANCE, UNITED KINGDOM AND GERMANY)
The funded status of pension plans and termination indemnities is as follows:
<TABLE>
<CAPTION>
December 31,
==================
1994 1995
- ------------------------------------------------------------
<S> <C> <C>
Vested benefits (30,589) (36,635)
Non-vested benefits (15,589) (16,597)
- ------------------------------------------------------------
Projected benefit obligation (46,178) (53,232)
Plan assets at fair value 36,309 45,455
- ------------------------------------------------------------
Funded status (9,869) (7,777)
Unrecognized transition obligation (4,752) (4,377)
Unrecognized prior service cost 7,844 7,298
Unrecognized net gains or losses 2,289 825
- ------------------------------------------------------------
Net accrued for pension plans (4,488) (4,031)
Accrual (6,755) (8,223)
Prepaid 2,267 4,192
============================================================
</TABLE>
The accumulated benefit obligation amounted to $45,046 as of December 31, 1995
($38,118 as of December 31, 1994).
The periodic net pension and termination indemnities cost includes the
following:
<TABLE>
<CAPTION>
December 31,
==========================
1993 1994 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of
benefits earned 1,330 2,819 3,613
Interest cost on liability 1,585 2,482 3,016
Return on plan assets (2,466) 986 (3,716)
Net amortization and
deferral (118) (3,379) 418
- ----------------------------------------------------------------------
TOTAL 331 2,908 3,331
======================================================================
Assumptions 1993 1994 1995
- ----------------------------------------------------------------------
Discount rate 7.0% 7.0% 7-8.5%
Salary increase rate 4.5-6% 4.5-6% 4-6.5%
Expected rate of return
on funds 8.5% 8.5% 8-10%
======================================================================
</TABLE>
14. OTHER NON-CURRENT LIABILITIES
<TABLE>
<CAPTION>
December 31,
===================
1994 1995
- -----------------------------------------------------------------
<S> <C> <C>
Provision for claims and litigation -- 16,000
Provision for restructuring cost 5,000 --
Provision for patent risks 20,000 20,000
Long-term payables 13,666 --
Other 1,812 1,462
- -----------------------------------------------------------------
TOTAL 40,478 37,462
=================================================================
</TABLE>
15. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
GUARANTEES December 31,
=================
1994 1995
- --------------------------------------------------------
<S> <C> <C>
Secured (mainly mortgages
on land, building and
liens on equipment) 21,129 14,407
Unsecured 256,090 186,253
- --------------------------------------------------------
TOTAL 277,219 200,660
========================================================
</TABLE>
<TABLE>
<CAPTION>
REPAYMENT SCHEDULE December 31,
=================
1994 1995
- --------------------------------------------------------
<S> <C> <C>
N+2 90,142 86,509
N+3 85,387 33,058
N+4 29,559 30,163
N+5 28,647 29,814
Thereafter 43,484 21,116
- --------------------------------------------------------
TOTAL 277,219 200,660
========================================================
</TABLE>
46
<PAGE>
SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
INTEREST RATES December 31,
====================
1994 1995
- --------------------------------------------------------
<S> <C> <C>
Non interest bearing* 5,242 4,661
From 0 to 3% 98,580 87,005
From 3 to 6% 39,452 36,071
From 6 to 10% 114,873 66,035
From 10 to 15% 19,072 6,888
- --------------------------------------------------------
TOTAL 277,219 200,660
========================================================
</TABLE>
* Non-interest bearing and low interest bearing borrowings relate to borrowings
under Italian and French governmental programs.
<TABLE>
<CAPTION>
Currencies December 31,
====================
1994 1995
- --------------------------------------------------------
<S> <C> <C>
U.S. dollar 33,498 141
Italian lira 138,187 120,333
French franc 27,627 15,830
Singapore dollar 33,420 26,622
Other 44,487 37,734
- --------------------------------------------------------
TOTAL 277,219 200,660
========================================================
</TABLE>
At December 31, 1995, the current portion of long-term debt included in current
liabilities amounted to $88,248 (1994: $124,864).
At December 31, 1995, the above long-term debt included $746 obligations under
capital leases (1994: $1,139).
Financial debt includes mainly:
<TABLE>
<CAPTION>
====================
1994 1995
- --------------------------------------------------------
<S> <C> <C>
SGS-THOMSON Microelectronics NV
Libor + 0,45% Bank Loan 1991-1996 66,667 33,333
Libor + 1/8 Bank Loan 1988-1995 15,000 --
SGS-THOMSON Microelectronics S.A.
Libor + 0,55% Bank Loan 1992-1997
(French francs 100,000,000) 11,223 --
RTDI + 0,5% Bank Loan 1985-1995
(French francs 183,000,000) 6,418 --
Libor + 0,55% Bank Loan 1992-1997
(French francs 100,000,000) 11,223 8,163
SGS-THOMSON Microelectronics PTE Ltd
PR + 0,25% Bank Loan 1991-1997
(Singapore dollars 50,000,000) 19,019 11,783
5.44% Bank Loan 1992-1997
(Singapore dollars 40,000,000) 21,910 22,623
SGS-THOMSON Microelectronics s.r.l.
2,15% 1991-2001 Government Loan
(Italian lira 155,694,000,000) 95,879 86,933
========================================================
</TABLE>
16. OTHER PAYABLES AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
December 31,
====================
1994 1995
- -------------------------------------------------------------------
<S> <C> <C>
Taxes other than income tax 35,370 29,739
Salaries and wages 61,768 69,062
Social charges 40,484 74,217
Advances received on fundings 6,764 11,188
Provision for restructuring costs
and assets write-down 38,459 23,957
Litigation and other risks 4,359 19,853
Commercial rebates 16,154 31,992
Royalties payable 18,470 38,427
Other 58,316 44,303
- -------------------------------------------------------------------
TOTAL 280,144 342,738
===================================================================
</TABLE>
PROVISION FOR RESTRUCTURING COSTS
During 1993, the Company decided to upgrade the technology of its main
production plants around the world. This upgrading began in 1994 and will
continue through 1996. It will involve significant fixed asset write-offs and
moving costs. The last restructuring operations are planned to occur in 1996.
47
<PAGE>
The provision includes:
<TABLE>
<CAPTION>
December 31,
====================
1994 1995
- -------------------------------------------------------------------
<S> <C> <C>
Non-cash items:
- --Equipment, machinery and
facilities write-offs (net book value
at forecasted closing dates) 23,200 4,292
Cash items:
- --Lay-off 4,539 6,882
- --Moving costs 15,720 12,783
Total 43,459 23,957
Of which short-term 38,459 23,957
Of which long-term (see note 14) 5,000 --
===================================================================
</TABLE>
17. OTHER REVENUES
Other revenues consists of the following:
<TABLE>
<CAPTION>
December 31,
====================
1993 1994 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Royalties and
indemnities received 5,412 14,056 16,549
Development services
invoiced to customers 22,329 23,126 9,800
Miscellaneous sales 1,481 5,554 7,346
Other 642 -- 54
- -------------------------------------------------------------------
TOTAL 29,864 42,736 33,749
===================================================================
</TABLE>
18. PERSONNEL
Labor costs consists of the following:
<TABLE>
<CAPTION>
December 31,
====================
1993 1994 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and wages 453,573 524,844 643,559
Social security
contribution 131,047 162,235 194,650
Other 28,951 37,053 48,251
- -------------------------------------------------------------------
TOTAL 613,571 724,132 886,460
===================================================================
</TABLE>
These costs are allocated to cost of sales, selling, general and administrative
expenses and research and development costs.
At December 31, 1995, the Company employed 25,523 persons (1994: 22,017).
19. RESTRUCTURING COSTS
Restructuring costs consists of the following:
<TABLE>
<CAPTION>
December 31,
====================
1993 1994 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Cash items
Severance 4,900 13,009 3,602
Moving costs 22,400 2,957 9,373
Non-cash items
Asset write-offs 22,600 21,066 --
- -------------------------------------------------------------------
TOTAL 49,900 37,032 12,975
===================================================================
</TABLE>
The cash outlays relating to the restructuring costs are for the most part made
in the period the costs are recorded in the income statement or in the
subsequent period.
The main benefits of the asset write-offs done in 1993 and 1994 will occur in
1995 and subsequent periods. However, the benefits will not be significant
because of relative immateriality of the costs involved and the increased
depreciation expense in future periods related to the upgrading of some
manufacturing plants around the world (see Note 14).
20. OTHER INCOME AND EXPENSES
Other income and expenses consists of the following:
<TABLE>
<CAPTION>
December 31,
====================
1993 1994 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Research and
development fundings* 84,257 80,139 89,643
Patents income
(expense) net (8,631) (7,598) (8,055)
Exchange gain (loss) 8,886 1,982 5,082
Start-up costs (1,602) (8,847) (26,489)
Litigation and other risks (10,000) 0 0
Goodwill amortization
and write-off (15,496) (1,437) (1,437)
Stock-option plan
compensation charge 0 (18,125) 0
Other (7,741) (14,130) 363
- -------------------------------------------------------------------
TOTAL 49,673 31,984 59,107
===================================================================
</TABLE>
* Does not include certain other funding received for industrialization costs
(which include certain costs incurred to bring prototype products to the
production stage). Such funding and costs are netted in cost of sales in the
income statement (in the amount of $20,400 for 1993; $19,276 for 1994 and
$11,825 for 1995).
48
<PAGE>
21. NET INTEREST EXPENSES
Net interest expenses consists of the following:
<TABLE>
<CAPTION>
December 31,
==============================
1993 1994 1995
- --------------------------------------------------
<S> <C> <C> <C>
Income 11,300 20,500 35,206
Expense (49,087) (41,522) (52,060)
- --------------------------------------------------
TOTAL (37,787) (21,022) (16,854)
==================================================
</TABLE>
22. INCOME TAX
SGS-THOMSON Microelectronics N.V. and its subsidiaries are individually liable
for income tax. Tax losses can only offset profits generated by the company
incurring a loss.
<TABLE>
<CAPTION>
December 31,
=============================================
1993 1994 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (The Netherlands) 0 0 0
U.S. (3,162) (6,304) (9,558)
Foreign (9,642) (24,280) (105,089)
- --------------------------------------------------------------------------------
Current (12,804) (30,584) (114,647)
Deferred (4,809) (18,880) 6,365
- --------------------------------------------------------------------------------
TOTAL (17,613) (49,464) (108,282)
================================================================================
</TABLE>
Reconciliation between the provision for income tax and pre-tax income
is as follows:
<TABLE>
<CAPTION>
December 31,
===========================================
1993 1994 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss) 160,087 362,494 525,894
Income tax 17,613 49,464 108,282
- ---------------------------------------------------------------------------
Equity in earnings of
affiliates
Pre-tax income 177,700 411,958 634,176
- ---------------------------------------------------------------------------
Theoretical income tax
(35%--statutory tax
in The Netherlands) 62,195 144,185 221,962
Permanent differences (5,713) (12,403) (50,601)
Changes in unrecognized
net deferred tax assets
Variation in valuation
allowance (41,656) (70,645) (25,528)
Other taxes and credits 3,037 (9,962) (32,252)
Effect of tax rate
differences (250) (1,711) (5,299)
- ---------------------------------------------------------------------------
Net income tax 17,613 49,464 108,282
===========================================================================
</TABLE>
Permanent differences reflect mainly (i) the effects of the special
pioneer regimes existing in certain Southeast Asian countries and (ii) the
non-deductible goodwill depreciation.
Pioneer status currently applies to one of the Company's two Singapore
factories. Under this regime all the profits of this operation calculated in
accordance with normal taxation rules and after deduction of capital allowances
are exempt from Singapore income tax for the specified pioneer period. In the
case of the Company, this pioneer period expires on December 31, 1996. After
this date, the part of the Company's operations currently enjoying pioneer
status will cease to enjoy any tax privileges and will be subject to taxation on
the same basis as the second (non-pioneer) factory unless further incentives are
applied for and obtained. The aggregate effect of the tax holiday amounts to
$13,190 in 1995 (per share: $0.10), $12,166 in 1994 (per share: $0.10) and
$9,354 in 1993 (per share: $0.11). The tax holiday had no effect in 1991. In
determining the deferred tax under U.S. GAAP, the Company records a liability
(or asset) for a temporary difference that reverses after the tax holiday period
ends using the normal taxation rate.
Sources of deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
=======
1995
<S> <C>
- --------------------------------------------------------------
Tax losses carryforward and capital allowances 103,789
Other assets 53,099
- --------------------------------------------------------------
Total assets, gross 156,888
Valuation allowance (28,091)
- --------------------------------------------------------------
Total assets, net 128,797
- --------------------------------------------------------------
Fixed assets depreciation 140,224
Other liabilities 7,362
- --------------------------------------------------------------
Total liabilities 147,586
==============================================================
</TABLE>
As a result of offsetting net deferred tax assets against deferred tax
liabilities in each tax-paying entity and jurisdiction, a deferred tax assets of
$43,331 and a deferred tax liability of $62,120 were covered.
As of December 31, 1995, the Company and its subsidiaries had net
operating losses carryforwards and capital allowance carryforwards expiring in
the following years:
<TABLE>
<CAPTION>
December 31,
============
1995
- -------------------------------------------------
<S> <C>
Year + 1 26,823
Year + 2 10,252
Year + 3 9,222
Year + 4 --
Year + 5 and after 3,978
No limit 246,962
- -------------------------------------------------
Total 297,237
=================================================
</TABLE>
49
<PAGE>
23. CREDIT FACILITIES
As of December 31, 1995, the aggregate amount of the Company's long-term credit
facilities was approximately $289,000 under which $289,000 of indebtedness was
outstanding, and the aggregate amount of the Company's short-term facilities was
approximately $784,000 under which $404,540 of indebtedness was outstanding.
24. CAPITAL AND OPERATING LEASES
The Company leases land, buildings, plant and equipment under non-cancelable
capital and operating lease agreements.
As of December 31, 1995, the future minimum lease payments to which the
Company was committed consisted of the following:
<TABLE>
<CAPTION>
=======================
Capital Operating
Year Leases Leases
- ------------------------------------------------
<S> <C> <C>
1996 7,605 5,152
1997 472 4,605
1998 0 2,012
1999 0 91
2000 and thereafter 0 85
- ------------------------------------------------
Total 8,077 11,945
================================================
</TABLE>
In 1995, the Company has not financed any equipment through a capital
lease.
25. FINANCIAL INSTRUMENTS
Financial instruments and derivatives are used exclusively for purposes other
than trading.
- - INTEREST RATE SWAP AGREEMENTS In 1992 the Company entered into three interest
rate swap agreements maturing in December 1996 for $90,000 (notional amount)
with the purpose of changing the floating rates of certain loans into fixed
rates. One swap was terminated in 1994.
- - FORWARD EXCHANGE CONTRACTS The Company enters into forward contracts as a
hedge against commercial transactions. Such contracts mature mainly during the
first quarter of 1996, and amount to $191,000 forward sale of U.S. dollars and
$59,717 forward sale of other foreign currencies and to $14,396 forward purchase
of U.S. dollars and $18,192 forward purchase of other foreign currencies.
- - SALE OF RECEIVABLES WITH RECOURSE As of December 31, 1995 there was no
outstanding receivable sold with recourse.
- - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISKS AND CONCENTRATIONS OF
CREDIT RISK The Company uses financial instruments with off-balance sheet risks
primarily to manage its exposure to fluctuations in interest rates and foreign
currency exchange rates. The Company controls the credit risks associated with
these financial instruments through credit approvals, investment limits and
centralized monitoring procedures but does not normally require collateral or
other security from the parties to the financial instruments with off-balance
sheet risk. In addition, the Company conducts its operations with customers
located throughout the world.
Management believes that receivables are well diversified, thereby
reducing potential credit risk to the Company. As a consequence, the Company
does not anticipate non-performance by counterparties which could have a
significant impact on its financial position or results of operations.
Interest rate and foreign currency agreements (notional amounts):
<TABLE>
<CAPTION>
December 31,
=========================
1994 1995
- ----------------------------------------------------------------
<S> <C> <C>
Long-term interest rate swaps
(pay fixed, receive variable) 60,000 30,000
Forward exchange contracts:
Sales 159,535 250,717
Purchases (36,537) (32,588)
================================================================
</TABLE>
<TABLE>
<CAPTION>
======================================
Remaining
term Interest rate
- ---------------------------------------------------------------
<S> <C> <C>
Long-term interest
rate swap 12 months paid: 6/6.5%
received: Libor + 45Bp
Forward exchange
contracts 1 month N/A
===============================================================
</TABLE>
- - FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 107
("SFAS 107") "Disclosures about Fair Value of Financial Instruments". SFAS 107
requires disclosures of the estimated fair value of all financial instruments
other than specified items such as lease contracts, subsidiary and affiliate
investments and employers' pension and benefit obligations. Except for publicly
traded equity and marketable debt securities for which market prices have been
used, these values have been estimated for the majority of the Company's
financial instruments.
50
<PAGE>
Accordingly, fair values are based on estimates using various valuation
techniques, such as present value of future cash flows.
However, methods and assumptions followed to disclose data presented
herein are inherently judgmental and involve various limitations, including the
following:
- - Fair values presented do not take into consideration the effects of future
interest rate and currency fluctuations,
- - Estimates as of December 31, 1995 are not necessarily indicative of the
amounts that the Company would record upon further disposal/termination of the
financial instrument.
As a consequence, the use of different estimations, methodologies and
assumptions may have a material effect on the estimated fair value amounts. The
methodologies used are as follows:
CASH AND CASH EQUIVALENTS, ACCOUNTS AND NOTES RECEIVABLE, BANK OVERDRAFTS,
SHORT-TERM BORROWINGS, ACCOUNTS AND NOTES PAYABLES
The carrying amounts reflected in the consolidated financial statements are
reasonable estimates of fair value because of the relatively short period of
time between the origination of the instruments and their expected realization.
LONG-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
The fair values of these financial instruments were determined by estimating
future cash flows on a borrowing-by-borrowing basis and discounting these future
cash flows using the Company's incremental borrowing rates for similar types of
borrowing arrangements.
INTEREST RATE SWAPS AND FORWARD EXCHANGE CONTRACTS
The fair value of these instruments is the estimated amount that the Company
would receive or pay to settle the related agreements as of December 31, 1995
and 1994 based upon current interest rates and the creditworthiness of the
counterparties.
<TABLE>
<CAPTION>
=======================================================
1994 1995
- --------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE SHEET
Investments 577 577 578 578
Marketable debt
securities 58,807 58,807 9,008 9,008
Bank loans
(including
current portion) 402,083 369,955 288,908 260,515
OFF-BALANCE SHEET
Long-term interest
swap -- 882 -- 48
Forward exchange
contracts -- (340) -- (507)
================================================================================
</TABLE>
26. OTHER COMMITMENTS AND CONTINGENCIES
- - LITIGATION The Company is involved in a number of litigations incidental to
the normal conduct of its operations. However, the ultimate unrecorded liability
with respect to these contingencies is not considered to be material in relation
to the consolidated results.
- - OTHER CONTINGENT LIABILITY The Company's position on certain tax regulation
may differ from the tax authorities' interpretation, which could result in a tax
liability. However, the Company believes the risk of incurring a significant
liability is remote and, therefore, no significant provision was made as at
December 31, 1995.
27. RELATED PARTY TRANSACTIONS
The main transactions and balances with the shareholders of SGS-THOMSON
Microelectronics Holding N.V. and their affiliates were as follows:
<TABLE>
<CAPTION>
December 31,
==========================================
1993 1994 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Sales 72,719 158,457 195,352
Research and
development expenses (12,800) (12,317) (17,815)
Other purchases
and expenses -- (13,757) (42,237)
=======================================================================
</TABLE>
Indebtedness of the Company was supported by guarantees from the
shareholders of SGS-THOMSON Microelectronics Holding N.V. as follows:
<TABLE>
<CAPTION>
December 31,
======================
1994 1995
<S> <C> <C>
- ---------------------------------------------------------------
Long-term debt 140,763 156,359
Short-term debt 69,792 79,117
- ---------------------------------------------------------------
Total 210,555 235,476
===============================================================
</TABLE>
51
<PAGE>
28. SEGMENT INFORMATION
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
==============================================================================================================================
Other,
Corporate &
Americas Asia/Pacific Europe Elimination Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993
Income statement
Net revenues 495,462 566,086 975,985 -- 2,037,533
Intersegment sales 86,603 602,823 682,968 (1,372,394) 0
--------------------------------------------------------------------------------------
Total 582,065 1,168,909 1,658,953 (1,372,394) 2,037,533
Operating profit 7,688 65,768 146,212 (4,181) 215,487
Depreciation (22,549) (53,759) (153,096) -- (229,404)
Research & development expenses (28,286) (568) (242,050) -- (270,904)
Cash-flow statement
Capital expenditures 53,596 107,469 284,816 -- 445,881
Balance-sheet
Identifiable assets 205,684 469,096 1,225,172 340,976 2,240,928
Other information
Employees 1,481 6,468 11,949 -- 19,898
Wages & salaries (76,934) (88,466) (448,171) -- (613,571)
1994
Income statement
Net revenues 673,514 752,301 1,217,126 2,000 2,644,941
Intersegment sales 130,575 1,352,481 2,521,539 (4,004,595) --
--------------------------------------------------------------------------------------
Total 804,089 2,104,782 3,738,665 (4,002,595) 2,644,941
Operating profit 33,578 141,723 288,430 (30,751) 432,980
Depreciation (29,442) (70,000) (188,543) -- (287,985)
Research & development expenses (37,157) (1,705) (299,499) -- (338,361)
Cash-flow statement
Capital expenditures 163,302 131,996 484,398 -- 779,696
Balance sheet
Identifiable assets 411,555 591,202 1,742,175 479,759 3,224,691
Other information
Employees 2,057 7,010 12,950 -- 22,017
Wages & salaries (110,840) (101,111) (512,181) -- (724,132)
1995
Income statement
Net revenues 846,406 1,080,428 1,627,585 -- 3,554,419
Intersegment sales 179,767 3,411,776 3,372,542 (6,964,085) 0
--------------------------------------------------------------------------------------
Total 1,026,173 4,492,204 5,000,127 (6,964,085) 3,554,419
Operating profit 63,348 242,113 355,208 (9,639) 651,030
Depreciation (51,263) (90,450) (250,677) -- (392,390)
Research & development expenses (48,607) (4,875) (386,852) -- (440,334)
Cash-flow statement
Capital expenditures 187,517 204,694 609,725 -- 1,001,936
Balance-sheet
Identifiable assets 574,730 845,536 2,336,956 728,784 4,486,006
Other information
Employees 2,439 7,934 15,150 -- 25,523
Wages & salaries (139,640) (120,832) (625,988) -- (886,460)
==============================================================================================================================
</TABLE>
The Company is engaged in the design, development, manufacture and marketing of
a wide variety of semiconductor products. SGS-THOMSON Microelectronics N.V.
operates in three main geographic areas. In the information above, sales include
local sales and exports made by operations within each area. Total sales by
geographic area include sales to unaffiliated customers and intergeographic
transfers. To control costs, a substantial portion of the Company's products are
transported between the U.S., Asia and Europe in the process of being
manufactured and sold. Sales to unaffiliated customers have little correlation
with the location of manufacture. As a global participant in the semiconductor
industry, the Company's business is subject to risks beyond its control, such as
instability of foreign economies and governments and changes in law and politics
affecting trade and investment.
52
<PAGE>
Auditor's Report SGS-THOMSON Microelectronics N.V.
To the Supervisory Board and the Shareholders of SGS-THOMSON Microelectronics
N.V.:
We have audited the accompanying consolidated balance sheets of SGS-THOMSON
Microelectronics N.V. (a Dutch corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SGS-THOMSON Microelectronics N.V. and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles, as applied in the United States of America.
/s/ Arthur Anderson & Co.
Arthur Andersen & Co.
Amsterdam, The Netherlands
January 26th, 1996
53
<PAGE>
Supervisory Board and
Executive Officers
SUPERVISORY BOARD
JEAN-PIERRE NOBLANC
Chairman
General Manager, Components Sector - CEA Industrie
BRUNO STEVE
Vice Chairman
Chief Executive Officer and Chief Operating Officer - Finmeccanica
REMY DULLIEUX
Group Executive Vice President, Strategic
Procurement and Development - France Telecom
ALESSANDRO OVI
Chief Executive Officer - Technitel S.p.A.
GIOVANNI RUOPPOLO President, Board of Auditors - Ente Nazionale Idrocarburi
S.p.A.
HENRI STARCK
Advisor to the President - Thomson-CSF
EXECUTIVE OFFICERS
PASQUALE PISTORIO
President and Chief Executive Officer
LAURENT BOSSON
Corporate Vice President, Front-end Manufacturing
and Americas Region
CARLO BOZOTTI
Corporate Vice President,
European and Headquarters Region
SALVATORE CASTORINA
Corporate Vice President,
Discrete and Standard ICs Group
MURRAY DUFFIN
Corporate Vice President, Total Quality Management
ALAIN DUTHEIL
Corporate Vice President,
Strategic Planning and Human Resources
ENNIO FILAURO
Corporate Vice President, Memory Products Group
PHILIPPE GEYRES
Corporate Vice President, Programmable Products Group
MAURIZIO GHIRGA
Corporate Vice President, Chief Financial Officer
JEAN CLAUDE MARQUET
Corporate Vice President, Asia/Pacific Region
PIER ANGELO MARTINOTTI
Corporate Vice President, New Ventures Group
JOEL MONNIER
Corporate Vice President,
Central Research and Development
PIERO MOSCONI
Corporate Vice President, Treasurer
ALDO ROMANO
Corporate Vice President, Dedicated Products Group
GIORDANO SERAGNOLI
Corporate Vice President, Back-end Manufacturing
and Subsystems Products Group
KEIZO SHIBATA
Corporate Vice President, Japan Region
Corporate Information
PRINCIPAL EXECUTIVE OFFICE
SGS-THOMSON Microelectronics
Technoparc du Pays de Gex - B.P. 112
165, Rue Edouard Branly
01630 St. Genis Pouilly - France
Telephone: 33-50-40-26-40
STOCK LISTING
The common stock of SGS-THOMSON Microelectronics N.V. is traded on the New York
Stock Exchange under the symbol "STM". The common stock is also listed on the
Bourse de Paris and quoted on SEAQ International.
TRANSFER AGENT AND REGISTRAR
For questions about transfer procedures or other stock account matters, please
contact:
Bank of New York
(for Shares of New York Registry)
Telephone: 212-815-5800 or 1-800-524-4458
Netherlands Management Company B.V.
(for Shares of Dutch Registry)
Telephone: 31-20-622-9726
INVESTOR RELATIONS
For copies of financial reports and other investor information, please contact:
Francois Guibert, Group Vice President Business Planning and Development, at the
Principal Executive Office noted above, or call 33-50-40-25-94. In the U.S., you
may call 214-466-7699.
Editorial: Morgen-Walke Associates
Design: Inc Design, New York City [LOGO] Printed on recycled paper
Photography credits include:
Artechnique Photographie-Seyssins;
CTS-Vimercate, Phoenix;
Studio Foto Manenti-Milan
Certain names and terms used herein are Registered Trademarks of their
respective owners.
53
<PAGE>
SENIOR
MANAGEMENT
TEAM
[PHOTO]
- - PRODUCT GROUPS
ALDO ROMANO
Corporate Vice President,
Dedicated Products Group
PHILIPPE GEYRES
Corporate Vice President, Programmable Products Group
PIER ANGELO MARTINOTTI
Corporate Vice President,
New Ventures Group
ENNIO FILAURO
Corporate Vice President,
Memory Products Group
SALVATORE CASTORINA
Corporate Vice President,
Discrete and Standard ICs Group
[PHOTO]
- - REGIONAL
RICHARD PIERANUNZI
Vice President,
Marketing and Sales
Americas Region
CARLO BOZOTTI
Corporate Vice President,
European and
Headquarters Region
KEIZO SHIBATA
Corporate Vice President,
Japan Region
JEAN-CLAUDE MARQUET
Corporate Vice President,
Asia Pacific Region
[PHOTO]
- - STAFF FUNCTIONS
PIERO MOSCONI
Corporate Vice President,
Treasurer
ALAIN DUTHEIL
Corporate Vice President,
Strategic Planning and Human
Resources
MAURIZIO GHIRGA
Corporate Vice President,
Chief Financial Officer
MURRAY DUFFIN
Corporate Vice President,
Total Quality and Environmental
Management
[PHOTO]
- - CENTRAL FUNCTIONS
LAURENT BOSSON
Corporate Vice President,
Front-end Manufacturing and
Americas Region
JOEL MONNIER
Corporate Vice President,
Central Research and
Development
GIORDANO SERAGNOLI
Corporate Vice President,
Back-end Manufacturing and
Subsystems Products Group
<PAGE>
[LOGO] SGS-THOMSON
MICROELECTRONICS
ARTHUR ANDERSEN & CO.
Accountants
June 27, 1996
Securities and Exchange Commission
Division of International Corporate Finance
450 Fifth Street
Washington D.C.
SGS-THOMSON Microelectronics N.V.
Information required pursuant to Item 304(a) of
regulation SK under the Securities Act of 1933
We have read Item 18 in the Annual Report on Form 20-F dated June 27, 1996 of
SGS- THOMSON Microelectronics N.V. to be filed with the Securities and Exchange
Commission and are in agreement with the statements contained therein.
/s/Arthur Andersen & Co.
