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, 1996
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: 1-13546
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 138,985,580
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.......................................... 39
Item 3. Legal Proceedings................................................ 43
Item 4. Control of Registrant............................................ 44
Item 5. Nature of Trading Market......................................... 51
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders*....................................................... 52
Item 7. Taxation......................................................... 52
Item 8. Selected Consolidated Financial Data............................. 56
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 56
Item 10. Directors and Officers of Registrant............................. 56
Item 11. Compensation of Directors and Officers........................... 66
Item 12. Options to Purchase Securities from Registrant or Subsidiaries... 66
Item 13. Interest of Management in Certain Transactions................... 67
PART II
Item 14. Description of Securities to be Registered*...................... 68
PART III
Item 15. Defaults upon Senior Securities*................................. 68
Item 16. Changes in Securities and Changes in Security for Registered
Securities*.................................................... 68
PART IV
Item 17. Financial Statements*............................................ 68
Item 18. Financial Statements............................................. 68
Item 19. Financial Statements and Exhibits................................ 69
Signature
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* Omitted because item is not applicable.
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PART I
Item 1: Description of Business In 1996
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. According to preliminary industry data, SGS-THOMSON entered in
1996 the group of the top 10 worldwide suppliers of semiconductor devices. On
the basis of preliminary 1996 industry rankings, SGS-THOMSON was the world's
leading supplier of analog monolithic ICs, mixed signal ASICs ICs, smartcard
ICs, special automotive ICs, EPROM and EEPROM memories and the world's second
leading supplier of telecom ICs. According to industry data for 1995,
SGS-THOMSON was the leading supplier of MPEG decoders ICs with approximately
44.3% share of the MPEG decoders market. 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, Nortel,
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 approximately 59% of the
Company's net revenues in 1996 compared to approximately 51% in 1995.
SGS-THOMSON also targets applications that require substantial analog and
mixed-signal content and can exploit the Company's system level expertise. In
1996, analog ICs (including mixed-signal ICs), the majority of which are also
differentiated ICs, accounted for approximately 46% of the Company's net
revenues (unchanged from 1995), while discrete devices accounted for
approximately 14% of the Company's net revenues (compared to approximately 17%
in 1995). In recent years, analog ICs have experienced less volatility in sales
growth rates and average selling prices than the overall semiconductor industry.
In 1996, the Company developed a number of important new
products such as the first superintegrated chips for hard disk drives and
set-top-boxes (OMEGA chip announced in 1997), new 8, 16 and 32 bits
application-specific cores of its microcontrollers families, a new
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family of mixed-signal semicustom chips, new integrated Audio/Video chips for
MPEG-2 decompression functionality in multimedia and consumer applications, an
antitaping chip that can be integrated in the Company video encoding devices, a
new multimedia analog front-end for computer and a radiofrequency single chip
for digital cellular phones.
In 1996, SGS-THOMSON reached an agreement with Samsung
Electronics Co. Ltd. to cooperate in the development and sourcing of
microcontrollers and digital signal processors designed specifically for high
volume markets, such as set-top-boxes, multimedia PCs and mobile communication.
The Company also signed an agreement with World Space for developing and
producing chip sets for new generation personal satellite radios and an
agreement with Chromatic Research Inc. to co-design, manufacture and market
single-chip multimedia processors of the MPACT series (capable of 2D and 3D
graphics, audio, video, fax/modem, telephony and videophone functionalities) for
multimedia PC applications and entered into a strategic partnership with
Microsoft to add hardware Digital Video Disk support to the Microsoft Active
Movie platform.
In 1996, SGS-THOMSON's cumulative shipments of integrated
circuits for smartcards surpassed the one billion mark. The Company's smartcard
chip portfolio spans the full range of commercial applications, including GSM
mobile phones, pay-TV, ID cards, banking, electronic purses, health cards,
access control, toll payment and mass transport, and includes standard memory
chips as well as the most advanced 8 bit cryptocontrollers. The Company is
currently developing 32 bit cryptocontrollers as well as solutions for
contactless applications. In 1996, SGS-THOMSON was the first company to obtain
security certifications for banking and Pay-TV devices according to the ITSEC
European Norms.
In November 1996, the Company announced that the research and
development center jointly operated by the Company and the Centre National
d'Etudes et des Telecommunications ("CNET"), the research laboratory of France
Telecom, had completed the development of the 0.25 micron CMOS process, only one
year after the qualification of the 0.35 micron process. The 0.25 micron
process, currently used in the prototyping of a complex evaluation circuit of
several million transistors, consists of six metal layers and involves more than
22 levels of masking. 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.
In 1996, the Company established a small research laboratory
in Berkeley, California, which will principally cooperate in the design of
advanced macrocells and libraries for the Company's analog, digital and mixed
signal technologies.
Since 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
production) in Singapore, which was announced in 1996.
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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, global positioning systems, flat panel
displays, hard disk drives and digital video 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. According to preliminary industry data, the Company was
the leading supplier of EPROMs in 1996, accounting for approximately
30% of worldwide EPROM sales, as well as the leading supplier of
EEPROMs. The Company has developed a proprietary know-how for flash
memory devices and has started mass production for this market. The
Group does not produce DRAMs, a commodity memory product.
The 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. Initial activities have focused on manufacturing
and marketing x86 microprocessors. New activities include design and
manufacturing of "system on silicon" solutions based on the 486 CPU
core and more recently media processors based on Very Long Instruction
Word ("VLIW") processes.
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
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<PAGE>
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, BCD technologies
(bipolar, CMOS and DMOS) for intelligent power applications and embedded memory
technologies. This broad technology portfolio, a cornerstone of the Company's
strategy for many years, enables the Company to meet the increasing demand for
"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 1996, SGS-THOMSON has expanded its diversified
manufacturing infrastructure while improving the cost, quality and flexibility
of its operations. SGS-THOMSON has applied 1996 investments in its manufacturing
facilities to bring to full capacity the 8-inch front-end manufacturing facility
in Crolles, France, to continue the ramp up of the new 8-inch front-end
manufacturing facility in Phoenix, Arizona, to complete the building of and to
begin equipping the third 8-inch front-end manufacturing facility in Catania,
Italy, and to complete 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. During 1996, the Company has also completed
conversion from 4-inch to 5-inch of the two front-end wafer fabrication plants
in Tours, France, from 5-inch to 6-inch of the front-end wafer fabrication
facility in Rousset, France, and has installed a new 6-inch module in the Rancho
Bernardo, California front-end wafer fabrication facility. In addition, the
Company has started construction of a new 8-inch front-end wafer fabrication
facility in Rousset, France, has initiated the 6-inch to 8-inch conversion of
one of its Agrate, Italy front-end wafer fabrication plants, and has started
planning the construction of a new 8-inch front-end wafer fabrication facility
in Singapore, announced during 1996. Finally, the Company has also identified
one more 8-inch front-end wafer fabrication plant to be built in Italy. 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 fosters 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 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 1996, approximately 44% of the
Company's net revenues originated in Europe (compared to 46% in 1995),
approximately 23% in the Americas (compared to 24% in 1995), approximately 27%
in the Asia Pacific region
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(compared to 26% in 1995) and approximately 6% in Japan (compared to 4% in
1995). In 1996 the Company's sales in the Asia Pacific region surpassed the $1
billion level for the first time. In 1996, 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 major suppliers of design
software. The Company has entered into several strategic customer alliances,
including alliances with Alcatel, Seagate Technology, Thomson Multimedia and
Western Digital, among others. 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 Nortel 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. The Company has also
established joint development programs with leading suppliers such as Applied
Materials, ASM Lithography, LAM and Air Liquide, and with CAD Tools producers
including Cadence, Synopsis and Mentor. It is a participant in Sematech I 300I
for the development of 300 millimeter wafer manufacturing processes. SGS-THOMSON
is active in joint European research efforts such as the new MEDEA program
(which succeeded to JESSI as of 1997), and also cooperates with major research
institutions and universities.
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
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transistors and a leading supplier to the telecommunications industry. SGS
Microelettronica's 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, including bank overdrafts, less cash and
cash equivalents and marketable securities) from a high
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of approximately $905 million at December 31, 1991 to 66.7 million at December
31, 1996. 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 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 "1996 Employee Offering"). Common Shares offered in the 1996 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 1996 Employee
Offering ("Participating Employees") and who held those shares at least until
the first anniversary of the day on which such shares were issued to such
Participating Employees, were entitled to purchase, for each lot of ten shares
purchased in the 1996 Employee Offering, one additional share (a "Bonus Share")
at a discounted price. The purchase price of each Bonus Share was the $ or FF
equivalent of NLG 13.75, which is the nominal value per share. An aggregate of
253,397 new Common Shares were issued pursuant to the 1996 Employee Offering. In
1997, the Company intends to implement a share purchase plan which is intended
to enable employees in most SGS-THOMSON locations worldwide to purchase, subject
to various conditions, up to one million Common Shares to be newly issued.
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 and decreased to an estimated 15%
in 1996. 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
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(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 $132 billion in 1996 (growing at a compound annual rate of approximately 17%,
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 $102.7
billion in 1996 (growing at a compound annual rate of approximately 16%). In
1996, the TAM decreased by 8.6% with sales in the Asia Pacific Region, the
Americas, Europe and Japan decreasing by 6.7%, 9.2%, 2%, and 13.8%,
respectively. In 1996, approximately 32.3% of all semiconductors were shipped to
the Americas, 25.9% to Japan, 20.9% to Europe, and 20.9% 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
From market data related to 1996, it is evident that the
industry has started a correction from the extraordinary growth of recent years.
The Company, however, entered 1997 in a healthy financial condition, and with a
strong market position despite the strong corrections experienced by the
industry in 1996. Market conditions remained difficult in the first quarter of
1997, with continuing overall price pressures that negatively impacted the
Company's sales. As the quarter came to a close, however, the Company saw signs
that the market was improving as prices of several standard products began to
stabilize, and in some cases recover from recent low levels. In addition, the
Company's order rates accelerated in March. Although overall order visibility
remained modest, it improved over the fourth quarter of 1996. Certain industry
analysts expect a growth rate for 1997 compared to a market decline in 1996. It
is evident, however, that decreased visibility on customer demand has made it
somewhat more difficult to predict market conditions.
On June 5, 1997, the Company announced that, based on
available information for the first two months of its second quarter, it expects
its net revenue for the second quarter ending June 28, 1997 to be above the
first quarter level, but below analysts' expectations, and its gross margin to
be similar to that of the first quarter due to a short-term shift in product
mix.
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The Company also stated that its net earnings for the second quarter are likely
to be within a range approximating first quarter 1997 levels.
In the first two months of the quarter, a larger than
anticipated percentage of net sales was derived from commodity products such as
Standard ICs and Memories. Worldwide demand for these products has strengthened
in the last several months, but pricing remains low and the gross margin
associated with them is significantly below that of SGS-THOMSON's differentiated
products.
Looking ahead, the Company reaffirmed that it expects 1997 to
be a year of progressive improvement for the Company and that second half
results should benefit from better overall market conditions and a greater
contribution from sales of differentiated products.
In 1997, the Company intends to continue to emphasize its
expertise in differentiated products while continuing to offer commodity
products that contribute volume, profit and cash flow. 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
Company also remains confident about its long-term growth prospects as well as
those of the market it serves and consequently intends to move ahead with
capital expenditure and research and development plans, committing a percentage
of revenue on the same order of magnitude as during 1996.
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.
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.
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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 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.
- 10 -
<PAGE>
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 69.8% of semiconductor memory sales in 1996. 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
- 11 -
<PAGE>
usually contain more functions than are actually required and, therefore, may
not be cost-effective for certain specific applications. In addition to standard
logic devices, a broad range of full-custom, semicustom and ASSP logic devices
has been developed for a wide variety of applications. These devices are
typically designed to meet particular customer requirements. Compared to memory
markets, logic device markets are much more differentiated and dependent upon
intellectual property and advanced product design skills.
Analog/digital (or "mixed-signal") ICs combine analog and
digital devices on a single chip to process both analog signals and digital
data. Historically, analog and digital devices have been developed separately as
they are fundamentally different and it has been technically difficult to
combine analog and digital devices on a single IC. System manufacturers have
generally addressed mixed-signal requirements using printed circuit boards
containing many separate analog and digital circuits acquired from multiple
suppliers. However, system designers are increasingly demanding system level
integration in which complete electronic systems containing both analog and
digital functions are integrated on a single IC.
Mixed-signal ICs are typically characterized as analog ICs due
to their similar market characteristics, including longer product life cycles,
diverse applications and customers and more stable growth through economic
cycles as compared to digital devices. However, certain parts of the
mixed-signal market are becoming higher volume markets as the increasing use of
mixed-signal devices has enhanced the options of system designers and
contributed to the development of new applications, including multimedia, video
conferencing, automotive, mass storage and personal communications.
- 12 -
<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 1996 83-88 88-93 83-93 93-95 93-96
---- ---- ---- ---- ---- ----- ----- ----- ----- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Integrated Circuits . $ 13,335 $ 35,893 $ 66,018 $126,056 $114,941 21.9% 13.0% 17.3% 38.2% 20.3%
Analog (linear and
mixed-signal) ....... 2,875 7,228 10,673 16,646 17,044 20.2 8.1 14.0 24.6 16.9
Digital
Logic ......... 6,712 17,750 34,079 55,953 61,879 21.5 13.9 17.6 28.2 22.0
Memory
DRAM ....... 1,741 6,390 13,140 40,833 25,132 29.7 15.5 22.4 76.3 24.0
Others ..... 2,007 4,524 8,127 12,624 10,886 17.7 12.4 15.0 24.6 10.2
-------- -------- -------- -------- ------ ---- ---- ---- ---- ----
Total Memory ... 3,748 10,914 21,267 53,457 36,018 23.8 14.3 19.0 58.5 19.2
-------- -------- -------- -------- ------ ---- ---- ---- ---- ----
Total digital ....... 10,460 28,664 55,346 109,410 97,897 22.3 14.1 18.1 40.6 20.9
Discrete ............ 3,696 6,999 8,637 14,004 12,878 13.6 4.3 8.9 27.3 14.2
Opto-electronics .... 736 2,113 2,654 4,344 4,147 23.5 4.7 13.7 27.9 16.0
-------- -------- -------- -------- ------ ---- ---- ---- ---- ----
TAM ............ $ 17,767 $ 45,005 $ 77,309 $144,404 $131,966 20.4% 11.4% 15.8% 36.7% 19.5
======== ======== ======== ======== ======== ==== ==== ==== ==== ====
Europe .............. $ 3,320 $ 8,104 $ 14,599 $ 28,199 27,562 19.5% 12.5% 15.9% 39.0% 23.6%
Americas ............ 7,761 13,418 24,744 46,998 46,679 11.6 13.1 12.3 37.8 19.9
Asia Pacific ........ 1,150 5,374 14,168 29,540 27,550 36.1 21.4 28.5 44.4 24.8
Japan ............... 5,536 18,109 23,798 39,667 34,175 26.7 5.6 15.7 16.1 12.8
-------- -------- -------- -------- ------ ---- ---- ---- ---- ----
TAM ........... $ 17,767 $ 45,005 $ 77,309 $144,404 $131,966 20.4% 11.4% 15.8% 36.7% 19.5
======== ======== ======== ======== ======== ==== ==== ==== ==== ====
<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 fads or subcontracting wafer
production.
- 13 -
<PAGE>
With the continuing development of new semiconductor
applications and increasing demands of system designers for more integrated
systems-oriented products, semiconductor manufacturers must continually improve
their core technology and manufacturing competencies. In addition, the
increasing diversity and complexity of semiconductor products, the demands of
technological change, and the costs associated with keeping pace with industry
developments have contributed to the growth of cooperative product design and
development and manufacturing alliances with customers as well as among
semiconductor suppliers. Alliances with customers provide the manufacturer with
valuable systems and application know-how and access to markets for key
products, while allowing the manufacturer's customers to share some of the risks
and benefits of product development. Customers also gain access to the
manufacturer's process technologies and manufacturing infrastructure. Alliances
with other semiconductor manufacturers permit costly research and development
and manufacturing resources to be shared to mutual advantage for joint
technology development.
To compete as a broad line semiconductor manufacturer,
management believes that it is important to have: (i) a broad and diverse
customer base; (ii) a diversified product portfolio (including analog, digital
mixed-signal and power products) and experience in several application markets;
(iii) a broad range of process technologies (including basic function-oriented
and advanced systems-oriented technologies); (iv) 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. According to preliminary industry data, in 1996 SGS-THOMSON became
one of the top 10 worldwide suppliers of semiconductor devices. 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
- 14 -
<PAGE>
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 and the asynchronous transfer mode communication systems 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 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, including engine
management and safety, and is developing devices for new applications such as
global positioning systems. In the industrial market, the Company is developing
innovative power products, particularly for use in lighting systems and switch
mode power supplies.
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. In 1996,
the Company developed a 0.25 micron, six-metal layers process that can be used
to create either circuits which operate at high speed (clock frequency of 400
MHZ at 2.5V) or circuits with low power consumption (1.0V) and capable of
densities of up to 30,000 gates per square millimeter. 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.
Expand and Improve Manufacturing Capabilities. In 1996,
SGS-THOMSON expanded its diversified manufacturing infrastructures while
improving the cost, quality and flexibility of its operations. SGS-THOMSON has
applied 1996 investments in its manufacturing facilities to bring to full
capacity the 8-inch front-end manufacturing facility in Crolles, France, to
continue the ramp-up of the new 8-inch front-end manufacturing facility in
Phoenix, Arizona,
- 15 -
<PAGE>
to complete the building of and to begin equipping the third 8-inch front-end
manufacturing facility in Catania, Italy, and to continue to build and equip 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.
During 1996, the Company has also completed conversion from 4-inch to 5-inch of
the two front-end wafer fabrication modules in Tours, France, from 5-inch to
6-inch of the front-end wafer fabrication facility in Rousset, France, and has
installed a new 6-inch module in the Rancho Bernardo, California front-end wafer
fabrication facility. In addition, the Company has started construction of a new
8-inch front-end wafer fabrication facility in Rousset, France, has initiated
the 6-inch to 8-inch conversion of one of its Agrate, Italy front-end wafer
fabrication plants, and has started planning the construction of a new 8-inch
front-end wafer fabrication facility in Singapore, announced during 1996.
Finally, the Company plans one more 8-inch front-end wafer fabrication plant to
be built in Italy. In 1996, approximately 93% of the ICs wafers manufactured by
SGS-THOMSON were manufactured on 5-, 6- and 8-inch wafers. The Company fosters 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.
Emphasize Differentiated 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 approximately
59% of the Company's net revenues in 1996 compared to approximately 51% in 1995.
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 1996 net
revenues (unchanged from 1995), while discrete devices accounted for
approximately 14% of the Company's 1996 net revenues (compared to 17% in 1995).
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, Bosch,
Seagate Technology, Thomson Multimedia, and Western Digital, among others.
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
- 16 -
<PAGE>
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 established joint
development programs with leading suppliers such as Applied Materials, ASM
Lithography, LAM and Air Liquide, and with CAD Tools producers including
Cadence, Synopsis and Mentor. It is a participant in Sematech I 300I for the
development of 300 millimeter wafer manufacturing processes. SGS-THOMSON is
active in joint European research efforts such as the new MEDEA program (which
succeeded to JESSI as of 1997), and also cooperates with major research
institutions and universities.
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.
- 17 -
<PAGE>
The following table sets forth certain of the Company's
significant customers in 1996 and certain applications for its products:
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Telecommunications
Customers: Alcatel Gemplus Nortel Schlumberger
AT&T Goldstar Orga Siemens
Daewoo Italtel Philips
Ericsson Motorola Sagem
Fujitsu Nokia Samsung
------------------------------------------------------------------------------------------
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 Creative Technologies IBM Tatung
ATI Technologies Cyrix Matsushita Western Digital
Bull DEC Olivetti Xerox
Canon Epson Quantumi
Compaq Hewlett-Packard Seagate Technology
------------------------------------------------------------------------------------------
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 Peugeot S.A. Renault
------------------------------------------------------------------------------------------
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 Nokia Sharp
Canon Grundig Pace Sony
Creative Technology Kenwood Philips Thomson Multimedia
Daewoo Matsushita Pioneer
General Instrument NEC Samsung
------------------------------------------------------------------------------------------
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 TV sets and monitors
Video cassette recorders
- -------------------------------------------------------------------------------------------------------------------
Industrial and
Other Applications
Customers: Astec Emerson Philips Siemens
Asea Brown Boveri Mannesman Schlumberger Schneider
------------------------------------------------------------------------------------------
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>
- 18 -
<PAGE>
Two customers each accounted for slightly above 5% of the
Company's net revenues in 1996 and sales to the Company's top ten customers
accounted for approximately 38% of the Company's net sales in 1996. 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 21% of
the Company's net revenues in 1996 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 77.8% of the TAM in 1996,
compared to 84% of the TAM in 1983. While the TAM increased at a compound annual
growth rate of approximately 17% from $17.8 billion in 1983 to an estimate of
$132 billion in 1996, the SAM increased at a compound annual growth rate of
approximately 16% from $15.0 billion to an estimate of $102.7 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 $1,757.7
million in 1996 (an increase of 29.3% over 1995 revenues), representing
approximately 43% of SGS-THOMSON's 1996 revenues. Approximately 33.2% of the
Group's revenues in 1996 were generated in Europe, while approximately 23.3%,
37.8%, and 5.7% 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
- 19 -
<PAGE>
manufacturers located in the region. All of the Group's products are ASSPs or
full custom devices.
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 preliminary
published industry data, in 1996, SGS-THOMSON was the world's second largest
supplier of dedicated telecommunications ICs. 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, airbag controls, antiskid braking systems, ignition circuits,
injection circuits, multiplex wiring kits and products for body and chassis
electronics, engine management and instrumentation systems. The Company is
currently targeting the emerging application of global positioning systems.
Video Products. SGS-THOMSON produces ICs for TV sets,
monitors, videocassette recorders, satellite receivers, pay-tv decoders and
digital video disks. The
- 20 -
<PAGE>
Company is focusing on developing products for applications in the growing U.S.
satellite and cable television markets. Leveraging its BCD Technology know how,
the Group is now targeting the emerging market of flat panel displays.
Image Processing. SGS-THOMSON has 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.
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 delivers 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. According to the latest published industry
data, in 1995 SGS-THOMSON was the leading supplier of MPEG decoder ICs with an
approximately 44.3% share of the MPEG decoders market.
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 $784.1 million in 1996 (a decrease of 6.4% over 1995 revenues),
representing approximately 19% of SGS-THOMSON's net revenues. Approximately 53%
of the Group's 1996 revenues were generated in Europe, while approximately
21.5%, 23.9%, and 1.6% were generated in the Americas, the Asia Pacific region,
and Japan, respectively. According to preliminary published industry data, based
on 1996 revenues, SGS-THOMSON is among the top four suppliers of power
transistors (1996 total market of $4.9 billion) and thyristors (1996 total
market of $738 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
- 21 -
<PAGE>
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 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) systems, television/monitor deflection circuits and lighting systems.
According to preliminary published industry data, on the basis of 1996 revenues,
SGS-THOMSON is among the leading suppliers of bipolar transistors, including RF
power transistors (1996 total market of $2.2 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.
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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.
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 $736.8 million in 1996 (an increase of 12.8% over 1995
revenues), representing approximately 18% of SGS-THOMSON's 1996 revenues.
Approximately 53.1% of the Group's 1996 revenues were generated in Europe, while
approximately 19.5%, 14.4%, and 13.0% were generated in the Americas, the Asia
Pacific region, and Japan, respectively. According to preliminary published
industry data, on the basis of 1996 revenues, SGS-THOMSON was the leading
producer of EPROMs (1996 total market of $1.1 billion) and the leading supplier
of EEPROMs (1996 total market of $1.1 million).
There are two basic types of memory devices, random access
memories ("RAMs") and non-volatile. RAMs are typically used in microprocessor
systems to store data used in the operation of such systems, whereas
Non-Volatile Memory is 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 non-volatile memories that offer
varying degrees of functionality at varying costs. Among such non-volatile
memories, read-only memories ("ROMs") are permanently programmed when they are
manufactured while programmable ROMs (PROMs) can be programmed by system
designers or end-users after they are manufactured. Erasable PROMs (EPROMs) may
be erased and reprogrammed several times,
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but to do so EPROMs must be physically removed from electronic systems, exposed
to ultraviolet light, reprogrammed using an external power supply and then
returned to the systems. Electrically erasable PROMs (EEPROMs) can be erased
byte by byte and reprogrammed "in-system" without the need for removal. Using
EEPROMs, a system designer or user can program or reprogram systems at any time.
"Flash" memories are 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 can also be erased and rewritten. The entire contents of a flash
memory or large blocks of data (not individual bytes) can be erased with a
"flash" of current. Because flash memories can be erased and reprogrammed
electrically and in-system, they are more flexible than EPROMs and, therefore,
may replace EPROMs in many of their current applications. Flash memories may
also be used for solid state mass storage of data, a potentially high volume
application, and in other applications, including, in particular mobile
telephone systems. Flash memories are 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 preliminary published industry data, the TAM for
memory devices in 1996 was approximately $36.0 billion, with DRAMs, SRAMs, ROMs,
EPROMs, flash and EEPROMs accounting for approximately 69.8%, 13.2%, 3.7%, 3.1%,
7.2% and 3.0% 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 preliminary industry data, SGS-THOMSON
consolidated its world's leading market position for EPROMS in 1996, with
revenues of $335.5 million (basically unchanged over 1995 despite a sharp market
decline) or approximately 30.4% of worldwide EPROM sales. The Company currently
produces EPROMs using 0.5 micron CMOS technologies.
The EPROM market is relatively mature and it has been
declining in 1996 according to preliminary industry data. Nevertheless, in 1996,
the Company succeeded in maintaining its sales level and in further
consolidating its market leadership because of its best in class EPROM
technology. This technology has, in fact, allowed the Group to build one of the
broadest product portfolios currently offered in the market, and at the same
time it has enabled continuous improvement of manufacturing yields and reduction
of die size, thus leading the Company to an extremely advantageous cost
position. Efficient manufacturing in the Singapore and Malaysia assembly plants
together with SGS-THOMSON's large sales and
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distribution channels around the world have allowed the full exploitation of the
technological advantage.
Due to the volatility of EPROM supply, prices reached a top
high at the beginning of 1996, and then progressively declined, because of
industry oversupply, to an end of year low basically in line with the price at
the beginning of 1995.
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 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
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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. In 1996, SGS-THOMSON's cumulative
shipments of integrated circuits for smartcards surpassed the one billion mark.
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. The Company is now developing 32 bits
cryptocontrollers as well as solutions for contactless applications. In 1996,
SGS-THOMSON was the first company to obtain security certification for banking
and Pay-TV applications according to the ITSEC European Norms.
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 $720.5 million in 1996 (an
increase of 34.6% over 1995), representing approximately 17% of SGS-THOMSON's
1996 revenues. Approximately 45.2% of the Group's 1996 revenues were generated
in Europe, while approximately 27.7%, 24.5% and 2.6% 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.
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).
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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, ST7, ST9
microcontrollers to the 16-bit ST10 and 32-bit ST20 devices. The ST10 and ST20
families are designed to address the full spectrum of embedded processor
applications, from computer peripherals such as hard disk drives and 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, satellite receivers, cellular
telephones and global positioning systems.
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 is producing 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.
The Company is prototyping a 0.35 micron/2.7V five-metal layers HCMOS6
technology version of the D950-CORE. 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 0.35 micron CMOS five-metal layer standard cells.
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 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
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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. SGS-THOMSON
manufactures a wide range of mixed-signal semicustom devices, including a 0.5
micron BiCMOS library of cells.
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 1996, SGS-THOMSON
U.S. produced x86 chips for the original equipment manufacturer market. The
Company is also focusing on designing and manufacturing "system on silicon"
solutions based on the 486 CPU core, and more recently media processors based on
Very Long Instruction Word ("VLIW") processors.
In 1996, the Company enhanced its position in the emerging
market for new consumer electronics products by forming a joint development
arrangement with Microsoft for DVD products, and by licensing the MPACT media
processor from Chromatic Research. The Company also announced the first product
on the market to employ the Macrovision 7.0 Anti-Copy System for DVD and set-top
box applications. Another important product introduction for DVD applications
was the Dolby AC-3 decoder. In addition, the Company helped define industry
standards with the development of the Video Interface Port, which was initiated
together with several competitors and will create an architecture for using
video in PCs.
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 1996, the Company derived approximately 79% of its revenues
from sales directly to customers through its regional sales organizations
(compared to approximately 77% in 1995) and 21% of its net revenues from sales
through distributors (compared to approximately 23% in 1995). SGS-THOMSON
operates regional sales organizations in Europe, North
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America, the Asia Pacific region and Japan. In 1996, approximately 44% of the
Company's revenues originated in Europe (compared to approximately 46% in 1995),
while 23% originated in the Americas (compared to approximately 24% in 1995),
27% originated in the Asia Pacific region (compared to approximately 26% in
1995) and 6% originated in Japan (compared to approximately 4% in 1995). In 1996
the Company's sales in the Asia Pacific region surpassed for the first time the
$1 billion level. In 1996, two customers each accounted for slightly more than
5% of the Company's net revenues.
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, Hong Kong and India.
In Japan, the large majority 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.
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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 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 1996, the Company undertook the Gold Standard program, a
long-term commitment to excellence in standard products. The program consists in
manufacturing and offering standard products at the same price level as the
market but with a superior level of quality, service and lead time. The related
initiatives included worldwide advertising, promotional task forces in all
regions, special distribution initiatives, worldwide training of salespeople and
marketing personnel.
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.
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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 1992 (not including design center, process
engineering, pre-production or industrialization costs):
Year ended December 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in millions, except percentages)
Expenditures .................... $260.9 $270.9 $338.3 440.3 532.3
as a percentage of net revenues 16.6% 13.3% 12.8% 12.4% 12.9%
As a result of the history of the Company, approximately 89% of the Company's
research and development expenses in 1996 were incurred in Europe, primarily in
France and Italy. See "-- State Support for the Semiconductor Industry". As of
December 31, 1996, approximately 2,980 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; Carrollton, Texas; Phoenix, Arizona; Berkeley,
California; and Noida, India. The central research and development units
participate in several strategic partnerships. The Company's manufacturing
facility at Crolles, France houses a research and development center that is
operated 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 Noida, 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 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 company 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
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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". The Company has
developed a wide network of cooperation with several universities in the United
Kingdom (Bristol and Newcastle), Italy (Bologna, Catania, Milan, Pavia and
Turin), France (Grenoble, Marseille, Toulouse and Tours), in the United States
(Carnegie Mellon, Stanford, Berkeley and UCLA) and Singapore for basic research
projects on design and process development.
In addition to central research and development, each
operating division also 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) 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 covered the period 1988 through 1996 and involved
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
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manufacturing or using semiconductors. The amount of support under French
programs is decided annually and subject to budget appropriation.
The Company will also participate in the Micro-Electronics
Development for European Application "MEDEA" cooperative research and
development program which was launched in June 1996 by the Eureka Conference and
is designed to bring together many of Europe's top researchers in a 12,000
man-year program that will cover the period 1997-2000.
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, ran from 1992 through 1996 and required, among other things,
compliance with EC regulations and annual and project-by-project reviews and
approvals. The agreements were 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 19 to the Consolidated Financial Statements. Such funding
has totalled $80.1 million, $89.6 million and $63.8 million in the years 1994,
1995 and 1996, 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 $19.3 million, $11.8 million and $4.6 million in 1994, 1995
and 1996, respectively. See Note 19 to the Consolidated Financial Statements.
Government support for capital expenditures funding has totalled $40.4 million,
$64.5 million and $93.3 million in the years 1994, 1995 and 1996, respectively.
Such funding has been used to support the Company's capital investment; while
receipt of these funds is not directly reflected in the Company's results of
operations, the resulting lower amounts recorded in property, plant and
equipment reduce the level of depreciation recognized by the Company.
Low interest financing has been made available (principally in
Italy) under programs such as the Italian Republic's Fund for Applied Research,
established in 1968 for the purpose of supporting Italian research projects
meeting specified program criteria. At year-end 1994, 1995 and 1996, the Company
had $133.2 million, $115.4 million and $176.3 million, respectively, of
indebtedness outstanding under state-assisted financing programs at an average
interest cost of 2.9%, 2.64% and 4.0%, respectively.
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Funding for programs in France and Italy is subject to
compliance with EU and national regulations as well as to annual appropriation;
if such governments were unable to provide anticipated funding on a timely basis
or if existing government-funded programs were curtailed or discontinued or if
the programs were deemed not to comply with applicable regulations, 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 1,600 original invention patents or pending
patent applications, most of which have been registered in several countries
around the world. In 1996, the Company filed 493 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 in July 1992 which is now final as well as
in a court judgement dated December 30, 1994 which has been confirmed in appeal.
- 34 -
<PAGE>
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 license 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.
- 35 -
<PAGE>
The Company's backlog has decreased during 1996 following the
tough semiconductor market conditions. On January 22, 1997, the Company
announced that with lead times shrinking throughout the industry during 1996,
the Company entered 1997 with less order visibility than it has historically
enjoyed and on June 6, 1997, the Company announced that the third quarter order
backlog as of May 31, 1997 was substantially above second quarter levels and
reflected a significant increase in order visibility over the first and second
quarters of 1997.
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
- 36 -
<PAGE>
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 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). The Company has also
introduced a digital signal processing core for 0.5 micron ASICs (DSP 950), the
ST20 family of compatible 0.5 micron 32-bit microprocessor cores and a
multimedia accelerator (Riva 128) as well as the STi 3540 DVD MPEG2 decoder. The
Company also continually strives to improve the operating performance and design
features of many of its products.
According to preliminary industry data, SGS-THOMSON
consolidated its leading world market position for EPROMs in 1996 with revenues
of $335.5 million, basically unchanged over 1995 despite a sharp market decline.
According to preliminary industry data, the Company was the world's leading
supplier of EEPROMs in 1996. 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 is currently developing families of 8
and 16 Mbit flash memories. The Company is also developing a new generation of
digital video decompression chips, a 64-bit RISC microprocessor and 0.35 micron
BiCMOS mixed-signal standard cells. There can be no assurance, however, that the
Company's flash memories or other new products, including its x86
microprocessors, 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
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<PAGE>
inefficiently implements production increases or transitions, the Company's
results of operations could be adversely affected.
Employees
As of December 31, 1996, the Company employed approximately
25,893 people, of whom approximately 5,358 were employed in France, 5,514 were
employed in Italy, 588 were employed in the rest of Europe, 2,555 were employed
in the United States, 4,308 were employed in Malta and Morocco and 7,570 were
employed in Singapore, Malaysia and Japan. As of December 31, 1996,
approximately 2,980 employees were engaged in research and development, 1,296 in
marketing and sales, 17,672 in manufacturing, 1,629 in administration and
general services and 2,343 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. By the end of 1996, ten
of the Company's plants were certified for the Eco-Management and Audit Scheme
("EMAS") and five sites have also obtained ISO 14001 certification.
Although the Company has not suffered material environmental
claims in the past and believes that its activities conform to presently
applicable environmental regulations, in all material respects, environmental
claims or the failure to comply with present or future regulations could result
in the assessment of damages or imposition of fines against the Company,
suspension of production or a cessation of operations.
- 38 -
<PAGE>
Item 2: Description of Property
SGS-THOMSON currently operates 17 main 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.
- 39 -
<PAGE>
<TABLE>
<CAPTION>
Location Products Technologies
-------- -------- ------------
<S> <C> <C>
Front-end Facilities:
Crolles, France Semicustom devices and dedicated 8-inch 0.7/0.35 micron CMOS and
products 1.0/0.35 micron BiCMOS; R&D on
submicron technologies in
conjunction with CNET and Philips
Semiconductors
Phoenix, Arizona x86 microprocessors, EPROMs and 8-inch 0.5/0.35 micron CMOS
other VLSI products
Agrate, Italy EPROMSs, EEPROMs, semicustom Fab 1 - 6-inch 0.8/0.6 micron CMOS
devices, microcontrollers, flash Fab 2 - 6-inch 2.0/1.2 micron BiCMOS and
memories 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 micron BiCMOS, BCD and
bipolar
Grenoble, France(1) Dedicated products, semicustom 4-inch 2.0/1.2 micron BiCMOS
devices, smartcard products
Castelletto, Italy Smart power BCD 6-inch 4.0/1.2 micron bipolar and
mixed BCD pilot line (converted
from 5-inch in 1996)
Tours, France Thyristors, diodes and application- Fab 1 - 5-inch discrete (converted from 4-
specific discretes inch in 1996)
Fab 2 - 5-inch discrete (converted from 4-
inch in 1996)
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 (new 6-inch module in progress)
Back-end Facilities:
Muar, Malaysia Broad range
Kirkop, Malta Broad range
Toa Payoh, Singapore Broad range
Ain Sebaa, Morocco Discrete semiconductors
Bouskoura, Morocco Subsystems
Shenzen, China Discrete semiconductors
<FN>
(1) The closure of the Grenoble front-end facility is now scheduled to take place during 1997.
(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>
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<PAGE>
In 1996, approximately 61% of the value of SGS-THOMSON
manufactured devices were produced in Europe, 21% in the Asia Pacific region,
and 18% in the United States. The major hubs for European manufacturing and
product design and development are located in Agrate, Italy and Crolles, France.
In the United States, the Company's main manufacturing facility are located in
Carrollton, Texas and Phoenix, Arizona. In the Asia Pacific region, the Company
operates a front-end wafer fab in Singapore and back-end facilities in Singapore
and Muar, Malaysia.
In 1996, SGS-THOMSON has expanded its diversified
manufacturing infrastructure while improving the cost, quality and flexibility
of its operations. SGS-THOMSON has applied 1996 investments in its manufacturing
facilities to bring to full capacity the 8-inch front-end manufacturing facility
in Crolles, France, to continue the ramp up of the new 8-inch front-end
manufacturing facility in Phoenix, Arizona, to complete the building of and to
begin equipping the third 8-inch front-end manufacturing facility in Catania,
Italy, and to complete a new back-end facility and design center in Shenzhen,
China, through its joint venture created in 1996 with a subsidiary of the
Shenzhen Electronics Group. During 1996, the Company has also completed
conversion from 4-inch to 5-inch of the two front-end wafer fabrication plants
in Tours, France, from 5-inch to 6-inch of the front-end wafer fabrication
facility in Rousset, France, and has installed a new 6-inch module in the Rancho
Bernardo, California front-end wafer fabrication facility. In addition, the
Company has started construction of a new 8-inch front-end wafer fabrication
facility in Rousset, France, has initiated the 6-inch to 8-inch conversion of
one of its Agrate, Italy front-end wafer fabrication plants, and has started
planning the construction of a new 8-inch front-end wafer fabrication facility
in Singapore, announced during 1996. Finally, the Company has also identified
one more 8-inch front-end wafer fabrication plant to be built in Italy. In 1996,
approximately 93% of the ICs 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 built and equipped 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 and equipment installation has been completed in 1996 as scheduled and
production started at the end of 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.
- 41 -
<PAGE>
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.
The Company undertook in 1996 certain initiatives to expand
its manufacturing resources in order to help relieve capacity constraints with
regard to certain advanced products. In particular the manufacturing plan in
Phoenix, Arizona, was qualified to produce a broader and more flexible range of
products. SGS-THOMSON has applied 1994, 1995 and 1996 investments to build and
equip two 8-inch front-end manufacturing facilities in Crolles, France and
Phoenix, Arizona currently in operation, and has applied 1995 and 1996
investments to build and equip an additional 8-inch front-end manufacturing
facility in Catania, Italy, now qualified, 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 wafer 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 which is now under construction. 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
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<PAGE>
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; however, the Company does not believe that the ultimate resolution
of pending legal proceedings will have a material adverse effect on its
financial condition.
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 Secundo 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
- 43 -
<PAGE>
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.
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 May 30, 1997.
Common Shares Owned
-------------------
Number of
Shareholders Common Shares %
- ------------ ------------- -
SGS-THOMSON Microelectronics
Holding II B.V.................. 95,863,880 68.9
The officers and directors of the Company as a group own an
insignificant number of Common Shares.
- 44 -
<PAGE>
The chart below illustrates the current shareholding
structure:
THIS INFORMATION WAS REPRESENTED BY AN ORGANIZATIONAL CHART
IN THE ORIGINAL DOCUMENT.
Description of Shareholding Structure:
SGS-THOMSON Microelectronics N.V. is owned 68.9% by SGS-THOMSON
Microelectronics Holding II B.V. a wholly-owned subsidiary of SGS-THOMSON
Microelectronics 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 shareholder, FT2CI, is owned 49.9% and 50.1% by
Thomson-CSF and FT1CI, respectively. Thomson-CSF is owned 58.0% by Thomson S.A.
FT1CI is owned 51.0% and 49.0% by CEA-Industrie and France Telecom,
respectively. The Italian shareholder, MEI, is owned 50.1% and 49.9% by I.R.I.
and Comitato SIR, respectively.
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<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
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<PAGE>
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 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,
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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.
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-
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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) 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
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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 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.
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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.
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.
New York Stock Exchange Bourse de Paris
Price per Common Share Price per Common Share
---------------------- ----------------------
Calendar Period High Low High Low
- --------------- ---- --- ---- ---
1995
First quarter........... $32 1/2 $22 1/2 FRF160.0 FRF119.0
Second quarter.......... $41 7/8 $29 3/4 FRF205.5 FRF142.0
Third quarter........... $57 1/2 $40 3/8 FRF288.0 FRF197.0
Fourth quarter.......... $49 $40 3/8 FRF244.0 FRF201.0
1996
First quarter........... $41 1/3 $29 1/2 FRF211.9 FRF141.0
Second quarter.......... $47 1/2 $34 2/3 FRF246.5 FRF175.5
Third quarter........... $49 4/5 $29 3/4 FRF258.0 FRF150.0
Fourth quarter.......... $70 5/8 $44 1/3 FRF397.0 FRF228.0
At December 31, 1996, there were 138,985,580 Common Shares
issued and outstanding, of which 23,608,380 or 16.99% were registered in the
Common Share registry maintained on the Company's behalf in New York.
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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.
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
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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.
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
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(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:
(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
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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.
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.
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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 29 of the Registrant's
1996 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 30 through 40 of the Registrant's 1996 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.
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
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<PAGE>
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 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
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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 55
Jean-Pierre Noblanc Vice Chairman 1994 58
Remy Dullieux Member 1993 46
Riccardo Gallo Member 1997 53
Alessandro Ovi Member 1994 53
Henri Starck Member 1987 68
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.
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.
- 58 -
<PAGE>
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.
Riccardo Gallo was appointed to the Supervisory Board in 1997.
He is Associate Professor of Industrial Economics at the Engineering Faculty of
"La Sapienza" University in Rome. He is also a member of Comitato Sir. From 1982
to 1991 he served as General Director at the Italian Ministry of National
Budget. At the beginning of the 1990s he served as Vice Chairman of I.R.I. In
1994, he was appointed by the Italian Minister of Industry as Extraordinary
Commissioner of Fidia, a research-oriented pharmaceutical company.
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 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
one hundred articles in the field of Physics.
- 59 -
<PAGE>
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 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".
- 60 -
<PAGE>
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.
- 61 -
<PAGE>
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 17 33 61
Officer
Laurent Bosson Corporate Vice President, 14 14 54
Front-end Manufacturing
and Americas Region
Carlo Bozotti Corporate Vice President, 20 20 44
European and
Headquarters Region
Salvatore Castorina Corporate Vice President, 15 31 61
Discrete and Standard
ICs Group
Murray Duffin Corporate Vice President, 10 37 63
Total Quality Management
Alain Dutheil Corporate Vice President, 14 27 52
Strategic Planning and
Human Resources
Ennio Filauro Corporate Vice President, 28 37 64
Memory Products Group
Philippe Geyres Corporate Vice President, 13 21 44
Programmable Products Group
Maurizio Ghirga Corporate Vice President, Chief 14 14 59
Financial Officer
Jean-Claude Marquet Corporate Vice President 11 30 55
Asia Pacific Region
Pier Angelo Martinotti Corporate Vice President, New 16 29 56
Ventures Group
Joel Monnier Corporate Vice President, Central 14 23 52
Research and Development
Piero Mosconi Corporate Vice President, 33 33 57
Treasurer
Aldo Romano Corporate Vice President, 31 31 56
Dedicated Products Group
Giordano Seragnoli Corporate Vice President, 32 34 60
Back-end Manufacturing
and Subsystems
Keizo Shibata Corporate Vice President, 5 32 60
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 Fads 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-
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<PAGE>
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 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
- 63 -
<PAGE>
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.
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
- 64 -
<PAGE>
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 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.
- 65 -
<PAGE>
Item 11: Compensation of Directors and Officers
The aggregate cash compensation offered for 1996 to the
members of the Supervisory Board by the Company was approximately $462,000. The
amount of cash compensation for 1996 to the executive officers of the Company
and members of the Management Board as a group by the Company and its
subsidiaries was approximately $7 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 1996 under certain group life and medical insurance
programs provided by the Company. The aggregate additional amount set aside by
the Company in 1996 to provide pension, retirement or similar benefits for
executive officers and members of the Management Board of the Company as a group
was approximately $2.8 million.
Item 12: Option to Purchase Securities from Registrant or Subsidiaries
As of June 24, 1997, options to purchase up to an aggregate of
171,790 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). Of such
outstanding options, 49,000 are held by executive officers of the Company as a
group and all outstanding options 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 has
granted 1,200,000 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 and of which,
as of May 1, 1997, 1,174,200 options were still exercisable. 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
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<PAGE>
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
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 $232.1 million in 1996. At December 31, 1996 there was no outstanding
indebtedness guaranteed by indirect
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<PAGE>
shareholders, other than debt guaranteed by SGS-THOMSON Microelectronics Holding
N.V. See Note 26 to the Consolidated Financial Statements.
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
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, 1996 are incorporated by reference from the Registrant's 1996 Annual Report
to Shareholders, on pages 41 through 58.
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<PAGE>
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.
- 69 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(Item 19(a))
Reference Page
--------------
1996 Annual
Report to
Form 20-F Shareholders
--------- ------------
SGS-THOMSON Microelectronics N.V. and Subsidiaries
Report of Independent Accountants for the Year ended
December 31, 1996................................... 59
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994.................... 41
Consolidated Balance Sheet as of December 31, 1996 and
1995................................................ 42
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994.............. 43
Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994........ 44
Notes to Consolidated Financial Statements............ 45
Independent Public Accountant's Report for the Years
ended December 31, 1995 and 1994.................... 71
Schedule - Valuation and Qualifying Accounts for
the Years Ended December 31, 1996, 1995 and 1994.... 72
Independent Public Accountant's Report on Schedule.... 73
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<PAGE>
AUDITOR'S REPORT
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.
Arthur Andersen & Co.
Amsterdam, The Netherlands
January 26th, 1996
-71-
<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>
Valuation and qualifying accounts
deducted from the related asset
accounts
1996
Inventories................... 36,500 ---- 45,176 (36,500) 45,176
Accounts Receivable........... 17,881 (514) 1,114 (329) 18,152
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
</TABLE>
-72-
<PAGE>
To the Supervisory Board and the Shareholders of SGS-THOMSON Microelectronics
N.V.:
We have audited the financial statements of SGS-THOMSON Microelectronics N.V.
and subsidiaries as of December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995 and have issued our report thereon
dated January 26, 1996. We have also audited the schedule included in this
Annual Report on Form 20-F as listed in item 19.
This schedule is the responsibility of the Company's management and is presented
for purpose of complying with the Securities and Exchange Commission's rules and
regulations and is not part of the basic financial statements.
In our opinion, the schedule referred to above fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Arthur Andersen & Co
Amsterdam, the Netherlands
June 26, 1996
-73-
<PAGE>
Glossary
ASIC.............. application-specific integrated circuit
ASSP.............. application-specific standard product
BCD............... bipolar, CMOS and DMOS process technology
BiCMOS............ bipolar and CMOS process technology
CAD............... computer aided design
CIM............... computer integrated manufacturing
CMOS.............. complementary metal oxide silicon
DMOS.............. diffused metal oxide silicon
DRAMS............. dynamic random access memory
DSP............... digital signal processor
DVD............... digital video disk
EEPROM............ electrically erasable programmable read-only memory
EPROM............. erasable programmable read-only memory
HCMOS............. high-speed complementary metal-oxide-silicon
IC................ integrated circuit
IGBT.............. insulated gate bipolar transistors
ISDN.............. integrated services digital network
Kbit.............. kilobit
Mbit.............. megabit
MOS............... metal oxide silicon process technology
MOSFET............ metal oxide silicon field effect transistor
MPEG.............. motion picture experts group
PROM.............. programmable read-only memory
RAM............... random access memory
RF................ radio frequency
RISC.............. reduced instruction set computing
ROM............... read-only memory
SAM............... serviceable available market
SLIC.............. subscriber line interface card
SMPS.............. switch mode power supply
SPC............... statistical process control
SRAM.............. static random access memory
TAM............... total available market
VLSI.............. very large scale integration
-74-
<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, 1997 By: /s/ Pasquale Pistorio
---------------------------------------
Name: Pasquale Pistorio
Title: President and Chief Executive Officer
-75-
<PAGE>
INDEX TO EXHIBITS
(Item 19(b))
Exhibit
Number Description
------ -----------
13 SGS-THOMSON Microelectronics N.V. 1996 Annual Report to
Shareholders
23 Consents of Independent Accountants
Exhibit 13
1996 Annual Report to Shareholders
<PAGE>
SGS-THOMSON
MICROELECTRONICS
[GRAPHIC] 1996 ANNUAL REPORT
SGS-THOMSON Microelectronic 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 ranked among the top
10 worldwide semiconductor suppliers and is the world's leading supplier of
analog ICs, EPROM/EEPROM non-volatile memories 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 listed on the New
York Stock Exchange (symbol: STM) and the Bourse de Paris, and is quoted on SEAQ
International.
CONTENTS
Financial Highlights 1
Message from the President 2
SGS-THOMSON at Glance 7
High Growth Applications
Automotive 10
Computer 12
Telecommunications 14
Consumer 16
Industrial 18
Manufacturing 20
Research and Development 24
Strategic Alliances 26
Financial Report 28
Supervisory Board and Executive Officers 60
Corporate Information 60
<PAGE>
FINANCIAL HIGHLIGHTS SGS-THOMSON Microelectronics N.V.
Twelve months ended December 31,
<TABLE>
<CAPTION>
(In millions, except per share data) 1992 1993(1) 1994(1) 1995(1) 1996
CONSOLIDATED STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,568.1 $ 2,037.5 $ 2,644.9 $ 3,554.4 $ 4,122.4
Cost of sales(2) (1,051.6) (1,248.4) (1,528.7) (2,096.0) (2,414.7)
Gross profit(2) 516.5 789.1 1,116.2 1,458.4 1707.7
Total operating expenses(3) (464.7) (573.6) (683.2) (807.4) (908.3)
Operating income(4) 51.8 215.5 433.0 651.0 799.4
Net interest expenses/other(5) (46.5) (37.8) (21.0) (16.8) (3.9)
Profit before tax 5.3 177.7 412.0 634.2 795.5
Income tax expense (2.3) (17.6) (49.5) (108.3) (171.6)
Income before minority interests 3.0 160.1 362.5 525.9 623.9
Minority interests(6) 0 0 0 0.6 1.6
Net income(7) $ 3.0 $ 160.1 $ 362.5 $ 526.5 $ 625.5
Earnings per share(8) $ 0.06 $ 1.92 $ 3.04 $ 4.03 $ 4.50
Weighted average shares outstanding 53.6 83.5 119.4 130.6 138.7
CONSOLIDATED BALANCE SHEET DATA (END OF PERIOD):
Cash, cash equivalents and marketable
securities $ 99.5 $ 327.4 $ 461.5 $ 758.4 $ 556.4
Working capital 467.7 390.0 291.1 417.4 611.8
Total assets 1,842.3 2,240.9 3,224.7 4,486.0 5,005.5
Short-term debt
(including current portion of long-term debt) 360.6 231.1 322.5 492.8 428.2
Long-term debt (excluding current portion)(1) 547.6 374.8 277.2 200.7 194.9
Shareholders' equity(1) 412.9 1,004.0 1,680.0 2,661.7 3,260.0
</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 $100 million capital
contribution in each of 1988, 1989 and 1991.
(2) Cost of sales is net of certain third-party funding for industrialization
costs (which include certain costs incurred to bring prototype products to the
production stage) included therein. See Note 19 to the Consolidated Financial
Statements. For a discussion of certain significant charges reflected in cost of
sales in 1994, 1995 and 1996, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
(3) Includes, among other things, third-party funding for research and
development, the expenses for which are reflected in research and development
expenses, as well as foreign currency gains and losses, fab start-up costs,
patent license payments received and patent costs incurred. The Company's
reported research and development expenses do not include design center, process
engineering, pre-production or industrialization costs.
(4) The Company has changed the title of this line item from "operating profit."
The make-up of this line item has not changed.
(5) Includes mainly net interest expenses, plus a gain on disposal of an
investment in 1992 and 1996.
(6) In 1994, the Company created a joint venture with a subsidiary of the
Shenzhen Electronics Group ("SEG"). the Company owns a 60% interest in the joint
venture, with a subsidiary of SEG owning the remaining 40%.
(7) The Company has changed the title of this line item from "net earnings." The
make-up of this line item has not changed.
(8) Net earnings per share amounts have been restated to reflect a 40:1 stock
split effected in connection with the Initial Public Offering.
In the original documents the following tables were represented by bar graphs:
NET REVENUES
($US Millions)
1992 - 1,568
1993 - 2,038
1994 - 2,645
1995 - 3,554
1996 - 4,122
NET INCOME
($US Millions)
1992 - 3.0
1993 - 160.1
1994 - 362.5
1995 - 526.5
1996 - 625.5
SHAREHOLDERS' EQUITY
($US Millions)
1992 - 412.9
1993 - 1,004.0
1994 - 1,680.0
1995 - 2,661.7
1996 - 3,260.0
<PAGE>
[PHOTO]
/ PASQUALE PISTORIO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MESSAGE FROM
THE PRESIDENT
SGS-THOMSON distinguished itself in 1996 by achieving consistent performance
within a volatile semiconductor marketplace. The Company surpassed the $4
billion mark in net revenues, and both sales and profits increased at rates that
outpaced the industry average and the served markets. We also maintained our
market leadership in a variety of high growth applications, while at the same
time investing in the future via a well-focused research and development effort.
Our ability to continue the Company's profitable growth in spite of a
difficult market cycle was a direct reflection of SGS-THOMSON's established
strategies of maintaining a high proportion of differentiated products, forming
close alliances with major customers, and creating a balanced business mix by
application and geography. It is also a tribute to a talented and dedicated team
of people worldwide.
/ 1996 FINANCIAL HIGHLIGHTS
Net revenues for 1996 were a record $4.12 billion, an increase of 16% from
1995's results. Gross profit for the year amounted to $1.70 billion, increasing
17% year over year. This represented a gross margin of 41.4% of net revenues for
1996, compared with 41.0% in 1995. Operating income for the year increased 23%
to $799.4 million. Expressed as a percentage of net revenues, the operating
profit margin rose to 19.4% for the past year, versus 18.3% in 1995.
Net income for 1996 advanced 19% to $625.5 million, compared to $526.5
million for 1995. Earnings per share rose nearly 12% to $4.50, based on 138.7
million weighted average shares outstanding. The corresponding 1995 figure was
$4.03 per share, based upon 130.6 million weighted average shares outstanding.
Due to our emphasis on differentiated products, focus on high growth
applications, and breadth of geographic markets, 1996 clearly was a successful
year for SGS-THOMSON from the perspective of overall sales and profitability. I
should note that our rate of growth slowed in the latter part of the year due to
the industry downturn. Also, our gross margin decreased to 38% in the fourth
<PAGE>
"OUR PROFITABLE GROWTH REFLECTED SGS-THOMSON'S
ESTABLISHED STRATEGIES TO FOSTER
DIFFERENTIATED PRODUCTS, CLOSE ALLIANCES WITH
CUSTOMERS, AND A BALANCED BUSINESS MIX."
quarter, which was within the expected range for this phase of the industry
cycle, but nonetheless was below the strong levels of the past several quarters.
This was partly due to the under-utilization of our non-VLSI fabs and a
temporary reduction in output from Phoenix while we qualified that facility for
additional manufacturing activities. The Company also experienced pricing
pressures, especially on the commodity portion of our portfolio. We expect
utilization at the non-VLSI fabs and Phoenix to improve as we move into 1997.
However, we continue to see pricing pressure in the commodity area, and are thus
maintaining cautious expectations for margins at least through the first quarter
of the new year.
One of the ways in which we have responded to the challenging market
conditions is by intensifying our control of operating costs. Total operating
expenses were reduced as a percent of net revenues to 22.0% in 1996 from 22.7%
in 1995, even though we continued to increase research and development expenses
to support our technological leadership. Expenses also declined in absolute
terms in the fourth quarter as compared with the year-ago period.
With confidence in the long-term prospects for our industry, we continued
to invest in the growth of the Company. Last year, capital expenditures totalled
$1.12 billion, compared with $1.00 billion in 1995. Research and development
expenses increased by 21% to $532.3 million in 1996, and represented 12.9% of
net revenues.
SGS-THOMSON finished the year with a sound balance sheet. At the end of
1996, cash, cash equivalents and marketable securities totaled $556.4 million.
Total debt was $623.1 million, including $194.9 million of long-term debt, while
net debt stood at $66.7 million. With shareholders' equity of $3.26 billion, our
ratio of net debt-to-equity was a conservative 0.02.
/ OPERATING PERFORMANCE
The developments of 1996 clearly show that SGS-THOMSON has been the beneficiary
of strategies to spur the growth of differentiated products and to create solid
alliances with key customers. Differentiated products, which we define as
dedicated/ASSPs, semicustom integrated circuits and microcontrollers, accounted
for 58.6% of net revenues in 1996, compared to 51.5% in 1995. For the fourth
quarter, differentiated products were a record 61.3% of net revenues, in spite
of capacity constraints in our leading-edge, submicron technologies. The growth
in differentiated products more than offset decreases in sales of commodity
linear and discrete products. Further, we derived approximately 31% of our net
revenues from significant customers with whom we have strategic alliances.
Revenues generated by such alliances rose 36.5% over 1995. The stability
produced by our strategic alliances also helped balance the industry-wide
pressure on commodity business.
<PAGE>
Our net revenues for 1996 were well-balanced from the perspective of
applications. Consumer applications sales were up 26.4%, and accounted for 22.1%
of net revenues. Sales of products used in the automotive market rose 20.4%, and
represented 9.6% of the total. Business with the computer sector increased
13.8%, to reach 26.7% of net revenues. Sales of products for telecommunications
applications increased 14.0%, representing 22.1% of net revenues. In the
industrial area, sales rose at a rate of 8.8%, and were 19.6% of net revenues
for the year.
Revenues from all major geographic regions advanced over the previous
year, and outperformed the growth rates of the respective markets. Our North
American sales posted a 10.4% increase for 1996, while the overall market
decreased an estimated 9.2%. In the Asia/Pacific our sales were up 22.8%, versus
a 6.7% decline for the region. SGS-THOMSON's sales in Europe rose 12.1%,
compared with a 2.3% market decrease. Our Japan business enjoyed 46.8% sales
growth, versus a 13.8% decrease for the region as a whole. As a percentage of
net revenues, Europe represented 44.3%, North America 22.7%, Asia/Pacific 27.5%
and Japan 5.5% for the year. Including products sold to the Asian operations of
U.S. customers, North America represented more than 30% of net revenues.
/ SEMICONDUCTOR MARKET PERSPECTIVE
As I noted earlier, SGS-THOMSON's financial and operational progress during 1996
was achieved against the backdrop of a volatile semiconductor market
environment. I would like to take this opportunity to provide an overview of the
industry conditions that prevailed during much of the past year, and those that
are expected to have an effect on our results in 1997. Please note that this is
a general assessment, and that the timing of market phases may vary from our
model by a quarter or two.
We believe there are four phases to the present market cycle. Phase I
began in approximately the third or fourth quarter of 1995, and was marked by
some overcapacity in certain commodity products, particularly DRAMs. While we do
not manufacture such products, and thus were not seriously affected by the first
phase, other producers suffered from price pressures.
Phase II began in the 1996 second and third quarters, characterized by an
inventory liquidation period with prices falling more rapidly in response to
very substantial over-supply. Again, the majority of the pricing pressure took
place in commodity categories. Competitors in the most affected segments of the
industry were obliged to adjust by liquidating inventory, cutting production and
reducing employment.
"REVENUES WERE WELL-BALANCED FROM
THE PERSPECTIVE OF APPLICATIONS,
AND ALSO OUTPERFORMED THE GROWTH RATES
OF OUR REGIONAL MARKETS."
<PAGE>
The 1996 fourth quarter represented the onset of Phase III of this market
cycle. Production began to reach some equilibrium with demand, although total
available capacity remains under-utilized, which has facilitated a reduction in
excess inventories. Price pressures continue, but are showing signs of
stabilizing with the exception of spot prices on certain commodity devices. We
believe this phase will continue at least through the first quarter of 1997, and
likely into the second quarter.
This will bring us to Phase IV, which should see the restoration of a
greater balance between capacity and orders. Generally, demand should then start
to outpace production, and conditions will be right for prices and margins to
recover. With the start of this new phase of the cycle, we expect that the
semiconductor market will return to its usual pattern of growth during the
latter part of 1997.
SGS-THOMSON's approach to the changing conditions in our market has been
to balance the need for restraint with prudent investments in new products and
new facilities that will serve as our engines for continued growth. I would like
to highlight some of the initiatives that we have undertaken recently with an
eye toward the opportunities that we believe will arise in the near future.
/ NEW PRODUCT DEVELOPMENTS
Late in 1996, we announced the successful processing of the first wafers in the
next generation of technology, using a 0.25 micron CMOS process (0.20 micron
effective gate length). This exciting development will facilitate our program to
manufacture "superintegrated" ICs for high speed applications, such as PCs; for
low power applications, such as digital mobile phones; and for advanced consumer
digital entertainment systems.
Also during the year, we further enhanced our position in the emerging
market for new consumer electronics products by forming a joint development
arrangement with Microsoft for DVD products, and by licensing the MPACT media
processor from Chromatic Research. We also announced the first product on the
market to employ the Macrovision 7.0 Anti-Copy System for DVD and set-top box
applications. Another important product introduction for DVD applications was
the Dolby AC-3 decoder. Also, we helped define industry standards with the
development of the Video Interface Port, which was initiated together with
several competitors and will create an architecture for using video in PCs.
We made an important addition to our portfolio of cores, introducing a
fully compatible 486 core that customers can integrate into their own designs.
Also, the Company entered into a promising new alliance, licensing to Samsung
our ST20 32-bit micro core and D-950 DSP core technologies. Other innovations
included a new generation of power MOSFET transistors with improved switching
characteristics and better overall performance, and expanded offerings in
Application Specific Discrete (ASD)(TM) products.
At the beginning of 1997, we announced an agreement for a joint
technology, development and manufacturing program with Ramtron International, a
specialized designer of advanced non-volatile memories. We anticipate that if
this venture is successful, our two companies would develop--and SGS-THOMSON
would manufacture--ferroelectric random access memory (FRAM) devices. The new
FRAM products would combine the high speed of DRAMs, the non-volatility of ROMs,
and the flexibility of EEPROMs to create features that are currently not
available in any single semiconductor memory device. The resulting products
would be targeted for use in communication products, palm-top computers, smart
cards and other portable applications.
<PAGE>
/ MANUFACTURING EXPANSION
Over the past year, we undertook a number of initiatives to expand our
manufacturing resources in order to help relieve capacity constraints with
regard to certain advanced products. Our Phoenix fab was qualified to produce a
broader and more flexible range of products. We substantially increased our
capacity to manufacture non-volatile memories, particularly the commonly used
2Mbit and 4Mbit Flash devices, by allocating more capacity in Agrate to this
product line. The qualification of our new 8-inch fab in Catania is also nearly
complete, with volume production of Flash memories expected in the second half
of 1997. In addition, we took steps to strengthen our manufacturing presence in
the Asia/Pacific region with the announcement of plans for a new
state-of-the-art 8-inch submicron wafer diffusion plant in Singapore.
We were particularly pleased that our facility in Rancho Bernardo,
California, became the first plant in the U.S. to receive international ISO
14001 certification as an environmentally-friendly manufacturing site. Rancho
Bernardo also achieved compliance with respect to the even more stringent
European Union environmental regulations known as the Eco-Management and Audit
Scheme (EMAS). We now have a total of 12 sites approved according to the
voluntary EMAS regulations, of which seven are also ISO 14001 certified. At
SGS-THOMSON, we place a high priority on environmental policies, and work to
maximize the use of recyclable or reusable materials while reducing consumption
of resources and the amount of waste generated. We are confident that we are on
target to achieve our goal of having all sites worldwide approved for EMAS
before the end of 1997.
/ OUTLOOK
The decreased visibility on customer demand has made it somewhat difficult to
predict market conditions, although we have set forth our view of the general
direction of the market cycle. In any event, SGS-THOMSON enjoys both a strong
financial position and a strong market position as we enter 1997. We will
continue to emphasize our expertise in differentiated products in the coming
year, while continuing to offer commodity products that contribute volume,
profit and cash flow. As noted earlier, we are enthusiastic about the long-term
growth prospects for the Company and the markets that we serve. We intend to
move ahead with capital expenditure and R&D plans, committing a percentage of
revenue on the same order of magnitude as during 1996.
With our ongoing focus on innovative differentiated products,
diversification by applications and regions, and increasing productivity, we
look forward to another year in which SGS-THOMSON will outperform the markets it
serves.
PASQUALE PISTORIO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
SGS-THOMSON AT A GLANCE
STRATEGIC STRENGTHS
/ BROAD LINE SUPPLIER OF DIFFERENTIATED PRODUCTS FOR HIGH GROWTH APPLICATIONS
SUCH AS AUTOMOTIVE, COMPUTER, TELECOMMUNICATIONS, CONSUMER AND INDUSTRIAL
MARKETS.
/ FOCUSED PORTFOLIO STRATEGY TO ACHIEVE WORLD LEADERSHIP IN DEDICATED, POWER AND
NON-VOLATILE MEMORY PRODUCTS; "TOP 5" SHARE IN SEMICUSTOM, MICROCONTROLLERS AND
SPECIAL SRAM PRODUCTS; AND PROFITABLE PARTICIPATION IN OTHER PRODUCTS, WHICH DO
NOT INCLUDE DRAMS.
/ WIDE RANGE OF ADVANCED, INTER-MIXABLE TECHNOLOGIES FACILITATES
SYSTEM-ON-A-CHIP APPROACH AND SUPPORTS DIFFERENTIATED PRODUCT STRATEGY.
/ GLOBAL, DIVERSIFIED CUSTOMER BASE NOTABLE FOR STRATEGIC ALLIANCES.
/ WORLDWIDE, HIGHLY EFFICIENT MANUFACTURING CAPACITY TO GIVE CUSTOMERS READY
ACCESS TO PRODUCTS.
In the original document the following tables were represented by pie charts:
1996 Revenues by Region
- ----------------------------------
Europe - 44%
Asia/Pacific - 28%
Americas - 23%
Japan - 5%
1996 Revenues by Product Family
- -----------------------------------
Differentiated Products - 59%
Logic and Memories - 22%
Discretes - 14%
Standard/Commodities - 5%
1996 Revenues by Application
- -----------------------------------
Computers - 27%
Telecommunications - 22%
Consumer - 22%
Industrial - 19%
Automotive - 10%
<PAGE>
SGS-THOMSON AT A GLANCE
/ 1996 REVENUES: US$4.12 BILLION / DIFFERENTIATED PRODUCTS/REVENUES: 58.6%
/ 17 MAIN MANUFACTURING SITES / 9 ADVANCED R&D SITES / 26,000 EMPLOYEES
/ 31 DESIGN AND APPLICATION CENTERS / 60 SALES OFFICES IN 24 COUNTRIES
/ OVER 12,000 PATENTS ISSUED AND PENDING, COVERING OVER 4,000 INVENTIONS
DPG - DEDICATED PRODUCTS GROUP /
Produces application-specific and custom products offering complete system
solutions for all major end-user applications, including mobile communications
terminals, automotive systems, digital and analog consumer systems and computer
peripherals such as disk drives, monitors and printers.
Products are based on advanced bipolar, CMOS, BiCMOS, mixed-signal and power
technologies.
[GRAPHIC]
MPG - MEMORY PRODUCTS GROUP /
Responsible for a broad range of memory products.
Products include non-volatile memories, EPROMs (of which MPG has been the
leading supplier since 1993), Flash memories, EEPROMs, application specific
memories and non-volatile RAMs; and smartcard products including chips and
software support products. Does not produce DRAMs.
[GRAPHIC]
/ PPG - PROGRAMMABLE PRODUCTS GROUP
Products include microcomponents (such as a wide range of microcontrollers,
microprocessors, digital signal processors); digital semicustom devices; PC
graphic devices; multimedia acceleration ICs and digital video devices.
[GRAPHIC]
/ DSG - DISCRETE AND STANDARD ICS GROUP
Offers a broad product portfolio for a diverse customer base.
Products include discrete power devices such as power transistors (power
bipolar, power MOS, 1GBT, VIPower), rectifiers, protection devices, thyristors
and application-specific discrete (ASD) products; standard linear and logic ICs;
radio frequency (RF) products.
[GRAPHIC]
NVG - 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.
Initial activities have focused on manufacturing and marketing x86
microprocessors. New activities include design and manufacturing of "system on
silicon" solutions based on the 486 CPU core, and more recently media processors
based on Very Long Instruction Word (VLIW) processors.
[GRAPHIC]
SPG - SUBSYSTEMS PRODUCTS GROUP /
Produces electronic subsystems to provide complete solutions for OEM customer
applications, particularly in accessories for cellular telephones.
Products include converters and complete power supplies; motor control modules;
hands-free systems; battery chargers.
[GRAPHIC]
<PAGE>
[GRAPHIC]
Automobile manufacturers have moved to increase the safety, comfort and engine
performance of their products, with the result that the typical automobile has
become a repository for a wide range of semiconductor products. Such innovations
as anti-lock braking (ABS) systems and keyless door locks, as well as everyday
requirements such as alternator regulators and directional signals, depend on
SGS-THOMSON's technologies. The demand for microchip products in the automotive
sector is so pervasive that industry sources estimate a compound annual growth
rate of 16% in semiconductor content per vehicle between 1996 and the year 2000.
SGS-THOMSON's sales of products for the automotive market increased 20.4% in
1996, and represented 9.6% of net revenues.
With its technological leadership, particularly in BCD/BiCMOS, the
Company is able to accommodate a vast array of auto-related applications,
including airbags, climate control, instrumentation, transmissions and on-board
entertainment systems. Mixed analog/digital ICs produced by the Company have
achieved strong market shares in such areas as engine management, battery
charging, ABS and car information centers. SGS-THOMSON is considered to be a
valued "technology partner" by car manufacturers such as BMW, Chrysler,
Daimler-Benz, Ford and Peugeot, as well as systems and components companies like
Bosch, Delco, Fiat/Marelli, Nippondenso and Valeo.
The next generation of vehicles will require even more sophisticated
semiconductor products that will build upon SGS-THOMSON's expertise in
superintegration. The Company is developing superintegrated digital cores for
powertrain applications on behalf of a "Big Three" U.S. auto maker. Based on a
multi-chip module consisting of an ASIC +2Mbit Flash and a 16-bit
microprocessor, these cores add other technologies such as EEPROMs, discretes
and multifunction drivers to perform engine management and transmission
management tasks. Additional SGS-THOMSON products should be in demand as car
manufacturers incorporate more advanced navigational, communications and
entertainment systems.
AUTOMOTIVE APPLICATIONS
THE NEXT GENERATION OF VEHICLES WILL REQUIRE SOPHISTICATED
SEMICONDUCTOR PRODUCTS, BUILDING ON THE COMPANY'S
SUPERINTEGRATION EXPERTISE.
<PAGE>
As computers become more pervasive in offices and homes, and as their functions
increase in complexity and speed, the demand for semiconductor products should
increase dramatically. For instance, industry estimates call for the volume of
hard disk drives shipped to grow at a compound annual rate of 20% from 1996 to
2000. That growth trend should be matched by monitors, printers and other
related products. SGS-THOMSON's sales of products for computer applications rose
13.8% in 1996, and accounted for 26.7% of net revenues.
SGS-THOMSON technologies are used in a wide range of computer
applications today. Hard disk drives rely on Bipolar-CMOS-DMOS to provide super
smart power, as well as BiCMOS for high-speed read/write channels. The Company
is the #1 supplier of deflection combo ICs for computer monitors. A variety of
personal computer functions utilize x86 microprocessors, Flash and fast or
specialty SRAM memories. Multimedia applications may require the RIVA 128
accelerator, MPACT series media processors or the STi3540 DVD/MPEG2 decoder.
Among the Company's customers are Acer, Bull, Canon, Compaq, Epson,
Hewlett-Packard, IBM, Olivetti, Quantum, Seagate, Western Digital and Xerox.
For the future, the Company is working with two leading hard disk drive
manufacturers on superintegration technology for their next generation of
products. In this effort, SGS-THOMSON is integrating CMOS technology for the
functions such as the microcontroller, memory, communications interface and
servo-logic; BCD for digital power; and BiCMOS for the read/write digital
channel and preamplifier. Flat panel display drivers may be based on the
Company's 120V and 170V BCD process, now in pilot production. A "pen chip" using
mixed CMOS/DMOS technology plus micromachinery is being developed for ink-jet
cartridge applications. These and other technologies provided by SGS-THOMSON
will be found in many of the innovative computer products coming to market in
the near future.
COMPUTER APPLICATIONS
TECHNOLOGIES PROVIDED BY SGS-THOMSON WILL BE
FOUND IN MANY INNOVATIVE COMPUTER
PRODUCTS COMING TO MARKET IN THE FUTURE.
[GRAPHIC]
<PAGE>
[GRAPHIC]
The market for semiconductor products in telecommunications is expected to
continue to expand rapidly, with an estimated 20% compound annual growth rate
projected for 1996-2000, according to industry sources. An even more pronounced
growth rate of 39% over the same period is estimated for the mobile
communication segment. As one of the largest suppliers of integrated circuits to
the worldwide cellular and Personal Communication Services (PCS) markets, this
expected growth should benefit SGS-THOMSON in the years ahead.
In 1996, the Company's sales to the telecommunications market increased
14%, and contributed 22.1% of net revenues. SGS-THOMSON products are found in
many diverse telecom applications. In the wireless segment, the Company produces
ASICS and memories in high volumes for various cellular systems (GSM, DCS,
US-TDMA), as well as for pagers. Telephone sets, answering machines, faxes and
advanced terminals depend on the Company's products. Networks and central office
installations utilize line card chipsets (analog and ISDN) as well as protocol
controllers (HDLC, X25, Frame Relay) from the Company. SGS-THOMSON is present as
well in the emerging Asynchronous Transfer Mode (ATM) market. Significant
customers include leading producers of mobile and fixed terminals, digital
switches, modems and audioprocessing equipment, such as Alcatel, Motorola,
Nokia, Northern Telecom, PC-Tel, Racal and Siemens.
As with the Company's other industry applications, the telecom segment is
migrating to superintegration solutions. For instance, the next generation of
digital cellular phone can use a SGS-THOMSON "system-on-a-chip" approach using
no more than four chips (radio, digital signal processing and protocol,
memories, energy management).
TELECOMMUNICATIONS APPLICATIONS
THE MARKET FOR SEMICONDUCTOR PRODUCTS IS EXPECTED
TO CONTINUE EXPANDING RAPIDLY, WHICH SHOULD
BENEFIT SGS-THOMSON IN THE YEARS AHEAD.
<PAGE>
Semiconductors made by SGS-THOMSON are found in consumer products worldwide, and
the Company enjoys relationships with leading customers in every region,
including: General Instrument, Goldstar, Kenwood, Matsushita, Philips, Pioneer,
Samsung, Sanyo, Sharp, Sony and Thomson Multimedia. In the past year, sales to
the consumer segment increased 26.4%, and provided 22.1% of the Company's net
revenues.
Many of the recent innovations in consumer products should greatly
increase the need for SGS-THOMSON's technologies. Overall, industry analysts
expect the market for semiconductors in digital consumer products (excluding
video games) will grow at a compound annual rate of 28% from 1996 through the
end of this decade. Two consumer applications with particularly promising growth
characteristics are digital set-top boxes and digital video disk (DVD) players.
A look at the Company's product offerings for set-top boxes and DVD
players provides a clear indication of SGS-THOMSON's important role in these
growing areas. Its ST20 microcontroller core, which is needed for links to
satellite services and conventional cable services, is used or has been
designed-in by major set-top box manufacturers.
The MPEG2 audio/video decoder, in which the Company is the worldwide
market leader, is also a key element for set-top boxes, as is its PAL/NTSC
encoder and front end chip set. Through superintegration, many of these features
are available on a single chip of the "Omega" family, the STi55xx, for both
set-top box and DVD applications.
CONSUMER APPLICATIONS
THE COMPANY PRODUCT OFFERINGS FOR SET-TOP BOXES AND DVD
PLAYERS CLEARLY INDICATE SGS-THOMSON'S KEY ROLE IN THESE
GROWING AREAS.
[GRAPHIC]
<PAGE>
[GRAPHIC]
Sales of SGS-THOMSON products for industrial applications increased 8.8% during
the past year, and represented 19.6% of net revenues. While specialized
applications such as robotics, control systems, automation systems and power
supply equipment make extensive use of the Company's semiconductor products,
even everyday items like lighting products, home appliances and battery chargers
may incorporate SGS-THOMSON technology. Among the Company's major industrial
customers are Siemens, Philips, Schneider, Emerson and Schlumberger.
The production of semiconductors for smart cards continues to be one of
the Company's most significant growth opportunities. The powerful microchips
embedded in smart cards allow the devices to store financial and medical
information, activate telecommunications and video-on-demand equipment, and
perform many other functions. SGS-THOMSON has been the leader in smart card
chips since the inception of this technology, primarily as a result of its
strong lead in non-volatile memory technology and sophisticated security
functions. In fact, the Company was the first semiconductor company to receive
security certifications for such applications as banking and pay-TV.
Industry analysts estimate that 3.5 billion smart card units will be
produced in the year 2000, and that the value of the semiconductor content in
the segment will reach approximately $3 billion. This growth trend is being
driven by three factors. The number of applications is increasing, moving from
the original telephone payment uses to include health care information, Internet
payment and electronic purses. At the same time, the semiconductor content of
the cards is growing, from EEPROMs to 8-bit microcontrollers to 32-bit
microcontrollers. Finally, the regional acceptance of smart card technology has
spread from the initial base in Europe to the Asia/Pacific and North America.
INDUSTRIAL APPLICATIONS
SPECIALIZED APPLICATIONS SUCH AS ROBOTICS,
AND EVERYDAY ITEMS LIKE LIGHTING
PRODUCTS, RELY ON SGS-THOMSON TECHNOLOGY.
<PAGE>
With 12 main front-end and five back-end manufacturing sites in Europe, Asia and
North America, SGS-THOMSON has delivered on its commitment to locate its
facilities in close proximity to customers. The goal, wherever possible, is to
have an integrated presence in each major macroeconomic system. In 1996, the
Company continued to expand the capacity of its worldwide manufacturing machine,
making capital expenditures totalling $1.12 billion. Highlights of the year
included the allocation of additional capacity in Agrate, Italy, for Flash
device production; the start-up of activity at a new 8-inch fab in Catania,
Italy; and the announcement of plans for an advanced 8-inch submicron wafer
diffusion plant in Singapore.
In addition to the global reach of its manufacturing resources, the
Company is recognized by customers for its dedication to high efficiency
manufacturing; its fast production ramp-up on new technologies; and its
philosophy of double sourcing, so that there are always at least two fabs
qualified for each major process. SGS-THOMSON also has placed a strong emphasis
on meeting the needs of customers for larger diameter silicon wafers and smaller
die sizes. By the year 2000, the Company expects to have seven 8-inch fabs in
operation, and front-end modules capable of manufacturing chips with dimensions
of 0.5 microns or less.
An important element of SGS-THOMSON's manufacturing operations is its
dedication to quality. An Executive Total Quality Council, created in 1991,
fosters quality at all levels, both in manufacturing and in all other aspects of
the Company. The "TQM" program is built on five key principles: management
commitment to drive, support and monitor the effort; employee empowerment
through training, teamwork and recognition; fact-based decision making supported
by statistical tools; continuous improvement through systematic measurement and
increasingly higher standards; and a customer focus to embed the customer's
quality standards in all phases of production.
MANUFACTURING OPERATIONS
THE COMPANY IS RECOGNIZED FOR THE GLOBAL REACH,
HIGH EFFICIENCY AND FAST PRODUCTION RAMP-UP
OF ITS MANUFACTURING RESOURCES.
[GRAPHIC]
<PAGE>
[PHOTO]
AGRATE, ITALY
[PHOTO]
CASTELLETTO, ITALY
[PHOTO]
CATANIA, ITALY
[PHOTO]
RANCHO BERNARDO,
CA, USA
[PHOTO]
PHOENIX, AZ, USA
[PHOTO]
CARROLLTON, TX, USA
[PHOTO]
CROLLES, FRANCE
[PHOTO]
GRENOBLE, FRANCE
[PHOTO]
RENNES, FRANCE
[PHOTO]
TOURS, FRANCE
[PHOTO]
ROUSSET, FRANCE
[PHOTO]
AIN SEBAA, MOROCCO
[PHOTO]
BOUSKOURA, MOROCCO
[PHOTO]
KIRKOP, MALTA
MANUFACTURING
[PHOTO]
TOA PAYOH, SINGAPORE
[PHOTO]
SHENZHEN, CHINA
[PHOTO]
ANG MO KIO,
SINGAPORE
[PHOTO]
MUAR, MALAYSIA
<PAGE>
[GRAPHIC]
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 / SHENZHEN, CHINA
<PAGE>
OPERATIONS
[GRAPHIC]
TECHNOLOGY
ROAD-MAP
================================================
PROTOTYPING/START 96/97 98/99 2000+
- --------------------------------------------------------------------------------
High performance logic 0.35/0.25u 0.18u 0.12u
5-6 ML 6-7 ML 8+ ML
- --------------------------------------------------------------------------------
BiCMOS digital/analog 0.5/0.35u 0.25u 0.18u
3-5 ML 5-6 ML 6-7 ML
- --------------------------------------------------------------------------------
BCD (Bipolar/CMOS/DMOS) 0.6/0.5u 0.35u
3 ML 3-5 ML --
- --------------------------------------------------------------------------------
Programmable Logic* 0.6/0.5u 0.35/0.25u 0.18u
3 ML 5-6 ML 6-7 ML
8/16M 32/64M 256M
- --------------------------------------------------------------------------------
Flash Memories 0.4u 0.35/0.25u 0.18u
3V 2.5/1.8V 0.9V
- --------------------------------------------------------------------------------
*N.V. Memory capability
================================================================================
<PAGE>
The SGS-THOMSON research and development effort is characterized by its
proficiency in a wide range of advanced technologies; a concurrent engineering
approach that can hasten time to market; the effective use of pilot lines for
prototyping and faster ramp-up; and constructive cooperation with customers,
suppliers, other semiconductor makers and laboratories. The strength of the
Company's R&D effort has been a major contributor to its leadership in a host of
technologies, including: CMOS logic, Flash memories, analog, BiCMOS and BCD for
smart power applications.
In 1996, R&D expenditures totaled $532.3 million, representing 12.9% of
net revenues, and were carried out by approximately 2500 employees at nine
advanced research and development centers. Important technology milestones
during the year included the first wafers using the 0.25 micron CMOS process, a
variety of products and development programs for DVD applications, and a new
generation of power MOSFET transistors.
Another distinguishing feature of the Company's technology is its
expertise in superintegration -- the ability to create an entire
"system-on-a-chip" to replace functions originally performed by an electronic
system. In a typical superintegration example, a single chip might contain
several diverse logic blocks, including a powerful microcontroller core, as well
as embedded memories, such as SRAM, DRAM, Flash or ROM. It also would
incorporate an interface to the surrounding electronic system, involving analog
or power devices, and embedded micro-coded software for easier programming.
SGS-THOMSON has become a leader in superintegration because, unlike many
competitors who offer only logic or memory technologies, its technology platform
is versatile. This permits the concurrent development of logic, volatile or
non-volatile memory, linear and other essential components of the
system-on-a-chip, including power devices. Additionally, its pilot line
production and strong manufacturing capacity provide the "head start" that can
result in rapid time to market. The Company is developing superintegration
solutions for many of its customer applications, and the system-on-a-chip
concept is expected to be a major driver of future growth.
RESEARCH and DEVELOPMENT
<PAGE>
Strategic alliances with key customers, suppliers, research institutions and
other parties in the semiconductor marketplace play a vital role in
SGS-THOMSON's continued technological and market leadership. Such alliances
allow the Company to blend its expertise in semiconductor production with the
intimate knowledge of systems and product features contributed by its strategic
partners. The alliances may result in joint product development, the definition
of a common system architecture, and joint R&D or technology exchanges.
Alliances have been formed with customers in every main industry served
by SGS-THOMSON. Seagate Technology and Western Digital are among the Company's
partners in the computer peripheral sector. Automotive alliances include
Fiat/Marelli. In telecommunications, strategic allies include Alcatel and
Northern Telecom, while Thomson Multimedia is a long-term partner in the
consumer market. In addition, there are a number of other strategic alliances
with customers that for confidentiality reasons cannot be mentioned here.
The Company also has established joint development programs with leading
suppliers such as Applied Materials, ASM Lithography, LAM and Air Liquide, and
with makers of CAD tools including Cadence, Synopsis and Mentor. It is a
participant in Sematech-I300I for the development of 300 millimeter wafer
manufacturing processes. SGS-THOMSON is active in joint European research
efforts, such as the new MEDEA program (successor to JESSI), and also cooperates
with major research insti- tutes and universities. In 1996, SGS-THOMSON derived
nearly $1.3 billion in revenues from products that resulted from strategic
alliances -- a figure that has grown at a compound annual rate of 48% since
1992. Clearly, the Company's strategic alliances are a source of exceptional
financial stability and growth opportunity.
STRATEGIC ALLIANCES
THE COMPANY'S STRATEGIC ALLIANCES ARE
A SOURCE OF EXCEPTIONAL FINANCIAL
STABILITY AND GROWTH OPPORTUNITY.
[GRAPHIC]
<PAGE>
FINANCIAL CONTENTS
Selected Consolidated Financial Data 29
Management's Discussion and Analysis of
Financial Condition and Results of Operations 30
Consolidated Statements of Income 41
Consolidated Balance Sheet 42
Consolidated Statements of Cash Flows 43
Notes to Consolidated Financial Statements 45
Auditor's Report 59
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA SGS-THOMSON Microelectronics N.V.
The table below sets forth selected consolidated financial data for the Company
for each of the years in the five-year period ended December 31, 1996. Such data
have been derived from the consolidated financial statements of the Company.
Consolidated financial statements for the three-year period ended December 31,
1996, are included elsewhere in this annual report.
The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the related notes
thereto included elsewhere in this annual report.
Twelve months ended December 31,
<TABLE>
<CAPTION>
(In millions except per share data) 1992 1993)(1) 1994)(1) 1995)(1) 1996
Consolidated Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 1,550.6 $ 2,007.7 $ 2,602.2 $ 3,520.7 $ 4,078.3
Other revenues 17.5 29.8 42.7 33.7 44.1
Net revenues 1,568.1 2,037.5 2,644.9 3,554.4 4,122.4
Cost of sales(2) (1,051.6) (1,248.4) (1,528.7) (2,096.0) (2,414.7)
Gross profit(2) 516.5 789.1 1,116.2 1,458.4 1,707.7
Operating expenses:
Selling, general and administrative (270.0) (302.5) (339.9) (413.2) (421.1)
Research and development(3) (260.9) (270.9) (338.3) (440.3) (532.3)
Restructuring costs (38.9) (49.9) (37.0) (13.0) 0.0
Other income and expenses(3) 105.1 49.7 32.0 59.1 45.1
Total operating expenses (464.7) (573.6) (683.2) (807.4) (908.3)
Operating income(4) 51.8 215.5 433.0 651.0 799.4
Net interest expenses (65.2) (37.8) (21.0) (16.8) (11.2)
Gain on disposal of investment 18.7 0.0 0.0 0.0 7.3
Income before income taxes and minority interests 5.3 177.7 412.0 634.2 795.5
Income tax expense (2.3) (17.6) (49.5) (108.3) (171.6)
Income before minority interests 3.0 160.1 362.5 525.9 623.9
Minority interests(5) 0.0 0.0 0.0 0.6 1.6
Net income(6) $ 3.0 $ 160.1 $ 362.5 $ 526.5 $ 625.5
Earnings per share(7) $ 0.06 $ 1.92 $ 3.04 $ 4.03 $ 4.50
Number of weighted average shares used in
calculating earnings per share 53.6 83.5 119.4 130.6 138.7
Consolidated Balance Sheet Data (end of period):
Cash, cash equivalents and marketable securities $ 99.5 $ 327.4 $ 461.5 $ 758.4 $ 556.4
Working capital 467.7 390.0 291.1 417.4 611.8
Total assets 1,842.3 2,240.9 3,224.7 4,486.0 5,005.5
Short-term debt (including current portion
of long-term debt) 360.6 231.1 322.5 492.8 428.2
Long-term debt (excluding current portion)(1) 547.6 374.8 277.2 200.7 194.9
Shareholders' equity(1) 412.9 1,004.0 1,680.0 2,661.7 3,260.0
Consolidated Operating Data:
Capital expenditures(8) $ 196.0 $ 445.9 $ 779.7 $ 1,001.9 $ 1,125.2
Net cash from operating activities 198.7 460.9 728.1 825.1 980.7
Depreciation and amortization(8) 209.8 229.4 288.0 392.4 535.9
</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 19 to the Consolidated Financial
Statements. For a discussion of certain significant charges reflected in cost of
sales in 1994, 1995 and 1996, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
(3) Other income and expenses include, 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. The
Company's reported research and development expenses do not include design
center, process engineering, pre-production or industrialization costs.
(4) The Company has changed the title of this line item from "operating profit."
The make-up of this line item has not changed.
<PAGE>
(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) The Company has changed the title of this line item from "net earnings." The
make-up of this line item has not changed.
(7) Earnings per share amounts have been restated to reflect a 40:1 stock split
effected in connection with the Initial Public Offering.
(8) Capital expenditures are net of certain third-party funding, the effect of
which is to decrease depreciation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SGS-THOMSON Microelectronics N.V.
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 telecommunications 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 1992 to 1996, the Company's net revenues increased from $1,568.1
million to $4,122.4 million, with the Company experiencing strong revenue growth
during each year in this period. 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). According to
trade association data, the TAM (total available market) increased from $59.9
billion in 1992 to a preliminary estimate of $132.0 billion in 1996, while the
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 $49.0 billion in 1992 to a
preliminary estimate of $102.7 billion in 1996. The Company's share of the TAM
increased from 2.6% to 3.1% during this period, while the Company's share of the
SAM increased from 3.2% to 4.0%. Revenue growth within the Company from 1992
through 1996 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 46% in 1992 to approximately 56% in 1996.
Differentiated ICs (which the Company defines as being its dedicated
products, semicustom devices and microcontrollers) accounted for approximately
59% of the Company's net revenues in 1996, compared to just over 51% in 1995.
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 1996, analog ICs (including mixed signal
ICs), the majority of which are also differentiated ICs, accounted for
approximately 46% of the Company's net revenues (no change from 1995), while
discrete devices accounted for approximately 14% of the Company's net revenues
(compared to approximately 17% in 1995). Over the last three years, these
families of products, in particular analog ICs, 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 32.9% in 1992 to 41.4% in 1996. Benefiting from a favorable
industry environment in 1993, 1994 and 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 1996, the gross profit margin
was 41.4% compared to 41.0% in 1995. The stable gross profit margin in 1996
compared to 1995 was realized within an unfavorable industry environment (which
resulted in tough pricing pressures), due primarily to a more favorable product
mix and improved manufacturing productivity.
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 1997 in a healthy financial condition. It is,
however, evident that the industry has started a correction from the
extraordinary growth of recent years. According to preliminary estimated trade
association data, in 1996 TAM revenues decreased approximately 9% over 1995
while SAM revenues increased approximately 3%. The Company cannot anticipate how
deep or how long this correction phase will be. The Company is confident,
however, that its heavy emphasis on differentiated products in its portfolio,
its strong customer base and strategic alliances, its well diversified sales
base, both in terms of applications and geography, recent contracts with key
customers and new design wins in such high growth areas as hard disk drives, set
top boxes and
<PAGE>
digital cellular phones should allow the Company to continue to outperform the
industry average in 1997. Based on currently available information, the Company
believes that the second, third and fourth quarters of 1997 will show
progressive improvement compared to the first quarter of 1997.
Some of the above statements contained in this "Overview" 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 Prospectus dated October 18, 1995 (pages
9 through 16), could materially affect the Company.
The table below sets forth information on the Company's net revenues by product
group and by geographic region.
Twelve months ended December 31,
<TABLE>
<CAPTION>
(In millions) 1992 1993 1994 1995 1996
Net Revenues by Product Group:
<S> <C> <C> <C> <C> <C>
Dedicated Products(1) $ 562.6 $ 724.1 $ 987.7 $ 1,359.7 $1,757.7
Discrete and Standard ICs(2) 432.3 514.6 636.3 838.0 784.1
Memory Products(1) 279.2 440.0 560.7 653.3 736.8
Programmable Products 259.9 320.4 381.4 535.3 720.5
Others(3) 34.1 38.4 78.8 168.1 123.3
Total $1,568.1 $2,037.5 $2,644.9 $3,554.4 $4,122.4
Net Revenues by Geographic Region:(4)
Europe $ 839.7 $ 976.0 $1,219.1 $1,627.5 $1,824.4
Americas(5) 350.5 495.5 673.5 846.4 934.1
Asia Pacific 328.7 463.2 617.6 925.1 1,135.7
Japan 49.2 102.8 134.7 155.4 228.2
Total $1,568.1 $2,037.5 $2,644.9 $3,554.4 $4,122.4
</TABLE>
(1) 1996 revenues for the Dedicated Products Group include $5.6 million of
revenues from certain foundry activities which were moved from the Memory
Products Group in January 1996. Revenues for the Dedicated Products Group and
the Memory Products Group have been restated for prior periods to reflect this
change.
(2) Includes revenues from sales of RF products, which were moved to the
Discrete and Standard ICs product group in May 1994. Revenues for the Discrete
and Standard ICs group have been restated for prior years to include RF product
revenues.
(3) Includes revenues from sales of subsystems and other products and from the
New Ventures Group, which was created in May 1994 to act as a focal point for
the Company's new business opportunities.
(4) Revenues are classified by location of customer invoiced. For example,
products ordered by U.S.-based companies to be invoiced to Asia Pacific
affiliates are classified as Asia Pacific revenues.
(5) Substantially all of the revenues derived from the Americas are derived from
the United States.
<PAGE>
The following table sets forth certain financial data from the Company's
consolidated statements of income since 1992, expressed in each case as a
percentage of net revenues:
Twelve months ended December 31,
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Net sales 98.9% 98.5% 98.4% 99.1% 98.9%
Other revenues 1.1 1.5 1.6 0.9 1.1
Net revenues 100.0 100.0 100.0 100.0 100.0
Cost of sales (67.1) (61.3) (57.8) (59.0) (58.6)
Gross profit 32.9 38.7 42.2 41.0 41.4
Operating expenses:
Selling, general and administrative (17.2) (14.8) (12.9) (11.6) (10.2)
Research and development (16.6) (13.3) (12.8) (12.4) (12.9)
Restructuring costs (2.5) (2.4) (1.4) (0.4) 0.0
Other income and expenses 6.7 2.4 1.2 1.7 1.1
Total operating expenses (29.6) (28.2) (25.8) (22.7) (22.0)
Operating income 3.3 10.6 16.4 18.3 19.4
Net interest expenses (4.2) (1.9) (0.8) (0.5) (0.3)
Gain on disposal of investment 1.2 0.0 0.0 0.0 0.2
Income before income taxes and minority interests 0.3 8.7 15.6 17.8 19.3
Income tax expense (0.1) (0.9) (1.9) (3.0) (4.2)
Income before minority interests 0.2 7.9 13.7 14.8 15.1
Minority interests 0.0 0.0 0.0 0.0 0.1
Net income 0.2% 7.9% 13.7% 14.8% 15.2%
</TABLE>
<PAGE>
1996 versus 1995
The growth that the worldwide semiconductor market experienced in 1994 and 1995
did not materialize in 1996; total industry sales declined in 1996 compared to
1995. See "Overview." In the fourth quarter of 1996, however, the market
increased slightly over the previous quarter after three straight quarters of
decline. The Company experienced strong increases in operating income and net
income in 1996, driven by significant growth in net revenues and improvements in
manufacturing productivity. These increases were achieved in spite of the fact
that the Company's average product selling prices in 1996 declined compared to
1995.
/Net Revenues. Net sales increased 15.8%, from $3,520.7 million in 1995
to $4,078.3 million in 1996. The increase in net sales of $557.6 million was
primarily a result of an improved product mix, including sales of new products,
in each of the Company's principal product groups. The exchange rate impact on
net sales in 1996 was not significant. See "Impact of Changes in Exchange
Rates." Other revenues (consisting primarily of co-development contract fees,
certain contract indemnity payments and patent royalty income) increased from
$33.7 million in 1995 to $44.1 million in 1996, primarily due to an increase in
licensing fees and co-development fees, partly offset by a decrease in patent
and royalty income. As a result net revenues increased 16.0%, from $3,554.4
million in 1995 to $4,122.4 million in 1996.
The Dedicated Products Group's net revenues increased 29.3% primarily as
a result of an improved mix in computer, video/image processing and
telecommunications products. In addition, 1996 revenues for the Dedicated
Products Group include $5.6 million of revenues from certain foundry activities
which were moved from the Memory Products Group in January 1996. Revenues for
the Dedicated Products Group and the Memory Products Group have been restated
for prior periods in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" to reflect this change. Higher volumes in
computer, audio, automotive and telecommunication products also contributed to
the increase in net revenues. The Discrete and Standard ICs Group's net revenues
declined 6.4% as volume increases in transistors and an improved mix in discrete
devices were not sufficient to offset declining volumes in discrete devices,
standard commodities and standard logic devices. Net revenues of the Memory
Products Group increased 12.8% due to higher volumes in smartcard ICs (primarily
used in European telephone and bank cards) and an improved mix in EPROMs.
Increased volume and an improved product mix in flash memories and EEPROMs also
contributed to the increase in net revenues. The Programmable Products Group's
net revenues increased 34.6% principally due to higher volumes and an improved
product mix in analog arrays and microcontroller products.
In 1996 compared to 1995, the Company's net revenues increased 46.8% in
Japan, 22.8% in the Asia Pacific region, 12.1% in Europe and 10.4% in the
Americas.
The Company's net revenues increased in 1996 compared to 1995 despite the
difficult conditions that the semiconductor industry experienced in 1996.
/Gross profit. The Company's gross profit increased 17.1%, from $1,458.4
million in 1995 to $1,707.7 million in 1996, primarily as a result of an
improved product mix, higher other revenues and improvements in manufacturing
performances. As a percentage of net revenues gross profit was 41.0% in 1995 and
41.4% in 1996.
Cost of sales increased from $2,096.0 million in 1995 to $2,414.7 million
in 1996, due primarily to higher depreciation resulting from increased capital
spending in recent periods and to higher variable costs associated with
increased volume. Increased cost of sales were also attributable to the new
plant in Phoenix, Arizona whose costs were not included in cost of sales until
the third quarter of 1995 and to upgrades of manufacturing facilities in 1996.
The exchange rate impact on gross profit in 1996 was not significant. See
"Impact of Changes in Exchange Rates." Cost of sales in 1996 and 1995 was net of
$4.6 million and $11.8 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 slightly, from $413.2 million in 1995 to
$421.1 million in 1996. This increase was due primarily to increases in general
and administrative activities and to a strengthening in the Company's marketing
efforts. The 1995 period included a $10 million provision related to specific
charges to cover the possible financial impact related to legal proceedings in
one of the Company's subsidiaries. As a percentage of net revenues, selling,
general and administrative expenses decreased from 11.6% in 1995 to 10.2% in
1996, due primarily to higher net revenues.
<PAGE>
/Research and development expenses. Research and development expenses
continued to represent a substantial amount of the Company's net revenues,
increasing 20.9%, from $440.3 million in 1995 to $532.3 million in 1996. Despite
the growth in net revenues in 1996, research and development expenses as a
percentage of net revenues increased from 12.4% in 1995 to 12.9% in 1996. The
Company continued to invest heavily in both its research and development staff
and 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. There were no restructuring costs in 1996. The
$13.0 million in restructuring costs in 1995 included costs associated with
certain personnel lay-offs.
/Other income and expenses. Other income and expenses decreased from
income of $59.1 million in 1995 to income of $45.1 million in 1996. Other income
and expenses include primarily funds received from government agencies in
connection with the Company's research and development programs, the cost 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. The decrease in other income and expenses
resulted primarily from a decrease in funds received from government agencies in
connection with the Company's research and development programs and higher
start-up costs, partly offset by foreign currency gains.
/Operating income. The Company's operating income increased 22.8%, from
$651.0 million in 1995 to $799.4 million in 1996, primarily as a result of
increased net revenues and improved efficiency in manufacturing. The exchange
rate impact on operating income was marginal.
/Net interest expenses. Net interest expenses decreased from $16.8
million in 1995 to $11.2 million in 1996, primarily as a result of a capital
increase undertaken by the Company in October 1995, which allowed the Company to
repay a substantial majority of its outstanding debt.
/Gain on disposal of investment. In 1996, the Company recorded a one-time
gain of $7.3 million from the sale of a distribution subsidiary in France.
/Income tax expense. Provision for income tax was $171.6 million in 1996
compared to $108.3 million in 1995, primarily as a result of the substantial
increase in income before tax. The accrued effective tax rate increased from
approximately 17% in 1995 to approximately 22% in 1996, since certain favorable
tax benefits on capital investments were no longer available in certain
countries in 1996 compared to 1995. These favorable rates were due to tax
benefits available in certain countries. As such benefits may not be available
in future periods, the Company could register an increase in the effective tax
rate in the coming years.
1995 versus 1994
The growth that the worldwide semiconductor market experienced in 1994 continued
through 1995 with the markets in Europe, the Americas and the Asia Pacific
region all showing strong growth. Market growth in Japan was lower than in the
other regions, however, due to general economic conditions. The Company
experienced strong increases in revenues, operating income and net income in
1995, caused by significant increases in volume and an improved product mix,
including sales of new products. Average selling prices of comparable products
were slightly lower in 1995 than in 1994, but due to improved product mix the
average price per unit increased.
Net Revenues. Net sales increased 35.3%, from $2,602.2 million in 1994
to $3,520.7 million in 1995. The increase in net sales of $918.5 million was
primarily as a result of significantly increased sales volumes in each of 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. Net
sales were also positively impacted by an improved product mix, including sales
of new products, and the benefits derived from the weakening U.S. dollar. See
"Impact of Changes in Exchange Rates." In 1995, approximately $8.3 million in
billings for research and development activity, which were classified as other
revenues in 1994, were classified as net sales. Other revenues 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 in 1994 to
$3,554.4 million in 1995.
<PAGE>
The Dedicated Products Group's net revenues increased 37.7% 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 16.5%
as increased volumes of flash memory products and increased sales of EPROMs 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.
/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% in 1994 to 41.0% in 1995, 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.
Cost of sales increased from $1,528.7 million in 1994 to $2,096.0 million
in 1995, 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 1995.
Increased cost of sales was also attributable to the new plant in Phoenix,
Arizona whose costs were not included in cost of sales until the third quarter
of 1995 and higher depreciation resulting from increased capital spending in
recent periods.
The exchange rate impact on gross profit in 1995 compared to 1994 was
marginally negative, as the negative impact of the depreciation of the U.S.
dollar on cost of sales was marginally greater than the positive impact on net
revenues. See "Impact of Changes in Exchange Rates." 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 included in cost of
sales.
/Selling, general and administrative expenses. Selling, general and
administrative expenses increased 21.6%, from $339.9 million in 1994 to $413.2
million in 1995. In 1994, selling, general and administrative expenses included
a $15 million provision for potential patent infringements and in 1995 included
a $10 million provision related to specific 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 and to an increase in general and administrative functions. As
a percentage of net revenues, selling, general and administrative expenses
decreased from 12.9% in 1994 to 11.6% in 1995, due primarily to higher net
revenues.
/Research and development expenses. Research and development expenses
continued to represent a substantial amount of the Company's net revenues,
increasing 30.2%, from $338.3 million in 1994 to $440.3 million in 1995. 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% in 1994
to 12.4% in 1995. The Company continued to invest heavily in research and
development.
/Restructuring costs. Restructuring costs decreased significantly from
$37.0 million in 1994 to $13.0 million in 1995. The $13.0 million in
restructuring costs in 1995 included costs associated with certain personnel
lay-offs. In 1994, restructuring costs included primarily costs associated with
the closure of certain older fab facilities and certain personnel lay-offs.
<PAGE>
/Other income and expenses. Other income and expenses of the Company
increased from income of $32.0 million to income of $59.1 million in 1995. In
1995, other income and expenses included increased contributions to research and
development activities and start-up costs. In addition, in 1995 there were
several nonrecurring items affecting other income and expenses, which taken
together did not have a material impact. These include the reversal of the
provision for the restructuring of the Rancho Bernardo plant in connection with
the decision to retain and upgrade this facility. In 1994, other income and
expenses included a charge for stock option compensation of $18.1 million.
/Operating income. The Company's operating income increased 50.3%, from
$433.0 million in 1994 to $651.0 million in 1995, primarily as a result of the
reduction of provisions for restructuring costs and an increase in net revenues.
/Net interest expenses. Net interest expenses decreased 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 its initial public offering, and in October 1995 from an
additional capital increase, which allowed the Company to repay a substantial
majority of its outstanding debt.
/Income tax expense. 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 income before tax. The accrued effective tax rate increased from 12%
in 1994 to 17% in 1995. The still favorable 1995 rate is mainly due to the
application of benefits in certain countries associated with new capital
expenditure programs.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain financial information for the years 1994,
1995 and 1996. Such information is derived from unaudited consolidated financial
statements, prepared on a basis consistent with the audited consolidated
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.
<PAGE>
<TABLE>
<CAPTION>
(inmillions,
except percentages Apr. 2, July 2, Oct. 1, Dec. 31, Apr. 1, July 1, Sept. 30, Dec.31
and per share data) 1994 1994 1994 1994 1995 1995 1995 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Income Data
Net revenues $ 599.3 $ 672.4 $ 657.2 $ 716.0 $ 778.6 $ 878.5 $ 922.6 $ 974.7
Cost of sales (346.8) (389.4) (380.5) (412.0) (451.8) (526.9) (552.3) (565.1)
Gross profit 252.5 283.0 276.7 304.0 326.8 351.6 370.3 409.6
Operating expenses:
Selling, general and
administrative (91.3) (82.1) (81.5) (85.0) (90.7) (99.8) (103.6) (119.0)
Research and
development (72.5) (82.7) (83.4) (99.7) (97.5) (105.1) (109.3) (128.4)
Restructuring costs (0.2) (22.9) (10.7) (3.2) (0.3) (0.8) (6.8) (5.1)
Other income
and expenses 13.8 15.3 3.3 (0.4) 3.4 11.8 15.7 28.3
Total operating
expenses (150.2) (172.4) (172.3) (188.3) (185.1) (193.9) (204.0) (224.2)
Operating income 102.3 110.6 104.4 115.7 141.7 157.7 166.3 185.4
Net interest expenses (4.8) (5.6) (5.6) (5.0) (2.9) (5.1) (6.7) (2.1)
Gain on disposal
of investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Income before
income taxes and
minority interests 97.5 105.0 98.8 110.7 138.8 152.6 159.6 183.3
Income tax expense (18.0) (18.5) (11.5) (1.5) (31.9) (30.1) (30.7) (15.7)
Income before
minority interests 79.5 86.5 87.3 109.2 106.9 122.5 128.9 167.6
Minority interests 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.4
Net income $ 79.5 $ 86.5 $ 87.3 $ 109.2 $ 106.9 $ 122.6 $ 129.0 $168.0
Earnings per share $ 0.67 $ 0.73 $ 0.73 $ 0.90 $ 0.83 $ 0.95 $ 1.00 $ 1.24
Number of weighted
average shares used
in calculating
earnings per share 119.0 119.0 119.0 120.6 128.6 128.8 129.1 135.9
As a percentage of net
revenues
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (57.9) (57.9) (57.9) (57.5) (58.0) (60.0) (59.9) (58.0)
Gross profit 42.1 42.1 42.1 42.5 42.0 40.0 40.1 42.0
Operating expenses:
Selling, general and
administrative (15.2) (12.2) (12.4) (11.9) (11.6) (11.4) (11.2) (12.2)
Research and
development (12.1) (12.3) (12.7) (13.9) (12.5) (12.0) (11.8) (13.2)
Restructuring costs 0.0 (3.4) (1.6) (0.4) 0.0 (0.1) (0.7) (0.5)
Other income and
expenses 2.3 2.3 0.5 (0.1) 0.4 1.3 1.7 2.9
Total operating
expenses (25.1) (25.6) (26.2) (26.3) (23.8) (22.1) (22.1) (23.0)
Operating income 17.1 16.4 15.9 16.2 18.2 18.0 18.0 19.0
Net interest expenses (0.8) (0.8) (0.9) (0.7) (0.4) (0.6) (0.7) (0.2)
Gain on disposal
of investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Income before
income taxes and
minority interests 16.3 15.6 15.0 15.5 17.8 17.4 17.3 18.8
Income tax expense (3.0) (2.8) (1.7) (0.2) (4.1) (3.4) (3.3) (1.6)
Income before
minority interests 13.3 12.9 13.3 15.3 13.7 13.9 14.0 17.2
Minority interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net income 13.3% 12.9% 13.3% 15.3% 13.7% 14.0% 14.0% 17.2%
</TABLE>
Quarter ended
(inmillions,
except percentages Mar. 30 June 29, Sept. 28, Dec. 31,
and per share data) 1996 1996 1996 1996
Consolidated Statement
of Income Data
Net revenues $1,027.7 $1,047.4 $ 988.4 $1,058.9
Cost of sales (586.4) (582.1) (589.2) (657.0)
Gross profit 441.3 465.3 399.2 401.9
Operating expenses:
Selling, general and
administrative (106.1) (103.1) (104.0) (107.9)
Research and
development (121.4) (136.0) (134.5) (140.4)
Restructuring costs (1.8) 0.3 0.3 1.2
Other income
and expenses 8.7 (2.2) 6.4 32.1
Total operating
expenses (220.6) (241.0) (231.8) (215.0)
Operating income 220.7 224.3 167.4 186.9
Net interest expenses (0.5) (1.6) (3.2) (5.9)
Gain on disposal
of investment 7.3 0.0 0.0 0.0
Income before
income taxes and
minority interests 227.5 222.7 164.2 181.0
Income tax expense (52.7) (46.9) (32.1) (39.8)
Income before
minority interests 174.8 175.8 132.1 141.2
Minority interests 0.2 0.3 0.3 0.8
Net income $ 175.0 $ 176.1 $ 132.4 $ 142.0
Earnings per share $ 1.26 $ 1.27 $ 0.95 $ 1.02
Number of weighted
average shares used
in calculating
earnings per share 138.4 138.7 138.8 138.9
As a percentage of net
revenues
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales (57.1) (55.6) (59.6) (62.0)
Gross profit 42.9 44.4 40.4 38.0
Operating expenses:
Selling, general and
administrative (10.3) (9.8) (10.5) (10.2)
Research and
development (11.8) (13.0) (13.6) (13.3)
Restructuring costs (0.2) 0.0 0.0 0.1
Other income and
expenses 0.8 (0.2) 0.6 3.0
Total operating
expenses (21.5) (23.0) (23.5) (20.3)
Operating income 21.5 21.4 16.9 17.7
Net interest expenses 0.0 (0.2) (0.3) (0.6)
Gain on disposal
of investment 0.7 0.0 0.0 0.0
Income before
income taxes and
minority interests 22.1 21.3 16.6 17.1
Income tax expense (5.1) (4.5) (3.2) (3.8)
Income before
minority interests 17.0 16.8 13.4 13.3
Minority interests 0.0 0.0 0.0 0.1
Net income 17.0% 16.8% 13.4% 13.4%
<PAGE>
In 1996, approximately 44% of the Company's net revenues originated in
Europe, compared to 54% in 1992. 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, the negative impact of third quarter seasonality in Europe has
generally been offset by increased sales in other regions. In weak industry
conditions, as was the case in 1996, the growth in other regions generally does
not materialize, resulting in a decrease in net revenues in the third quarter.
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 second quarter of
1996 increased to 44.4% from 42.9% in the first quarter of 1996. This unusually
high gross margin was caused by a very favorable product mix combined with
higher utilization of the Company's manufacturing facilities. For the third
quarter of 1996, gross profit as a percentage of net revenues declined to 40.4%
(39.4%, net of revenue from licensing fees), primarily due to pricing pressures
and a reduced loading of production lines as a result of the seasonal slowdown
in Europe associated with the third quarter. Gross profit as a percentage of net
revenues further declined for the fourth quarter of 1996 to 38.0%. This decline
was attributable to a combination of factors, including under-utilization of
non-VLSI fabs, the temporary de-saturation of the Phoenix fab due to a change in
product mix and continued price pressure, mainly on the commodity portion of the
Company's product portfolio.
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.
In 1996, the U.S. dollar, on average, appreciated slightly against the
principal European (except Italian) and Asian currencies which have a material
impact on the Company. The exchange rate impact on results of operations in 1996
was not significant. In 1995, the strong depreciation which the U.S. dollar
registered in the first six months of 1995 resulted in a negative impact on
results of operations in 1995, because the positive impact on net revenues was
more than offset by a negative impact on cost of sales resulting in a net
negative impact on gross profit.
<PAGE>
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 U.S. 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 2.4 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
changes in 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, Maltese lira, U.S. dollars, Singapore dollars and French francs.
See "Liquidity and Capital Resources" and Note 14 to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash generated from operations totalled $980.7 million in 1996
compared to $825.1 million in 1995 and $728.1 million in 1994.
Significant increased net cash from operations in 1994, 1995 and 1996
coupled with capital increases undertaken by the Company in December 1994 and
October 1995, which resulted in net proceeds to the Company of $198.7 million
and $371.6 million, respectively, enabled the Company to substantially reduce
its indebtedness, finance capital expenditures and improve its balance sheet.
The Company's net financial position (cash, cash equivalents and marketable debt
securities net of total debt) moved from a positive net financial position of
$64.9 million at December 31, 1995 to a negative net financial position of $66.7
million at December 31, 1996, primarily due to the need to finance increased
capital expenditures in 1996. At December 31, 1996, cash and cash equivalents
was $551.9, compared to $754.0 million at December 31, 1995 and $457.2 million
at December 31, 1994. At December 31, 1996, the aggregate amount of the
Company's long-term credit facilities was approximately $287 million, all of
which was outstanding, and the aggregate amount of the Company's short-term
facilities was approximately $975 million, under which approximately $316
million of indebtedness was outstanding. The Company has approximately $112
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.
In 1996, the Company's capital expenditure payments totalled $1,125.2
million, compared to $1,001.9 million in 1995 and $779.7 million in 1994.
Capital expenditures for 1996 were principally devoted to equip and upgrade both
the new 8-inch and existing 6-inch front-end facilities at the Catania, Italy
plant, to the expansion of the 8-inch front-end wafer fabrication plant in
Crolles, France, to the extension and conversion of an existing 8-inch facility
in Agrate, Italy, to the upgrading of the 8-inch front-end facility in Rousset,
France and to the ramp-up of production at the Phoenix, Arizona 8-inch front-end
manufacturing facility. Capital expenditures for 1995 were principally devoted
to completion of the first phase of the Phoenix facility, completion of the
<PAGE>
8-inch wafer equipment installation in the Crolles facility, conversion of
existing facilities to 5-inch and 6-inch wafer fabrication and equipping of an
8-inch front-end manufacturing facility in the Catania plant. 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.
The Company currently expects that capital spending for the foreseeable
future will continue to be at levels at least as high as in 1995 and 1996, and
possibly higher. The Company will continue to monitor its level of capital
spending, however, taking into consideration factors such as the trend of the
semiconductor market for the foreseeable future. Based on currently expected
market trends and conditions for 1997, the Company has again planned a
significant amount for capital expenditures that will be used for a variety of
projects, including (i) capacity expansion at the Crolles 8-inch front-end
facility, (ii) the commencement of buildings and facilities at the Rousset
8-inch front-end facility, (iii) capacity expansion of the Catania 8-inch
front-end facility, (iv) the commencement of buildings and facilities at the
Agrate 8-inch facility and (v) capacity expansion and upgrading of the
Carrollton, Texas facility.
In 1996, the Company's receivables from government agencies totalled
$217.3 million compared to $184.7 million in 1995 and $178.0 million in 1994.
The $32.6 million increase in 1996 was due primarily to certain important
government contracts that were obtained in the fourth quarter of 1996. See Note
7 to the Consolidated Financial Statements. In 1996, the Company's advances from
government agencies totalled $10.7 million compared to $11.2 million in 1995 and
$6.8 million in 1994. See Note 15 to the Consolidated Financial Statements.
Although the timing of receipt of funds under government contracts has been
delayed from time to time in the past, the Company has so far received the
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, available support from
third parties and additional borrowings will be sufficient to meet its
anticipated needs for liquidity through at least 1997.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands of U.S. dollars except per share amounts) 1994 1995 1996
<S> <C> <C> <C>
Net sales 2,602,205 3,520,670 4,078,246
Other revenues (note 16) 42,736 33,749 44,114
NET REVENUES 2,644,941 3,554,419 4,122,360
Cost of sales (1,528,694) (2,096,039) (2,414,706)
GROSS PROFIT 1,116,247 1,458,380 1,707,654
Selling, general and administrative (339,858) (413,148) (421,012)
Research and development (338,361) (440,334) (532,294)
Restructuring costs (note 18) (37,032) (12,975) 0
Other income and expenses (note 19) 31,984 59,107 45,074
OPERATING INCOME 432,980 651,030 799,422
Net interest expenses (note 20) (21,022) (16,854) (11,169)
Gain on disposal of investment 0 0 7,263
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 411,958 634,176 795,516
Income tax expense (note 21) (49,464) (108,282) (171,638)
INCOME BEFORE MINORITY INTERESTS 362,494 525,894 623,878
Minority interests 584 1,666
NET INCOME 362,494 526,478 625,544
EARNINGS PER SHARE 3.04 4.03 4.50
Number of shares outstanding at the end of the year 128,603,880 138,208,680 138,985,580
Number of weighted average shares used in calculating
earnings per share 119,392,417 130,647,079 138,695,540
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEET SGS-THOMSON Microelectronics N.V.
As at December 31,
(In thousands of U.S. dollars) 1995 1996
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 4) 754,046 551,896
Marketable securities (note 4) 4,354 4,508
Trade accounts and notes receivable (note 5) 595,419 645,923
Inventories (note 6) 450,649 521,402
Other receivables and assets (note 7) 360,262 418,051
TOTAL CURRENT ASSETS 2,164,730 2,141,780
Intangible assets, net (note 8) 13,386 17,350
Property, plant and equipment, net (note 9) 2,299,502 2,839,932
Investments and other non-current assets (note 10) 8,388 6,450
2,321,276 2,863,732
TOTAL ASSETS 4,486,006 5,005,512
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts and current portion of long-term
debt (note 14) 492,788 428,245
Trade accounts and notes payable 507,889 444,166
Other payables and accrued liabilities (note 15) 342,738 318,556
Accrued and deferred income tax 138,256 210,805
TOTAL CURRENT LIABILITIES 1,481,671 1,401,772
Long-term debt (note 14) 200,660 194,910
Reserves for pension and termination indemnities
(note 12) 94,956 100,685
Other non-current liabilities (note 13) 37,462 38,224
333,078 333,819
TOTAL LIABILITIES 1,814,749 1,735,591
MINORITY INTERESTS 9,542 9,901
Capital stock 1,066,528 1,072,933
Capital surplus 922,065 930,330
Accumulated result 584,039 1,209,738
Translation adjustments 89,083 47,019
SHAREHOLDERS' EQUITY (note 11) 2,661,715 3,260,020
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,486,006 5,005,512
Other commitments and contingencies: Note 25
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands of U.S. dollars) 1994 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 362,494 526,478 625,544
Add (deduct) non-cash items:
Depreciation and amortization 287,985 392,390 535,908
Gain on disposal of investment 0 0 (7,263)
Other non-cash items 60,121 (8,707) 7,298
Minority interest in net income of subsidiaries 0 (584) (1,666)
Changes in assets and liabilities:
Trade receivables (71,290) (126,603) (71,774)
Inventories (35,031) (91,412) (80,517)
Trade payables 78,144 17,005 (38,019)
Other assets and liabilities, net 45,705 116,562 11,156
NET CASH FROM OPERATING ACTIVITIES 728,128 825,129 980,667
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchases of tangible assets (779,696) (1,001,936) (1,125,205)
Proceeds from sales of tangible assets and investments 1,455 0 8,420
Other investing activities (5,951) 2,868 (5,297)
Investment in marketable debt securities (net) 59,618 5 (196)
NET CASH USED IN INVESTING ACTIVITIES (724,574) (999,063) (1,122,278)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 13,702 11,741 84,623
Repayment of long term debt (148,554) (96,202) (54,085)
Increase (decrease) in short-term facilities 101,224 165,298 (106,239)
Capital increase 202,836 391,321 16,671
NET CASH FROM (USED IN) FINANCING ACTIVITIES 169,208 472,158 (59,030)
Effect of changes in exchange rates 20,936 (1,412) (1,509)
NET CASH INCREASE (DECREASE) 193,698 296,812 (202,150)
Cash and cash equivalents at beginning of the year 263,536 457,234 754,046
Cash and cash equivalents at end of the year 457,234 754,046 551,896
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY SGS-THOMSON Microelectronics N.V.
<TABLE>
<CAPTION>
Capital Capital Accumulated Translation Shareholders'
(In thousands of U.S. dollars) stock surplus result adjustments equity
<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1994 906,451 484,009 (304,778) (81,671) 1,004,011
Capital increase 75,049 123,772 198,821
Stock option compensation 18,125 18,125
Net income 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 85,028 294,455 379,483
Deferred compensation 1,704 (155) 1,549
Net income 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
Capital increase 6,405 8,847 15,252
Deferred compensation (582) 155 (427)
Net income 625,544 625,544
Translation adjustment (42,064) (42,064)
BALANCE AS OF DECEMBER 31, 1996 1,072,933 930,330 1,209,738 47,019 3,260,020
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SGS-THOMSON Microelectronics N.V.
(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 Finanziara Telefonica (S.T.E.T.), an Italian corporation) and the
non-military business of Thomson Semiconducteurs (then owned by Thomson-CSF, a
French corporation) whereby each company contributed their respective
semiconductor businesses in exchange for a 50% interest in the Company.
The Company is registered in the Netherlands with its statutory domicile
in Amsterdam.
As of December 31, 1996, the Company was 69.04% (December 31, 1995:
69.36%) owned by SGS-THOMSON Microelectronics II B.V., and 30.96% by the public
(December 31, 1995: 30.64%)
At December 31, 1996, SGS-THOMSON Microelectronics II B.V. was 100% owned
by SGS-THOMSON Microelectronics Holding N.V. At December 31, 1996 and at
December 31, 1995, SGS-THOMSON Microelectronics Holding N.V. was owned as
follows:
o 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%).
o 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%).
2. SUMMARY OF ACCOUNTING POLICIES
2.1) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America (US GAAP). The Company maintains its accounting records in accordance
with Dutch accounting principles, which have been restated to conform with US
GAAP. No significant adjustments have arisen as a consequence of this
restatement to conformity with US GAAP.
The Company's consolidated financial statements include the assets,
liabilities and results of operations of its majority-owned subsidiaries. The
ownership of the other interest holders is reflected as minority interests. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The initial combination of the SGS Microelettronica and Thomson
Semiconducteurs civilian semiconductor 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.
2.2) USE OF ESTIMATES
The presentation of financial statements in accordance with US GAAP requires
management to make estimates and assumptions that affect the reported results of
certain assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the related reported
amounts of sales and expenses during the reporting period. Actual results could
differ from those estimates. Management believes that the estimates are
reasonable.
2.3) 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 is made
at the time of sale for estimated product returns and price protection which may
occur under programs the Company has with these customers.
/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
<PAGE>
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.
2.4) 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 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. Assets and liabilities of these subsidiaries
are translated at current rates of exchange at the balance sheet date. Income
and expense items are translated at the average exchange rate for the period.
The effects of translating the financial position and results of operation of
local functional currency are included in shareholders' equity.
2.5) 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.
2.6) INTANGIBLE ASSETS
Intangible assets include the cost of technologies and licenses purchased from
third parties, amortized over a period ranging from five to eighteen years, and
goodwill acquired in business combinations amortized over its estimated useful
life, generally five to fifteen years.
2.7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of government subsidies.
Major renewals and improvements are capitalized; minor replacements, maintenance
and repairs are charged to current operations. Depreciation is computed using
the straight-line method over the following estimated useful lives:
Buildings 33 years
Leasehold improvements 10 years
Machinery and equipment 6 years
Computer 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 over the shorter of
the estimated useful life or the lease term.
2.8) 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.
Marketable debt and equity securities and other equity investments are
classified as "available for sale" securities and stated at market value.
2.9) INVENTORIES
Inventories are stated at the lower of cost or market (net realizable value).
Cost is computed on a currently adjusted standard basis (which approximates
actual cost on a current average basis).
2.10) RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred. Research and
development costs include costs incurred by the Company as well as the Company's
share of costs incurred by two French research and development interest groups.
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".
<PAGE>
2.11) 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.
/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. The undiscounted value of the vested obligation at the balance
sheet date is recorded as a liability.
France In France, an indemnity is paid to personnel only upon retirement from
the Company. The French entity recognizes the related cost and liability with
the prior years' liability being amortized over the average remaining service
period until retirement age.
2.12) RESTRUCTURING COSTS
Restructuring costs include incremental costs to be incurred as a result of the
adoption by management of a formal plan to reorganize certain activities. Such
costs may include severance payments, moving costs and fixed asset write-offs.
2.13) INCOME TAXES
The provision for current taxes represents the income taxes expected to be
payable for the current year. 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 where necessary to reduce deferred tax assets to the amount expected
to be "more likely than not" realized in the future. Tax rate changes are
reflected in income in the period such changes are enacted.
2.14) FINANCIAL INSTRUMENTS
/INTEREST RATE SWAP AGREEMENTS: The Company enters into interest swap
agreements with the purpose of reducing its interest rate exposure by changing
the floating rates of certain loans into fixed rates. The differential to be
paid or received is recognized in interest expense over the life of the
agreements.
/FOREIGN EXCHANGE FORWARD CONTRACTS: The Company enters into forward
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. Generally
gains and losses associated with currency rate changes are recognized currently.
2.15) STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation", which establishes a fair value-based method of accounting for
compensation costs related to stock option plans and other forms of stock based
compensation plans as an alternative to the intrinsic value-based method of
accounting as defined under Accounting Principles Board Opinion no. 25 (APB 25).
The Company has decided not to elect the new method of accounting, and will
provide pro forma disclosure as if the fair value-based method prescribed by FAS
123 had been applied in measuring compensation expense (note 11).
2.16) ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising expenses
for 1994, 1995 and 1996 were $6,644, $10,133 and $12,686, respectively.
2.17) EARNINGS PER SHARE
Earnings per share is calculated based upon the weighted average number of
common shares and dilutive common stock equivalents using the treasury stock
method. Dilutive common stock equivalents consist of stock options.
2.18) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
<PAGE>
3. CONSOLIDATED ENTITIES
The consolidated financial statements include the accounts of SGS-THOMSON
Microelectronics N.V. and the following entities as of December 31, 1996:
<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. 2,289,764 FRF 100
Paris SGS-THOMSON Microelectronics S.N.C. 0 FRF 100
Italy Milano SGS-THOMSON Microelectronics S.R.L. 502,000,000 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 Kong 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
Rancho Ber. SGS-THOMSON Microelectronics (RB), Inc. 1 USD 100
Dallas SGS-THOMSON Microelectronics Leasing Co Inc. 1 USD 100
Brazil Sao Paulo SGS-THOMSON Microelectronics Ltda 14,314 BRL 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 252,748 CNY 60
India New Delhi SGS-THOMSON Microelectronics PTE LTD 62,000 INR 100
</TABLE>
<PAGE>
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of the following:
December 31,
1995 1996
Cash 801 1,579
Bank accounts 748,591 548,777
Marketable securities
(with maturity under 3 months) 4,654 1,540
TOTAL 754,046 551,896
Marketable securities
(with maturity over 3 months) 4,354 4,508
Marketable securities consist mainly of certificates of deposit. There was no
significant difference between the book value of traded marketable securities
and their fair market value as of December 31, 1995 and 1996.
5. TRADE ACCOUNTS AND NOTES RECEIVABLE
Trade accounts and notes receivable consist of the following:
December 31,
1995 1996
Trade accounts and notes receivable 613,300 664,075
Less valuation allowance (17,881) (18,152)
TOTAL 595,419 645,923
During 1994, 1995 and 1996 no customer represented individually over ten percent
of consolidated net revenues.
6. INVENTORIES
Inventories consist of the following:
December 31,
1995 1996
Raw materials 126,756 121,485
Work-in-process 202,817 278,289
Finished products 121,076 121,628
TOTAL 450,649 521,402
7. OTHER RECEIVABLES AND ASSETS
December 31,
1995 1996
Receivables from
government agencies* 184,670 217,334
Taxes and other government receivables 53,996 48,148
Down payment to suppliers 7,577 1,617
Loans to employees 5,201 3,821
Prepaid expenses 21,685 14,700
Sundry debtors 18,419 23,342
Deferred tax 43,331 65,291
Other 25,383 43,798
TOTAL 360,262 418,051
* Related to research and development contracts, industrialization contracts and
capital expenditures.
<PAGE>
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
1995 1996
Technologies and licenses, gross 61,806 56,648
Pension transition obligation 2,142 2,423
Other 315 0
Less accumulated amortization (50,877) (41,721)
TOTAL 13,386 17,350
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31, 1995 Gross Depreciation Net
Land and buildings 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
DECEMBER 31, 1996 Gross Depreciation Net
Land and buildings 456,973 (88,926) 368,047
Machinery and
equipment 4,147,941 (2,057,281) 2,090,660
Other tangible
fixed assets 221,555 (144,943) 76,612
Prepayments and
construction in progress 304,613 -- 304,613
TOTAL 5,131,082 (2,291,150) 2,839,932
<PAGE>
10. INVESTMENTS AND OTHER NON-CURRENT ASSETS
Investments and other non-current assets consist of the following:
December 31,
1995 1996
Investments carried at fair value 578 1,176
Long-term deposits and receivables 7,810 5,274
TOTAL 8,388 6,450
Long-term deposits and receivables consist primarily of indemnities receivable
from third parties on the sale of businesses, which bear interest or are
discounted to reflect their present value.
11. SHAREHOLDERS' EQUITY
PUBLIC OFFERINGS OF SHARES
In December 1994, the Company increased its capital stock through the issuance
of 9,606,240 new shares of capital stock, which resulted in an increase in
capital stock and capital surplus of $75,049 and $123,772, respectively. In
connection with a secondary offering of capital stock in October 1995, the
Company issued 8,960,000 new shares of capital stock, which resulted in an
increase in capital stock and capital surplus of $79,356 and $292,075,
respectively.
OUTSTANDING SHARES
The authorized share capital of the Company is NLG 2,750,000,000, consisting of
200,000,000 shares, each with a nominal value of NLG 13.75. As of December 31,
1994, 1995 and 1996, the number of shares of capital stock outstanding at a par
value of NLG 13.75 were 128,603,880 shares, 138,208,680 shares and 138,985,580
shares, respectively.
STOCK OPTION PLANS
In 1989, the Shareholders voted to adopt the 1989 Stock Option Plan ("the 1989
Plan") and approved the issuance of 1,634,400 options to 136 employees to
purchase capital stock at a price of NLG 25 per share. Under the 1989 Plan, the
options vest over four years and are exercisable for ten years. In 1994, the
minimum exercise price of the options was reduced to NLG 17.50. As a result, the
Company recorded a compensation charge of $18,125 in the fourth quarter of 1994.
In 1995, the Shareholders voted to adopt the 1995 Stock Option Plan ("the
1995 Plan") whereby options for up to 5,500,000 shares may be granted in
installments over a five year period. Under the 1995 Plan, the options may be
granted to purchase shares of capital stock at a price not lower than the market
price of the shares on the date of grant, and generally vest over four years and
are exercisable over a period of eight years. In March 1996, the Company granted
1,200,000 options to 497 employees at an exercise price of $36.25 per share.
In 1996, the Shareholders voted to adopt the Supervisory Board Option
Plan whereby members of the Supervisory Board may receive, during the three-year
period 1996-1998, 3,000 options for 1996 and 1,500 options for 1997 and 1998, to
purchase shares of capital stock at the closing market price of the shares on
the date of grant. Under the Plan, the options vest over one year and are
exercisable for a period expiring eight years from the date of grant. In October
1996, options to purchase 25,500 shares were granted at an exercise price of
$54.00 per share.
<PAGE>
A summary of stock option transactions for the plans follows:
Price Per Share
Number of
OPTIONS OUTSTANDING Shares Range Average
December 31, 1993 1,474,400 17.5-25 NLG 20.0 NLG
Options canceled (18,000) 17.5-25 NLG 19.2 NLG
December 31, 1994 1,456,400 17.5-25 NLG 20.0 NLG
Options exercised (646,200) 17.5-25 NLG 19.6 NLG
December 31, 1995 810,200 17.5-25 NLG 20.0 NLG
Options granted
1995 Plan 1,200,000 $36.25 $36.25
Supervisory Board Plan 25,500 $54.00 $54.00
Options canceled (16,500) $36.25 $36.25
Options exercised (531,790) 17.5-25 NLG 20.1 NLG
December 31, 1996 1,487,410 17.5-25 NLG 20.1 NLG
$36.25-$54.00 $36.73
<PAGE>
EMPLOYEE OFFERING PLAN
Pursuant to a resolution of the Supervisory Board of the Company in November
1995, the Company offered to certain of its employees worldwide the right to
acquire up to 1,000 shares of capital stock per employee, at a price of $33.725
per share, representing a discount of five percent from the market price. A
total of 243,710 shares were sold to participating employees worldwide as a
result of the offering. Participating employees who purchased shares in the
offering and who hold such shares for at least one year will be entitled to
purchase, for a price of 13.75 NLG, one share for each ten shares purchased in
the offering.
FAIR VALUE OF STOCK-BASED COMPENSATION
The Company applies the principles of APB 25 in accounting for its stock option
grants. Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under the
plans consistent with the method of SFAS 123 (Note 2.15), the Company's net
earnings and net earnings per share would have been decreased to the pro forma
amounts indicated below:
Year ended December 31,
1995 1996
Net income
As reported 526,478 625,544
Pro forma 526,478 620,084
Earnings per share
As reported 4.03 4.50
Pro forma 4.03 4.47
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: dividend yield of 0%, expected volatility of 55%, a risk-free
interest rate of 5%, and expected life of five years.
RETAINED EARNINGS
At December 31, 1996, the amount of retained earnings available to pay dividends
under Dutch law was approximately $2,187,000 (1995: $1,595,000). Retained
earnings for purposes of this calculation are based upon generally accepted
accounting principles in The Netherlands. The Company's subsidiaries are subject
to the laws of the countries in which they are domiciled. These laws may
restrict the ability of the subsidiaries to transfer funds to the Company. Such
restrictions are not considered to be significant as of December 31, 1996.
12. RESERVES FOR PENSION AND
TERMINATION INDEMNITIES
Reserves for pension and termination indemnities consist of the following:
December 31,
1995 1996
Italy(a) 86,733 98,028
Other countries(b) 8,223 2,657
TOTAL 94,956 100,685
(A) ITALY
Changes in the undiscounted benefit consist of the following:
December 31,
1995 1996
Accrual at the beginning of the period 75,237 86,733
Accrued benefits 14,533 18,469
Payments (5,044) (10,213)
Translation adjustment 2,007 3,039
Accrual at the end of the period 86,733 98,028
<PAGE>
(B) OTHER COUNTRIES (FRANCE, UNITED STATES, JAPAN AND GERMANY)
The funded status of pension plans and termination indemnities is as follows:
December 31,
1995 1996
Vested benefits (36,635) (47,816)
Non-vested benefits (16,597) (10,480)
Projected benefit obligation (53,232) (58,296)
Plan assets at fair value 45,455 54,562
Funded status (7,777) (3,734)
Unrecognized transition obligation (4,377) (4,404)
Unrecognized prior service cost 7,298 6,869
Unrecognized net gains or losses 825 514
Net accrued for pension plans (4,031) (755)
The accumulated benefit obligation amounted to $57,205 as of December 31, 1996
($45,046 as of December 31, 1995).
<PAGE>
The periodic net pension and termination indemnities cost includes the
following:
December 31,
1994 1995 1996
Service cost of benefits earned 2,819 3,613 4,764
Interest cost on liability 2,482 3,016 3,960
Return on plan assets 986 (3,716) (4,267)
Net amortization and deferral (3,379) 418 (1,467)
TOTAL 2,908 3,331 2,990
ASSUMPTIONS 1994 1995 1996
Discount rate 7% 7-8.5% 6.5-8.5%
Salary increase rate 4.5-6% 4-6.5% 4-6.5%
Expected rate of return of funds 8.5% 8-10% 6.5-10%
13. OTHER NON-CURRENT LIABILITIES
December 31,
1995 1996
Provision for claims and litigation 16,000 11,550
Provision for patent risks 20,000 20,000
Other long-term payables 1,462 6,674
TOTAL 37,462 38,224
14. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
1995 1996
Secured (mainly mortgages on land,
building and liens on equipment) 14,407 23,336
Unsecured 186,253 171,574
TOTAL 200,660 194,910
December 31,
REPAYMENT SCHEDULE 1996
1998 42,683
1999 51,885
2000 45,327
2001 17,106
Thereafter 37,909
TOTAL 194,910
December 31,
INTEREST RATES 1995 1996
Non-interest bearing* 4,661 4,669
From 1 to 3 % 87,005 73,237
From 3 to 6 % 36,071 57,067
From 6 to 10 % 66,035 55,758
From 10 to 15 % 6,888 4,179
TOTAL 200,660 194,910
* Non-interest bearing and certain low interest bearing borrowings relate to
borrowings under Italian and French governmental programs.
<PAGE>
December 31,
CURRENCIES 1995 1996
U.S. dollar 141 6,950
Italian lira 120,333 143,258
French franc 15,830 9,698
Singapore dollar 26,622 0
Other 37,734 35,004
TOTAL 200,660 194,910
At December 31, 1996, the current portion of long-term debt included in current
liabilities amounted to $112,372 (1995: $88,248). At December 31, 1996, the
above long-term debt included $357 obligations under capital leases (1995:$746).
Financial debt includes mainly:
1995 1996
SGS-THOMSON Microelectronics NV
Libor 0.45% Bank Loan 1991-1996
(US dollars 100,000,000) 33,333 --
SGS-THOMSON Microelectronics SA
Libor 0.55% Bank Loan 1992-1997
(French francs 100,000,000) 8,163 3,807
SGS-THOMSON Microelectronics PTE Ltd
PR + 0.25% Bank Loan 1991-1997
(Singapore dollars 50,000,000) 11,783 --
5.44% Bank Loan 1992-1997
(Singapore dollars 40,000,000) 22,623 --
SGS-THOMSON Microelectronics s.r.l
2.15% 1991-2001 Government Loan
(Italian lira 155,694,000,000) 86,933 76,575
<PAGE>
15. OTHER PAYABLES AND ACCRUED LIABILITIES
December 31,
1995 1996
Taxes other than income taxes 29,739 24,754
Salaries and wages 69,062 95,553
Social charges 74,217 49,882
Advances received on fundings 11,188 10,724
Provision for restructuring costs and
asset writedowns 23,957 5,981
Litigation and other risks 19,853 5,000
Commercial rebates 31,992 53,214
Royalties payable 38,427 19,612
Other 44,303 53,836
TOTAL 342,738 318,556
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 1997. It has involved fixed asset write-offs and moving costs.
The remaining provision as of December 31, 1995 and 1996 was $23,957 and $5,981
respectively.
16. OTHER REVENUES
Other revenues consist of the following:
December 31,
1994 1995 1996
Royalties and
indemnities received 14,056 16,549 582
Development services
invoiced to customers 23,126 9,800 975
Licensing revenues 0 0 16,693
Miscellaneous sales 5,554 7,346 18,675
Other 0 54 7,189
TOTAL 42,736 33,749 44,114
17. PERSONNEL
Labor costs consist of the following:
December 31,
1994 1995 1996
Salaries and wages 524,844 643,559 745,329
Social security contribution 162,235 194,650 210,611
Other 37,053 48,251 53,838
TOTAL 724,132 886,460 1,009,778
Labor costs are allocated to cost of sales, selling, general and administrative
expenses and research and development costs. At December 31, 1996 the Company
employed 25,893 persons (1995: 25,523).
18. RESTRUCTURING COSTS
Restructuring costs consist of the following:
December 31,
1994 1995
Cash items:
Severance 13,009 3,602
Moving costs 2,957 9,373
Non-cash items:
Asset write-offs 21,066 0
TOTAL 37,032 12,975
<PAGE>
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 benefits of the asset write-offs effected in 1994 have not been
significant because of the 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 15).
<PAGE>
19. OTHER INCOME AND EXPENSES
Other income and expenses consist of the following:
December 31,
1994 1995 1996
Research and
development funding* 80,139 89,643 63,792
Patents income
(expense) net (7,598) (8,055) (2,639)
Exchange gain (loss) 1,982 5,082 11,822
Start-up costs (8,847) (26,489) (38,987)
Goodwill amortization (1,437) (1,437) (315)
Stock option plan
compensation charge (18,125) 0 0
Other (14,130) 363 11,401
TOTAL 31,984 59,107 45,074
* 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 ($19,276 for 1994, $11,825 for 1995 and $4,613 for 1996).
20. NET INTEREST EXPENSES
Net interest expenses consist of the following:
December 31,
1994 1995 1996
Income 20,500 35,206 34,139
Expenses (41,522) (52,060) (45,308)
TOTAL (21,022) (16,854) (11,169)
Cash paid for interest was $51,156 for 1995 and $45,389 for 1996.
21. 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 taxable
entity incurring a loss.
December 31,
1994 1995 1996
Domestic 0 0 (37,270)
U.S. (6,304) (9,558) (221)
Foreign (24,280) (105,089) (75,632)
Current (30,584) (114,647) (113,123)
Deferred (18,880) 6,365 (58,515)
INCOME TAX EXPENSE (49,464) (108,282) (171,638)
The principal items accounting for the differences in income taxes computed at
The Netherlands statutory rate (35%) and the effective income tax rate comprise
the following:
Income tax expense computed
at statutory rate 144,185 221,962 279,013
Deductions for financial
reporting for which
no current tax benefit
is available (12,403) (50,601) (14,894)
Variation in valuation
allowance (70,645) (25,528) (23,935)
Other tax and credits (9,962) (32,252) (7,855)
Effect of tax rate differences (1,711) (5,299) (60,691)
INCOME TAX EXPENSE 49,464 108,282 171,638
<PAGE>
Permanent differences reflect mainly the effects of the special pioneer regimes
existing in certain Southeast Asian countries and the non-deductible goodwill
amortization.
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 applicable taxation rules and after deduction of capital
allowances--are exempt from Singapore income tax for the specified pioneer
period. This pioneer period expired on December 31, 1996. Beginning in 1997, the
part of the Company's operations currently enjoying pioneer status will continue
to benefit from certain tax privileges since a half rate taxation basis will be
applied when compared to the second non-pioneer factory. In calculating deferred
taxes, the Company records a liability (or asset) for a temporary difference
that reverses after the tax holiday period ends, using the applicable taxation
rate.
<PAGE>
Deferred tax assets and liabilities consist of the following:
1995 1996
Tax loss carryforwards and
capital allowances 103,789 14,976
Other assets 53,099 122,942
Total assets, gross 156,888 137,918
Valuation allowance (28,091) (4,156)
DEFERRED TAX ASSETS, NET 128,797 133,762
Fixed assets depreciation 140,224 148,562
Other liabilities 7,362 59,220
DEFERRED TAX LIABILITIES 147,586 207,782
As a result of offsetting deferred tax assets against deferred tax liabilities
in each tax jurisdiction, the Company recorded a net deferred tax asset of
$43,331 in 1995 and $65,291 in 1996, and a net deferred tax liability of $62,120
in 1995 and $139,311 in 1996.
As of December 31, 1996, the Company and its subsidiaries had tax credits
of $2,813 with no expiration date and net operating loss carryforwards and
capital allowance carryforwards expiring in the following years:
December 31,
1996
1997 12,917
1998 12,565
1999 2,038
2000 and thereafter 904
TOTAL 28,424
The Company paid $52,545 cash for income taxes in 1995 and $109,277 cash for
income taxes in 1996.
22. CREDIT FACILITIES
As of December 31, 1996, the aggregate amount of the Company's long-term credit
facilities was approximately $287,000 under which $287,000 of indebtedness was
outstanding, and the aggregate amount of the Company's short-term facilities was
approximately $975,000 under which $315,873 indebtedness was outstanding.
23. LEASE COMMITMENTS
The Company leases land, building, plant and equipment under non-cancellable
lease agreements. As of December 31, 1996 the future minimum lease payments to
which the Company was committed under operating leases were as follows:
Year
1997 13,372
1998 6,840
1999 2,056
2000 1,422
2001 1,289
Thereafter 50
TOTAL 25,029
<PAGE>
24. FINANCIAL INSTRUMENTS
Financial instruments and derivatives are used exclusively for purposes other
than trading.
FORWARD EXCHANGE CONTRACTS The Company enters into forward contracts as
a hedge against potentially adverse changes in foreign currency exchange rates.
Such contracts mature mainly during the first quarter of 1997, and amount to
$153,200 forward sale of U.S. dollars and $83,660 forward sale of other foreign
currencies and to $38,000 forward purchase of U.S. dollars and $32,939 forward
purchase of other foreign currencies.
<PAGE>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS AND CONCENTRATION 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. In the event of a failure to honor one of the forward contracts by
one of the banks with which the Company has contracted, management believes any
loss would be limited to the exchange rate differential from the time the
contract was made until the time it was compensated.
INTEREST RATE AND FOREIGN CURRENCY AGREEMENTS:
December 31,
xxx 1995 1996
Long-term interest rate swaps 30,000 0
Forward exchange contracts :
sales 250,717 236,860
purchases (32,588) (70,939)
Remaining term
Forward exchange contracts 1 to 6 months
FAIR VALUE OF FINANCIAL INSTRUMENTS The estimates of fair value were
obtained using prevailing financial market information from various valuation
techniques as of December 31, 1996. The methodologies used to estimate fair
values 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 1996 based upon
current interest rates and the creditworthiness of the counterparties.
December 31,
1995 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
BALANCE SHEET
Investments 578 578 -- --
Marketable
securities 9,008 9,008 6,048 6,048
Bank loans
(including
current portion) 288,908 260,515 286,859 270,218
OFF-BALANCE SHEET
Long-term interest
swap 48 --
Forward exchange
contracts (507) 2,900
<PAGE>
25. OTHER COMMITMENTS AND CONTINGENCIES
LITIGATION The Company is involved in various litigations incidental to
the normal conduct of its operations. However, these contingencies are not
considered to be material in relation to the consolidated results.
OTHER CONTINGENT LIABILITIES The Company's position on certain tax
regulation may differ from the tax authorities' eventual interpretation, which
could result in a tax liability. However, the Company believes the risk of
incurring a significant liability is remote and, therefore, believes that
provisions carried as at December 31, 1996 are sufficient.
26. RELATED PARTY TRANSACTIONS
The main transactions with the shareholders of SGS-THOMSON Microelectronics
Holding NV and their affiliates were as follows:
December 31,
1994 1995 1996
Sales 158,457 195,352 232,057
Research and
development expenses (12,317) (17,815) (13,262)
Other purchases
and expenses (13,757) (42,237) (48,155)
Indebtedness of the Company was supported by guarantees from the shareholders of
SGS-THOMSON Microelectronics Holding NV as follows:
December 31,
1995 1996
Long-term debt 156,359 119,858
Short-term debt 79,117 22,246
TOTAL 235,476 142,104
Accounts receivable 47,154 31,580
Accounts payable 11,393 10,519
<PAGE>
27. SEGMENT INFORMATION
The Company, operating in a single industry segment, designs, develops,
manufactures and markets a wide variety of semiconductors. Net revenues,
earnings from operations, capital expenditures and identifiable assets
classified by the major geographic areas in which the Company operates are:
<TABLE>
<CAPTION>
Other Corporate
Americas Asia Pacific Europe and Elimination Total
<S> <C> <C> <C> <C> <C>
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) 0
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 and 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
Number of employees 2,057 7,010 12,950 -- 22,017
Wages and 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 and 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
Number of employees 2,439 7,934 15,150 -- 25,523
Wages and salaries (139,640) (120,832) (625,988) -- (886,460)
1996
Income statement
Net revenues 934,224 1,363,771 1,824,365 -- 4,122,360
Intersegment sales 268,688 3,764,473 5,068,912 (9,102,073) 0
Total 1,202,912 5,128,244 6,893,277 (9,102,073) 4,122,360
Operating profit 3,038 211,998 596,685 (12,299) 799,422
Depreciation (77,967) (105,363) (352,211) (367) (535,908)
Research and development expenses (73,710) (7,816) (450,465) (303) (532,294)
Cash flow statement
Capital expenditures 179,326 165,404 780,305 170 1,125,205
Balance sheet
Identifiable assets 686,455 933,115 2,848,124 537,818 5,005,512
Other information
Number of employees 2,555 7,570 15,753 15 25,893
Wages and salaries (166,486) (133,471) (708,826) (995) (1,009,778)
</TABLE>
In the above information, 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 US,
Asia and Europe in the process of being manufactured and sold. Sales to
unaffiliated customers have little correlation with the location of manufacture.
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.
<PAGE>
REPORT OF
INDEPENDENT ACCOUNTANTS SGS-THOMSON Microelectronics N.V.
TO THE SUPERVISORY BOARD AND SHAREHOLDERS OF SGS-THOMSON MICROELECTRONICS N.V.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
SGS-THOMSON Microelectronics N.V. and its subsidiaries at December 31, 1996, and
the results of their operations and their cash flows for the year in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. The consolidated financial
statements of SGS-THOMSON Microelectronics N.V.for the two years ended December
31, 1995 were audited by other independent accountants whose report dated
January 26, 1996 expressed an unqualified opinion on those statements.
PRICE WATERHOUSE NEDERLAND BV
Amsterdam, The Netherlands
January 17, 1997
<PAGE>
SUPERVISORY BOARD
AND EXECUTIVE OFFICERS
SUPERVISORY BOARD(1)
Bruno Steve, Chairman
Chief Executive Officer -- Finmeccanica
Jean-Pierre Noblanc, Vice Chairman
General Manager, Components Sector -- CEA Industrie
Remy Dullieux
"Directeur Executif," Northern and Eastern Regions -- France Telecom
Riccardo Gallo
Associate Professor of Industrial Economics, Engineering Faculty,
"La Sapienza" University -- Rome
Alessandro Ovi
Chief Executive Officer -- Technitel S.p.A.
Henri Starck
Advisor to the President -- Thomson-CSF
Robert White
Professor and Department Head -- Carnegie Mellon University
(1) Reflects the composition of the Supervisory Board following the Annual
General Meeting held on May 5, 1997.
EXECUTIVE OFFICERS
Pasquale Pistorio
President and Chief Executive Officer
Laurent Bosson
Corporate Vice President, Front-end Manufacturing
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
Richard Pieranunzi
Corporate Vice President, Americas Region
Aldo Romano
<PAGE>
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
Photomontages: Jeff Brice
Certain names and terms used herein are Registered Trademarks of their
respective owners. Editorial: Morgen-Walke Associates Design: Inc Design, New
York City Printed on recycled paper
CORPORATE INFORMATION
PRINCIPAL EXECUTIVE OFFICE
SGS-THOMSON Microelectronics
Technoparc du Pays de Gex -- B.P. 112
165, Rue Edouard Branly
01637 St. Genis Pouilly Cedex -- France
Telephone: 33-4-50-40-26-40
http://www.st.com
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 33-4-50-40-25-94. In
the U.S., you may call 214-466-7699.
SENIOR MANAGEMENT TEAM
[PHOTO]
Products Group
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
REGIONAL
Richard Pieranunzi
Corporate Vice President, 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
<PAGE>
Maurizio Ghirga
Corporate Vice President, Chief Financial Officer
Murray Duffin
Corporate Vice President, Total Quality and Environmental Management
CENTRAL FUNCTIONS
Laurent Bosson
Corporate Vice President, Front-end Manufacturing
Joel Monnier
Corporate Vice President, Central Research and Development
Giordano Seragnoli
Corporate Vice President, Back-end Manufacturing and Subsystems Products Group
Exhibit 23
Consents of Independent Accountants
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-8 (No. 33-80797, No.
33-90616, No. 333-06390 and No. 333-06962) of our report dated January 17, 1997
appearing on page 59 of the Annual Report to Shareholders of SGS-Thomson
Microelectronics NV for the year ended December 31, 1996 listed under Item 19(a)
of SGS-Thomson Microelectronics NV's Annual Report on Form 20-F. We also consent
to the application of such report to the Financial Statement Schedule for the
year ended December 31, 1996 listed under Item 19(a) of SGS-Thomson
Microelectronics NV's Annual Report on Form 20-F when such schedule is read in
conjunction with the financial statements referred to in our report. The audit
referred to in such report also included this schedule.
PRICE WATERHOUSE NEDERLAND BV
Amsterdam, The Netherlands
June 25, 1997
<PAGE>
"As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement."
Amsterdam, The Netherlands
June 25, 1997 Arthur Andersen & Co.
