SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1995
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File number: 33-86320
SGS-THOMSON Microelectronics N.V.
(Exact name of Registrant as specified in its charter)
N/A The Netherlands
(Translation of Registrant's (Jurisdiction of incorporation
name into English) or organization)
Technoparc du Pays de Gex - B.P. 112
165, rue Edouard Branly
01630 Saint Genis Pouilly
France
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange
on which registered
Common Shares, nominal value New York Stock Exchange
NLG 13.75 per Common Share
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report:
Common Shares, nominal value NLG 13.75
per Common Share 138,208,680
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the registrant
has elected to follow:
Item 17 |_| Item 18 |X|
TABLE OF CONTENTS
PART I
Page
----
Item 1. Description of Business........................................ 1
Item 2. Description of Property........................................ 35
Item 3. Legal Proceedings.............................................. 38
Item 4. Control of Registrant.......................................... 40
Item 5. Nature of Trading Market....................................... 47
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders*..................................................... 47
Item 7. Taxation....................................................... 47
Item 8. Selected Consolidated Financial Data........................... 51
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 52
Item 10. Directors and Officers of Registrant........................... 52
Item 11. Compensation of Directors and Officers......................... 61
Item 12. Options to Purchase Securities from Registrant or Subsidiaries. 61
Item 13. Interest of Management in Certain Transactions................. 62
PART II
Item 14. Description of Securities to be Registered*.................... 63
PART III
Item 15. Defaults upon Senior Securities*............................... 63
Item 16. Changes in Securities and Changes in Security for Registered
Securities*.................................................. 63
PART IV
Item 17. Financial Statements*.......................................... 63
Item 18. Financial Statements........................................... 63
Item 19. Financial Statements and Exhibits.............................. 64
Signature
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* Omitted because item is not applicable.
PART I
Item 1: Description of Business
The Company
SGS-THOMSON is a global independent semiconductor company that
designs, develops, manufactures and markets a broad range of semiconductor
integrated circuits and discrete devices used in a wide variety of
microelectronic applications, including telecommunications systems, computer
systems, consumer products, automotive products and industrial automation and
control systems. On the basis of 1995 revenues, SGS-THOMSON was the world's
leading supplier of analog ICs, mixed-signal ICs, power ICs and MPEG-2 decoder
ICs. The Company currently offers more than 3,000 main types of products to more
than 1,500 customers including Alcatel, Bosch, Creative Technology, Ford,
Hewlett-Packard, IBM, Motorola, Nokia, Northen Telecom, Philips, Seagate
Technology, Siemens, Sony, Thomson Multimedia and Western Digital.
The Company offers a diversified product portfolio and
develops products for a wide range of market applications to reduce its
dependence on any single product, industry or application market. The Company
has focused on developing products that exploit its technological strengths,
including differentiated ICs (which the Company defines as being its dedicated
products, semicustom devices and microcontrollers). Differentiated ICs foster
close relationships with customers, resulting in early knowledge of their
evolving requirements and opportunities to access their markets for other
products, and are less vulnerable to competitive pressures than standard
commodity products. Differentiated ICs accounted for just over 51% of the
Company's net revenues in 1995 compared to approximately 48% in 1994. SGS-
THOMSON also targets applications that require substantial analog and
mixed-signal content and can exploit the Company's system level expertise. In
1995, analog ICs (including mixed-signal ICs), the majority of which are also
differentiated ICs, accounted for approximately 46% of the Company's net
revenues (compared to approximately 43% in 1994), while discrete devices
accounted for approximately 17% of the Company's net revenues (compared to
approximately 15% in 1994). In recent years, analog ICs and discrete devices
have experienced less volatility in sales growth rates and average selling
prices than the overall semiconductor industry.
In 1995, the Company introduced a number of important new
products, such as the STG2000 multimedia accelerator, the single-chip MPEG-2
decoder family, ST20 32-bit micro cores, as well as a digital processor (DSP
950) and 4 Mbit flash memory family. Most of these products address the rapidly
growing markets for multimedia personal computers, television set top boxes and
digital cellular telephones. The Company has also signed a licensing agreement
with Bosch that grants the automotive component manufacturer the right to
develop and manufacture smart power ICs using the Company's latest generation
bipolar-CMOS-DMOS (1.2 micron, 60 volt) process. The Company entered into a
multi-year agreement with Western Digital, pursuant to which the Company is to
supply Western Digital with ICs based on CMOS standard cell methodologies (0.7
micron migrating to 0.5 micron by year end 1995). This agreement provides for
the Company to supply products for disc controllers as well as new products
under development.
In July 1995, the Company announced that the research and
development center jointly operated by the Company and CNET, the research
laboratory of France Telecom, had completed the development of the 0.35 micron
CMOS process, only one year after the qualification of the 0.5 micron process.
The 0.35 micron process, currently used in the assembly and development of a
complex evaluation circuit of several million transistors, consists of five
metal layers and involves more than 140 elementary operations. Other complex
prototypes are being developed to further validate the process and accelerate
the introduction of products based on this process, in particular a systolic
processor for the estimation of movement in images, and a programmable video
processor for the coding of images in accordance with the MPEG 4 standard
(currently undergoing standardization).
In 1995, the Company established a design center in India, the
Company's largest design center outside of Europe, which will principally
cooperate in the design of advanced macrocells and libraries for the Company's
analog, digital and mixed signal technologies.
In 1995, SGS-THOMSON adopted a plan to increase its
manufacturing capacity through the addition of new 8-inch submicron fabrication
plants that will be designed to meet the growing demand for VLSI devices. The
Company also approved the building and equipping of a new 8-inch 0.5 micron
front-end wafer fabrication plant (which will also be capable of 0.35 and 0.25
micron production) in Rousset, France.
The Company's business is organized into five principal
product groups:
The Dedicated Products Group produces application-specific
semiconductor products using advanced bipolar, CMOS, BiCMOS,
mixed-signal and power technologies. The Group's dedicated products are
used in all major end-user applications, including such new
applications as mobile communications networks, asynchronous transfer
mode communications systems and digital video compression systems. The
breadth of the Group's customer and application base provides it with a
source of stability in the cyclical semiconductor market, while its
position as a strategic supplier of application-specific products
provides it with opportunities to supply its customers' requirements
for other products, including discrete devices, programmable products
and memories.
The Discrete and Standard ICs Group produces discrete power
devices, power transistors, standard linear and logic ICs and radio
frequency ("RF") products. The Group's discrete and standard products
are manufactured using mature technological processes that are less
capital intensive than the Company's other principal products. The
Group has a diverse customer base and broad product portfolio.
The Memory Products Group produces a broad range of memory
products, including EPROMs, flash memories, EEPROMs, SRAMs, and chips
for smartcards. The Company was the leading supplier of EPROMs in 1995,
accounting for approximately 21.6% of worldwide EPROM sales. The
Company is using its EPROM and EEPROM know-how to develop and produce a
broad portfolio of flash memory devices. The Group does not produce
DRAMS, a commodity memory product.
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The Programmable Products Group produces microcomponents
(including microcontrollers, microprocessors and digital signal
processors), digital semicustom devices and mixed analog/digital
semicustom devices.
The New Ventures Group identifies and develops new business
opportunities to complement the Company's existing businesses and
exploit its technological know-how, manufacturing capabilities and
global marketing team. The Group was formed in May 1994, and its
initial activities have focused on the manufacture and sale by the
Company's wholly owned subsidiary in the United States, SGS-THOMSON
Microelectronics, Inc. ("SGS-THOMSON U.S."), of x86 microprocessors
designed by Cyrix Corporation ("Cyrix").
As part of its activities outside the five principal products
groups, the Company also produces subsystems for industrial and other
applications.
SGS-THOMSON's products are manufactured and designed using a
broad range of manufacturing processes and proprietary design methods.
SGS-THOMSON uses all of the prevalent function-oriented process technologies,
including CMOS, bipolar and non-volatile memory technologies. In addition, by
combining basic processes, the Company has developed advanced systems-oriented
technologies that enable it to produce differentiated and application-specific
products, including BiCMOS technologies (bipolar and CMOS) for mixed-signal
applications and BCD technologies (bipolar, CMOS and DMOS) for intelligent power
applications. This broad technology portfolio, a cornerstone of the Company's
strategy for many years, enables the Company to meet the increasing demand for
"systems-on-a-chip" solutions. To complement this depth and diversity of process
and design technology, the Company also possesses a broad intellectual property
portfolio that it has used to enter into cross-licensing agreements with many
major semiconductor manufacturers.
In 1995, SGS-THOMSON has expanded its diversified
manufacturing infrastructure while improving the cost, quality and versatility
of its operations. SGS-THOMSON has applied 1994 and 1995 investments to build
and equip two 8-inch front-end manufacturing facilities in Crolles, France and
Phoenix, Arizona currently in operation, is applying 1995 investments to build
and equip an additional 8-inch front-end manufacturing facility in Catania,
Italy, not yet in operation, and to build a new back-end facility and design
center in Shenzhen, China through its joint venture created in 1994 with a
subsidiary of the Shenzhen Electronics Group. The Company also converted 4-inch
and 5-inch water fabs to 5-inch and 6-inch production and is commencing the
conversion and expansion from 6-inch to 8-inch production of a front-end
fabrication facility in Agrate, Italy. In addition, the Company has identified
two other 8-inch front-end wafer fabrication facilities, one of which will be in
Singapore, with the other one in Italy now under consideration. In 1995, the
Company approved the building and equipping of a new 8-inch 0.5 micron front-end
wafer fabrication plant (which will also be capable of 0.35 and 0.25 micron
production) in Rousset, France. The Company has many back-end manufacturing
activities in large and modern facilities in lower-cost areas in the
Mediterranean and Asia Pacific regions and has focused on continually improving
the productivity of all of its manufacturing facilities. SGS-THOMSON has also
centralized the management of its manufacturing operations and implemented
computer-integrated manufacturing systems and statistical process control
techniques. The Company is fostering a corporate-wide Total Quality Management
("TQM") culture that defines a common set of objectives and
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performance measurements for employees in all geographic regions, at every stage
of product design, development and production for all product lines.
SGS-THOMSON is international in scope, operating front-end
and/or back-end manufacturing facilities in Europe, the United States, the
Mediterranean and Asia Pacific regions, and conducting research and development
primarily in France and Italy, and design, marketing and sales activities in
each of the electronic industry's major economic regions: Europe, the United
States, the Asia Pacific region and Japan. In 1995, approximately 46% of the
Company's net revenues originated in Europe (compared to approximately 46% in
1994), approximately 24% in the Americas (compared to approximately 26% in
1994), 26% in the Asia Pacific region (compared to approximately 23% in 1994)
and approximately 4% in Japan (compared to approximately 5% in 1994). In 1995,
approximately one-third of the 6-inch equivalent wafers manufactured by the
Company were manufactured outside of Europe and more than one-half of the
Company's employees were located outside of Europe.
SGS-THOMSON believes that strategic alliances are critical to
success in the semiconductor industry, and has entered into strategic alliances
with customers, other semiconductor manufacturers and a major supplier of design
software. The Company has entered into several strategic customer alliances,
including alliances with Alcatel, Seagate Technology and Thomson Multimedia.
Customer alliances provide the Company with valuable systems and application
know-how and access to markets for key products, while allowing the Company's
customers to share some of the risks of product development with the Company and
gain access to the Company's process technologies and manufacturing
infrastructure. Alliances with other semiconductor manufacturers permit costly
research and development and manufacturing resources to be shared to mutual
advantage for joint technology development. The Company has also entered into
technology development alliances with customers and other manufacturers,
including Northern Telecom in North America to develop advanced 0.5 micron
BiCMOS mixed-signal technologies and Mitsubishi Electric Corporation
("Mitsubishi") in Japan to develop a family of 16 Mbit flash memories for mass
storage applications. The Company has also entered into an agreement with
Philips Semiconductors to jointly develop sub-micron CMOS logic processes in
Crolles, France through 1997.
History
The Company was formed in June 1987 as a result of the
combination of the non-military business of Thomson Semiconducteurs, the
microelectronics business of the French state-controlled defense electronics
company Thomson-CSF, and SGS Microelettronica, the microelectronics business
owned by STET-Societa Finanziaria Telefonica S.p.A. ("STET"), the Italian
state-controlled telephone company. Since its formation, the Company has
significantly broadened and upgraded its range of products and technologies and
has strengthened its manufacturing and distribution capabilities in Europe,
North America, and the Asia Pacific region, while at the same time restructuring
its operations to improve efficiency.
At the time of the Company's formation, SGS Microelettronica
was the 20th largest semiconductor company in the world by revenues and the
non-military semiconductor business of Thomson Semiconducteurs was of comparable
size. At its inception, the Company was among the world's leading suppliers of
intelligent power devices and bipolar power transistors and a leading supplier
to the telecommunications industry. SGS Microelettronica's
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strengths in power products, industrial products and
automotive products and its presence in the emerging Asia Pacific market
complemented Thomson Semiconducteurs' strengths in mixed-signal processing,
telecommunications devices and consumer electronics, its presence in the North
American market and its strong intellectual property portfolio, which included
patents acquired when Thomson Semiconducteurs purchased substantially all of the
assets of Mostek Corporation in 1985. The combination of the two European-based
semiconductor businesses provided opportunities to realize operating
efficiencies, consolidate global operations and better withstand downturns in
the cyclical semiconductor industry, and facilitated the financing of research
and development and capital expenditures necessary to compete effectively with
the world's leading semiconductor companies.
Following the Company's formation, management implemented a
comprehensive plan to rationalize the Company's operations, pursuant to which a
variety of measures were taken to reduce fixed costs, improve product quality
and increase yields. Between 1987 and 1992, the Company closed or sold ten
manufacturing plants, and certain back-end and front-end production processes
were shifted to lower cost facilities in the Mediterranean and Asia Pacific
regions. Although it maintained a broad product line, the Company rationalized
its product offerings and process technologies and focused on increasing its
production of differentiated products. Management also standardized the
Company's management information systems and consolidated management,
administrative and sales staffs for the combined group.
To increase its presence in the microprocessor market, in
April 1989 SGS-THOMSON acquired Inmos Ltd. ("Inmos"), a British semiconductor
company that was founded in 1978 and purchased by Thorn EMI plc ("Thorn EMI") in
1984. In connection with its sale of Inmos to the Company, Thorn EMI and an
affiliate acquired a 10% interest in SGS-THOMSON which has since been sold. In
October 1989, the Company purchased the former microwave semiconductor business
of Microwave Semiconductor Corporation, and in March 1993, SGS-THOMSON acquired
the low current thyristors and triacs business of Tag Semiconductors Limited, a
subsidiary of Raytheon Company.
Since its formation in 1987, the Company has maintained its
commitment to research and development despite significant cost reductions
during the Company's restructuring, particularly in 1990 and 1991 when the
Company experienced losses. Management initially combined the research and
development staffs of the predecessor companies and focused its expanded
research and development resources on strategic products, applications and
technologies. Beginning in 1993, the Company significantly increased its capital
investments as part of a long-term program to upgrade and increase its
manufacturing capabilities at existing plants and to build new facilities.
To provide the Company with a stronger capital structure, the
Company's shareholders contributed capital totalling $800 million between 1988
and 1993. The Company used these funds in part to finance restructuring costs
and to reduce net debt (total debt less cash and cash equivalents and marketable
securities) from a high of approximately $905 million at December 31, 1991 to a
positive financial position of approximately $65 million at December 31, 1995.
In December, 1994, the Company completed a registered public offering of Common
Shares (the "Initial Public Offering") with net proceeds to the Company of
approximately $198.7 million. In the Initial Public Offering, the Company sold
9,606,240 shares and the selling shareholders sold 11,393,760 shares at the
initial price to public of $22.25 a share. In October
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1995, the Company completed a secondary public offering of Common Shares in the
U.S. and in France (the "Offering") with net proceeds to the Company of
approximately $371.6 million. In the Offering, the Company sold 8,960,000 shares
and the selling shareholders sold 11,740,000 shares at a price to public of
$43.5 a share. See Item 4: "Control of Registrant". In February 1996, the
Company also completed an offering of Common Shares to certain of its employees
worldwide (the "Employee Offering"). Common Shares offered in the Employee
Offering were offered at a 5% discount to the market price as of January 5,
1996. In addition, eligible employees who purchased shares in the Employee
Offering ("Participating Employees") and who hold those shares at least until
the first anniversary of the day on which such shares were issued to such
Participating Employees, will be entitled to purchase, for each lot of ten
shares purchased in the Employee Offering, one additional share (a "Bonus
Share") at a discounted price. The purchase price of each Bonus Share will be
the $ or FF equivalent of NLG 13.75, which is the nominal value per share.
Participating Employees purchased an aggregate of 243,710 Common Shares in the
Employee Offering, at a price per share of U.S. $33.72 or FF169.10.
Industry Background
Semiconductors are the basic building blocks used to create an
increasing variety of electronic products and systems. Since the invention of
the transistor in 1948, continuous improvements in semiconductor process and
design technologies have led to smaller, more complex and more reliable devices
at a lower cost per function. As performance has increased and size and cost
have decreased, semiconductors have expanded beyond their original primary
applications, computer systems, to applications such as telecommunications
systems, automotive products, consumer goods and industrial automation and
control systems. In addition, system users and designers have demanded systems
with more functionality, higher levels of performance, greater reliability and
shorter design cycle times, all in smaller packages at lower costs. These
demands have resulted in increased semiconductor content as a percentage of
system cost. Calculated on the basis of TAM (as defined below) as a percentage
of worldwide revenues from production of electronic equipment according to
published industry data (which for purposes of this annual report are data
published by Dataquest, Inc. ("Dataquest")), semiconductor pervasiveness has
increased from 9.0% in 1991 to 19.0% in 1995. The demand for electronic systems
has also expanded geographically with the emergence of new markets, particularly
in the Asia Pacific region.
Semiconductor sales have increased significantly over the long
term but have experienced significant cyclical variations in growth rates.
According to trade association data (which for all purposes of this annual
report are World Semiconductor Trade Statistics ("WSTS")), worldwide sales of
all semiconductor products (the total available market or "TAM") increased from
$17.8 billion in 1983 to an estimate of $144.4 billion in 1995 (growing at a
compound annual rate of approximately 19%, according to trade association data),
while the market for products produced by the Company (the serviceable available
market, or "SAM" which, prior to 1995 consisted of the TAM without DRAMS,
microprocessors and opto-electronic products and commencing in 1995 and for all
prior periods compared therewith includes microprocessors as a result of the
Company's production of x86 products) increased from approximately $15.0 billion
in 1983 to an estimate of $97.5 billion in 1995 (growing at a compound annual
rate of approximately 17.0%). The TAM increased 42.0% in 1995, with sales in the
Asia Pacific region, the Americas, Europe and Japan increasing by 54.0%, 40.0%,
43.0%
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and 35.0%, respectively. In 1995, approximately 32.5% of all semiconductors were
shipped to the Americas, 27.5% to Japan, 19.5% to Europe, and 20.5% to the Asia
Pacific region.
Historically, cyclical changes in production capacity in the
semiconductor industry and demand for electronic systems have resulted in
pronounced cyclical changes in the level of semiconductor sales and fluctuations
in prices and margins for semiconductor products from time to time. However,
certain significant changes in the industry could contribute to continued growth
over the long term notwithstanding cyclical variations from period to period.
Such changes include the development of new semiconductor applications,
increased semiconductor content as a percentage of total system cost, emerging
strategic partnerships, growth in the electronic systems industry in the Asia
Pacific region.
Business Outlook
Historically, cyclical changes in production capacity in the
semiconductor industry and demand for electronic systems have resulted in
pronounced cyclical changes in the level of semiconductor sales and fluctuations
in prices and margins for semiconductor products from time to time. However,
certain significant changes in the industry could contribute to continued growth
over the long term notwithstanding cyclical variations from period to period.
Such changes include the development of new semiconductor applications,
increased semiconductor content as a percentage of total system cost, emerging
strategic partnerships and growth in the electronic systems industry in the Asia
Pacific region.
The Company is entering 1996 in a healthy financial and
business condition, with demand exceeding its capacity in the majority of its
product portfolio. It is, however, evident that the industry has started a
correction from the extraordinary growth of recent years.
Certain industry analysts expect a growth rate for 1996 well
below that of 1995, with disparities in growth among different product families.
Based on information available to date, the Company believes that the market has
already experienced a strong correction in the first half of 1996, and the
Company expects this correction to continue at least into the second half of the
year. The Company cannot anticipate how deep or how long this correction phase
will be. The Company is confident, however, that the heavy emphasis on
differentiated products in its portfolio, its strong customer base and strategic
alliances, together with its well diversified sales base, both in terms of
applications and geography, should allow SGS-THOMSON to again outpace the rate
of growth in its served market.
The above statements contained in this "Business Outlook" are
forward looking statements that involve a number of risks and uncertainties. In
addition to the factors discussed above, among the other factors that could
cause actual results to differ materially are the following: the cyclicality of
the semiconductor and electronic systems industries; capital requirements and
the availability of funding; competition; new product development and
technological change; manufacturing risks; order cancellations or reduced
bookings by key customers or distributors; intellectual property developments,
international events, currency fluctuations; problems in obtaining adequate raw
materials on a timely basis; and the loss of key personnel. Unfavorable changes
in the above or other factors discussed under "Risk Factors" listed from time to
time in the Company's SEC reports, including in the Company's Prospectus dated
October 18, 1995 (pages 9 through 16), could materially affect the Company.
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Semiconductor Classifications
The process technologies, levels of integration, design
specificity, functional technologies and applications for different
semiconductor products vary significantly. As differences in these
characteristics have increased, the semiconductor market has become highly
diversified as well as subject to constant and rapid change. Semiconductor
product markets may be classified according to each of these characteristics.
Semiconductors can be manufactured using different process
technologies, each of which is particularly suited to different applications.
Since the mid-1970s, the two dominant processes have been bipolar (the original
technology used to produce integrated circuits) and CMOS (complementary
metal-oxide-silicon). Bipolar devices typically operate at higher speeds than
CMOS devices, but CMOS devices consume less power and permit more transistors to
be integrated on a single IC. While bipolar semiconductors were once used
extensively in large computer systems, CMOS has become the most prevalent
technology, particularly for devices used in personal computer systems. In
connection with the development of new semiconductor applications and the
demands of system designers for more integrated semiconductors, advanced
technologies have been developed during the last decade that are particularly
suited to more systems-oriented semiconductor applications. For mixed-signal
applications, BiCMOS technologies have been developed to combine the high speed
and high voltage characteristics of bipolar technologies with the low power
consumption and high integration of CMOS technologies. For intelligent power
applications, BCD technologies have been developed that combine bipolar, CMOS
and DMOS technologies. Such systems-oriented technologies require more process
steps and mask levels, and are more complex than the basic function-oriented
technologies. The use of systems-oriented technologies requires knowledge of
system design and performance characteristics (in particular, analog and
mixed-signal systems and power systems) as well as expertise and experience with
several semiconductor process technologies.
Semiconductors are often classified as either discrete devices
(such as individual diodes or transistors) or integrated circuits (in which
thousands of functions are combined on a single "chip" of silicon to form a more
complex circuit). Compared to the market for ICs, there is typically less
differentiation among discrete products supplied by different semiconductor
manufacturers. Also, discrete markets have generally grown at slower, but more
stable, rates than IC markets.
Semiconductors may also be classified as either standard
components or application-specific ICs ("ASICs"). Standard components are used
by a large group of systems designers for a broad range of applications, while
ASICs are designed to perform specific functions in specific applications.
Generally, there are three types of ASICs: full-custom devices, semicustom
devices and application-specific standard products ("ASSPs"). Full custom
devices are typically designed to meet the particular requirements of one
specific customer. Semicustom devices are more standardized ICs that can be
customized with efficient CAD tools within a short design cycle time to perform
specific functions. ASSPs are standardized ASICs that are designed to perform
specific functions in a specific application, but are not proprietary to a
single customer.
The two basic functional technologies for semiconductor
products are analog and digital. Analog (or linear) devices monitor, condition,
amplify or transform analog signals, which
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are signals that vary continuously over a wide range of values. Analog circuits
are critical as an interface between electronic systems and a variety of real
world phenomena such as sound, light, temperature, pressure, weight or speed.
Electronics systems continuously translate analog signals into digital data, and
vice versa.
The analog semiconductor market consists of a large and
growing group of specific markets that serve numerous and widely differing
applications, including applications for automotive systems, instrumentation,
computer peripheral equipment, industrial controls, communications devices,
video products and medical systems. Because of the varied applications for
analog circuits, manufacturers typically offer a greater variety of devices to a
more diverse group of customers. Compared to the market for commodity digital
devices such as standard memory and logic devices, the analog market is
characterized by longer product life cycles, products that are less vulnerable
to technological obsolescence, and lower capital requirements due to the use of
mature manufacturing technologies. Such characteristics have resulted in growth
rates that have been less volatile than growth rates for the overall
semiconductor industry.
Digital devices perform binary arithmetic functions on data
represented by a series of on/off states. Historically, the digital IC market
has been primarily focused on the fast growing markets for computing and
information technology systems. Increasing demands for high-throughput computing
and networking and the proliferation of more powerful personal computers and
workstations in recent years have led to dramatic increases in digital device
density and integration. As a result, significant advances in electronic system
integration have occurred in the design and manufacture of digital devices.
There are two major types of digital ICs: memory products and
logic devices. Memory products, which are used in electronic systems to store
data and program instructions, are generally classified as either volatile
memories (which lose their data content when power supplies are switched off) or
nonvolatile memories (which retain their data content without the need for
constant power supply). Volatile memories are used to store data in virtually
all computer systems, from large and mid-range computers to personal computers
and workstations. The primary volatile memory devices are DRAMs, which accounted
for more than 76.0% of semiconductor memory sales in 1995. Nonvolatile memories
are typically used to store program instructions that control the operation of
microprocessors and electronic systems. The primary nonvolatile memory devices
are EPROMs, flash memories and EEPROMs. Memory products are typically standard,
general purpose ICs that can be manufactured in high volumes using basic CMOS
processes, and they are generally differentiated by cost and physical and
performance characteristics, including data capacity, die size, power
consumption and access speed.
Logic devices process digital data to control the operation of
electronic systems. The largest segment of the logic market, standard logic
devices, include microprocessors, microcontrollers and digital signal
processors. Microprocessors are the central processing units of computer
systems. Microcontrollers are complete computer systems contained on single
integrated circuits that are programmed to control the operation of
electromechanical systems by processing input data from electronic sensors and
generating electronic control signals. Digital signal processors ("DSPs") are
parallel processors used for high complexity, high speed real-time computations
in a wide variety of applications, including digital cellular telephone systems
and data compression systems. Standard devices are intended to be utilized by a
large group of systems designers for a broad range of applications.
Consequently, standard devices usually
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contain more functions than are actually required and, therefore, may not be
cost-effective for certain specific applications. In addition to standard logic
devices, a broad range of full-custom, semicustom and ASSP logic devices has
been developed for a wide variety of applications. These devices are typically
designed to meet particular customer requirements. Compared to memory markets,
logic device markets are much more differentiated and dependent upon
intellectual property and advanced product design skills.
Analog/digital (or "mixed-signal") ICs combine analog and
digital devices on a single chip to process both analog signals and digital
data. Historically, analog and digital devices have been developed separately as
they are fundamentally different and it has been technically difficult to
combine analog and digital devices on a single IC. System manufacturers have
generally addressed mixed-signal requirements using printed circuit boards
containing many separate analog and digital circuits acquired from multiple
suppliers. However, system designers are increasingly demanding system level
integration in which complete electronic systems containing both analog and
digital functions are integrated on a single IC.
Mixed-signal ICs are typically characterized as analog ICs due
to their similar market characteristics, including longer product life cycles,
diverse applications and customers and more stable growth through economic
cycles as compared to digital devices. However, certain parts of the
mixed-signal market are becoming higher volume markets as the increasing use of
mixed-signal devices has enhanced the options of system designers and
contributed to the development of new applications, including multimedia, video
conferencing, automotive, mass storage and personal communications.
- 10 -
The Semiconductor Market
The following tables set forth information with respect to
worldwide semiconductor sales by type of semiconductor and geographic region:
Worldwide Semiconductor Sales (1) Compound Annual Growth Rates(2)
--------------------------------------------------------------------------------------
1983 1988 1993 1995 83-88 88-93 83-93 93-95
---- ---- ---- ---- ----- ----- ----- -----
(in millions)
Integrated Circuits........ $13,335 $35,893 $66,018 $126,056 21.9% 13.0% 17.3% 38.2%
Analog (linear and mixed-
signal)................. 2,875 7,228 10,673 16,646 20.2 8.1 14.0 24.6
Digital
Logic................. 6,712 17,750 34,079 55,953 21.5 13.9 17.6 28.2
Memory
DRAM................ 1,741 6,390 13,140 40,833 29.7 15.5 22.4 76.3
Others.............. 2,007 4,524 8,127 12,624 17.7 12.4 15.0 24.6
----- ----- ----- ------ ---- ---- ---- ----
Total Memory.... 3,748 10,914 21,267 53,457 23.8 14.3 19.0 58.5
----- ------ ------ ------ ---- ---- ---- ----
Total digital......... 10,460 28,664 55,346 109,410 22.3 14.1 18.1 40.6
Discrete................... 3,696 6,999 8,637 14,004 13.6 4.3 8.9 27.3
Opto-electronics........... 736 2,113 2,654 4,344 23.5 4.7 13.7 27.9
--- ----- ----- ---- --- ---- ----
TAM..................... $17,767 $45,005 $77,309 144,404 20.4% 11.4% 15.8% 36.7%
======= ======= ======= ======= ==== ==== ==== ====
Europe..................... $3,320 $8,104 $14,599 $28,199 19.5% 12.5% 15.9% 39.0%
Americas................... 7,761 13,418 24,744 46,998 11.6 13.1 12.3 37.8
Asia Pacific............... 1,150 5,374 14,168 29,540 36.1 21.4 28.5 44.4
Japan...................... 5,536 18,109 23,798 39,667 26.7 5.6 15.7 16.1
----- ------ ------ ------ ---- --- ---- ----
TAM................... $17,767 $45,005 $77,309 $144,404 20.4% 11.4% 15.8% 36.7%
======= ======= ======= ======== ==== ==== ==== =====
<FN>
- ----------
(1) Source: WSTS.
(2) Calculated using end points of the periods specified.
</FN>
During the 1960s and 1970s, the development of semiconductor
process technologies was critical to the success of participants in the
industry. As process technologies matured, manufacturing sciences became
important; in the 1980s, the emphasis shifted to increasing production volumes
and yields and lowering production costs. The large capital expenditures and
other resources required during this period to develop advanced manufacturing
capabilities resulted in a stratification of the industry between broad range
suppliers operating multiple front-end and back-end manufacturing facilities and
specialty niche players operating small wafer fabs or subcontracting wafer
production.
With the continuing development of new semiconductor
applications and increasing demands of system designers for more integrated
systems-oriented products, semiconductor manufacturers must continually improve
their core technology and manufacturing competencies.
- 11 -
In addition, the increasing diversity and complexity of semiconductor products,
the demands of technological change, and the costs associated with keeping pace
with industry developments have contributed to the growth of cooperative product
design and development and manufacturing alliances with customers as well as
among semiconductor suppliers. Alliances with customers provide the manufacturer
with valuable systems and application know-how and access to markets for key
products, while allowing the manufacturer's customers to share some of the risks
and benefits of product development. Customers also gain access to the
manufacturer's process technologies and manufacturing infrastructure. Alliances
with other semiconductor manufacturers permit costly research and development
and manufacturing resources to be shared to mutual advantage for joint
technology development.
To compete as a broadline semiconductor manufacturer,
management believes that it is important to have: (i) a broad and diverse
customer base; (ii) a diversified product portfolio (including analog, digital
mixed-signal and power products) and experience in several application markets;
(iii) a broad range of process technologies (including basic function-oriented
and advanced systems-oriented technologies); (iv) an efficient, quality, global
manufacturing infrastructure; (v) global marketing and technical support; and
(vi) a worldwide network of strategic alliances with customers and other
semiconductor manufacturers.
Strategy
Since the Company's formation in 1987, management's objectives
have been to become one of the world's top ten semiconductor suppliers and to
achieve operating results better than the average of the top ten semiconductor
suppliers. To achieve these objectives, the Company has focused on using its
core technology and manufacturing competencies to produce innovative, quality
and cost-effective products. The key elements of the Company's strategy are set
forth below.
Maintain Broad Customer Base and Increase Customer
Penetration. The Company works with its key customers to identify evolving needs
and new applications and to develop innovative products and product features.
The Company also seeks to use its access to key customers as a supplier of
application-specific products to establish itself as a supplier across a broad
range of products. The Company maintains a geographically diverse customer base
across a broad range of market applications. Regional sales and marketing
organizations operate in each of Europe, the United States, the Asia Pacific
region and Japan. In addition, the Company's central strategic marketing team
and key account management teams serve selected multinational customers.
Offer Diversified Product Portfolio in Evolving Application
Markets. The Company offers a diversified product portfolio and develops
products for a wide range of market applications to reduce its dependence on any
single product, industry or application market. As a broad range supplier, the
Company provides its customers with a single source of supply for multiple
product needs. In the telecommunications market, the Company is developing
advanced BiCMOS and high frequency bipolar processes and focusing on products
for the switching equipment and new, fast-growing telecommunications markets,
including the digital cellular telephone market. In the computer market, the
Company produces dedicated products, memories, microcontrollers, semicustom
devices and microprocessors for use in all types of computer systems. The
Company is focusing particularly on the development of a family of flash memory
- 12 -
products and dedicated products for computer monitors, disk drives and printers.
In addition, the Company has started to manufacture and market x86
microprocessors. In the consumer products market, the Company is developing
dedicated products for television and home entertainment systems and devices for
new multimedia applications, including digital video decoders. In the automotive
market, management is using its BCD processes to develop dedicated products for
a wide range of automotive applications, and is currently focusing on developing
strategic relationships with U.S. automobile manufacturers. In the industrial
market, the Company is developing innovative power products, particularly for
use in lighting systems and switch mode power supplies.
Emphasize Differentiated and Analog ICs. Within its
diversified product portfolio, the Company has focused on developing products
that exploit its technological strengths, including differentiated ICs (which
the Company defines as being its dedicated products, semicustom devices and
microcontrollers). Differentiated ICs foster close relationships with customers,
resulting in early knowledge of their evolving requirements and opportunities to
access their markets for other products, and are less vulnerable to competitive
pressures than standard commodity products. Differentiated ICs accounted for
just over 51% of the Company's net revenues in 1995 compared to approximately
48% in 1994. The Company also targets applications that require substantial
analog and mixed-signal content and can exploit the Company's system level
expertise. Analog ICs (including mixed-signal ICs), the majority of which are
also differentiated ICs, accounted for approximately 46% of the Company's 1995
net revenues (compared to approximately 43% in 1994), while discrete devices
accounted for approximately 17% of the Company's 1995 net revenues (compared to
approximately 15% in 1994). In recent years, analog ICs and discrete devices
have experienced less volatility in sales growth rates and average selling
prices than the overall semiconductor industry.
Expand Strategic Alliances. Consistent with its belief that
strategic alliances are critical to success in the semiconductor industry, the
Company has entered into such alliances with customers, other semiconductor
manufacturers and a major supplier of design software. The Company has entered
into several customer strategic alliances, including with Alcatel, Seagate
Technology and Thomson Multimedia. Alliances with customers provide the Company
with valuable systems and application know-how and access to markets for key
products, while allowing the Company's customers to share some of the risks of
product development with SGS-THOMSON and to gain access to the Company's process
technologies and manufacturing infrastructure. Alliances with other
semiconductor manufacturers are generally designed to permit costly research and
development and manufacturing resources to be shared to mutual advantage for
joint technology development. Technology development alliances have been formed
with customers and other manufacturers, including Philips Semiconductors in
Europe to develop sub-micron CMOS technologies and Northern Telecom in North
America to develop advanced 0.5 micron BiCMOS mixed-signal technologies and
Mitsubishi in Japan to develop a family of 16 Mbit flash memories for mass
storage applications. The Company has also entered into an alliance with Cadence
Design Systems Inc. for the development of advanced CAD tools. Such design tools
are critical to the timely and cost-effective development of new and advanced
products.
Expand and Improve Manufacturing Capabilities. One of the
Company's principal goals is to expand its diversified manufacturing
infrastructure while seeking to achieve further improvements in the cost,
quality and versatility of its operations. To expand capacity, SGS-
- 13 -
THOMSON has applied 1994 and 1995 investments to build and equip two 8-inch
front-end manufacturing facilities in Crolles, France and Phoenix, Arizona
currently in operation, is applying 1995 investments to build and equip an
additional 8-inch front-end manufacturing facility in Catania, Italy, not yet in
operation, and to build a new back-end facility and design center in Shenzhen,
China through its joint venture created in 1994 with a subsidiary of the
Shenzhen Electronics Group. The Company also converted 4-inch and 5-inch water
fabs to 5-inch and 6-inch production and is starting the conversion and
expansion from 6-inch to 8-inch production of a front-end fabrication facility
in Agrate, Italy. In addition, the Company has identified two other 8-inch
front-end wafer fabrication facilities, one of which will be in Singapore, with
the other one in Italy now under consideration. In 1995, the Company approved
the building and equipping of a new 8-inch 0.5 micron front-end wafer
fabrication plant (which will also be capable of 0.35 and 0.25 micron
production) in Rousset, France. In 1995, approximately 76.0% of the wafers
manufactured by SGS-THOMSON were manufactured on 5-inch or larger wafers. The
Company is fostering a corporate-wide Total Quality Management ("TQM") culture
that defines a common set of objectives and performance measurements for
employees in all geographic regions, at every stage of product design,
development and production for all product lines. SGS-THOMSON has established
front-end and back-end manufacturing facilities in each of Europe, the United
States and the Mediterranean and Asia Pacific regions. The Company's
geographically diverse facilities allow it to shift production to accommodate
variable production requirements.
Develop Advanced Process and Design Technologies. The Company
intends to continue to exploit its expertise and experience with a wide range of
process and design technologies to develop more advanced technologies. The
Company is committed to continuing to increase research and development
expenditures in the future. Despite significant cost reductions following the
Company's formation in 1987 and particularly during 1990 and 1991 when the
Company experienced losses, management did not reduce research and development
spending. The Company is using its memory products as the focal point of its
process development efforts due to their standardized design features,
manufacturability and potential high volumes. Technological advances in the
areas of transistor performance and interconnection technologies are being
developed through the Company's logic products and semicustom devices. The
Company is currently producing 0.6 micron 16 Mbit EPROMs and three volt,
triple-metal layer semicustom devices with densities of up to one million gates.
It is also working closely with many of its key customers on developing
easy-to-use design equipment for specific applications. The Company is
developing advanced and standardized design tools for its CMOS processes as well
as libraries of macrofunctions and megafunctions for many of its products, and
is focusing on improving its concurrent engineering practices to better
coordinate design activities and reduce overall time-to-market.
- 14 -
Customers and Applications
SGS-THOMSON designs, develops, manufactures and markets over
3,000 main types of products that it sells to more than 1,500 customers. To many
of its key customers the Company provides a wide range of products, including
dedicated products, discrete devices, memory products and programmable products.
The Company's position as a strategic supplier of application-specific products
to certain customers fosters close relationships that provide it with
opportunities to supply such customers' requirements for other products,
including discrete devices, programmable products and memory products.
- 15 -
The following table sets forth certain of the Company's
customers in 1995 and certain applications for its products:
- -------------------------------------------------------------------------------------------------------------------
Telecommunications
Customers: Alcatel Fujitsu Italtel Philips
AT&T Gemplus Motorola Racal-Milgo
Daewoo Goldstar Nokia Samsung
Ericsson Hayes Northern Telecom Siemens
------------------------------------------------------------------------------------------
Applications: Answering machines ISDN controllers
Central office switching systems Modems
Chips for smartcards PBX systems
Digital cellular telephones Telephone sets (corded and cordless)
- -------------------------------------------------------------------------------------------------------------------
Computer Systems
Customers: ACER Cyrix Matsushita Smith-Corona
Bull DEC Olivetti Tatung
Canon Epsom Quantum Western Digital
Compaq Hewlett-Packard Seagate Technology Xerox
Conner Peripherals IBM
------------------------------------------------------------------------------------------
Applications: Chips for smartcards Optical scanners
Disk drives Photocopiers
Monitors Printers
Network controllers
Automotive
Customers: BMW Daimler-Benz Ford Marelli
Bosch Delco Hyundai Valeo
Chrysler Fiat
------------------------------------------------------------------------------------------
Applications: Alternator regulators Ignition circuits
Airbags Injection circuits
Antiskid braking systems Instrument
Automotive entertainment systems Electric Motor Controllers
Body and chassis electronics Multiplex wiring kits
Central locking systems Transmission control systems
Engine management systems
- -------------------------------------------------------------------------------------------------------------------
Consumer Products
Customers: Canal Plus Goldstar Philips Sony
Canon Grundig Pioneer Thomson Multimedia
Creative Technology Kenwood Samsung Zenith
Daewoo Matsushita Sanyo
General Instrument Nokia Sharp
------------------------------------------------------------------------------------------
Applications: Audio power amplifiers Graphic equalizers
Audio processors Pay television decoders
Cable television systems Satellite receiver decoding circuits
Compact disc players Set up boxes
Digital video encoders and decoders Televisions and monitors
Video cassette recorders
- -------------------------------------------------------------------------------------------------------------------
Industrial and
Other Applications
Customers: Astec Emerson Philips Siemens
Asea Brown Boveri Mannesman Schlumberger
------------------------------------------------------------------------------------------
Applications: Battery chargers Motor controllers
Industrial automation and control systems Power supplies
Intelligent power switches Smartcard readers
Lighting systems (lamp ballasts) Switch mode power supplies
- -------------------------------------------------------------------------------------------------------------------
- 16 -
No customer accounted for more than 5% of the Company's net
revenues in 1995 and sales to the Company's top ten customers accounted for
approximately 34% of the Company's net sales in 1995, the Company has several
large customers, certain of whom have entered into strategic alliances with the
Company. Many of the Company's key customers operate in cyclical businesses and
have in the past, and may in the future, vary order levels significantly from
period to period. In addition, approximately 22.7% of the Company's net revenues
in 1995 were made through distributors. There can be no assurance that such
customers or distributors, or any other customers, will continue to place orders
with the Company in the future at the same levels as in prior periods. The loss
of one or more of the Company's customers or distributors, or reduced bookings
by its key customers or distributors, could adversely affect the Company's
operating results. In addition, in a declining market the Company has in the
past and may in the future be requested to reduce prices to limit the level of
order cancellations. Despite price reductions, however, in an industry downturn
order cancellations may be expected, particularly by distributors and for
commodity products.
Products and Technology
SGS-THOMSON designs, develops, manufactures and markets a
broad range of products used in a wide variety of microelectronic applications,
including telecommunications systems, computer systems, consumer goods,
automotive products and industrial automation and control systems. The Company's
products include standard commodity components, full custom devices, semicustom
devices and ASSPs for analog, digital and mixed-signal applications.
Historically, the Company has not produced DRAMs or, until recently, x86
microprocessors. The SAM represented approximately 67.5% of the TAM in 1995,
compared to 84% of the TAM in 1983. While the TAM increased at a compound annual
growth rate of approximately 19% from $17.8 billion in 1983 to an estimate of
$144.4 billion in 1995, the SAM increased at a compound annual growth rate of
approximately 17% from $15.0 billion to an estimate of $97.5 billion during the
same period.
The Company's products are organized into five principal
product groups: Dedicated Products, Discrete and Standard ICs, Memory Products,
Programmable Products and the New Ventures Group.
Dedicated Products Group
The Dedicated Products Group designs, develops and
manufactures application-specific products using advanced bipolar, CMOS,
mixed-signal and power technologies. The Group offers complete system solutions
to customers in several application markets. As the largest of SGS-THOMSON's
product groups, the Dedicated Products Group generated revenues of $1,350.5
million in 1995 (an increase of 38.9% over 1994 revenues), representing
approximately 38% of SGS-THOMSON's 1995 revenues. Approximately 37.0% of the
Group's revenues in 1995 were generated in Europe, while approximately 22.4%,
36.7%, and 3.9% were generated in the Americas, the Asia Pacific region, and
Japan, respectively. Many of the dedicated products sold to the Asia Pacific
region are sold to U.S.-based original equipment manufacturers located in the
region. All of the Group's products are ASSPs or full custom devices.
- 17 -
The Dedicated Products Group works closely with customers to
develop application-specific products using SGS-THOMSON's technologies and
manufacturing capabilities. The breadth of the Group's customer and application
base provides it with a source of stability in the cyclical semiconductor
market. In addition, the Company's position as a strategic supplier of
application-specific products fosters close relationships that provide it with
opportunities to supply such customers' requirements for other products,
including discrete devices, programmable products and memory products.
The Group particularly emphasizes dedicated ICs for
telecommunications, audio, automotive, power and computer applications.
The Group is organized into the following four product
divisions: (i) telecommunications; (ii) computer and industrial; (iii) audio and
automotive; and (iv) video. In addition, the Company created a business unit to
design and manufacture products for the emerging digital video processing
industry.
Telecommunications Products. According to published industry
data, in 1995 SGS-THOMSON was the world's second largest supplier of dedicated
telecommunications ICs (1995 total market of $2.5 billion). The Company's
telecommunications products are used primarily in telephone sets, modems and
subscriber line interface cards (SLICs) for digital central office switching
equipment. The Group is targeting applications in mobile communications networks
and telephone sets and asynchronous transfer mode ("ATM") communication systems.
Computer and Industrial Products. SGS-THOMSON's computer and
industrial products include components for computer peripheral equipment,
facsimile machines, photocopiers, industrial automation systems and lighting
applications. Its key products are power ICs for motor controllers and
read/write amplifiers, intelligent power ICs for spindle motor control and head
positioning in computer disk drives and battery chargers for portable electronic
systems, particularly mobile telephone sets.
Audio and Automotive Products. SGS-THOMSON's audio products
include audio power amplifiers, audio processors and graphic equalizer ICs. The
Company has sold more than 1.2 billion audio power amplifier ICs since 1972.
The Company's automotive products include alternator
regulators, antiskid braking systems, ignition circuits, injection circuits,
multiplex wiring kits and products for body and chassis electronics, engine
management and instrumentation systems.
Video Products. SGS-THOMSON produces ICs for television sets,
videocassette recorders, satellite receivers and pay-tv decoders. The Company is
focusing on developing products for applications in the growing U.S. satellite
and cable television markets.
Image Processing. SGS-THOMSON has recently created a business
unit to design and manufacture products for the emerging digital video
processing industry. Emerging digital video technologies offer a number of
advantages over traditional analog video, including the ability to compress
video data for transmission and storage, to transmit and reproduce video data
without perceptible image degradation and to randomly access and edit video
data.
- 18 -
Despite the advantages of digital video, its widespread
adoption has been constrained by the lack of high-performance, cost-effective
compression devices and by the absence of digital video compression standards.
Video compression, which uses complicated mathematical algorithms operating at
high speeds to encode the large amounts of data that result from digitizing
video signals, is both highly complex and technically challenging. Digital video
compression technology is expected to contribute to the development of a number
of new or enhanced applications in the consumer electronics, computer and
communications markets, including video CD players, interactive game consoles
and video conferencing systems.
The Company's image processing business unit is delivering
large volumes of Motion Picture Experts Group ("MPEG") decoder ICs suitable for
video CD products, personal computers, multimedia and digital TV applications.
These products implement the MPEG 1 standard for CD ROM, video CD and personal
computer applications and the MPEG 2 standard for digital TV applications (both
cable and satellite digital TV). This unit is also developing products for
emerging video phone applications.
Discrete and Standard ICs Group
The Discrete and Standard ICs Group designs, develops, and
manufactures discrete power devices, power transistors, standard logic and
linear ICs, and RF products (which were transferred to the Discrete and Standard
ICs Group in May 1994). Including revenues from RF products, the Group generated
revenues of $838.0 million in 1995 (an increase of 31.7% over 1994 revenues),
representing approximately 24% of SGS-THOMSON's net revenues. Approximately
52.6% of the Group's 1995 revenues were generated in Europe, while approximately
21.1%, 25.2%, and 1.1% were generated in the Americas, the Asia Pacific region,
and Japan, respectively. According to published industry data, based on 1995
revenues SGS-THOMSON is among the top three suppliers of power transistors (1995
total market of $5.2 billion) and thyristors (1995 total market of $807
million).
The Group's discrete and standard products are manufactured
using mature technological processes. Although such products are less capital
intensive than the Company's other principal products, the Company is
continuously improving product performance and developing new product features.
The Group has a diverse customer base, and a large percentage of the Group's
products are sold through distributors.
Discrete Power Devices. SGS-THOMSON manufactures and sells a
variety of discrete power devices, including rectifiers, protection devices and
thyristors (SCRs and triacs). The Company's devices are used in various
applications, including in particular telecommunications systems (telephone
sets, modems and line cards), household appliances and industrial systems (motor
control and power control devices). More specifically, rectifiers are used in
voltage converters and voltage regulators, protection devices are used to
protect electronic equipment from power supply spikes or surges, and thyristors
are used to vary current flows through a variety of electrical devices,
including lamps and household appliances.
Power Transistors. SGS-THOMSON designs, manufactures and sells
power transistors, which (like the Company's discrete power devices) operate at
high current and voltage levels in a variety of switching and pulse mode
systems. The Company has three power
- 19 -
transistor divisions: bipolar transistors, power MOSFETs (metal-oxide-silicon
field effect transistors) and new power transistors such as IGBTs.
The Company's bipolar power transistors are used in a variety
of high-speed, high-voltage applications, including SMPS (switch mode power
supply) system, television/monitor deflection circuits and lighting systems.
According to published industry data, on the basis of 1995 revenues, SGS-THOMSON
is among the leading suppliers of bipolar transistors, including RF power
transistors, (1995 total market of $2.6 billion). The Company introduced power
MOSFETs in 1991 to extend the use of power transistors to new high-frequency,
high-voltage applications, including automotive components, crowbar protection
devices, resonant converters and power factor correction devices. According to
industry data, the Company has been ranked number five worldwide in the fast
growing segment of the power MOSFETs.
The Company also offers a family of VIPower (vertical
integration power) products, as well as omnifets and application-specific
devices. VIPower products exhibit the operating characteristics of power
transistors while incorporating full thermal, short circuit and overcurrent
protection and allowing logic level input. VIPower products are used in consumer
goods (lamp ballasts) and automotive products (ignition circuits, central
locking systems and transmission circuits). Omnifets are power MOSFETs with
fully-integrated protection devices that are used in a variety of sophisticated
automotive and industrial applications. Application-specific devices are
semicustom ICs that integrate diodes, rectifiers and thyristors on the same
chip, thereby providing cost-effective and space-saving components with a short
design time.
Standard Logic and Linear ICs. The Company produces a variety
of bipolar and HCMOS logic devices, including clocks, registers, gates and
latches. Such devices are used in a wide variety of applications, including
increasingly in portable computers, computer networks and telecommunications
systems.
The Company also offers standard linear ICs covering a variety
of applications, including amplifiers, comparators, decoders, detectors,
filters, modulators, multipliers and voltage regulators.
Radio Frequency Products. The Company supplies components for
RF transmission systems used in television broadcasting equipment, radar
systems, telecommunications systems and avionic equipment. At present, most of
the Company's RF products are sold in the United States. The Company is
targeting new applications for its RF products, including two-way wireless
communications systems (in particular, cellular telephone systems) and
commercial radio communication networks for business and government
applications.
- 20 -
Memory Products Group
The Memory Products Group designs, develops and manufactures a
broad range of semiconductor memory products. The Memory Products Group
generated revenues of $662.5 million in 1995 (an increase of 15% over 1994
revenues), representing approximately 19% of SGS-THOMSON's 1995 revenues.
Approximately 44.5% of the Group's 1995 revenues were generated in Europe, while
approximately 25.4%, 16.6%, and 13.5% were generated in the Americas, the Asia
Pacific region, and Japan, respectively. According to published industry data,
on the basis of 1995 revenues, SGS-THOMSON was the leading producer of EPROMs
(1995 total market of $1.4 billion) and the leading supplier of EEPROMs (1995
total market of $1.3 million).
There are two basic types of memory devices, random access
memories ("RAMs") and read-only memories ("ROMs"). Data can be both read from
and written to RAMs, whereas data can only be read from, but not written to,
ROMs. RAMs are typically used in microprocessor systems to store data used in
the operation of such systems, whereas ROMs are typically used to store program
instructions that control the operation of microprocessors and electronic
systems.
The most common types of RAMs are DRAMs (dynamic RAMs) and
SRAMs (static RAMs). DRAMs are volatile memories that lose their data content
when power supplies are switched off, whereas SRAMs are volatile memories that
allow the storage of data in the memory array but without the need for clock or
refresh logic circuitry. SRAMs are roughly four times as complex as DRAMs (four
transistors per bit of memory compared to one transistor) and are significantly
more expensive than DRAMs per unit of storage. DRAMs are used in a computer's
main memory to temporarily store data retrieved from low cost external mass
memory devices such as hard disk drives. SRAMs are principally used as caches
and buffers between a computer's microprocessor and its DRAM-based main memory.
There are several types of read-only memories that offer
varying degrees of functionality at varying costs. ROMs are permanently
programmed when they are manufactured while programmable ROMs (PROMs) can be
programmed by system designers or end-users after they are manufactured.
Erasable PROMs (EPROMs) may be erased and reprogrammed several times, but to do
so EPROMs must be physically removed from electronic systems, exposed to
ultraviolet light, reprogrammed using an external power supply and then returned
to the systems. Electrically erasable PROMs (EEPROMs) can be erased byte by byte
and reprogrammed "in-system" without the need for removal. Using EEPROMs, a
system designer or user can program or reprogram systems at any time.
Programmable erasable ROMs ("flash" memories) are relatively
new products that represent an intermediate solution for system designers
between EPROMs and EEPROMs based on their cost and functionality. Flash memories
are typically less expensive than EEPROMs, but may be erased and rewritten. The
entire contents of a flash memory or large blocks of data (not individual bytes)
can be erased with a "flash" of current. Because flash memories can be erased
and reprogrammed electrically and in-system, they are more flexible than EPROMs
and, therefore, may replace EPROMs in many of their current applications. Flash
memories may also be used for solid state mass storage of data, a potentially
high volume application, and in other applications, including, in particular
mobile telephone systems. Flash memories are
- 21 -
smaller and use less power than the hard disk drives now commonly used for mass
data storage, and, therefore, are considered candidates to replace disk drives,
particularly in portable computers.
According to published industry data, the TAM for memory
devices in 1995 was approximately $53.4 billion, with DRAMs, SRAMs, ROMs,
EPROMs, flash and EEPROMs accounting for approximately 76.4%, 11.3%, 3.7%, 2.6%,
3.5% and 2.5% of the total, respectively.
The Company's Memory Products Group is organized into the
following divisions: (i) EPROMs; (ii) flash memories; (iii) EEPROMs and
application-specific memories; (iv) SRAMs; and (v) smartcard products.
EPROMs. SGS-THOMSON produces a broad range of EPROMs, from 16
Kbit to 16 Mbit. According to published industry data, SGS-THOMSON was the
world's leading supplier of EPROMS in 1995, with revenues of $337.3 million (a
decrease of 3% over 1994 revenues) or approximately 21.6% of worldwide EPROM
sales. The Company currently produces EPROMs using 0.5 micron CMOS technologies.
The EPROM market is a relatively mature, commodity-like
market. To compete in such market, the Company has focused on reducing die
sizes, improving manufacturing yields and reducing costs. SGS-THOMSON has been
successful in the world EPROM market primarily due to its non-volatile CMOS
manufacturing technologies, its assembly plants in Singapore and Malaysia, and
its large sales and distribution channels around the world.
Due to industry capacity limitations in 1993, EPROM prices
rose and backlog increased. With additional industry capacity coming on-line in
early 1994, EPROM prices and backlogs began declining in the second quarter of
1994 and continued declining during the remainder of the year. Prices remained
low in 1995 but improved in the beginning of 1996.
Flash Memories. The Company is using its EPROM and EEPROM
know-how to develop advanced flash memory products, and currently produces flash
memories up to 4 Mbit in size. The Company intends to develop a broad portfolio
of flash memory devices to cover all EPROM-like market needs, including 0.5
micron dual voltage and single voltage devices up to 16 Mbit. The Company also
intends to develop specific processes based on current technology to produce 64
Mbit 0.35 micron devices for the mass storage market. The Company is using its
flash memories and fast SRAMs as the focal point of its process development
efforts due to their standardized design features, manufacturability and
potential high volumes.
In May 1993, the Company entered into a strategic alliance
with Mitsubishi to jointly develop a family of compatible 16 Mbit dual voltage
flash memories for mass storage applications using 0.5 micron CMOS wafer process
technology and to standardize specific manufacturing processes. In addition, in
December 1994, SGS-THOMSON signed an agreement with Advanced Micro Devices Inc.
("AMD"), the supplier of approximately 24% of flash memories sold in 1994, to
cooperate in the definition of standards for future EPROM-like flash memory
products based on AMD's single-voltage architecture. The cooperation is intended
to help create an alternative industry standard to Intel's standard for flash
memory products and
- 22 -
thereby accelerate growth in the worldwide flash memory market. SGS-THOMSON and
AMD currently plan to independently develop compatible products around the
standard. The Company currently produces the 4 Mbit single voltage flash memory
device which is designed to the same specifications as the equivalent device
from AMD, with which it is pin-compatible, although built with a proprietary 0.6
um double-metal CMOS technology.
EEPROMs and Application-Specific Memories. The Company offers
1.2 micron serial EEPROMs up to 16 Kbit and parallel EEPROMs up to 64 Kbit.
Serial EEPROMs are the most popular type of EEPROMs and are generally used in
computer, automotive and consumer applications. Parallel EEPROMs account for a
smaller portion of the EEPROM market, being used mainly in telecommunications
equipment. SGS-THOMSON entered the parallel EEPROM market in late 1993. The
Company intends to work closely with its key customers and strategic allies to
identify and develop new application-specific memory devices using mixed
technologies.
SRAMS. The Company focuses on producing fast SRAMs and
specialty low power SRAMs, but not other more standardized types of SRAMs. The
Company's fast SRAMS are used as cache memories in computer systems and as main
memories in telecommunications systems. The Company produces fast SRAMs up to 1
Mbit with access speeds of 9 to 20 nanoseconds. The Company's low power SRAMs
are used as main memories in portable computers and telecommunications
equipment. The Company produces low power SRAMs up to 1 Mbit with access speeds
of 35 to 70 nanoseconds.
Smartcard Products. Smartcards are credit-card like devices
containing integrated circuits that store data and provide an array of security
capabilities. They are used in a wide and growing variety of applications,
including public pay telephone systems (primarily in France and Germany),
cellular telephone systems (primarily in Europe), bank cards (primarily in
France) and pay television systems (primarily in the United Kingdom and France).
Other potential applications include medical record applications, card-access
security systems and toll-access applications. SGS-THOMSON shipped more than 207
million units in 1995.
Smartcards incorporate a variety of products manufactured by
the Company, including microcontrollers, EPROMs, EEPROMs and flash memory
components. A key smartcard customer of the Company is Gemplus, a French company
that was formed in 1988 as a spinoff from the Company. The Company retained a
32% interest in Gemplus until 1992.
Programmable Products Group
The Programmable Products Group designs, develops and
manufactures microcomponents (including microcontrollers, microprocessors and
digital signal processors), digital semicustom devices, mixed analog and digital
semicustom devices. The Group generated revenues of $535.5 million in 1995 (an
increase of 40.4% over 1994), representing approximately 15% of SGS-THOMSON's
1995 revenues. Approximately 51.4% of the Group's 1995 revenues were generated
in Europe, while approximately 27.0%, 20.0%, and 1.6% were generated in the
Americas, the Asia Pacific region and Japan, respectively.
Microcomponents. The Company's microcomponents division
manufactures and sells microcontrollers, microprocessors and digital signal
processors.
- 23 -
Microcontrollers are complete computer systems contained on
single integrated circuits that are programmed to specific customer
requirements. They contain microprocessor cores as well as logic circuitry and
memory capacity. Microcontrollers control the operation of electronic and
electromechanical systems by processing input data from electronic sensors and
generating electronic control signals, and are used in a wide variety of
consumer products (alarm systems, household appliance controls and video
products), automotive systems (engine control and dashboard instrumentation),
computer peripheral equipment (disk drives, facsimile machines, printers and
optical scanners), industrial applications (motor drives and process
controllers), and telecommunications systems (telephones, answering machines and
digital cellular phones).
Based on its experience with a variety of second-sourced
microcontrollers, the Company has developed its complete "ST" family of
proprietary microcontroller products, ranging from the 8-bit ST6
microcontrollers to the 32-bit ST20 devices. The ST20 family is designed to
address the full spectrum of embedded processor applications, from computer
peripherals such as hard disk drives and laser beam printers to high volume
consumer appliances such as digital telephone handsets and digital satellite
receivers. SGS-THOMSON's microcontrollers draw on the Company's large product
and technology portfolios to combine logic devices, EPROMs, EEPROMs, flash
memories and various macrofunctions around a range of second-sourced and
proprietary cores. The Company has also developed a line of starter kits and
code generators and compilers that permit system designers to quickly and easily
implement the Company's microcontrollers into their electronic systems. The
Company is targeting emerging applications for microcontrollers, including
televisions, monitors, cable television and satellite receivers and cellular
telephones.
Microprocessors are the central processing units of computer
systems. The Company second-sources a variety of microprocessors developed by
other semiconductor manufacturers. The Company is currently developing a 64-bit
RISC microprocessor.
Digital signal processors ("DSPs") are parallel processors
used for high complexity, high speed real-time computations. DSPs are used in a
wide variety of applications, including answering machines, modems, digital
cellular telephone systems, audio processors and data compression systems.
SGS-THOMSON and its predecessors have been producing DSPs for more than ten
years. The Company recently introduced the D950-CORE, a fixed point DSP core
based upon the Company's 0.5 micron/3.3V triple-level-metal HCMOS5 technology
for a wide range of applications in the computer, telecommunications and
consumer markets. Examples of applications include mobile phones, telephone
answering machines, fax machines, modems, disk drives, video conferencing
systems and speech, sound, music and other multimedia functions.
Digital Semicustom Devices. Semicustom devices are ICs
containing standardized lines or arrays of transistors that can be configured or
interconnected to perform specific functions after a short design cycle time.
SGS-THOMSON manufactures a wide range of digital semicustom devices, including
high-speed low-voltage 0.5 micron CMOS triple-metal layer gate arrays, standard
cells and embedded arrays.
SGS-THOMSON's semicustom devices are supported by libraries of
cells, macro functions and design tools. SGS-THOMSON supports popular CAD tools
and platforms, and has strategic alliances with Cadence Design Systems, Inc. and
Synopsys, Inc. to develop
- 24 -
semicustom CAD tools. SGS-THOMSON is developing proprietary libraries for
semicustom devices for telecommunications, computer and consumer applications.
Mixed-Signal Semicustom Devices. SGS-THOMSON and its
predecessor companies have also manufactured mixed-signal BiCMOS semicustom gate
arrays, standard cells and embedded arrays since 1985. Mixed-signal devices
combine standard cells of digital gates and analog devices on the same
semicustom IC. Such devices can be used in a wide variety of analog/digital
applications, including computer peripherals, telecommunications products and
industrial systems.
New Ventures Group
SGS-THOMSON established the New Ventures Group in May 1994 to
bring together various major product initiatives that would otherwise have been
coordinated within and across individual product groups. The Group identifies
and develops new business opportunities to complement the Company's existing
businesses and exploit its technological know-how, manufacturing capabilities
and global marketing team. The Group's first activities have been the
manufacture and sale of x86 microprocessors designed by Cyrix. The Group is also
evaluating other business opportunities.
x86 microprocessors are the central processing units of
IBM-compatible personal computer systems (which accounted for more than 84% of
worldwide personal computer sales in 1995). SGS-THOMSON U.S. has manufactured
Cyrix-designed x86 chips since 1992 as a foundry for Cyrix. In 1995, SGS-THOMSON
U.S. produced x86 chips for the original equipment manufacturer market. The
Company is also focusing on developing improvements to its x86 products,
including size reduction and speed improvement, as well as future generations
such as the Cyrix 6x86.
The Company expects to be able to use microprocessor
technology, its broad range of other products and technologies and its strengths
in developing and marketing application-specific products to produce powerful
x86 core-based embedded applications and derivative products.
Sales, Marketing and Distribution
In 1995, the Company derived approximately 77% of its revenues
from sales directly to customers through its regional sales organizations
(compared to approximately 75% in 1994) and 23% of its revenues from sales
through distributors (compared to approximately 25% in 1994). SGS-THOMSON
operates regional sales organizations in Europe, North America, the Asia Pacific
region and Japan. In 1995, approximately 46% of the Company's revenues
originated in Europe (compared to approximately 46% in 1994), while 24%
originated in the United States (compared to approximately 26% in 1994), 26%
originated in the Asia Pacific Region (compared to approximately 23% in 1994)
and 4% originated in Japan (compared to approximately 5% in 1994). In 1995, no
customer accounted for more than 5% of the Company's net revenues.
- 25 -
The European region is divided into five main sales and
services districts: Central Europe (Germany and Austria), Northern Europe
(United Kingdom, Ireland and Scandinavia), Western Europe (France and the
Benelux countries), Southern Europe (Italy, Spain, Portugal) and Export Group.
The sales organization in each district is segmented by application market
(i.e., telecommunications, computer, consumer, automotive and industrial), while
marketing is segmented by product groups.
In North America, the sales and marketing team is organized
into six business units that are located near major centers of activity for
either a particular application or geographic region: automotive (Detroit,
Michigan), industrial and consumer (Chicago, Illinois), computer and peripheral
equipment (San Jose, California), communications (Dallas, Texas), distribution
(Boston, Massachusetts), and Latin America (Phoenix, Arizona). Each business
unit has a sales force that specializes in the relevant business sector. Each
business unit also provides product-related marketing and application support.
This structure allows SGS-THOMSON to monitor emerging applications, to provide
local design support, and to develop new products in conjunction with the
various product divisions as well as to develop new markets and applications
with its current product portfolio. A central marketing operation in Boston
provides market communications, data processing and customer quality services to
the whole region, while a logistics center in Phoenix supports the distribution
network in North America.
In the Asia Pacific region, sales and marketing is organized
by country and is managed from the Company regional sales headquarters in
Singapore. The Company has sales offices in Taiwan, Korea, China, Hong Kong,
India, Malaysia, Thailand and Australia. The Singapore sales organization
provides central marketing, customer service, technical support, shipping,
laboratory and design services for the entire region. In addition, there are
design centers in Taiwan, Korea and Hong Kong. In 1995, the Company established
a design center in India, the Company's largest design center outside of Europe,
which will principally cooperate in the design of advanced macrocells and
libraries for the Company's analog, digital and mixed signal technologies.
In Japan, substantially all of the Company's sales are made
through distributors, as is typical for foreign suppliers to the Japanese
market. Each distributor serves specific territories or customers and is
responsible for maintaining the minimum inventories required by Japanese
customers. The Company provides marketing and technical support services to
distributors through sales offices in Tokyo and Osaka. In addition, the Company
has established a design center and application laboratory in Tokyo. The design
center designs custom ICs for Japanese clients, while the application laboratory
allows Japanese customers to test SGS-THOMSON products in specific applications.
The Company's central marketing efforts are organized into a
central strategic marketing organization and a key account management
organization. The strategic marketing organization is organized by application
market. In addition, in July 1992 the Company created a series of initiatives
that it refers to as Golden Programs. These programs focus the Company's
multi-divisional and multi-area organizations on 13 key application markets
worldwide. Each Golden Program includes a team of personnel from corporate
strategic marketing, the product groups and divisions and the regional sales
offices. The Golden Program teams work closely with the Company's strategic
allies in each application market. The current Golden Programs
- 26 -
include television/terminals, memory disk drives, digital cellular telephones,
color television, power supply, line card, multimedia graphics, automobile
radio, monitors, satellite and cable television systems, lighting, engine
management and asynchronous transfer mode data communications.
In addition to the central strategic marketing team, the
Company has established key account management teams to serve key multinational
customers. The key account management teams work with the Company's regional and
divisional managers to provide a broad range of products to its major accounts
and to develop complete systems solutions for customers. The teams build
strategic relationships with the Company's major accounts that can lead to the
development of new products, increased access to evolving technologies and
enhanced knowledge of customer requirements.
Each of the four regional sales organizations operate
dedicated distribution organizations. To support the distribution network,
SGS-THOMSON operates logistic centers in Saint Genis, France, Phoenix, Arizona
and Singapore, and has made considerable investments in warehouse
computerization and logistics support.
The Company also uses distributors and representatives to
distribute its products around the world. Typically, distributors handle a wide
variety of products, including products that compete with SGS-THOMSON products,
and fill orders for many customers. Most of the Company's sales to distributors
are made under agreements allowing for price protection and/or the right of
return on unsold merchandise. The Company recognizes revenues when it ships
products to distributors. Sales representatives generally do not offer products
that compete directly with the Company's products, but may carry complementary
items manufactured by others. Representatives do not maintain a product
inventory; instead their customers place large quantity orders directly with
SGS-THOMSON and are referred to distributors for smaller orders.
Research and Development
Management believes that research and development is critical
to the Company's success and is committed to increasing research and development
expenditures in the future. Despite significant cost reductions following the
Company's formation in 1987, and particularly in 1990 and 1991 when the Company
experienced losses, management did not reduce research and development spending.
The table below sets forth information with respect to the Company's research
and development spending since 1991 (not including design center, process
engineering, pre-production or industrialization costs):
Year ended December 31,
-----------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(in millions, except percentages)
Expenditures ........................... $245.3 $260.9 $270.9 $338.3 440.3
as a percentage of net revenues....... 17.9% 16.6% 13.3% 12.8% 12.4%
As a result of the history of the Company, approximately 89% of the Company's
research and development expenses in 1995 were incurred in Europe, primarily in
France and Italy. See
- 27 -
"-- State Support for the Semiconductor Industry". As of December 31, 1995,
approximately 2,540 employees were employed in research and development
activities.
Central research and development units conduct research on the
basic VLSI technologies, packaging technologies and design tools that are used
by all product groups and the front-end manufacturing organization.
SGS-THOMSON'S central research and development activities are conducted in
Crolles, France, Agrate, Italy, and Carrollton, Texas. The central research and
development units participate in several strategic partnerships. The Company's
manufacturing facility at Crolles, France houses a research and development
center that is operated pursuant to a partnership agreement between the Company
and CNET, the research laboratory of France Telecom, an indirect shareholder of
the Company in 1993. This center is developing submicron process technologies.
The Company has also entered into an agreement with Philips Semiconductors to
jointly develop sub-micron CMOS logic processes in Crolles, France through 1997.
A technical center in New Delhi, India, develops design software and CAD
libraries and tools.
The Company has signed an agreement providing for a research
and development cooperation with GRESSI, the research and development Groupement
d'Interet Economique ("GIE") formed by the Centre National d'Etudes et des
Telecommunications ("CNET"), a research laboratory wholly owned by France
Telecom, and the Laboratoire d'Electronique de Technologie d'Instrumentation
("LETI"), a research laboratory of CEA, the parent of one of the indirect
shareholders of the Company. The objectives of the cooperation is to develop
know-how on innovative aspects of VLSI technology evolution which can be
transferred to industrial applications, and to address the development of
innovative process steps and process modules to be used in future generations of
VLSI products. The cooperation agreement is based upon a pluriannual plan
through 1998, and the Company is expected to bear half of the program's total
cost. See Item 13: "Management's Interest in Certain Transactions".
In addition to central research and development, each
operating division also independently conducts research and development
activities on specific processes and products.
State Support for the Semiconductor Industry
Due to the importance of the semiconductor industry, various
government authorities in the world, including the European Commission and
individual countries in Europe, have established programs for the funding of
research and development, innovation, industrialization and training in the
industry. In addition, many countries grant various forms of tax relief, direct
grants and other incentives to semiconductor companies as well as other
industries to encourage investment. The Company has structured its operations to
benefit from such programs and incentives and expects to continue to do so in
the future. Unlike certain of its competitors, however, the Company does not
receive significant direct or indirect financing from defense development
programs.
The main European programs in which the Company is involved
include: (i) the joint European research program called JESSI, (ii) European
Union research and development projects such as ESPRIT (European Strategic
Programme for Information Technology) and RACE (Research and Development in
Advanced Communications Technologies for Europe), (iii)
- 28 -
national programs for research and development and industrialization in the
electronics industries, and (iv) investment incentive programs for the economic
development of certain regions. The pan-European programs are generally open to
eligible companies operating and investing in Europe and cover an extended
period. In Italy, both electronics and economic development programs are open to
eligible companies regardless of their ownership or country of incorporation.
JESSI is a European cooperative project in microelectronics
among several countries that covers the period 1988 through 1996 and involves
more than 80 companies. ESPRIT started in 1983 and is being extended through
1998 within the fourth framework program of the European Commission on
Information and Communication Technologies (ICT). In Italy, the "Programma
Nazionale per la Microelettronica" has 18 participants, and various programs for
intervention in the "Mezzogiorno" (southern Italy) are open to eligible
companies, including non-European companies, operating in the region and
regulated by specific laws. Italian programs often cover several years, but
funding is typically subject to annual budget appropriation. In France, support
for microelectronics is provided to over 30 companies manufacturing or using
semiconductors. The amount of support under French programs is decided annually
and subject to budget appropriation.
In addition, management expects to have the opportunity to
take part in the future in European "structural funds" that are intended to
furnish important support through 1999 to dedicated regions in many European
countries, and provide priorities in funding for productive investment, training
and job creation. These funds are available to eligible companies, including
non-European companies, operating in the dedicated regions.
As a result of the history of the Company, its research and
development facilities and activities are mainly concentrated in France and
Italy, and the substantial majority of the Company's state funding has been
derived from programs in such countries. Umbrella agreements with the Republics
of France and Italy, which set forth the parameters of state support under the
national programs, currently run from 1992 through 1996 and require, among other
things, compliance with EC regulations and annual and project-by-project reviews
and approvals. The agreements are based on the maintenance of an equilibrium in
the levels of research and development and related expenditures between the two
countries.
Public authority funding for research and development are
reported in "Other Income and Expenses" in the Company's consolidated statements
of income. See Note 20 to the Consolidated Financial Statements. Such funding
has totalled $84.2 million, $80.1 million and $89.6 million in the years 1993,
1994 and 1995, respectively. Public funding for industrialization costs (which
include certain costs incurred to bring prototype products to the production
stage) is offset against expenses in computing cost of sales, and has the effect
of increasing the Company's gross profit. Such funding of industrialization
costs has totalled $20.4 million, $19.3 million and $11.8 million in 1993, 1994
and 1995, respectively. See Note 20 to the Consolidated Financial Statements.
Government support for capital expenditures funding has totalled $24.5 million,
$40.4 million and $64.5 million in the years 1993, 1994 and 1995, respectively.
Such funding has been used to support the Company's capital investment; while
receipt of these funds is not directly reflected in the Company's results of
operations, the resulting lower amounts recorded in property, plant and
equipment reduce the level of depreciation recognized by the Company.
- 29 -
Low interest financing has been made available (principally in
Italy) under programs such as the Italian Republic's Fund for Applied Research,
established in 1968 for the purpose of supporting Italian research projects
meeting specified program criteria. At year-end 1994 and 1995, the Company had
$133.2 million and $115.4 million, respectively, of indebtedness outstanding
under state-assisted financing programs at an average interest cost of 2.9% and
2.64%, respectively. See Note 15 to the Consolidated Financial Statements.
Funding for programs in France and Italy is subject to annual
appropriation, and if such governments were unable to provide anticipated
funding on a timely basis or if existing government-funded programs were
curtailed or discontinued, such an occurrence could have a material adverse
effect on the Company's business, operating results and financial condition.
From time to time the Company has experienced delays in the receipt of funding
under these programs. As the availability and timing of such funding are
substantially outside the Company's control, there can be no assurance that the
Company will continue to benefit from such government support, that funding will
not be delayed from time to time, that sufficient alternative funding would be
available if necessary or that any such alternative funding would be provided on
terms as favorable to the Company as those previously provided.
Various programs that provide different forms of financial
support and incentives (such as research and development grants, low interest
loans, capital investment support and tax incentives) for companies in the
semiconductor industry are offered in a number of countries. In connection with
its long term expansion plans, management believes that opportunities for such
financial support and incentives may be available to it in countries outside
France and Italy.
Intellectual Property
Intellectual property rights which apply to various Company
products include patents, copyrights, trade secrets, trademarks and maskwork
rights. SGS-THOMSON owns more than 1,000 original invention patents or pending
patent applications, most of which have been registered in several countries
around the world. In 1995, the Company filed 420 original patent applications
around the world. Management believes that its intellectual property represents
valuable property and intends to protect the Company's investment in technology
by enforcing all of its intellectual property rights.
The Company has entered into several patent cross-licenses
with several major semiconductor companies, consisting primarily of most of the
major Japanese semiconductor companies.
Pursuant to a 1977 license agreement (the "Intel License
Agreement"), SGS-THOMSON U.S. is licensed to make, have made, use and sell (in
addition to other rights) products that practice all Intel patents filed prior
to 1999 for the life of such patents. The Intel License Agreement was originally
entered into by Mostek Corporation ("Mostek") and Intel. Thomson
Semiconducteurs, one of the constituent companies of the current Company,
acquired Mostek assets in 1985 and SGS-THOMSON U.S. succeeded to the interest of
Mostek under the Intel License Agreement upon the Company's formation in 1987.
SGS-THOMSON U.S.'s succession rights under the Intel License Agreement were
upheld in a court judgment rendered
- 30 -
in July 1992 which is now final as well as in a court judgement dated December
30, 1994 which has been confirmed in appeal.
In January 1994, SGS-THOMSON U.S. and Cyrix entered into a
non-exclusive production and license agreement (the "Cyrix License Agreement")
pursuant to which SGS-THOMSON U.S. agreed to produce Cyrix-designed x86 chips to
sell to Cyrix for resale as Cyrix-branded products. In addition, Cyrix granted
SGS-THOMSON U.S. a licence to sell (as SGS-THOMSON products) a proportion of the
chips that it makes available to Cyrix and to use Cyrix architecture to produce
application-specific ICs. The Cyrix License Agreement extends to future
generations of x86 products. Cyrix and SGS-THOMSON U.S. signed an amendment to
the Cyrix License Agreement in July 1995 that allows SGS-THOMSON U.S. to
manufacture and sell to third parties additional quantities of Cyrix products at
least through 1997. SGS-THOMSON U.S. may continue to manufacture and sell
application-specific ICs using Cyrix architecture after termination of the
agreement. In April 1994, Cyrix entered into x86 production and license
agreements with IBM.
The Company's success depends in part on its ability to obtain
patents, licenses and other intellectual property rights covering its products
and manufacturing processes. To that end, the Company has acquired certain
patents and patent licenses and intends to continue to seek patents on its
inventions and manufacturing processes. The process of seeking patent protection
can be long and expensive, and there can be no assurance that patents will issue
from currently pending or future applications or that, if patents are issued,
they will be of sufficient scope or strength to provide meaningful protection or
any commercial advantage to the Company. In addition, effective copyright and
trade secret protection may be unavailable or limited in certain countries.
Litigation, which could demand financial and management resources, may be
necessary to enforce patents or other intellectual property rights of the
Company.
Also, there can be no assurance that litigation will not be
commenced in the future against the Company regarding patents, mask works,
copyrights, trademarks or trade secrets, or that any licenses or other rights to
necessary intellectual property could be obtained on acceptable terms. The
failure to obtain licenses or other intellectual property rights, as well as the
expense or outcome of litigation, could adversely affect the Company's results
of operations or financial condition. The Company has from time to time
received, and it may in the future receive, communications alleging possible
infringement of certain patents and other intellectual property rights of others
and it is currently the defendant in a lawsuit charging the Company with patent
infringement. Regardless of the validity or the successful assertion of such
claims, the Company could incur significant costs with respect to the defense
thereof which could have a material adverse effect on the Company's results of
operations or financial condition. See Item 3: "Legal Proceedings".
Backlog
The Company's sales are made primarily pursuant to standard
purchase orders that are generally booked from one to twelve months in advance
of delivery. Quantities actually purchased by customers, as well as prices, are
subject to variations between booking and delivery to reflect changes in
customer needs or industry conditions.
- 31 -
Although the Company's backlog has increased significantly in
1995 in an improved semiconductor market, in a declining market the Company has
in the past and may in the future be requested to reduce prices to limit the
level of order cancellations. Despite price reductions, however, in an industry
downturn order cancellations may be expected, particularly by distributors and
for commodity products. The Company's level of backlog is therefore not
necessarily a reliable indicator of the level of future billings.
SGS-THOMSON also sells certain products to key customers
pursuant to frame contracts. Frame contracts are annual fixed-price contracts
with customers setting forth the terms of purchase and sale of specific
products. These contracts allow the Company to schedule production capacity in
advance and allow customers to manage their inventory levels consistent with
just-in-time principles while shortening the cycle times required to produce
ordered products. Orders under frame contracts are also subject to risks of
price reduction and order cancellation.
Competition
Markets for the Company's products are highly competitive.
While only a few companies compete with SGS-THOMSON in all of the Company's
product lines, the Company faces significant competition in each of its product
lines. SGS-THOMSON competes with major international semiconductor companies,
some of which have substantially greater financial and other resources than the
Company with which to pursue engineering, manufacturing, marketing and
distribution of their products. Smaller niche semiconductor companies are also
increasing their participation in the semiconductor market. Competitors include
manufacturers of standard semiconductors, application-specific ICs and fully
customized ICs, including both chip and board-level products, as well as
customers who develop their own integrated circuit products.
Some of the Company's competitors are also its customers.
The Company's primary competitors include Advanced Micro
Devices, Inc., Hitachi, Intel Corporation, Motorola, Inc., National
Semiconductor Corporation, Nippon Electric Company, Ltd., Philips
Semiconductors, Samsung, Siemens, Texas Instruments Incorporated and Toshiba.
The market for the Company's new x86 microprocessors is currently dominated by
Intel Corporation.
The Company competes in different product lines to various
degrees on the basis of price, technical performance, product features, product
system compatibility, customized design, availability, quality and sales and
technical support. The Company's ability to compete successfully depends on
elements both within and outside of its control, including successful and timely
development of new products and manufacturing processes, product performance and
quality, manufacturing yields and product availability, customer service,
pricing, industry trends and general economic trends.
The market for the Company's products is characterized by
rapidly changing technology. Therefore, the Company's success is highly
dependent upon its ability to develop complex new products on a cost-effective
basis, to introduce them in the marketplace on a timely basis, and to have them
selected for design into products of leading systems manufacturers. SGS-THOMSON
has committed and intends to continue to commit substantial resources to the
- 32 -
development of new products. Because new product development commitments must be
made well in advance of sales, however, new product decisions must anticipate
both future demand and the technology that will be available to supply such
demand. Delays in developing new products with anticipated technological
advances or in commencing volume shipments of new products may have an adverse
effect on the Company's business. In addition, there can be no assurance that
new products, if introduced, will gain market acceptance or will not be
adversely affected by new technological changes or new product announcements by
others. See "-- Research and Development".
In recent years the Company has introduced, among other new
products, dedicated products for several applications, including, in particular,
telecommunications, computer peripheral, and automotive applications, power
MOSFETS for high-frequency and high-voltage applications, Omnifets (power
MOSFETS with fully integrated protection devices). In 1995, the Company
introduced a multimedia accelerator (co-designed and developped by NVIDIA
Corporation) for the high volume multimedia personal computer market, a digital
signal processing core for 0.5 micron ASICs (DSP 950) and the ST20 family of
compatible 0.5 micron 32-bit microprocessor cores. The Company also continually
strives to improve the operating performance and design features of many of its
products.
According to published industry data, SGS-THOMSON was the
world's leading supplier of EPROMs in 1995 with revenues of $337.3 million, a
decrease of 3% over 1994 revenues. The EPROM market is a relatively mature
commodity market. Flash memory products may replace EPROMs in many applications
in the second half of the 1990s. The Company currently supplies flash memory
products up to 4 Mbit, and has entered into an agreement with Mitsubishi to
jointly develop a family of 16 Mbit flash memories. The Company is also
developing a new generation of digital video decompression chips, a 64-bit RISC
microprocessor and a 0.7 micron BiCMOS mixed-signal standard cell. There can be
no assurance, however, that the Company's flash memories, x86 microprocessors or
other new products will be successfully developed or produced or that they will
achieve market acceptance or contribute significantly to the Company's revenues.
The market for the Company's new x86 microprocessors is dominated by Intel
Corporation.
The Company's future success is also dependent in part upon
its ability to develop and implement new design and process technologies.
Semiconductor design and process technologies are subject to rapid technological
change, and require large expenditures for capital investment and research and
development. The Company is developing advanced and standardized design tools
for its CMOS processes as well as libraries of macrofunctions and megafunctions
for many of its products, and is focusing on improving its concurrent
engineering practices to better coordinate design activities and reduce overall
time-to-market. If the Company experiences substantial delays in developing new
design or process technologies or inefficiently implements production increases
or transitions, the Company's results of operations could be adversely affected.
Employees
As of December 31, 1995, the Company employed approximately
25,468 people, of whom approximately 5,035 were employed in France, 5,117 were
employed in Italy, 575
- 33 -
were employed in the rest of Europe, 2,439 were employed in the United States,
4,370 were employed in Malta and Morocco and 7,933 were employed in Singapore,
Malaysia and Japan. As of December 31, 1995, approximately 2,540 employees were
engaged in research and development, 1,300 in marketing and sales, 17,954 in
manufacturing, 1,522 in administration and general services and 2,152 in
divisional functions.
The Company's future success will depend, in part, on its
ability to continue to attract, retain and motivate highly qualified technical,
marketing, engineering and management personnel. Unions are present in France,
Italy, Malta, Morocco and Singapore. The Company has not experienced any
significant strikes or work stoppages in recent years, other than in connection
with national strikes in Italy, and management believes that the Company's
employee relations are good.
Environmental Matters
The Company's manufacturing operations use many chemicals and
gases and the Company is subject to a variety of governmental regulations
related to the use, storage, discharge and disposal of such chemicals and gases
and other emissions and wastes. Consistent with the Company's TQM principles,
the Company has established proactive environmental policies with respect to the
handling of such chemicals and gases and emissions and waste disposals from its
manufacturing operations. The Company has engaged outside consultants to audit
its environmental activities and has created environmental management teams,
information systems, education and training programs, and environmental
assessment procedures for new processes and suppliers. In 1995, four of the
Company's plants, Kirkop, Malta, Toa Payoh, Singapore, Rancho Bernardo, United
States and Rennes, France, were certified for the Eco-Management and Audit
Source Standard ("EMAS").
Although the Company has not suffered material environmental
claims in the past and believes that its activities conform to presently
applicable environmental regulations, in all material respects, environmental
claims or the failure to comply with present or future regulations could result
in the assessment of damages or imposition of fines against the Company,
suspension of production or a cessation of operations.
Item 2: Description of Property
SGS-THOMSON currently operates 17 manufacturing facilities
around the world. The table below sets forth certain information with respect to
SGS-THOMSON's current manufacturing facilities, products and technologies.
Front-end manufacturing facilities are wafer fabrication plants and back-end
facilities are assembly, packaging and final testing plants.
- 34 -
Location Products Technologies
-------- -------- ------------
Front-end Facilities:
Crolles, France Semicustom devices and dedicated 8-inch 0.7/0.35 micron CMOS and
products 1.2/0.35 micron BiCMOS; and R&D
on submicron technologies in
conjunction with CNET and Philips
Semiconductors
Phoenix, Arizona x86 microprocessors and other VLSI 8-inch 0.5/0.35 micron CMOS
products
Agrate, Italy EPROMSs, EEPROMs, semicustom Fab 1 - 6-inch 0.8/0.6 micron CMOS
devices, microprocessors and Fab 2 - 6-inch 2.0/1.2 micron BiCMOS and
dedicated products BCD
Fab 3- 6-inch
0.65/0.35 micron CMOS
pilot line being
converted to 8-inch
Rousset, France Microcontrollers, EEPROMs and 6-inch 0.8 micron CMOS
smartcard products
Catania, Italy Power transistors, smart devices and Fab 1 - 5-inch 3 micron bipolar power
audio and automotive dedicated Fab 2 - 5-inch 3/4 micron power MOS/BCD
products (being converted to 6-inch)
Fab 3 - 6-inch 4/6/1 micron pilot line
Rennes, France Dedicated and power products 5-inch 2.0 micron BiCMOS, BCD
and bipolar
Grenoble, France(1) Dedicated products and semicustom 4-inch 2.0/1.2 micron BiCMOS
devices
Castelletto, Italy Smart power BCD 5-inch 4.0/1.2 micron bipolar and
mixed BCD pilot line (being
converted to 6-inch)
Tours, France Thyristors, diodes and application- Fab 1 - 4-inch discrete
specific discretes Fab 2 - 4-inch discrete
Ang Mo Kio, Singapore Dedicated products, microcontrollers Fab 1 - 5-inch 2 micron CMOS
and commodity products Fab 2 - 5-inch 6 micron bipolar standard
Fab 3 - 5-inch 3 micron bipolar complex
Carrollton, Texas Memories, microprocessors and Fab 1 - 4-inch 1.2 micron CMOS and
semicustom devices BiCMOS (being converted to 6-inch)
Fab 2 - 6-inch 0.6 micron CMOS
Rancho Bernardo, California(2) CMOS/BiCMOS telecommunications 4-inch 3 micron CMOS/BiCMOS
ICs
Back-end Facilities:
Muar, Malaysia Broad range
Kirkop, Malta Broad range
Toa Payoh, Singapore Broad range
Ain Sebaa, Morocco Discrete semiconductors
Bouskoura, Morocco Subsystems
<FN>
- ----------
(1) The closure of the Grenoble front-end facility (originally scheduled to be
closed after the Crolles facility became fully operational) has been
postponed due to capacity requirements in light of current market
conditions.
(2) This facility was acquired by the Company from Northern Telecom on January
1, 1994 in connection with entering into a strategic alliance with Northern
Telecom.
</FN>
In 1995, approximately 63.0% of the 6-inch equivalent wafers
manufactured by SGS-THOMSON were manufactured in Europe, 25.0% in the Asia
Pacific region, and 12.0% in the United States. The major hubs for European
manufacturing and product design and
- 35 -
development are located in Agrate, Italy and Crolles, France. In the United
States, the Company's main manufacturing facility is located in Carrollton,
Texas. In the Asia Pacific region, the Company operates a front-end wafer fab in
Singapore and back-end facilities in Singapore and Muar, Malaysia.
To expand capacity, SGS-THOMSON has applied 1994 and 1995
investments to build and equip two 8-inch front-end manufacturing facilities in
Crolles, France and Phoenix, Arizona currently in operation, is applying 1995
investments to build and equip an additional 8-inch front-end manufacturing
facility in Catania, Italy, not yet in operation, and to build a new back-end
facility and design center in Shenzhen, China through its joint venture created
in 1994 with a subsidiary of the Shenzhen Electronics Group. The Company also
converted 4-inch and 5-inch water fabs to 5-inch and 6-inch production and is
starting the conversion and expansion from 6-inch to 8-inch production of a
front-end fabrication facility in Agrate, Italy. In addition, the Company has
identified two other 8-inch front-end wafer fabrication facilities, one of which
will be in Singapore, with the other one in Italy now under consideration. In
1995, the Company approved the building and equipping of a new 8-inch 0.5 micron
front-end wafer fabrication plant (which will also be capable of 0.35 and 0.25
micron production) in Rousset, France. In 1995, approximately 76.0% of the
wafers manufactured by SGS-THOMSON were manufactured on 5-inch or larger wafers.
In 1994, the Company created a joint venture with a subsidiary
of the Shenzhen Electronics Group ("SEG") that is building and will operate a
back-end manufacturing facility and design center in the Futian free-trade zone
of Shenzhen in southern China. SGS-THOMSON owns a 60% interest in the joint
venture, with a subsidiary of SEG owing the remaining 40%. Construction of the
plant is being completed and equipment installation is scheduled to begin in
1996. The Company and SEG plan to invest initially approximately $77 million in
the joint venture. SEG is a diversified export-oriented electronics company
controlled by the Shenzhen Municipal Government that manufactures communications
equipment, computers and electronic products and components and engages in
import-export trading, financial investment management and real estate.
Although each fabrication plant is dedicated to specific
processes, the Company's strategy is to have multiple plants for key process
families. The Company subcontracts some back-end assembly and testing
operations.
Manufacturing Risks
The Company's manufacturing processes are highly complex,
require advanced and costly equipment and are continuously being modified in an
effort to improve yields and product performance. Impurities or other
difficulties in the manufacturing process can lower yields. Although the
Company's increased manufacturing efficiency has been an important factor in its
improved results of operations, as is common in the semiconductor industry, the
Company has from time to time experienced production difficulties that have
caused delivery delays and quality control problems. No assurance can be given
that the Company will be able to increase manufacturing efficiency in the future
to the same extent as in the past or that the Company will not experience
production difficulties in the future.
- 36 -
In addition, during the recent period of high revenue growth
for the Company, the Company's manufacturing facilities, particularly back-end
assembly, packaging and testing facilities, have been operating at high
capacity. SGS-THOMSON has applied 1994 and 1995 investments to build and equip
two 8-inch front-end manufacturing facilities in Crolles, France and Phoenix,
Arizona currently in operation, is applying 1995 investments to build and equip
an additional 8-inch front-end manufacturing facility in Catania, Italy, not yet
in operation, and to build a new back-end facility and design center in
Shenzhen, China through its joint venture created in 1994 with a subsidiary of
the Shenzhen Electronics Group. The Company also converted 4-inch and 5-inch
water fabs to 5-inch and 6-inch production and is starting the conversion and
expansion from 6-inch to 8-inch production of a front-end fabrication facility
in Agrate, Italy. In addition, the Company has identified two other 8-inch
front-end wafer fabrication facilities, one of which will be in Singapore, with
the other one in Italy now under consideration. In 1995, the Company approved
the building and equipping of a new 8-inch 0.5 micron front-end wafer
fabrication plant (which will also be capable of 0.35 and 0.25 micron
production) in Rousset, France. As is common in the semiconductor industry, the
Company has from time to time experienced difficulty in ramping up production at
new facilities or effecting transitions to new manufacturing processes and,
consequently, has suffered delays in product deliveries or reduced yields. There
can be no assurance that the Company will not experience manufacturing problems
in achieving acceptable yields and/or product delivery delays in the future as a
result of, among other things, capacity constraints, construction delays,
ramping up production at new facilities, upgrading or expanding existing
facilities or changing its process technologies, any of which could result in a
loss of future revenues. The Company's operating results could also be adversely
affected by the increase in fixed costs and operating expenses related to
increases in production capacity if revenues do not increase commensurately.
SGS-THOMSON's principal executive office is located in Saint
Genis, France, near Geneva, Switzerland. The Company also operates nine research
and development centers and 26 design centers. The Company maintains regional
sales headquarters in Saint Genis, France, Boston, Massachusetts, Singapore and
Tokyo, Japan, and has 44 sales offices in 22 countries throughout Europe, North
America and the Asia Pacific region. In general, the Company owns its
manufacturing facilities and leases most of its sales offices.
Item 3: Legal Proceedings
As is the case with many companies in the semiconductor
industry, the Company has from time to time received communications alleging
possible infringement of certain intellectual property rights of others.
Irrespective of the validity or the successful assertion of such claims, the
Company could incur significant costs with respect to the defense thereof which
could have a material adverse effect on the Company's results of operations or
financial condition.
The Company is currently involved in certain legal
proceedings, including litigation charging the Company with patent infringement.
The Company does not believe that the ultimate resolution of pending legal
proceedings will have a material adverse effect on its financial condition.
- 37 -
In May 1995, an investigation was ordered by the prosecutor of
the court of Catania, Italy of the research and development consortium CORIMME.
SGS-THOMSON Microelectronics s.r.l. holds a 662/3% voting interest in the
consortium with the University of Catania holding the remaining 331/3% voting
interest. A notice (Informazione di Garanzia) of the commencement of a criminal
investigation was served on the President of CORIMME and to the Board of
Directors and Statutory Auditors of CORIMME. Under Italian law, criminal
liability cannot be attributed to a company and therefore notices relating to
investigation of acts or events generally attributable to a company are sent to
the legal representative of such company (i.e. the president or the statutory
bodies). Investigations are still on going with regard to the dispute concerning
value-added-tax ("VAT") between CORIMME and the Italian tax authority, and with
regard to alleged misuse of public funds by SGS-THOMSON Microelectronics s.r.l.
In order to become eligible for government research and development funding, the
CORIMME consortium was required to submit detailed plans specifying the
objectives of a program and the manner in which the funding would be used. The
Company's management believes that the inquiry to date has focused on whether
part of the funds and other resources designated for research were used for
production or otherwise in violation of applicable requirements and on the
proper use of, and allocation of expenses (such as rent and utilities) for,
resources and the allocation of revenues between CORIMME and the Company. In
another matter concerning a dispute on VAT deductions, CORIMME was granted a
favorable ruling by the Commissione Tributaria di Primo Grado in Catania which
has been confirmed by The Commissione Tributaria di Secunda Grado in Catania.
The Company's management believes that CORIMME's contractual and other
requirements have been honored in all material respects. The Company's
management further believes that the management of CORIMME programs has been in
all material respects in accordance with those plans and with applicable
financial procedures provided by the Italian government. It is cooperating in
full with the authorities in the conduct of the inquiry. Due to the preliminary
nature of the inquiry it is impossible to determine the ultimate scope or
outcome of the inquiry. Although the investigation is at a preliminary stage,
management believes based on information available to the Company to date and
based on the advice of legal counsel that the outcome of the investigation will
not have a material effect on the financial condition or results of operations
of the Company.
- 38 -
Item 4: Control of Registrant
Principal Shareholders
In October, 1995, the Company completed a second public offering of the
Common Shares. In the Offering, the Company sold 8,960,000 shares and the
selling shareholders sold 11,740,000 shares at a price to public of $43.5 a
share. The following table sets forth certain information with respect to the
ownership of the Company's Common Shares, as of June 3, 1996.
Common Shares Owned
-------------------
Number of
Shareholders Common Shares %
- ------------ ------------- -
SGS-THOMSON Microelectronics
Holding II B.V.................. 95,863,880 69.4
- 39 -
THIS INFORMATION WAS REPRESENTED BY AN ORGANIZATIONAL CHART IN THE ORIGINAL
Description of Shareholding Structure:
SGS-THOMSON Microelectronics N.V. is owned 69.4% by SGS-THOMSON
Microelectronics Holding II B.V. a wholly-owned subsidiary of SGS-THOMSON
Microelectonics Holding N.V. SGS-THOMSON Microelectronics Holding N.V. is 50%
owned by a consortium of French shareholders and 50% owned by a consortium of
Italian shareholders. The French shareholders, FT2CI is owned 49.9% by
Thomson-CSF and FT1CI, respectively. Thomson-CSF is owned 58.0% by Thomson S.A.
FT1CI is owned 51.0% and 49% by CEA-Industrie and France Telecom, respectively.
The Italian shareholders, MEI, is owned 50.1% and 49.9% by I.R.I. and Comitato
SIR, respectively.
- 40 -
SGS-THOMSON Microelectronics Holding II B.V. ("SGS-THOMSON
Holding II") is a wholly owned subsidiary of SGS-THOMSON Microelectronics
Holding N.V. ("SGS-THOMSON Holding"). SGS-THOMSON Holding is 50% owned by a
consortium of French shareholders that are indirectly controlled by the French
government and 50% owned by a consortium of Italian shareholders that are
indirectly controlled by the Italian government. The consortium of French
shareholders is comprised of Thomson-CSF, a subsidiary of the French
state-controlled electronics company Thomson S.A., France Telecom, the French
state-controlled telephone company, CEA-Industrie, a corporation controlled by
the French atomic energy commission, and FT1CI and FT2CI, two French holding
companies. The consortium of Italian shareholders is comprised of Istituto per
la Ricostruzione Industriale S.p.A. ("I.R.I."), the holding company for Italian
state-owned industrial and commercial interests, Comitato per l'Intervento nella
SIR ed in settori ad Alta Technologia ("Comitato SIR") and MEI-Microelettronica
Italiana s.r.l. ("MEI"), an Italian holding company. In December 1994,
Finmeccanica, a subsidiary of I.R.I., transferred its interest in SGS-THOMSON
Holding to MEI. Shares of Thomson-CSF are listed on the Bourse de Paris and
Frankfurt Stock Exchange and American Depositary Receipts for its shares are
quoted on Nasdaq. Certificats d'investissement of CEA-Industrie are listed on
the Bourse de Paris.
SGS-THOMSON Holding II is a holding company whose only asset
is the common stock of the Company. It has no Supervisory Board, and its
Management Board is SGS-THOMSON Holding.
Shareholder Agreements
In connection with the formation of the Company, Thomson-CSF
and STET, as shareholders of the Company, entered into a shareholders agreement
on April 30, 1987. In connection with the formation of SGS-THOMSON Holding in
1989, which coincided with the acquisition by Thorn EMI of its interest in the
Company, the shareholders agreement (as amended, the "Holding Shareholders
Agreement") was amended to apply to the parties' ownership in SGS-THOMSON
Holding. The rights and obligations of Thomson-CSF and STET under the Holding
Shareholders Agreement were subsequently transferred to or assumed by, as the
case may be, FT2CI for Thomson-CSF, and Finmeccanica and MEI for STET. In
connection with the transfer by Finmeccanica of its interest in SGS-THOMSON
Holding to MEI, the rights and obligations of Finmeccanica under the Holding
Shareholders Agreement were subsequently transferred to or assumed by, as the
case may be, MEI.
Pursuant to the terms of the Holding Shareholders Agreement
and for the duration of such agreement, FT2CI (the "French Owner"), on the one
hand, and MEI (the "Italian Owner"), on the other hand, have agreed to maintain
equal interests in the share capital of SGS-THOMSON Holding and maintain,
together, ownership of the majority of SGS-THOMSON Holding's issued voting
shares. The admission of a third party to the share capital of SGS-THOMSON
Holding, whether through the sale of SGS-THOMSON Holding's outstanding shares or
through the issue by SGS-THOMSON Holding of new shares, or by any other means,
must be unanimously agreed upon. In the event of a new shareholder, the parties
undertake to ensure that the balance between the French and Italian
shareholdings shall be maintained.
The Holding Shareholders Agreement contemplates that the
parties shall agree upon common proposals and jointly exercise their powers of
decision and their full control of
- 41 -
the strategies and actions of SGS-THOMSON Holding and the Company. Under the
Holding Shareholders Agreement, the Supervisory Board of SGS-THOMSON Holding,
which is composed of three representatives of the French Owner and three
representatives of the Italian Owner, must give its prior approval before
SGS-THOMSON Holding, the Company, or any subsidiary of the Company may: (i)
modify its articles of incorporation; (ii) change its authorized share capital,
issue, acquire or dispose of its own shares, change any shareholder rights or
issue any instruments granting an interest in its capital or profits; (iii) be
liquidated or dispose of all or a substantial and material part of its assets or
any shares it holds in any of its subsidiaries; (iv) enter into any merger,
acquisition or joint venture agreement (and, if substantial and material, any
agreement relating to intellectual property) or form a new company; (v) approve
such company's draft consolidated balance sheets and financial statements or any
profit distribution by such company; or (vi) enter into any agreement with any
of the direct or indirect French or Italian Owners outside the normal course of
business. The Holding Shareholders Agreement also provides that long-term
business plans and annual budgets of the Company and its subsidiaries, as well
as any significant modifications thereto, shall be approved in advance by the
Supervisory Board of SGS-THOMSON Holding. In addition, the Supervisory Board of
SGS-THOMSON Holding shall also decide upon operations of exceptional importance
contained in the annual budget even after financing thereof shall have been
approved.
Such agreement also provides that similar and adequate levels
of research, development and technological innovation shall be achieved by the
Company and its subsidiaries in France and Italy and that there shall be no
substantial discrepancy in the percentage of state financing compared to
research, development and technological innovation expenditures by the Company
and its subsidiaries in each such country. See "Item 1: Description of Business
State Support for the Semiconductor Industry." Pursuant to the terms of the
Holding Shareholders Agreement, SGS-THOMSON Holding is not permitted, as a
matter of principle, to operate outside the field of semiconductor products. The
parties to the Holding Shareholders Agreement also undertake to refrain directly
or indirectly from competing with the Company in the area of semiconductor
products, subject to certain exceptions, and to offer the Company opportunities
to commercialize or invest in any semiconductor product developments by them.
Any financing or capital provided by the parties to SGS-THOMSON Holding or the
Company is intended to be provided pro rata based on the parties' respective
shareholdings in SGS-THOMSON Holding. In the Holding Shareholders Agreement, the
parties state that it is of the utmost importance that the French and Italian
governments grant sufficient and continuous financial support for research and
development, and undertake to take suitable actions with a view to obtaining
such funding.
In the event of a disagreement that cannot be resolved between
the parties as to the conduct of the business and actions contemplated by the
Holding Shareholders Agreement, each party has the right to offer its interest
in SGS-THOMSON Holding to the other, which then has the right to acquire, or to
have a third party acquire, such interest. If neither party agrees to acquire or
have acquired the other party's interest, then together the parties are
obligated to try to find a third party to acquire their collective interests, or
such part thereof as is suitable to change the decision to terminate the
agreement. The Holding Shareholders Agreement otherwise terminates in the event
that one of the parties thereto ceases to hold shares in SGS-THOMSON Holding.
- 42 -
The Company has been informed that the shareholders of FT2CI
as well as the shareholders of FT1CI (the majority shareholder of FT2CI) have
also entered into separate shareholder agreements that require the consent of
the Board of Directors of each such company to certain actions taken by
SGS-THOMSON Holding, the Company and its subsidiaries. These agreements provide
for the management of the interests of CEA-Industrie, France Telecom and
Thomson-CSF in SGS-THOMSON Holding and the Company, with the object of defining
among them the positions, strategies and decisions to be taken by the French
Owner in SGS-THOMSON Holding affecting the management of SGS-THOMSON Holding,
and the Company and its subsidiaries. The Company is not a party to either of
these agreements.
In particular, the agreement between the shareholders of FT2CI
(FT1CI and Thomson-CSF) provides that, subject to the fulfillment of their
duties as Supervisory Board members in accordance with Dutch law,
representatives of FT2CI on the Supervisory Board of SGS-THOMSON Holding and the
Company can only take positions on specified matters at meetings of such
Supervisory Boards if such positions are approved in advance by a majority (or
in certain circumstances three-quarters) of the Board of Directors of FT2CI
(which consists of nine members, six of whom are chosen by FT1CI and three of
whom are chosen by Thomson-CSF). Such matters requiring majority approval
include: (i) adoption and changes to long-term business plans of SGS-THOMSON
Holding and the Company, (ii) approval of annual budgets prior to their adoption
by the Supervisory Board of the Company, (iii) approval of the annual financial
statements of SGS-THOMSON Holding and the Company, (iv) modification of the
articles of association or capital increases of any of the Company's
subsidiaries, (v) dissolution or sale of all or a substantial part of the assets
of any of the Company's subsidiaries, (vi) any equity investment by SGS-THOMSON
Holding, the Company or any of its subsidiaries in another company or group,
(vii) any agreement between SGS-THOMSON Holding and/or the Company and any
shareholder of FT1CI or FT2CI outside the ordinary course of business, (viii)
any technology transfer agreement allowing the Company to create new families of
technology or allowing competitors access to major technologies of the Company,
and (ix) any major modification to the geographic distribution of industrial
sites of the Company in Europe or the United States. Such matters requiring
three-quarters' approval include: (i) any modification of the amount or
breakdown of the capital of SGS-THOMSON Holding or the Company not constituting
a strategic alliance or any issuance or repurchase by SGS-THOMSON Holding or the
Company of their shares or any modification of the rights attached thereto, (ii)
any issue by SGS-THOMSON Holding or the Company of shares giving rights to a
minimum number of shares of capital stock, with the effect of or leading to a
change in the ownership of share capital of SGS-THOMSON Holding or the Company,
(iii) any distribution of profits of SGS-THOMSON Holding and/or the Company,
(iv) any liquidation or dissolution of SGS-THOMSON Holding or the Company, or
any sale of all or a substantial part of the assets of either company, (v) any
modification of the articles of association of SGS-THOMSON Holding or the
Company, and (vi) any sale of assets or business likely to have a significant
negative impact on the shareholders' equity of the Company. In addition, any
modification of the Holding Shareholders Agreement requires the approval of
three-quarters of the members of FT2CI's Board of Directors. The FT2CI
shareholders agreement provides that the three representatives of the French
Owner on the Supervisory Boards of SGS-THOMSON Holding and the Company shall be
members of the FT2CI Board of Directors and will consist of two members chosen
by FT1CI and one member chosen by Thomson-CSF. The FT2CI shareholders agreement
also requires the consent of Thomson-CSF for the transfer of any shares in
FT1CI. Under certain circumstances, FT1CI is required to acquire Thomson-CSF's
interest in FT2CI, including if (i)
- 43 -
CEA-Industrie and France Telecom no longer hold a majority of FT1CI's capital,
(ii) FT1CI no longer holds a majority of FT2CI's capital, (iii) FT2CI and the
Italian shareholders together no longer hold a majority of SGS-THOMSON Holding's
capital, (iv) SGS-THOMSON Holding no longer holds a majority of the Company's
share capital or (v) FT2CI obtains more than a 50% interest in SGS-THOMSON
Holding. Under the FT2CI shareholders agreement, Thomson-CSF has agreed not to
compete with the Company in the area of non-military semiconductor products
until February 15, 1998. The FT2CI shareholders agreement terminates in 30 years
or in the event one of the parties ceases to hold shares in FT2CI.
The agreement between the shareholders of FT1CI (CEA-Industrie
and France Telecom) provides that the following acts of FT2CI with respect to
SGS-THOMSON Holding or the Company must be approved by three-quarters of the
Board of Directors of FT1CI (which consists of five directors, three of whom are
chosen by CEA-Industrie and two of whom are chosen by France Telecom): (i) any
modification of the articles of association of SGS-THOMSON Holding or the
Company, (ii) any change in the capital of SGS-THOMSON Holding or the Company,
or issuance, purchase or sale by SGS-THOMSON Holding or the Company of their
shares or rights attached thereto, or the issuance of any securities giving
rights to a share in the capital or profits of SGS-THOMSON Holding or the
Company, (iii) the liquidation or dissolution of SGS-THOMSON Holding or the
Company or the sale of all or an important and material part of the business or
assets of SGS-THOMSON Holding or the Company representing at least $10,000,000
of the consolidated shareholders' equity of the Company, (iv) any merger,
acquisition, partnership in interest or the execution of any material agreement
relating to intellectual property rights, in each case in which SGS-THOMSON
Holding or the Company participates or in which a proposal is made to
participate, or the establishment by SGS-THOMSON Holding or the Company of new
companies or groups, (v) approval of the balance sheets and consolidated
accounts of SGS-THOMSON Holding, the Company and its subsidiaries as well as the
policies of distributions of profits among the group, (vi) any agreement between
SGS-THOMSON Holding and/or the Company and the shareholders of FT1CI which is
out of the ordinary course of business, (vii) the approval of, or material
modifications to, shareholders agreements with the Italian Owner with respect to
SGS-THOMSON Holding or the Company and (viii) approval of strategic multi-year
plans and annual consolidated budgets of SGS-THOMSON Holding and the Company.
Transfers of shares in FT1CI to third parties are subject to the approval of at
least four members of the Board of Directors, and are subject to a right of
first refusal of the other shareholders, as well as other provisions. In the
event CEA-Industrie proposes to sell its interest in FT1CI, in whole or in part,
France Telecom has the right to require the acquiror to purchase its interest as
well. The FT1CI shareholders agreement terminates upon the termination of FT1CI.
As is the case with other companies controlled by the French
Government, the French Government has appointed for each of FT1CI and FT2CI a
Commissaire du Gouvernement and a Controleur d 'Etat. Pursuant to decree No.
94-214, dated March 10, 1994, these Government representatives have the right
(i) to attend any board meeting of FT1CI and FT2CI, and (ii) to veto any board
resolution or any decision of the president of FT1CI and FT2CI within 10 days of
such board meeting (or, if they have not attended the meeting, within 10 days of
the receipt of the board minutes or the notification of such president's
decision); such veto lapses if not confirmed within one month by the Ministry of
the Economy or the Ministry of Industry. FT1CI and FT2CI are subject to certain
points of the arrete of August 9, 1953 pursuant to which the Ministry of the
Economy and any other relevant ministries (a) have the
- 44 -
authority to approve decisions of FT1CI and FT2CI relating to budgets or
forecasts of revenues, operating expenses and capital expenditures, and (b) may
set accounting principles and rules of evaluation of fixed assets and
amortization.
In connection with the Initial Public Offering, SGS-THOMSON
Holding II and the Company entered into a registration rights agreement pursuant
to which the Company agreed that, upon request from SGS-THOMSON Holding II, the
Company will file a registration statement under the Securities Act of 1933, as
amended, to register Common Shares held by SGS-THOMSON Holding II, subject to a
maximum number of five requests in total as well as a maximum of one request in
any twelve-month period. Subject to certain conditions, the Company will grant
SGS-THOMSON Holding II the right to include its Common Shares in any
registration statements covering offerings of Common Shares by the Company.
SGS-THOMSON Holding II will pay a portion of the costs of any requested or
incidental registered offering based upon its proportion of the total number of
Common Shares being registered, except that SGS-THOMSON Holding II will pay any
underwriting commissions relating to Common Shares that it sells in such
offerings and any fees and expenses of its separate advisors, if any. Such
registration rights agreement will terminate upon the earlier of December 15,
2004 and such time as SGS-THOMSON Holding II and its affiliates own less than
10% of the Company's outstanding Common Shares.
The Company has been informed by SGS-THOMSON Holding II that,
although there may be additional offering by SGS-THOMSON Holding II of its
shares in the Company, SGS-THOMSON Holding II does not currently have any plans
to reduce its ownership interest to less than a controlling interest in the
Company for the foreseeable future. The timing and size of any future primary
and secondary offerings will depend upon a variety of factors, including in
particular market conditions.
The French and Italian shareholders of SGS-THOMSON Holding
have agreed that they will continue to manage their interest in the Company
through SGS-THOMSON Holding at least until the end of 1996 or early 1997, and
accordingly, for so long as they hold their interest in SGS-THOMSON Holding,
they have undertaken (i) to jointly hold 100% of SGS-THOMSON Holding's capital
and voting rights, (ii) to maintain equality between the interests of the French
and Italian shareholders, (iii) to ensure that SGS-THOMSON Holding maintains
more than 51% of the Company's share capital and voting rights, and (iv) to
jointly exercise their decision-making powers and monitor strategies and actions
as part of SGS-THOMSON Holding's management bodies.
Item 5: Nature of Trading Market
General
The Company's Common Shares are listed on the New York Stock
Exchange, which is the principal trading market for the Common Shares, under the
symbol "STM" and on the Bourse de Paris. Common Shares are also quoted on SEAQ
International.
- 45 -
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 3/4 FRF 160 FRF 119
Second quarter............... $41 7/8 $29 3/4 FRF 205.5 FRF 142.0
Third quarter................ $57 1/2 $40 3/8 FRF 288.0 FRF 197.0
Fourth quarter............... $48 3/8 $28 3/8 FRF 279.0 FRF 138.0
At December 31, 1995, there were 138,208,680 Common Shares
issued and outstanding, of which 24,772,537 or 17.9% were registered in the
Common Share registry maintained on the Company's behalf in New York.
Item 6: Exchange Controls and Other Limitations Affecting Security Holders
None.
Item 7: Taxation
The following is a summary of certain tax consequences of the
acquisition, ownership and disposition of the Company's Common Shares based on
tax laws of The Netherlands and the United States as in effect on the date of
this annual report on Form 20-F, and is subject to changes in Netherlands or
U.S. law, including changes that could have retroactive effect. The following
summary does not take into account or discuss the tax laws of any country other
than The Netherlands or the United States, nor does it take into account the
individual circumstances of an investor. Prospective investors in the Company's
Common Shares in all jurisdictions are advised to consult their own tax advisers
as to Netherlands, U.S. or other tax consequences of the purchase, ownership and
disposition of the Company's Common Shares.
- 46 -
Netherlands Taxation
The following summary of Netherlands tax considerations is
based on present Netherlands tax laws as interpreted under officially published
case law. The description is limited to the tax implications for an owner of
Common Shares who is not, or is not deemed to be, a resident of The Netherlands
for purposes of the relevant tax codes (a "non-resident Shareholder" or
"Shareholder") and who owns less than 10% of the Company's Common Shares.
Dividend Withholding Tax
General. Dividends distributed by the Company are subject to a
withholding tax imposed by The Netherlands at a rate of, generally, 25%.
Dividends include dividends in cash or in kind, constructive dividends,
repayment of paid-in capital not recognized for Netherlands tax purposes and
liquidation proceeds in excess of, for Netherlands tax purposes, recognized
paid-in capital. Stock dividends are also subject to withholding tax on the
nominal value unless sourced out of the Company's paid-in share premium
recognized for Netherlands tax purposes.
No withholding tax applies on the sale or disposition of
Common Shares to persons other than the Company and affiliates of the Company.
A Shareholder can be eligible for a reduction or a refund of
Netherlands dividend withholding tax under a tax convention which is in effect
between the country of residence of the Shareholder and The Netherlands. The
Netherlands has concluded such a convention with, among others, the United
States, Canada, Switzerland, Japan and all EC Member States except Portugal.
Under all of those conventions, Netherlands dividend withholding tax is reduced
to 15% or a lower rate.
U.S. Shareholders. Under the Tax Convention of December 18,
1992, concluded between the United States and The Netherlands (the
"Convention"), the withholding tax on dividends paid by the Company to a
resident of the United States (as defined in the Convention) who is entitled to
the benefits of the Convention under Article 26 may be reduced to 15% pursuant
to Article 10 of the Convention. Dividends paid by the Company to U.S. pension
funds and U.S. exempt organizations may be eligible for an exemption from
dividend withholding tax.
Relief/refund Procedure. If the 15% rate, or an exemption in
case of a qualifying U.S. pension fund, is applicable pursuant to the
Convention, the Company is allowed to pay out a dividend under deduction of 15%,
or respectively without any deduction, if, at the payment date, the relevant
shareholders have submitted the duly signed form IB 92 USA, which form includes
a banker's affidavit. Holders of Shares through DTC will initially receive
dividends subject to a withholding rate of 25%. An additional 10% of the
dividend will be paid to holders upon receipt by the dividend disbursing agent
of notification from the Participants in DTC that such holders are eligible for
the reduced rate under the Convention. Only where the applicant has not been
able to claim full or partial relief at source, will he be entitled to a refund
of the excess tax withheld. In that case he should mention in the Form IB 92 USA
the circumstances that prevented him from claiming relief at source.
- 47 -
Qualifying U.S. exempt organizations can only ask for a full
refund of the tax withheld by using the Form IB 95 USA, which form also includes
a banker's affidavit.
Income Tax and Corporate Income Tax
A non-resident individual or corporate Shareholder will not be
subject to Netherlands income tax with respect to dividends distributed by the
Company on the Common Shares or with respect to capital gains derived from the
sale or disposition of Common Shares in the Company, provided that:
(a) the non-resident Shareholder does not own a business which
is, in whole or in part, carried on through a permanent establishment or a
permanent representative in The Netherlands to which or to whom the Common
Shares are attributable;
(b) the non-resident Shareholder does not have a direct or
indirect substantial or deemed substantial interest in the share capital of the
Company as defined in The Netherlands tax code or, in the event the Shareholder
does have such a substantial interest, such interest is a business asset; and
(c) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise effectively managed in The Netherlands other than
by way of securities or through an employment contract, the Common Shares being
attributable to that enterprise.
In general terms, a substantial interest in the share capital
of the Company does not exist if the Shareholder alone or together with certain
relatives does not own, and has not owned in the preceding five years, one-third
or more of the nominal paid-in capital of any class of shares in the Company.
Net Wealth Tax
A non-resident individual Shareholder is not subject to
Netherlands net wealth tax with respect to the Shares, provided that:
(a) the non-resident Shareholder does not own a business which
is, in whole or in part, carried on through a permanent establishment or a
permanent representative in The Netherlands to which or to whom the Common
Shares are attributable; and
(b) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise effectively managed in The Netherlands other than
by way of securities or through an employment contract, the Common Shares being
attributable to that enterprise.
Corporations are not subject to Netherlands net wealth tax.
Gift and Inheritance Tax
A gift or inheritance of Common Shares from a non-resident
Shareholder will not be subject to a Netherlands gift and inheritance tax,
provided that:
- 48 -
(a) the non-resident Shareholder does not own a business which
is, in whole or in part, carried on through a permanent establishment or a
permanent representative in The Netherlands to which or to whom the Common
Shares are attributable; and
(b) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise effectively managed in The Netherlands other than
by way of securities or through an employment contract, the Common Shares being
attributable to that enterprise.
United States Taxation
The following discussion addresses the U.S. federal income
taxation of a beneficial owner of the Company's Common Shares that is an
individual who is a citizen or resident of the United States, or a corporation,
partnership or other entity created or organized under the laws of the United
States or any other state or political subdivision thereof, or an estate or
trust that is subject to U.S. federal income taxation without regard to the
source of its income (a "U.S. Investor"). The following summary does not address
the U.S. tax treatment of certain types of U.S. Investors subject to special
rules (e.g., dealers in securities, financial institutions, U.S. Investors whose
functional currency is not the U.S. dollar, individual retirement and other tax
deferred accounts, life insurance companies, tax-exempt organizations and
investors owning 10% or more of the Common Shares) or of other U.S. federal
taxes, such as U.S. federal estate tax, or of state or local tax laws.
Prospective U.S. Investors are advised to consult their own tax advisers to
ascertain the tax effect of ownership and disposition of the Common Shares with
respect to their particular circumstances.
Taxation of Dividends
To the extent paid out of current or accumulated earnings and
profits of the Company, as determined for United States federal income tax
purposes, the gross amount of dividends (including the amount of Netherlands
taxes withheld therefrom) paid with respect to the Common Shares (other than
certain pro rata distributions of capital stock of the Company or rights to
subscribe for shares of capital stock of the Company) will be included in the
gross income of a U.S. Investor as ordinary foreign source income on the date of
receipt. For foreign tax credit purposes, such dividends will generally
constitute "passive income", or in the case of certain U.S. Investors,
"financial services income". Such dividends will not be eligible for the
dividends received deduction allowed to United States corporations. Any
distribution that exceeds the Company's current and accumulated earnings and
profits will be treated as a nontaxable return of capital to the extent of the
U.S. Investor's tax basis in the Common Shares and thereafter as a capital gain.
The amount of any cash distribution paid in any currency other than U.S. dollars
("foreign currency") will be equal to the U.S. dollar value of such foreign
currency distribution on the date of receipt, regardless of whether a U.S.
Investor converts the payment into U.S. dollars. Gain or loss, if any,
recognized by a U.S. Investor on the sale or disposition of such foreign
currency will be U.S. source ordinary income or loss.
Netherlands withholding tax imposed on dividends paid to a
U.S. Investor by the Company at the Convention rate of 15% will be treated as a
foreign income tax eligible, subject to certain limitations, for credit against
such U.S. Investor's U.S. federal tax liability.
- 49 -
Taxation on Sale or Exchange
A U.S. Investor will generally recognize a gain or a loss for
U.S. federal income tax purposes on the sale, exchange or other disposition of
Common Shares equal to the difference, if any, between the amount realized on
such sale, exchange or other disposition and the U.S. Investor's adjusted tax
basis in the Common Shares. In general, a U.S. Investor's adjusted tax basis in
Common Shares will be equal to the amount paid by the U.S. Investor for such
Common Shares. Such gain or loss will be capital gain or loss if the Common
Shares are held as a capital asset and will be long-term capital gain or loss if
at the time of sale, exchange or other disposition the Common Shares have been
held for more than one year. Gain, if any, will generally be U.S. source income.
Backup Withholding and Information Reporting
In general, information reporting will apply to certain
dividends paid on the Common Shares and to the proceeds of sale of the Common
Shares paid to U.S. Investors other than certain exempt recipients (such as
corporations). A 31% backup withholding tax may apply to such payments if the
U.S. Investor fails to provide an accurate taxpayer identification number or
certification of exempt status or fails to report in full dividend and interest
income.
Item 8: Selected Consolidated Financial Data
Reference is made to the information appearing under the
caption "Selected Consolidated Financial Data" on page 25 of the Registrant's
1995 Annual Report to Shareholders, which information is hereby incorporated by
reference.
Item 9: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Reference is made to the information appearing under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 26 through 36 of the Registrant's 1995 Annual Report to
Shareholders, which information is hereby incorporated by reference.
Item 10: Directors and Officers of Registrant
Supervisory Board
The management of the Company is entrusted to the Management
Board under the supervision of the Supervisory Board. The Supervisory Board
advises the Management Board and is responsible for supervising the policies
pursued by the Management Board and the general course of affairs of the Company
and its business. In fulfilling their duties, the members of the Supervisory
Board must serve the interests of the Company and its business.
- 50 -
The Supervisory Board shall consist of such number of members
as resolved by the general meeting of shareholders upon proposal of the
Supervisory Board, with a minimum of six members. The members of the Supervisory
Board are appointed upon proposal of the Supervisory Board by the general
shareholders' meeting by a majority of the votes cast at a meeting where at
least one-half of the outstanding share capital is present or represented. On
June 24, 1996 the annual general meeting of shareholders approved a resolution
of the Supervisory Board to increase the size of the Supervisory Board from six
to seven members and appointed Robert M. White as a new member of the
Supervisory Board. The Supervisory Board intends to propose a further increase
in the size of the Supervisory Board to up to eight members, two of which would
not be affiliated with the Company or its direct or indirect shareholders.
SGS-THOMSON Holding II has informed the Company that it intends to concur with
this proposal.
Pursuant to various shareholders agreements, the members of
the Supervisory Board of the Company are required to include three members
designated by the French shareholders from the Board of Directors of FT2CI (of
whom Thomson-CSF has the right to appoint one member and FTlCI, a corporation
owned by CEA-Industrie and France Telecom, has the right to appoint two
members), and three members designated by the Italian shareholders (of whom
I.R.I. has the right to appoint two members and Comitato SIR has the right to
appoint one member). See Item 4: "Control of Registrant -- Shareholder
Agreements".
The members of the Supervisory Board shall appoint a chairman
and vice chairman of the Supervisory Board from among the members of the
Supervisory Board (with approval of at least three-quarters of the members of
the Supervisory Board) and may appoint one or more members as a delegate
supervisory director to communicate on a regular basis with the Management
Board. Resolutions of the Supervisory Board require the approval of at least
three-quarters of its members. The Supervisory Board must meet upon request by
two or more of its members or by the Management Board. The Supervisory Board has
adopted internal regulations to clarify the manner by which it carries out the
supervisory duties imposed upon it by law, the Company's Articles of Association
and resolutions of the shareholders and the Supervisory Board itself. By such
resolution the Supervisory Board: (x) authorized (i) the establishment of a
secretariat headed by an individual approved by it and appointed for a one-year
renewable term (a) to assist the Chairman and Vice Chairman of the Supervisory
Board in the operations of the board, (b) to implement and oversee the execution
within the Company of decisions adopted by the Supervisory Board and (c) to
cooperate in and contribute to the execution of the functions of the designated
Secretary and Assistant Secretary of the Supervisory Board, (ii) (a) the
possibility of the appointment by each member of the Supervisory Board of an
assistant and (b) the appointment by such board of two controllers to exercise
operational and financial control over the operations of the Company who, with
assistants, will also review operation reports and the implementation of
Supervisory Board decisions, and (iii) the establishment by the Supervisory
Board of advisory committees; and (y) established the procedure for the
preparation of Supervisory Board resolutions and the setting of such board's
calendar.
Members of the Supervisory Board must retire no later than at
the ordinary general meeting of shareholders held after a period of three years
following their appointment, but may be reelected. A member of the Supervisory
Board shall retire at the ordinary general meeting of shareholders held in the
year in which he reaches the age prescribed by law for
- 51 -
retirement of a supervisory director. Members of the Supervisory Board may be
suspended or dismissed by the general meeting of shareholders. The Supervisory
Board may make a proposal to the general meeting of shareholders for the
suspension or dismissal of one or more of its members. The members of the
Supervisory Board may receive compensation if authorized by the general meeting
of shareholders.
The shareholders agreement between the consortium of French
shareholders and the consortium of Italian shareholders, as shareholders of
SGS-THOMSON Holding, also includes certain provisions requiring the approval of
the Supervisory Board of SGS-THOMSON Holding for certain actions by SGS-THOMSON
Holding, the Company and its subsidiaries. In addition, pursuant to certain
other shareholders agreements among the consortium of French shareholders and a
decree issued by certain Ministries of The Republic of France, the approval by
members of the Supervisory Board appointed by the French shareholders of certain
actions to be taken by the Company or its subsidiaries requires the approval of
the Board of Directors of certain companies in the consortium of French
shareholders and is subject to a veto by certain Ministries of The Republic of
France. See Item 1: "Description of Business -- Competition" and Item 4:
"Control of Registrant -- Shareholder Agreements". These requirements for the
prior approval of various actions to be taken by the Company and its
subsidiaries may give rise to a conflict of interest between the interests of
the Company and the individual shareholders approving such actions, and may
result in a delay in the ability of the Management Board to respond as quickly
as may be necessary in the rapidly changing environment of the semiconductor
industry. Such approval process is subject to the provisions of Dutch law
requiring members of the Supervisory Board to act independently in the
supervision of the management of the Company.
As of the date of this report, the members of the Supervisory
Board were:
Name Position Year Appointed Age
---- -------- -------------- ---
Bruno Steve Chairman 1989 54
Jean-Pierre Noblanc Vice Chairman 1994 57
Remy Dullieux Member 1993 45
Alessandro Ovi Member 1994 52
Giovanni Ruoppolo Member 1993 60
Henri Starck Member 1987 67
Robert M. White Member 1996 58
Bruno Steve has been a member of the Company's Supervisory
Board since 1989. He served as Vice Chairman of the Supervisory Board from 1989
to July 1990. From July 1990 to March 1993, Mr. Steve served as Chairman of the
Supervisory Board. He has been with I.R.I., Finmeccanica's parent company,
Finmeccanica and other affiliates of I.R.I. in various senior positions for over
15 years. He has been the Chief Operating Officer of Finmeccanica since 1988 and
Chief Executive Officer since May 1995. He was Senior Vice President of
Planning, Finance and Control of I.R.I. from 1984 to 1988. Prior to 1984, Mr.
Steve served in several key executive positions at STET, I.R.I.s holding company
for the telecommunications sector.
- 52 -
Jean-Pierre Noblanc has been a member of the Supervisory Board
since 1994 and its Chairman until June 1996. Mr. Noblanc is presently General
Manager of the Components Sector of CEA Industrie. Prior to joining CEA
Industrie, Mr. Noblanc served at CNET, the Research Center of France Telecom, as
Director of the Applied Research Center of Bagneux and of the Microelectronics
Center of Grenoble, successively. Mr. Noblanc holds a degree in engineering from
the Ecole Superieure d'Electricite and a doctoral degree in the Physical
Sciences from the University of Paris. Mr. Noblanc is an Associate Member of the
Committee on Applications of the French Academy of Sciences and a director of
Thomson S.A. Mr. Noblanc also serves on the board of Pixtech Inc. and Picogiga
S.A..
Remy Dullieux has been a member of the Supervisory Board since
1993. He is a graduate of the Ecole Polytechnique. Since June 1996, Mr. Dullieux
has served as a France Telecom Executive Manager for the Northern and Eastern
areas of France. From 1991 to June 1996, Mr. Dullieux served as Group Executive
Vice President for Strategic Procurement and Development of France Telecom. From
1985 to 1988, Mr. Dullieux served as Regional Manager of Creteil.
Alessandro Ovi has been a member of the Supervisory Board
since 1994. He received a doctoral degree in Nuclear Engineering from the
Politecnico of Milan and a master degree of science in Operations Research from
Massachusetts Institute of Technology. He is currently the Chief Executive
Officer of Tecnitel S.p.A., a subsidiary of STET, and President of MEI. Prior to
joining Tecnitel S.p.A., Mr. Ovi was the Senior Vice President of International
Affairs and Communications at I.R.I. He currently serves on the boards of
Alitalia, STET, Italtel, a STET and Siemens Company, Sirti, Zambon and Carnegie
Mellon University.
Giovanni Ruoppolo has served as a member of the Supervisory
Board since 1993 and is currently a member of the Central Tax Committee. Mr.
Ruoppolo has previously served as President of the Board of Auditors of Ente
Nazionale Idrocarburi S.p.A., the Italian national oil and gas company and as
Chief of Staff in several Italian ministries. Mr. Ruoppolo, as President of the
consortium of banks and as President of Comitato SIR, is overseeing the
restructuring and liquidation of the SIR group, a major Italian petrochemical
business, and oversaw the restructuring and liquidation of Ente Gestione Aziende
Minerarie e Metallurgiche - ("EGAM"). Mr. Ruoppolo has published numerous books
and articles in the fields of law and economics.
Henri Starck has been a member of the Supervisory Board since
1987. Mr. Starck served as Chairman and Vice Chairman of the Supervisory Board
from June 1987 to June 1990 and from June 1990 to January 1993, respectively,
during which time he was General Manager of Thomson-CSF. Mr. Starck is currently
an adviser to the President of Thomson-CSF and a director of Sextant Avionique.
Mr. Starck is a graduate of the Ecole Polytechnique and the Ecole Nationale
Superieure du Genie Maritime.
Robert M. White was appointed to the Supervisory Board in June
1996. Mr. White is currently a Professor and Department Head at Carnegie Mellon
University and serves as a member of several academic and corporate boards,
including those of Ontrack Computer Systems, Inc., Zilog, Inc., Foundation for
the National Medals of Science and Technology, Industrial Advisory Board,
Lawrence Livermore National Laboratory and NEA Academic. From 1990 to 1993, Mr.
White served as Under Secretary of Commerce for
- 53 -
Technology in the United States Government. Prior to 1990, Mr. White served in
several key executive positions at Xerox Corporation, Control Data Corporation
and MCC. He received a doctoral degree in Physics from Stanford University and
graduated with a degree in Science from the Massachusetts Institute of
Technology. Mr. White has published four books, three of which have been
translated into foreign languages, and over a hundred articles in the field of
Physics.
Management Board
The management of the Company is entrusted to the Management
Board under the supervision of the Supervisory Board. Under the Articles of
Association, the Management Board shall obtain prior approval (x) from the
Supervisory Board for (i) all proposals to be submitted to a vote at the general
meeting of shareholders, (ii) the formation of all companies, acquisition or
sale of any participation, and conclusion of any cooperation and participation
agreement, (iii) all pluriannual plans of the Company and the budget for the
first coming year, covering investment policy, policy regarding research and
development, as well as commercial policy and objectives, general financial
policy, and policy regarding personnel, and (iv) all acts, decisions or
operations covered by the foregoing and constituting a significant change with
respect to decisions already taken by the Supervisory Board and (y) from the
general meeting of shareholders for decisions relating to (i) the sale of all or
of an important part of the Company's assets or concerns, and (ii) all mergers,
acquisitions or joint ventures which the Company wishes to enter into. In
addition, under the Articles of Association, the Supervisory Board may specify
by resolution certain actions by the Management Board that require its prior
approval. Following the adoption of such a resolution, the actions by the
Management Board with respect to the Company and all direct or indirect
subsidiaries of the Company requiring such prior approval include the following:
(i) modification of its Articles of Association; (ii) change in its authorized
share capital, issue, acquisition or disposal of its own shares, change in any
shareholder rights or issue of any instruments granting an interest in its
capital or profits; (iii) liquidation or disposal of all or a substantial and
material part of its assets or any shares it holds in any of its subsidiaries;
(iv) entering into any merger, acquisition or joint venture agreement (and, if
substantial and material, any agreement relating to intellectual property) or
formation of a new company; (v) approval of such company's draft consolidated
balance sheets and financial statements or any profit distribution by such
company; (vi) entering into any agreement with any of the direct or indirect
French or Italian Owners outside the normal course of business; (vii) submission
of documents reporting on (a) approved policy, expected progress and results and
(b) strategic long-term business plans and consolidated annual budgets or any
modifications to such; (viii) preparation of long-term business plans and annual
budgets; (ix) adoption and implementation of such long-term business plans and
annual budgets; (x) approval of all operations outside the normal course of
business, including operations already provided for in the annual budget; and
(xi) approval of the quarterly, semi-annual and annual consolidated financial
statements prepared in accordance with internationally accepted accounting
principles. Such resolution also requires that the Management Board obtain prior
approval from the Supervisory Board for (i) the appointment of the members of
the statutory management, administration and control bodies of SGS-THOMSON
Microelectronics S.A. and SGS-THOMSON Microelectronics s.r.l.; and (ii) the
nomination of the statutory management, administration and control bodies of the
Company and each of the Company's other direct and indirect subsidiaries
followed by confirmation to the Supervisory Board of such nominees'
appointments. The general meeting of shareholders may also specify certain
actions of the
- 54 -
Management Board that require shareholder approval. The shareholders have
resolved that the Management Board must obtain shareholder approval prior to:
(i) the sale of all or of an important part of the Company's assets and concerns
and (ii) all mergers, acquisitions or joint ventures which the Company wishes to
enter into. See "Item 1: Description of Business -Competition" and "Item 13:
Interest of Management in Certain Transactions".
The Management Board shall consist of such number of members
as resolved by the general meeting of shareholders upon the proposal of the
Supervisory Board. The members of the Management Board are appointed for three
year terms upon proposal by the Supervisory Board by the general shareholders'
meeting by a majority of the votes cast at a meeting where at least one-half of
the outstanding share capital is present or represented. The Supervisory Board
appoints one of the members of the Management Board to be chairman of the
Management Board (upon approval of at least three-quarters of the members of the
Supervisory Board). Resolutions of the Management Board require the approval of
a majority of its members. Mr. Pasquale Pistorio, the Company's President and
Chief Executive Officer, is currently the sole member of the Management Board.
The general meeting of shareholders may suspend or dismiss one
or more members of the Management Board at a meeting at which at least one-half
of the outstanding share capital is present or represented. No quorum is
required if a suspension or dismissal is proposed by the Supervisory Board. The
Supervisory Board may suspend members of the Management Board, but a general
meeting of shareholders must be convened within three months after such
suspension to confirm or reject the suspension. The Supervisory Board shall
appoint one or more persons who shall at any time in the event of absence or
inability to act of all the members of the Management Board be temporarily
responsible for the management of the Company. The Supervisory Board determines
the compensation and other terms and conditions of employment of the members of
the Management Board.
Executive Officers
As a legal matter, the executive officers of the Company
support the Management Board in its management of the Company. In practice, the
executive officers and the Management Board share management responsibilities.
The Company is organized in a matrix structure with geographical regions
interacting with product divisions, bringing all levels of management closer to
the customer and facilitating communication among research and development,
production, marketing and sales organizations.
The executive officers of the Company are (as of the date of
this report):
Years in
Years with Semiconductor
Name Position the Company(1) Industry Age
---- -------- -------------- -------- ---
Pasquale Pistorio President and Chief Executive 16 32 60
Officer
Laurent Bosson Corporate Vice President, 13 13 54
Front-end Manufacturing
and Americas Region
Carlo Bozotti Corporate Vice President, 19 19 43
European and
- 55 -
Years in
Years with Semiconductor
Name Position the Company(1) Industry Age
---- -------- -------------- -------- ---
Headquarters Region
Salvatore Castorina Corporate Vice President, 14 30 60
Discrete and Standard
ICs Group
Murray Duffin Corporate Vice President, 9 36 62
Total Quality Management
Alain Dutheil Corporate Vice President, 13 26 51
Strategic Planning and
Human Resources
Ennio Filauro Corporate Vice President, 27 36 64
Memory Products Group
Philippe Geyres Corporate Vice President, 12 20 44
Programmable Products Group
Maurizio Ghirga Corporate Vice President, Chief 13 13 58
Financial Officer
Jean-Claude Marquet Corporate Vice President 10 29 54
Asia Pacific Region
Pier Angelo Martinotti Corporate Vice President, New 15 28 54
Ventures Group
Joel Monnier Corporate Vice President, Central 13 22 51
Research and Development
Piero Mosconi Corporate Vice President, 32 32 56
Treasurer
Aldo Romano Corporate Vice President, 30 30 56
Dedicated Products Group
Giordano Seragnoli Corporate Vice President, 31 33 59
Back-end Manufacturing
and Subsystems
Keizo Shibata Corporate Vice President, 4 31 59
Japan Region
<FN>
(1) Including years with Thomson Semiconducteurs or SGS Microelettronica.
</FN>
Pasquale Pistorio has more than 30 years of experience in the
semiconductor industry. After graduating in Electrical Engineering from the
Polytechnical University of Turin in 1963, he started his career selling
Motorola products. Mr. Pistorio joined Motorola in 1967, becoming Director of
World Marketing in 1977 and General Manager of the International Semiconductor
Division in 1978. Mr. Pistorio joined SGS Microelettronica as President and
Chief Executive Officer in 1980 and became President and Chief Executive Officer
of the Company upon its formation in 1987.
Laurent Bosson has served as Corporate Vice President, Central
Manufacturing and VLSI Fabs since 1989 and in 1992 he was given additional
responsibility as President and Chief Executive Officer of the Company's
operations in the Americas. Mr. Bosson received a Masters degree in Chemistry
from the University of Dijon in 1969. He joined Thomson-CSF in 1964 and has held
several positions in engineering and manufacturing. In 1982, Mr. Bosson was
appointed General Manager of the Tours and Alencon facilities of Thomson
Semiconducteurs. In 1985, he joined the French subsidiary of SGS
Microelettronica as General Manager of the Rennes, France manufacturing
facility.
Carlo Bozotti has served as Corporate Vice President, Europe
and Headquarters Region since 1994. Mr. Bozotti joined SGS Microelettronica in
1977 after graduating in Electronic Engineering from the University of Pavia.
Mr. Bozotti served as Product Manager for the Industrial, Computer Peripheral
and Telecom divisions and as Product Manager for the Monolithic Microsystems'
Telecom business unit from 1986 to 1987. He was appointed Director
- 56 -
of Corporate Strategic Marketing and Key Accounts for the Headquarters Region in
1988 and became Vice President, Marketing and Sales, Americas Division in 1991.
Salvatore Castorina has served as Corporate Vice President,
Discrete and Standard ICs Group since 1989. Mr. Castorina received his
engineering degree in Electronics from the Polytechnical University of Turin and
began his career as a teacher of electrical and electronic technologies prior to
joining Thomson-CSF in Milan in 1965. In 1967, he joined Motorola Semiconductors
and held various positions in sales and marketing. In 1981, Mr. Castorina joined
the Company as Transistor General Manager in Catania and became the General
Manager of the Company's Discrete Division in 1989.
Murray Duffin has served as Corporate Vice President, Total
Quality Management since 1992. Mr. Duffin graduated from the University of
Manitoba in Electrical Engineering and later studied Semiconductor Physics and
Computer Logic at the University of California Los Angeles and received an MBA
from Arizona State University. Mr. Duffin started his career in 1959 as an RF
Applications Engineer and thereafter held numerous managerial positions within
most of the departments at TRW and Motorola Semiconductors prior to joining the
Company in 1986. From 1986 to 1992, Mr. Duffin was in charge of the quality and
service organization.
Alain Dutheil has served as Corporate Vice President,
Strategic Planning and Human Resources since 1994 and 1992, respectively. Mr.
Dutheil is also President of the Company's French subsidiary, SGS-THOMSON S.A.
After graduating in Electrical Engineering from the Ecole Superieure
d'Ingenieurs de Marseilles (ESIM), Mr. Dutheil joined Texas Instruments in 1969
as a Production Engineer, becoming Director for Discrete Products in France and
Human Resources Director for Texas Instruments, France in 1980 and Director of
Operations for Texas Instruments, Portugal in 1982. He joined Thomson
Semiconducteurs in 1983 as General Manager of a plant in Aix-en-Provence, France
and then became General Manager of the Company's Discrete Products Division.
From 1989 to 1994, Mr. Dutheil served as Director for Worldwide Back-end
Manufacturing in addition to serving as Corporate Vice President for Human
Resources from 1992 until the present.
Ennio Filauro has served as Corporate Vice President, General
Manager Memory Products Group since 1990. After graduating with a degree in
Electrical Engineering from the University of Palermo, Mr. Filauro began his
career in 1958 as a member of the Engineering and Quality Control Group of
Raytheon Italia. In 1968, Mr. Filauro joined SGS Microelettronica as head of
Quality Control Services at the research and development center in Castelletto,
and was subsequently responsible for the Central Production Direction of the
facilities in Rennes, Falkirk and Catania. From 1974 to 1979, Mr. Filauro served
as General Manager of the facility in Catania, and thereafter served as Director
of the Corporate Engineering Group in Agrate. He became General Manager of the
VLSI Division of SGS Microelettronica in 1985.
Philippe Geyres has served as Corporate Vice President,
General Manager Programmable Products Group since 1990. Mr. Geyres graduated
from the Ecole Polytechnique in 1973 and began his career with IBM in France
before joining Schlumberger Group in 1980 as Data Processing Director. He was
subsequently appointed Deputy Director of the IC Division at Fairchild
Semiconductors. Mr. Geyres joined Thomson Semiconducteurs in 1983 as Director of
the Bipolar Integrated Circuits Division. He was appointed Strategic Programs
Director in 1987, and later the same year, became Corporate Vice President,
Strategic Planning of the Company.
- 57 -
Maurizio Ghirga became Corporate Vice President, Chief
Financial Officer in 1987, after having served as chief financial controller of
SGS Microelettronica since 1983. Mr. Ghirga has a degree in Business
Administration from the University of Genoa. He spent more than ten years of his
career in various financial capacities at ESSO Company (an Exxon subsidiary in
Italy) and prior to joining the Company was Financial Controller of one of the
largest refinery plants in Italy and of an ESSO chemical subsidiary.
Jean-Claude Marquet has served as Corporate Vice President,
Asia Pacific Region since July 1995. After graduating in Electrical and
Electronics Engineering from the Ecole Breguet Paris, Mr. Marquet began his
career in the National French Research Organisation and later joined Alcatel. In
1969, he joined Philips Components. He remained at Philips until 1978, when he
joined Ericsson, eventually becoming President of Ericsson's French operations.
In 1985, Mr. Marquet joined Thomson Semiconducteurs as Vice President Sales and
Marketing, France. Thereafter, Mr. Marquet served as Vice President Sales and
Marketing for France and Benelux, and Vice President Asia Pacific and Director
of Sales and Marketing for the region.
Pier Angelo Martinotti has served as Corporate Vice President,
General Manager New Ventures Group since 1994. A graduate in Electronic
Engineering from the Polytechnical University of Turin, Mr. Martinotti began his
career at the Company in 1965 as an Application and Marketing Engineer. In 1968,
he joined Motorola Semiconductors in the area of strategic marketing in Europe,
and in 1975 became the Marketing (Sales) Director for Europe. From 1986 to 1990,
Mr. Martinotti was Chief Executive Officer of Innovative Silicon Technology, a
former subsidiary of the Company. Mr. Martinotti was appointed Director of
Corporate Strategic Planning in 1990.
Joel Monnier has served as Corporate Vice President, Director
of Central Research and Development since 1989. After graduating in Electrical
Engineering from the Institut National Polytechnique of Grenoble, Ecole
Nationale Superieure de Radio Electricite, Mr. Monnier obtained a doctoral
degree in microelectronics at LETI/CENG. He began his career in the
semiconductor industry in 1968 as a researcher with CENG, and subsequently
joined the research and development laboratories of Texas Instruments in
Villeneuve Loubet, France and Houston, Texas, eventually becoming Engineering
Manager and Operation Manager at Texas Instruments. Mr. Monnier joined
Thomson-CSF in 1983 as head of the research and manufacturing unit of Thomson
Semiconducteurs. In 1987, he was appointed Vice President and Corporate Director
of Manufacturing.
Piero Mosconi has served as Corporate Vice President,
Treasurer since 1987. After graduating in accounting from Monza in 1960, Mr.
Mosconi joined the faculty at the University of Milan. Mr. Mosconi worked with
an Italian bank before joining the Foreign Subsidiaries Department at SGS
Microelettronica in 1964 and becoming Corporate Director of Finance in 1980.
Aldo Romano has served as Corporate Vice President, General
Manager Dedicated Products Group since 1987. Mr. Romano is also Managing
Director of the Company's Italian subsidiary, SGS-THOMSON Microelectronics
s.r.l. A graduate in Electronic Engineering from the University of Padova in
1963, Mr. Romano joined SGS Microelettronica in 1965 as a designer of linear
ICs, becoming head of the linear IC design laboratory in 1968 and head of
Marketing
- 58 -
and Applications in 1976. Mr. Romano became Director of the Bipolar IC Division
(which has evolved into the Dedicated Products Group) in 1980.
Giordano Seragnoli has served as Corporate Vice President,
General Manager Subsystems since 1987 and since 1994, Director for Worldwide
Back-end Manufacturing. After graduating in Electrical Engineering from the
University of Bologna, Mr. Seragnoli joined the Thomson Group as RF Application
Designer in 1962 and joined SGS Microelettronica in 1965. Thereafter, Mr.
Seragnoli served in various capacities within the Company, including Strategic
Marketing Manager and Subsystems Division Manager, Subsystems Division Manager
(Agrate), Technical Facilities Manager, Subsystems Division Manager and Back-End
Manager.
Keizo Shibata has served as Corporate Vice President and
President of the Company's Japanese subsidiary, SGS-THOMSON Microelectronics
K.K., since 1992. Mr. Shibata obtained bachelors and masters degrees in
Engineering from Osaka University and has 31 years of experience in the
semiconductor industry. Prior to joining SGS-THOMSON, Mr. Shibata was employed
with Toshiba Corporation since 1964 in various capacities. From 1987 to 1988,
Mr. Shibata served as Chairman of both World Semiconductor Trade Statistics and
the Trade Policy Committee of the Electric Industry Association of Japan.
As is common in the semiconductor industry, the Company's
success depends to a significant extent upon, among other factors, the continued
service of its key senior executives and research and development, engineering,
marketing, sales, manufacturing, support and other personnel, and on its ability
to continue to attract, retain and motivate qualified personnel. The competition
for such employees is intense, and the loss of the services of any of these key
personnel without adequate replacement or the inability to attract new qualified
personnel could have a material adverse effect on the Company. The Company does
not maintain insurance with respect to the loss of any of its key personnel.
Item 11: Compensation of Directors and Officers
The aggregate cash compensation offered for 1995 to the
members of the Supervisory Board by the Company was approximately $252,000. The
amount of cash compensation for 1995 to the executive officers of the Company
and members of the Management Board as a group by the Company and its
subsidiaries was approximately $6.0 million.
In 1989, the Company established a Corporate Executive
Incentive Program (the "EIP") that entitles selected executives and members of
the Management Board to a yearly bonus based upon the individual performance of
such executives. The maximum bonus awarded under the EIP is based upon a
percentage of the executive's or member's salary and is adjusted to reflect the
overall performance of the Company. The participants in the EIP must satisfy
certain personal objectives that are focused on customer service, profit, cash
flow and market share.
The executive officers and members of the Management Board
were also covered in 1995 under certain group life and medical insurance
programs provided by the Company. The aggregate additional amount set aside by
the Company in 1995 to provide pension, retirement or similar benefits for
executive officers and members of the Management Board of the Company as a group
was approximately $2.4 million.
- 59 -
Item 12: Option to Purchase Securities from Registrant or Subsidiaries
As of May 22, 1996, options to purchase up to an aggregate of
692,350 Common Shares were outstanding under the Company's first stock option
plan (the "1989 Stock Option Plan"). Such options are fully vested and are
exercisable at the original issue price, as adjusted to reflect the 40:1 stock
split effected in connection with the Initial Public Offering, of NLG 25 per
share ($14.51 based on the noon buying rate in New York City for cable transfers
in Dutch guilders as certified for customs purposes by the Federal Reserve Bank
of New York of US$1=NLG 1.7225 on May 22, 1996 (the "Noon Buying Rate")) or at
the price of NLG 17.50 per share ($10.15 based on the Noon Buying Rate). Such
options, of which 942,050 have been exercised, are held by executive officers of
the Company as a group and expire on December 18, 1999.
On October 20, 1995, the Shareholders of the Company approved
resolutions authorizing the Supervisory Board for a period of five years to
adopt and administer a new stock option plan which provides for the granting to
managers and professionals of the Company of options to purchase up to a maximum
of 5.5 million Common Shares (the "1995 Stock Option Plan"). The Company
currently intends to grant options pursuant to the 1995 Stock Option Plan to
purchase up to 1,200,000 Common Shares at a price per Common Share of $36.25.
Such options are exercisable for a period of eight years following the date of
grant.
On June 24, 1996 the general meeting of shareholders approved
the granting of options to purchase up to 72,000 Common Shares to members and
professionals of the Supervisory Board over a period of three consecutive years,
beginning in 1996. Options granted thereunder will be exercisable until the
eighth anniversary date following the date of grant at the closing price of the
Common Shares on the New York Stock Exchange on the date such options are
exercised.
Item 13: Interest of Management in Certain Transactions
One of the Company's key customers is Thomson Multimedia.
Thomson Multimedia and Thomson-CSF, one of the indirect shareholders of the
Company (see "Item 4: Control of Registrant"), are both controlled by Thomson
S.A. The Company sells a broad range of products to Thomson Multimedia,
including dedicated products, microcontrollers and semicustom devices, for use
in televisions, video cassette recorders and satellite receiver systems. The
Company believes that all of the products that it sells to Thomson Multimedia
are sold on commercial terms no less favorable to the Company than could be
obtained with non-affiliated parties. The Company has also formed a joint
venture with Thomson Multimedia to conduct joint research and development on
advanced television products, including digital television products. The Company
and Thomson Multimedia share the funding of the joint venture's designers,
engineers and managers.
The Company has formed a joint venture research and
development center with CNET in the form of a Groupement d'Interet Economique
("GIE"). CNET is a research laboratory that is wholly owned by France Telecom,
one of the indirect shareholders of the Company. See "Item 4: Control of
Registrant". The research center is housed at the Company's Crolles, France
- 60 -
manufacturing facility. It is developing submicron process technologies. The
joint venture between the Company and CNET was created before France Telecom
became an indirect shareholder of the Company.
The Company participated in a joint research and development
project with LETI with respect to high-density silicium integrated circuits.
LETI is a research laboratory that is a department of CEA, the parent of one of
the indirect shareholders of the Company. See "Item 4: Control of Registrant".
In 1995, the Company has signed an agreement providing for a research and
development cooperation with GRESSI, the research and development GIE formed by
CNET and LETI. The objectives of the cooperation are to develop know-how on
innovative aspects of VLSI technology evolution which can be transferred to
industrial applications, and to address the development of innovative process
steps and process modules to be used in future generations of VLSI products. The
cooperation agreement is based upon a pluriannual plan through 1998, of which
the Company is expected to bear half of the program's total cost.
The Company participates in certain programs sponsored by the
French and Italian governments for the funding of research and development and
industrialization through direct grants as well as low interest financing. See
"Item 1: Description of Business -- State Support for the Semiconductor
Industry". The shareholders of SGS-THOMSON Holding, the corporate parent of the
Company's majority shareholder, are controlled, directly or indirectly, by the
governments of the Republics of France and Italy. See "Item 4: Control of
Registrant".
Sales to shareholders of the Company and their affiliates
totalled $195.4 million in 1995. At December 31, 1995 there was no outstanding
indebtedness guaranteed by indirect shareholders.
From time to time, the Company may deposit with its direct or
indirect shareholders, or their affiliates, available funds for investment on a
short-term basis at market interest rates.
PART II
Item 14: Description of Securities to be Registered
Not applicable.
PART III
Item 15: Defaults upon Senior Securities
None.
Item 16: Changes in Securities and Changes in Security for Registered Securities
- 61 -
None.
PART IV
Item 17: Financial Statements
Not applicable.
Item 18: Financial Statements
Consolidated financial statements of SGS-THOMSON
Microelectronics N.V. for each of the three years in the period ended December
31, 1995 are incorporated by reference from the Registrant's 1995 Annual Report
to Shareholders, on pages 37 through 55.
On January 26, 1996, the Supervisory Board determined that,
after nine consecutive years of service from a single auditor, a change of
auditors would be in the best interest of the Company and, consequently, decided
not to renew Arthur Andersen & Co. The appointment of Price Waterhouse as the
Company's new auditors was approved by the annual general meeting held on June
24, 1996. The letter from Arthur Andersen & Co. indicating that there has been
no cause for disagreement between the parties during the course of their
relationship is filed as Exhibit 1 hereto.
Item 19: Financial Statements and Exhibits
(a) 1. Financial Statements
The financial statements listed in the accompanying Index to
Financial Statements and Financial Statement Schedule are filed
or incorporated by reference as part of this annual report.
2. Financial Statement Schedule
The financial statement schedule listed in the accompanying index
is filed as part of this annual report.
(b) Exhibits
The exhibits listed in the accompanying index are filed or incorporated
by reference as part of this annual report.
- 62 -
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(Item 19(a))
Reference Page
--------------
1995 Annual
Report to
Form 20-F Shareholders
--------- ------------
SGS-THOMSON Microelectronics N.V. and Subsidiaries
Independent Public Accountant's Report..................... 55
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993......................... 37
Consolidated Balance Sheets as of December 31, 1995,
1994 and 1993............................................ 38
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993................... 39
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993............. 40
Notes to Consolidated Financial Statements as of
December 31, 1995, 1994 and 1993......................... 41
Schedule -Valuation and Qualifying Accounts for
the Years Ended December 31, 1995, 1994 and 1993........... 66
Independent Public Accountant's Report on Schedule............ 67
- 63 -
Schedule
SGS-THOMSON MICROELECTRONICS N.V.
VALUATION AND QUALIFYING ACCOUNTS
(Currency - Thousands of U.S. dollars)
Charged
Balance at to costs Balance at
beginning Translation and end of
of period adjustment expenses Deductions period
--------- ---------- -------- ---------- ------
-66-
Valuation and qualifying accounts
deducted from the related asset
accounts
1995
Inventories............................ 29,982 ---- 36,500 29,982 36,500
Accounts Receivable.................... 14,018 691 3,467 295 17,881
1994
Inventories............................ 28,121 ---- 29,982 28,121 29,982
Accounts receivable.................... 12,181 893 3,198 2,254 14,018
1993
Inventories............................ 6,748 ---- 28,121 6,748 28,121
Accounts receivable.................... 10,835 (815) 2,835 674 12,181
Long-term liabilities
1995
Claims and litigation.................. ---- ---- 16,000 ---- 16,000
1994
Loss on operating lease................ 13,949 ---- ---- 13,949 0
1993
Restructuring.......................... ---- ---- 19,500 ---- 19,500
Loss on operating lease................ 10,949 ---- 3,000 13,949
Patents litigation..................... ---- ---- 5,000 ---- 5,000
-67-
INSERT REPORT ON SCHEDULE
-68-
SIGNATURE
Pursuant to the Requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SGS-THOMSON Microelectronics N.V.
Date: June 27, 1996 By: /s/ Pasquale Pistorio
---------------------
Name: Pasquale Pistorio
Title: President and Chief Executive Officer
-69-
INDEX TO EXHIBITS
(Item 19(b))
Exhibit
Number Description
- ------ -----------
1. Letter of Arthur Andersen & Co.
2. SGS-THOMSON Microelectronics N.V. 1995 Annual Report to Shareholders
3. Amended and Restated Articles of Association of the Company