Financial Risk Management EEMS

Transcription

1 Consolidated and Parent Company Financial Statements at 31 December 2008 of EEMS Italia This document has been translated into English for the convenience of readers outside Italy. The original Italian document should be considered the authoritative version.

2 Contents Contents...2 DIRECTORS' REPORT...5 EEMS GROUP OPERATIONS AND PERFORMANCE... 6 Group structure... 6 Nature of the business and activities... 8 The Group as a going concern... 8 Significant events in Comments on the Group s financial position and results Financial data by business sector Reconciliation between results for the year and equity as per the parent company financial statements of EEMS Italia S.p.A and the consolidated financial statements at 31 December 2008 and Shares held by key managers Global semiconductors market Global photovoltaic market Research and development Management and Control Organisational Model pursuant to Legislative Decree n 231/ Report on corporate governance and ownership Treatment of personal data Related parties and intercompany transactions Atypical and/or unusual operations Financial risk management Other risks and uncertainties Outlook for the business EEMS ITALIA S.P.A. OPERATIONS AND PERFORMANCE Summary of financial position and results Major shareholders Proposal for the approval of the 2008 financial statements of EEMS Italia S.p.A. and allocation of the results for the year Consolidated Financial Statements of the EEMS Group at 31 December CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OFF CASH FLOWS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR YEAR ENDED 31 DECEMBER CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR YEAR ENDED 31 DECEMBER NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FORM AND STRUCTURE OF THE CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATION AREA APPLICATION OF THE GOING-CONCERN VALUATION METHOD TO THE GROUP ACCOUNTING STANDARDS AND VALUATION METHODS SEGMENT REPORTING BUSINESS COMBINATIONS AND OTHER SIMILAR VENTURES REVENUES OTHER OPERATING INCOME RAW MATERIALS AND CONSUMABLE STORES USED SERVICES STAFF COSTS OTHER OPERATING COSTS FINANCIAL INCOME AND CHARGES TAXES

3 14. EARNINGS PER SHARE GOODWILL AND DEFINITE-LIFE INTANGIBLE ASSETS CORPORATE-OWNED PROPERTY, PLANT AND EQUIPMENT AND ASSETS HELD UNDER FINANCIAL LEASES OTHER NON-CURRENT AND CURRENT ASSETS TRADE RECEIVABLES TAX CREDITS CASH AND CASH EQUIVALENTS EQUITY CURRENT AND NON-CURRENT FINANCIAL LIABILITIES PROVISIONS FOR FUTURE RISKS AND CHARGES TRADE PAYABLES TAXES PAYABLE OTHER CURRENT LIABILITIES NET FINANCIAL DEBT FINANCIAL RISK MANAGEMENT RELATED PARTIES AND INTERCOMPANY TRANSACTIONS SIGNIFICANT NON-RECURRENT EVENTS AND OPERATIONS ATYPICAL AND/OR UNUSUAL OPERATIONS KEY MANAGEMENT COMPENSATION INFORMATION TO BE PROVIDED PURSUANT TO ARTICLE 149-DUODECIES OF CONSOB REGULATION REGOLAMENTO EMITTENTI AVERAGE NUMBER OF EMPLOYEES EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE LIST OF INVESTMENTS CERTIFICATION OF THE CONSOLIDATED FINANCIAL STATEMENTS PURSUANT TO ARTICLE 154 BIS OF LEGISLATIVE DECREE 58/ Parent Company Financial Statements of EEMS Italia S.p.A. at 31 December PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF CASH FLOWS PARENT COMPANY STATEMENT OF CHANGES IN EQUITY FOR YEAR ENDED 31 DECEMBER PARENT COMPANY STATEMENT OF CHANGES IN EQUITY FOR YEAR ENDED 31 DECEMBER NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS FORM AND STRUCTURE OF THE PARENT COMPANY FINANCIAL STATEMENTS APPLICATION OF THE GOING-CONCERN VALUATION METHOD TO THE COMPANY ACCOUNTING STANDARDS AND VALUATION METHODS REVENUES OTHER OPERATING INCOME RAW MATERIALS AND CONSUMABLE STORES USED SERVICES STAFF COSTS OTHER OPERATING COSTS FINANCIAL INCOME AND CHARGES TAXES DEFINITE-LIFE INTANGIBLE ASSETS CORPORATE-OWNED PROPERTY, PLANT AND EQUIPMENT AND ASSETS HELD UNDER FINANCIAL LEASES INVESTMENTS OTHER NON-CURRENT AND CURRENT ASSETS TRADE RECEIVABLES RECEIVABLES AND PAYABLES WITH SUBSIDIARIES TAX CREDITS CASH AND CASH EQUIVALENTS EQUITY CURRENT AND NON-CURRENT FINANCIAL LIABILITIES PROVISIONS FOR FUTURE RISKS AND CHARGES TRADE PAYABLES TAXES PAYABLE OTHER CURRENT LIABILITIES NET FINANCIAL DEBT FINANCIAL RISK MANAGEMENT RELATED PARTIES AND INTERCOMPANY TRANSACTIONS

4 29. SIGNIFICANT NON-RECURRENT EVENTS AND OPERATIONS ATYPICAL AND/OR UNUSUAL OPERATIONS KEY MANAGEMENT COMPENSATION INFORMATION TO BE PROVIDED PURSUANT TO ARTICLE 149-DUODECIES OF CONSOB REGULATION REGOLAMENTO EMITTENTI AVERAGE NUMBER OF EMPLOYEES EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE CERTIFICATION OF THE PARENT COMPANY FINANCIAL STATEMENTS PURSUANT TO ARTICLE 154 BIS OF LEGISLATIVE DECREE 58/

5 DIRECTORS' REPORT DIRECTORS' REPORT 5

6 DIRECTORS' REPORT EEMS Group Operations and Performance Group structure The EEMS Group at 31 December 2008 comprised the following companies: EEMS Italia S.p.A. EEMS Italia S.p.A. 100% 100% Solsonica Solsonica S.p.A. S.p.A. 100% EEMS Asia Pte Ltd EEMS Asia Pte Ltd (Singapore) (Singapore) EEMS Singapore Pte Ltd EEMS Singapore Pte Ltd (Singapore) (Singapore) 100% 100% EEMS Test Singapore EEMS Test Singapore Pte Pte Ltd Ltd (Singapore) (Singapore) EEMS China Pte Ltd EEMS China Pte Ltd (Singapore) (Singapore) 100% EEMS Technology EEMS Technology Suzhou Co Ltd Suzhou Co Ltd (China) (China) 100% EEMS Suzhou Co Ltd EEMS Suzhou Co Ltd (China) (China) 6

7 DIRECTORS' REPORT Parent Company Board of Directors The Company s Board of Directors consists of the following five members: Office Name Date and place of birth Chairman Giovanni Battista Nunziante Salerno, 25 April 1930 Managing Director Vincenzo D Antonio Orta di Atella, Naples (formerly Atella di Napoli), 11 April 1945 Director Giuseppe Farchione* Pescara, 5 July 1960 Director Guido Cottini Cuneo, 15 April 1942 Director Stefano Lunardi* Genoa, 23 December 1971 * Independent Director The current Board of Directors was appointed by the Shareholders Meeting of 29 April 2008 and will remain in office until the approval of the 31 December 2010 Annual Report. For the purposes of their office, the members of the Board of Directors are domiciled at the EEMS registered office located in Cittaducale (Rieti), Viale delle Scienze 5. Board of Statutory Auditors Pursuant to article 24 of the Company s statutes, the Board of Statutory Auditors is composed of three Statutory Auditors in office and two alternate Statutory Auditors, appointed in such a way as to ensure that the minority shareholders can appoint one Statutory Auditor in office and one alternate Statutory Auditor. Their term of office lasts for three years and they may be re-elected. The current Board of Statutory Auditors, who are in office until the approval of the 31 December 2010 Annual Report, was appointed by EEMS s Shareholders Meeting of 29 April It consists of the following persons: Office Name Date and place of birth Chairman Vincenzo Donnamaria Rome, 4 October 1955 Statutory Auditor in office Felice De Lillo Senise (Potenza), 25 November 1963 Statutory Auditor in office Francesco Masci L Aquila, 23 October 1955 Alternate Auditor Egidio Filetto Ottaviano (Naples), 1 July 1970 Alternate Auditor Massimo Pagani Guazzugli Bonaiuti Pesaro, 15 July 1946 For the purposes of their office, the members of the Board of Statutory Auditors are domiciled at EEMS s registered office located in Cittaducale (Rieti), Viale delle Scienze 5. Independent Auditors Reconta Ernst & Young S.p.A. 7

8 DIRECTORS' REPORT Nature of the business and activities Memories business The Group provides a full range of back-end services to our semiconductor manufacturing customers, including all the final phases of the assembly, packaging, testing and finishing of DRAM and Flash memory semiconductors and DRAM modules. All these activities are performed thanks to continual investment in state of the art equipment and technology, which is rendered efficient by manufacturing processes which complete the Company s high technical capacity. In this situation, our research and development staff assists in developing modifications to our semiconductor packages to accommodate the continually evolving designs in the market. The range of services offered by the Company includes: Assembly and final testing of packages; Assembly and final testing of memory modules and cards; Qualification, reliability control and breakdown analysis services; Packages, modules and cards design; Writing, correlation and adjustment of testing software programmes. Production of photovoltaic cells and panels Solsonica was established as the result of the EEMS Group s strategy to diversify its products into a new high potential area such as the photovoltaic market. Capitalising on its industrial background built up over 30 years of experience in the highly competitive, technology-intensive, semiconductors market, Solsonica set the ground in 2008 to stand out as a leading player in the PV industry on a national and worldwide basis. The production of photovoltaic cells is done through processing silicon wafers. The modules are produced through the use of cells manufactured in the Cittaducale plant or else purchased on the open market. The Group as a going concern The present financial statements have been prepared from the perspective of the Group as a going concern. However, the Group is subject to market, financial and liquidity risks which give rise to a number of significant doubts which are fully described in the notes to the financial statements dealing with the application of the going-concern concept. 8

9 DIRECTORS' REPORT Significant events in 2008 Semiconductors Division Restructuring of production operations at the Cittaducale plant The Board of Directors of EEMS Italia S.p.A. on 19 June 2008 examined the situation regarding production activities at the Italian operating facility also in the light of the overall trend in the memories market. The persistence of the structural crisis affecting the worldwide memories market, the continual drop in average sales prices and the decision of our principal customer to cancel all orders from the Italian factory as from the third quarter of 2008 removed the economic basis for proceeding with activities in the memories division in Italy. On the other hand, the cost structure at the Asian subsidiaries allows us to maintain adequate margins although they are less profitable than in the past. In consequence, the Board of Directors decided to concentrate activities at the Cittaducale (Rieti) plant on the manufacture of photovoltaic cells and panels run by the subsidiary Solsonica S.p.A. and accordingly decided to take the necessary steps, in accordance with the law, to close production in the memories sector at the plant. This decision entailed taking on obligations and made it necessary to provide for extraordinary restructuring costs which have been reflected in the Group financial statements at 31 December On 5 August 2008 EEMS Italia S.p.A. ratified at the Labour Ministry an agreement with the unions for placing redundant employees under extraordinary redundancy arrangements and laying off under mobility arrangements about 119 employees in the sector within June Photovoltaic Division During 2008, production at the subsidiary Solsonica was boosted by the installation of the first assembly line for photovoltaic modules and a start was made on the sale of the first line of products, the Solsonica range 610 modules with ratings of between 200 and 240 watts. Completion was also reached on the installation, preproduction and testing of the photovoltaic cell lines which went into production in the first quarter of An agreement was signed in 2008 with a leading operator in the photovoltaic business. The agreement covers a total value of around 40 million euros. The first deliveries were made in July. In October Solsonica S.p.A. made a further sales agreement with TerniEnergia, a company operating in the field of renewable energy sources which is among the leading players in Italy in the photovoltaic sector, for the sale of photovoltaic modules up to a maximum of 29 MW for the triennium, with an obligation which has already been signed for a total amount of about 35 million euros. 9

10 DIRECTORS' REPORT Comments on the Group s financial position and results Financial summary and indicators (in thousands of euros) Total operating revenues 154, , ,657 Operating result before depreciation and amortisation and writeback/writedown of non-current assets 26,037 50,065 47,241 Operating result (45,091) 7,561 9,265 Net result for the year (35,164) 12,080 7,756 Total assets 274, , ,851 Total liabilities 146, , ,967 Equity 128, , ,884 Cash flow from operating activities 30,570 26,835 37,508 Cash flow from financing activities 31,422 27,786 27,554 Cash flow per investing activities (56,792) (62,608) (102,948) Number of shares 42,502,845 42,505,345 42,133,300 Number of employees 1,952 1,913 1,462 * Operating result before depreciation and amortisation and writeback/writedown of non-current assets The EEMS Group results for year 2008 were heavily impacted by the effects of the worldwide economic and financial crisis which caused a significant reduction in demand for our products. One of our historical customers, Qimonda, incurred losses which brought it into insolvency. This situation led to indirect losses also for EEMS which had gradually to reduce its operations at the Cittaducale plant, and block production as far as semiconductor memories were concerned. This decision led to significant restructuring costs although, to a significant extent, these have not yet entailed cash spending. They arose because we had to write down all the equipment used on producing memories and which, in the present market conditions, will have no future use, and also other marginal costs for the cancellation of supply contracts and costs relating to employees on the payroll. To complete the information, it should be stressed that the writedowns are based on estimates and it therefore cannot be excluded that there might be some future financial recoveries. The industrial reconstruction interrupted a negative trend which had seen the parent company EEMS Italia S.p.A. incurring significant pre-tax losses during the past two years (about 6.6 million euros in 2006 and about 11.5 million euros in 2007). Already as from the fourth quarter of 2008 the parent company has essentially borne current costs on running its corporate activities with expected positive fallouts for its two types of business: the photovoltaic in Italy and semiconductors in Asia. Qimonda s being declared insolvent in January 2009 also made it necessary for reasons of prudence to write down certain assets (accounts receivable and, to a marginal extent, inventories) which were directly connected to the services provided to this customer. More specifically, the trade receivables from Qimonda were entirely written off on the basis of a prudent estimate of the recoverable amount 10

11 DIRECTORS' REPORT made by management. With regard to production capacity, which had been specifically created to satisfy the multi-year agreement with the customer Qimonda, the impairment test carried out led to a value adjustment of about 6.3 million euros. For a correct reading of results it is therefore necessary to separate unusual components from ordinary ones. The following statement shows the main financial indicators before and after non-recurrent costs. Statement showing reconciliation between financial position and results excluding the effect of non-recurrent (pre-impairment) items (in thousands of euros) Operating result 2008 Operating result 2007 EBITDA* 2008 EBITDA* 2007 Amounts per consolidated financial statements (45,091) 7,561 26,037 50,065 Writedown of machinery and plant Italy 23, Writedown of machinery and plant Asia 6, Writedown of receivables and inventories 6, , Restructuring costs Italy 4, , Other extraordinary costs Italy 1, , Pre-impairment amounts (2,424) 7,561 38,633 50,065 * Operating result before depreciation and amortisation and writeback/writedown of non-current assets Total revenues and other operational income of the Group in 2008 was 154,090 thousand euros, down about 2% on The contribution made to Group revenues by the subsidiary Solsonica in its first year of activity was about 19.1 million euros even though production started only in April. However, the reduction in production in the memories sector in Italy performed up to July determined an overall reduction in turnover, as already indicated in the section dealing with significant events in the year ended 31 December The Group s gross operating margin (EBITDA) in 2008 was affected by the writedown of receivables from the customer Qimonda for about 6.4 million euros. Costs provided for the resignation incentive programme following the cessation of activities at the Cittaducale plant amount to about 4.6 million euros. Lastly, costs related to the conversion of production space to house the photovoltaic business amount to about 1.6 million euros. Before such extraordinary charges, EBITDA would have been about 38.6 million euros, down about 23% on the preceding year. Before such extraordinary charges, the negative operating result (EBIT) of about 45 million euros would have been negative for about 2.4 million euros compared with a positive operating result of 7.5 million euros in It should be stated that, in addition to the above-mentioned extraordinary restructuring costs, the Group sustained writedowns for about 24 million euros at the Cittaducale plant and about 6 million euros at the Asian subsidiaries. 11

12 DIRECTORS' REPORT Certain financial indicators are shown below: Earnings indicators: ROE (24.6)% 7.8% ROI (16.3)% 2.8% ROS (29.3)% 4.8% Solvency indicators: Treasury margin Solvency quotient Financial data by business sector Business sector Revenues Ebitda Capital investment Number of employees (in thousands of euros) Semiconductors - Asia 129, ,103 41,204 43,799 38,057 71,670 1,630 1,493 Semiconductors - Italy 24,145 54,329 (8,594) 9,330 1,473 1, Photovoltaic 19,122 1 (2,141) (833) 14,053 5, Intercompany eliminations (18,637) (5,265) (4,432) (2,231) (6,939) (11,772) - - Total - EEMS Group 154, ,168 26,037 50,065 46,644 66,767 1,952 1,913 * Operating result before depreciation and amortisation and writeback/writedown of non-current assets Semiconductors Asia Billings made by the Asia semiconductors division (net of intercompany eliminations) rose during 2008 by about 10% over the preceding year, even though the improvement if measured in dollars would have been about 17%. In this connection, the euro/us$ exchange rate averaged 1.37 in 2007 whereas in 2008 it was 1.47, dropping about 7%. The considerable level of capital investment during 2007 and 2008, also as a result of the launching of the second factory in China (EEMS Technology), had the effect of reducing margins which were hit by higher depreciation charges and the burden of operational leasing costs. Photovoltaic During 2008 the Company earned revenues for about 19.1 million euros. Margins obviously felt the effect of the costs for launching activities which will be recovered and absorbed with the expected growth in volumes. Capital investment related mainly to the acquisition of machinery for the production of cells and modules. With regard to the present number of employees, it should be remembered that the subsidiary Solsonica operates through employees temporarily seconded by the parent company. On the basis of agreements reached with the unions these persons will be progressively engaged directly by Solsonica S.p.A. Semiconductors Italy The parent company s result was marked by the above-mentioned restructuring costs relating to the cessation of production. This decision, as already referred to, became necessary as the result of the drastic fall in orders (affecting only the Italian plant) from the major customer involved. Revenues passed from about 54 million euros in 2007 to about 24 million euros in

13 DIRECTORS' REPORT After this restructuring the parent company will limit itself to corporate affairs and managing its holdings in companies engaged in the semiconductors business (located entirely in Asia) and the photovoltaic business, the latter being handled by the Cittaducale plant which is owned by EEMS Italia. Non-financial indicators Customer satisfaction Considering the present type of business and clientele, this indicator is not relevant. Efficiency in production Semiconductors: the Group s productivity indicator, measured as the ratio of revenues to number of employees, is about 78.9 thousand euros ( 82.2 thousand euros in the preceding year); Photovoltaic: the data is not significant. Reconciliation between results for the year and equity as per the parent company financial statements of EEMS Italia S.p.A and the consolidated financial statements at 31 December 2008 and 2007 The following statement shows the reconciliation between the results for the year and equity as appearing in the parent company financial statements of EEMS Italia S.p.A and in the consolidated financial statements at 31 December 2008, pursuant to Consob Communication n DEM/ of 28 July (in thousands of euros) Equity and results for the year appearing in parent company financial statements of EEMS Italia S.p.A. Equity at Changes to equity in the year Results for year 2008 Equity at , (31,249) 137,592 Share capital contributed by minority interests Results of consolidated subsidiaries 36, ,243 Elimination of effects of intercompany transactions* (11,035) - (4,371) (6,664) Reserve for difference on translation of foreign currency financial statements (4,283) 5,689 - (9,972) Other (132) (132) - - Equity and results for the year appearing in 128,174 6,139 (35,164) 157,199 consolidated financial statements * Relating mainly to the elimination of the effects of intercompany sales of machinery. 13

14 DIRECTORS' REPORT Shares held by key managers The table below gives the information to be disclosed on shares held at 31 December 2008 by key managers as required under article 79 of the regulation Regolamento Emittenti. Name Vincenzo D Antonio Blasetti Benedetto Francesco Fois Albert Ng Aik Khoon Yean Hung Chok Position Managing Director - EEMS Italia S.P.A. Operations Manager - EEMS Italia S.P.A. Administration and Finance Manager - EEMS Italia S.P.A. Managing Director - EEMS Asia Pte Ltd Operations Manager - EEMS Asia Pte Ltd Investee company Number of shares at start of year Number of shares acquired Number of shares sold Number of shares at end of year EEMS Italia SpA 2,504, ,504,700 EEMS Italia SpA 358, ,750 EEMS Italia SpA 11,230 2,360-13,638 EEMS Italia SpA 208,100-60, ,571 EEMS Italia SpA 135,515-74,491 61,024 Capital Expenditures The table below gives information on the major items of investment in fixed and intangible assets made by the Company in the years ended 31 December 2008 and (in thousands of euros) Investment in: Fixed assets 46,644 66,767 Comprising: Leased assets 95 - Corporate-owned assets 46,549 66,767 Intangible assets 2,366 3,558 Total 49,010 70,325 During 2008 the Group made capital investment, net of intercompany sales mainly made by EEMS Italia to EEMS Suzhou which were eliminated on consolidation, of Euro 46,644 thousand, principally in the factories of the Asian subsidiaries. This amount also includes the expenditure necessary to starting up the photovoltaic business, for Euro 14,053 thousand. Expenditure on intangible assets for the year ended 31 December 2008, amounting to Euro 2,366 thousand, relates mainly (for about Euro 2,308 thousand) to the rights obtained by Solsonica within the 14

15 DIRECTORS' REPORT agreement made with the German company Deutsche Solar AG and the Taiwanese company Mosel Vitelic Inc. which are both described in the notes to the consolidated financial statements. Global semiconductors market The semiconductors market is very sensitive to macroeconomic trends in that they are very closely related to widely consumed products such as, for example, computers, notebooks, cellular phones, TV sets, recorders, players and cars. It therefore follows that the economic and financial crisis is causing a reduction in consumption and hence a reduction in the end equipment which uses semiconductors. It is very difficult in the present economic crisis to estimate the impact this will have on the semiconductors industry. This time, market analysts do not have a general consensus and their forecasts show a notable range of oscillation: a reduction going from 10% to 20% for year 2009 with a possible inversion of the trend forecast by the more optimistic for the second half of 2009, and by the more cautious, for One thing is certain and that is that the start of the year has been very difficult. Also European producers such as Infineon and Stm have taken significant action to contain costs, making just as significant temporary reductions in production capacity. EEMS s business developed partly in the Mix Signal segment with its own production in Singapore and partly in the DRAM sector with its factories located in China. The fact that EEMS focused in back-end production services (defined as OSAT Outsourcing Service Assembly & Test) differentiates it from IDM businesses (Integrated Device Manufacturers) such as Stm and Infineon in that EEMS deals only with production services related to a part of the chain value. Demand and price trends In the specific sector of memories, the sequence of events has been historically very different from that for semiconductors, being marked by very intensive cycles of imbalance between supply and demand. The DRAM sector has for a long time been in a serious state of over-capacity which started as from the end of 2007 and has probably reached or is reaching a point of balance with demand just in these present months. From the chart presented below it can be seen that there certainly has been an inversion of trend in the DRAM cycle, which will develop shortly into a situation where scarcity of supply will tend to increase prices. This situation will allow DRAM producers to reduce and subsequently eliminate their losses and again enter a profits stage. 15

16 DIRECTORS' REPORT DRAM and NAND: Trend in supply compared with Trend in demand (source: Citi Research Feb. 09) In effect, in the following chart it can be seen that between the months of December and January there was a rebound in prices, albeit small, proving that the reductions in capacity and inventories are having their effect, being reflected in price recovery. DDR2: Price trend (source: Dramexchange) The proof that operators have taken all the necessary corrective action to reduce production capacity and align it to demand is also clear from the steep fall in capital spending which has passed rapidly from a peak of over 30 billion dollars in 2007 to slightly over 7 billion dollars forecast for It is reasonable to assume in the light of the above that such capital investment will be almost exclusively dedicated to technological improvements rather than to further increases in capacity. This development would be consistent with what is forecast for the next demand and supply cycle (see the above DRAM over(under) supply chart) which in fact indicates that the coming cycle will be the longest and deepest recorded with regard to scarcity of demand. 16

17 DIRECTORS' REPORT Investment (source: WSTS, SEC Company Data Feb. 09) Investment in technology will mainly be dedicated to the transition to channel-size nanometres. Technology Roadmap (source: Company Data, compiled by CIR Feb. 09) This improved technology, which is already in place, will allow DRAM producers to achieve significant cost reductions, and will lead to a recovery in margins and the manufacture of more highly performant products at more competitive prices. It is reasonable to expect that there will be a volume increase which in turn will be absorbed by higher demand. Typically, demand expressed in bits is growing about 50% per year. Technological change should provoke a significant increase in volumes as from 2009 up to 2012 for about 15.6% per year. In absolute terms, volume is forecast to rise from 14.4 billion pieces in 2008 to 24.7 million pieces in 2012, up 72%. 17

18 DIRECTORS' REPORT OSAT operators, which include EEMS, will benefit from a large proportion of this volume which is typically subdivided between IDM internal operations and a portion which is outsourced. This growth is forecast to continue in the future in that the IDMs will concentrate their investment mainly in their activities in the upstream area of the value chain, such as product planning and wafer processing technology. Estimated deliveries (source: Gartner, Samsung Q3, 2008) Global photovoltaic market The increase in energy costs, the ever-growing attention being paid to environmental impact and the heavy dependence on foreign supplies are making it increasingly more necessary to find alternative sources to the traditional ones which, in the light of the above, do not appear to be able to answer the growing worldwide demand for electric power. Among renewable sources, the photovoltaic solution seems to be the one with the best prospects for development. In effect, over recent years the photovoltaic industry, in terms of installed capacity at world level, has been growing at an average annual rate of over 30%. 10 Global cumulative PV capacity Installed world capacity (GW) CAGR : 30.4% Gw 1,428 1,762 2,201 2,795 3,847 5,167 6,770 9,162 18

19 DIRECTORS' REPORT Source: Epia (European Photovoltaic Industry Association) Future scenarios which take account, inter alia, of economic and industrial policies aimed at contrasting climate change and creating new development opportunities in industrialised nations, make it possible to foresee further growth in the photovoltaic industry over the coming years Cumulative capacity (GW) vs Market Value (B ) forecast up to 2030 Total capacity (GW) and market value ( billion) up to GW 500 B Gw 9,2 21, B Source: Epia (European Photovoltaic Industry Association) In Europe the photovoltaic market experienced enormous growth over recent years in terms of installed capacity. With regard to short-term prospects, growth should continue at a steady rate for countries such as Spain, France and Italy itself, which join Germany as drivers in the Old Continent. In addition, other countries bordering the Mediterranean are adopting incentive policies which should bring about further development in Europe. 19

20 DIRECTORS' REPORT Installed and cumulative capacity in Europe (MW) Source: EuPD Research Italian chart (Translation key: Altri paesi Other countries; Spagna Spain; Installato annuo Annual installed capacity; Accumulato Cumulative; Capacità accumulata Cumulative capacity) Growing demand in the European market, which up to now has not been supported by a local production chain of adequate dimensions, has been satisfied by supplies coming from Asian producers, with the sole exception of Germany which over recent years has established itself as a significant producer in the photovoltaic sector. Source: Navigant Consulting This said, it is considered of the utmost importance that Europe develop a production capacity which can meet the demand in growth. Among the industrialised countries, Italy is considered to be one with high potential in the developing market. 20

21 DIRECTORS' REPORT Installed and cumulative capacity in Italy * (MW) * Installed capacity Cumulative c capacity * Figures updated to 1 November 2008 Source: EPIA, GSE According to the reported data, at 1 November 2008 there were in operation over 10,000 new plants for a total capacity of 133 MW, nearly double that for the whole of With the new incentive system ( Conto Energia ) going into full rhythm, increasing public appreciation of sustainable energy and the favourable level of solar radiation, the Italian market has become one of the most interesting for the development of photovoltaic products, creating the basis for the birth of a national photovoltaic manufacturing industry. Research and development Our research and development department is an important element in maintaining a close relationship with customers. The department, which operates at the Asian plants, not only continually develops new test packages and technologies to supply customers with increasingly competitive and efficient solutions, but also develops modifications to the existing packages in use to adapt them to the specific characteristics of chips which are constantly evolving. The research and development department also provides a prototyping service to enable customers to integrate activities for the development of new chips and those relating to the packages themselves, thus permitting a general shortening in overall development periods and a higher level of reliability in the manufacture the final product. Research and development costs incurred by the Group are wholly charged off to profit and loss in the period incurred. During the year ended 31 December 2008 R&D costs amounted to Euro 551 thousand. This amount does not include other costs not directly incurred by the R&D department but which relate to this activity. 21

22 DIRECTORS' REPORT With regard to R&D for the photovoltaic division, during 2008 the first three module models were planned and developed: the Solsonica 610, 608 and 612. In addition, new manufacturing processes were finalised with particular attention being paid to output levels and the achievement of set quality targets. Studies are being carried out at present on alternative technologies to the use of silicon, such as CIGS and Mg-Si, to identify potential business development areas. Management and Control Organisational Model pursuant to Legislative Decree n 231/01 The Management and Control Organisational Model was introduced in February 2006 in accordance with Legislative Decree n 231/01, which also included the regulatory changes introduced by Legislative Decree n 61/102. The Management and Control Organisational Model adopted consists of a body of rules, tools and modes of conduct aimed at equipping the Company with a system reasonably suited to identifying and preventing serious criminal behaviour as defined by Legislative Decree n 231/2001, whether implemented by the Company itself or by parties under its management and supervision. The types of offences recently introduced are in the course of regulatory definition. The Supervisory Body, established in conformity with the regulatory requirements, implements the action plan for monitoring and evaluating the adequacy of the Management and Control Organisational Model adopted. It meets periodically to evaluate the checks performed and to examine the information flows transmitted by the corporate departments. Report on corporate governance and ownership Information on the system of corporate governance, company ownership and adherence to the codes of conduct is available on the Company s Internet site: Treatment of personal data Article 34 of Legislative Decree n 196 of 30 June 2003 provides that, in the case of the electronic processing of personal data, specific security measures must be adopted, according to what is set forth in the technical regulations set out in Appendix B of the law, which include, under letter g, the maintenance of an updated Security Planning Document (SPD). The SPD is a document in which, on the basis of a study made of risks, job distributions and responsibilities within the departments handling data processing, a description is given of the technical and organisational measures which have been taken to ensure, as required by law, that such data is being protected from the viewpoint of correct maintenance and handling. In compliance with Legislative Decree n 196/03, EEMS Italia has revised and updated the SPD that had previously been prepared pursuant to the law. Related parties and intercompany transactions The Group has no dealings with related parties other than subsidiaries. Intercompany transactions are governed by market conditions. Atypical and/or unusual operations There were no atypical and/or unusual operations in the year. 22

23 DIRECTORS' REPORT Financial risk management EEMS is exposed to financial risk connected with its operations, particularly in the following areas: - market risk (interest rate risk, foreign currency risk and price risk) - liquidity risk - credit risk - cash flow variation risk The Group monitors in a timely manner each of the abovementioned financial risks to minimize their impact, also through the use of hedge derivative instruments in the case of foreign exchange risks. The responsibility for setting the guidelines for Group policy in terms of risk management policies and the creation a risk management system for the Group belongs to the Board of Directors. The Finance and Control Department is in charge of the application and monitoring of these guidelines. For further information see Note 28 Financial risk management. Other risks and uncertainties Taking account of the potential causes that can give rise to other risks and uncertainties, such situations can be distinguished between those from internal and external sources. TYPE COMMENT AND PREVENTIVE ACTION INTERNAL Effectiveness/efficiency of processes Delegation Human resources Integrity Security Information Immaterial risk - The Group operates on the basis of processes which are technologically complex but there are no material uncertainties. - The delegation system is to a fair extent concentrated in a limited number of key persons. - Corporate management has an average experience in the sector of over 20 years. Should the professional relationship of a number of management members turn out to be lacking at the same time, this could have a negative effect on Group results. Immaterial risk - Staff competence is appropriate.. - Taking account of the nature of our operations, staff training is effected through onthe-job-training. - The parent company is an important corporate institution in the geographical area where it is located. - The work climate and relations with the unions are not hostile, neither in Italy nor in Asia Immaterial risk - Cases of fraud are rare and of small amount Immaterial risk - The Group adopts security standards which are appropriate and consistent with regulations in the countries where it operates. - The Company protects its assets through theft and illegal entry prevention systems, particularly for assets with a durable life and inventories. Immaterial risk - Information used to support strategic and operational decisions, although sometimes compiled manually, is available, complete, correct, reliable and timely. 23

24 DIRECTORS' REPORT Dependence Market Regulations Catastrophes Competition Political and social context - The semiconductors business is conditioned by dependence on a limited number of customers. EXTERNAL - There exists the risk of a reduction in the demand for outsourced services (Semiconductors) - Risk caused by technological innovation. The Group operates on the basis of technically complex processes which, in the case of technological innovation, entail significant financial investment. Immaterial risk No significant uncertainties are expected from potential modifications in Italian or foreign regulations such as to pose a threat to the business. Immaterial risk No concrete risks of catastrophe have been identified which could affect the business. - In the short (and partly also in the medium) term, there is a marginal risk of possible entry by new competitors or the creation of competitive practices by competitors which could have a negative effect on our market share (Semiconductors). - There is a concrete risk that new competitors may enter the market so as to negatively affect our expected results, given the development prospects for the photovoltaic sector (Photovoltaic). - For the photovoltaic business, this risk is not considered to be material (Photovoltaic) Outlook for the business Memories With due caution, as should be applied in an exceedingly turbulent market, the DRAM memories business might have reached its lowest point and could be ready for a price rebound, since production capacity has been heavily reduced through the voluntary decisions taken by all manufacturers in the sector or by a forced decision such as was the case of Qimonda which has practically abandoned all production given its state of insolvency. In addition, the intensive clearing out of inventories effected by memories producers over recent months with the temporary closure of plants can trigger recovery in plants remaining in existence as from the second quarter of this year or the second half of The singular nature of the consequences leading to Qimonda s default should be noted. On the one hand, this caused significant losses to EEMS in its 2008 financial statements, but on the other, it now places the EEMS Group in the position of having significant unutilised production capacity which can absorb the expected volumes growth without having to make further investment, if not that necessary to adapt technology to the migration towards DDR3 memories. This could bring about a significant competitive edge over other operators who before setting up such production capacity will require time and will have to find the necessary financial resources. This opportunity can have a positive fall-out for the EEMS Group as soon as the market trend has turned around (the first signals are noticeable), possibly already during the course of In addition EEMS, having closed the semiconductors activities in advance of the present crisis, now finds itself operating in a geographical area (China) where it can exploit, better than others, a very competitive structure. 24

25 DIRECTORS' REPORT Photovoltaic business With regard to the photovoltaic business, which although it is at the moment influenced by a lack of credit available to finance photovoltaic plant projects, the Company has installed the capacity necessary for cells and modules to sustain the business in 2009, which is forecast to grow over the preceding year. The installed production capacity for cells is 30 MWp and completion is being reached on expanding production capacity for 40 MWp modules. The Company intends to improve its market penetration and to do this it is going to pursue strategic alliances, as well as engaging in own initiatives, at the downstream end of the production chain. 25

26 DIRECTORS' REPORT EEMS Italia S.p.A. Operations and Performance Summary of financial position and results Selected parent company income statement data (in thousands of euros) 2008 % 2007 % Total operating revenues 24, , Operating result before depreciation and amortisation and writeback/writedown of non-current assets (8,590) (35.6) 9, Operating result (39,790) (164.8) (9,316) (17.1) Result before taxes (41,601) (172.3) (11,471) (21.1) Net result for the year (31,249) (129.4) (6,741) (12.4) Portion pertaining to the Group (31,249) (129.4) (6,741) (12.4) Portion pertaining to minority interests Number of shareholders 42,502,845 42,502,345 Number of employees - Italy Selected parent company balance sheet data (in thousands of euros) TOTAL NON-CURRENT ASSETS 157, ,009 TOTAL CURRENT ASSETS 25,214 28,048 ASSETS INTENDED FOR DECOMMISSION - 2,418 TOTAL ASSETS 182, ,475 TOTAL EQUITY 106, ,592 TOTAL NON-CURRENT LIABILITIES 48,413 43,573 TOTAL CURRENT LIABILITIES 27,579 12,310 TOTAL LIABILITIES 75,992 55,883 TOTAL LIABILITIES AND EQUITY 182, ,475 Summary parent company cash flow data (in thousands of euros) Cash flow from operational activities (2,768) 747 Cash flow from investment activities (17,708) (31,342) Cash flow from financial activities 26,030 12,600 Effect on cash of exchange fluctuations (119) (14) Net cash flow in the year 5,437 (18,009) 26

27 DIRECTORS' REPORT Certain financial indicators are shown below: Earnings indices ROE (25.6)% (4.8)% ROI (21.1)% (4.7)% ROS NS (18.3)% Solvency indices Treasury margin Solvency quotient Major shareholders Ordinary shares number 42,502,345. Shareholders possessing more than 2% thereof at 31 December 2008 are as follows: - Mallett Sarl (in liquidation): 42.65% - Vincenzo D Antonio: 5.89% Proposal for the approval of the 2008 financial statements of EEMS Italia S.p.A. and allocation of the results for the year To the Shareholders We thank you for the trust you have placed in us and invite you to approve the parent company and consolidated financial statements at 31 December 2008 as submitted to you, proposing that the loss for the year of Euro 31,249,240 be set against profits brought forward. 13 March 2009 For the Board of Directors The Chairman Giovanni Battista Nunziante 27

28 Consolidated Financial Statements of the EEMS Group at 31 December

29 CONSOLIDATED FINANCIAL STATEMENTS OF THE EEMS GROUP CONSOLIDATED INCOME STATEMENT Consolidated Income Statement (in thousands of euros) Revenues 6 153, ,870 Other operating income ,298 Total operating revenues 154, ,168 Raw materials and consumable stores used 8 55,526 48,806 - including: non-recurring items Services 9 31,416 22,811 - including: non-recurring items 1,620 - Staff costs 10 33,215 32,518 - including: non-recurring items 4,610 - Other operating costs 11 7,896 2,968 - including: non-recurring items 6,052 - Operating result before depreciation and amortisation and writebacks/writedowns of noncurrent assets 26,037 50,065 Depreciation and amortisation ,057 42,344 (Writebacks)/Writedowns , including: non-recurring items 23,889 - Operating result (45,091) 7,561 Financial income 12 2,668 1,137 Financial charges 12 (6,138) (5,231) Result before taxes (48,561) 3,467 Taxes for the year 13 (13,397) (8,613) Net result for the year (35,164) 12,080 Portion pertaining to the Group (35,164) 12,080 Portion pertaining to minority interests - - Profit (loss) per share for Group 14 (0.827) Profit (loss) per share for minority interests 14 (0.825)

30 CONSOLIDATED FINANCIAL STATEMENTS OF THE EEMS GROUP CONSOLIDATED BALANCE SHEET Consolidated Balance Sheet (in thousands of euros) Non-current assets: Intangible assets: 15 Goodwill 11,346 11,202 Definite-life intangible assets 5,133 3,447 Fixed assets: 16 Property, plant and equipment - corporate owned 167, ,279 Assets held under financial leases 5,201 11,544 Other non-current assets: Investments - - Financial accounts receivable - - Miscellaneous receivables and other non-current assets 17 9,488 3,723 Deferred tax assets 13,950 - TOTAL NON-CURRENT ASSETS 212, ,195 Current assets: Inventories 8 8,010 7,972 Trade receivables 18 12,458 32,458 Tax credits 19 5,272 1,697 Current financial assets - 11 Cash and cash equivalents 20 34,199 28,166 Other current assets 17 2,426 2,873 TOTAL CURRENT ASSETS 62,365 73,177 TOTAL ASSETS 274, ,372 Equity: 21 Equity pertaining to parent company 128, ,199 Equity pertaining to minority interests - - TOTAL EQUITY 128, ,199 Non-current liabilities: Non-current financial liabilities 22 61,069 59,485 Staff termination pay and other provisions 10 4,895 8,152 Deferred tax liabilities 13-1,188 Provision for future risks and charges 23 3, Miscellaneous payables and other non-current liabilities 23 1,708 - TOTAL NON-CURRENT LIABILITIES 71,185 69,153 Current liabilities: Current financial liabilities 22 48,354 15,090 Trade payables 24 18,742 31,205 Taxes payable Other current liabilities 26 7,819 6,146 TOTAL CURRENT LIABILITIES 75,383 53,020 TOTAL LIABILITIES 146, ,173 TOTAL LIABILITIES AND EQUITY 274, ,372 30

31 CONSOLIDATED FINANCIAL STATEMENTS OF THE EEMS GROUP CONSOLIDATED STATEMENT OF CASH FLOWS Consolidated Statement off Cash Flows (in thousands of euros) Results for the year (35,164) 12,080 Adjustments to reconcile the results for the year to cash flow from operations: Depreciation and amortisation 15,16 41,057 42,344 Provision for staff termination pay 10 1,104 1,482 Interest expense on staff termination pay actuarial calculation Other non-cash items (860) 919 Provision for future risks and charges 3, (Writeback)/writedown of property, plant and equipment 15,16 30, Deferred taxes 13 (14,707) (9,361) Net gains on sale of property, plant and equipment (200) (471) Staff termination pay disbursed 10 (4,655) (1,623) Change in current assets: Receivables 18,857 (14,251) Inventories 408 (1,774) Payables to suppliers excluding suppliers of investment assets (4,812) 4,022 Taxes payable (30) (529) Other flows (3,983) (6,653) Cash flow from operational activities 30,570 26,835 Proceeds from sale of property, plant and equipment 402 1,830 Purchases of property, plant and equipment (56,630) (62,645) Purchases of intangible assets (32) (1,279) Change in guarantee deposits (272) (514) Cash flow from investment activities (56,532) (62,608) New bank loans 54,871 54,093 Bank loan refunds (19,846) (21,156) Refund of principal on leased machinery arrangements (3,603) (5,609) Share capital increase Cash flow from financial activities 31,422 27,786 Effect on cash of exchange fluctuations 573 (387) Increase (decrease) in cash and cash equivalents 6,033 (8,374) Cash and cash equivalents at beginning of year 28,166 36,540 Cash and cash equivalents at end of year 20 34,199 28,166 Additional information: Taxes paid 1, Interest paid 5,902 3,029 31