1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from _______ to ________.
COMMISSION FILE NUMBER: 1-5740
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 95-2039518
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
3050 EAST HILLCREST DRIVE
WESTLAKE VILLAGE, CALIFORNIA 91362
(Address of principal executive (Zip code)
offices)
(805) 446-4800
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $0.66 2/3 AMERICAN STOCK EXCHANGE
(Title of each class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
The number of shares of the registrant's Common Stock outstanding as of
September 30, 1997 was 5,701,019 including 717,115 shares of treasury stock.
THIS REPORT INCLUDES A TOTAL OF 21 PAGES
THE EXHIBIT INDEX IS ON PAGE 19
2
DIODES INCORPORATED
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Information
Consolidated Condensed Balance Sheets at September 30,
1997 and December 31, 1996 3-4
Consolidated Condensed Statements of Income for the
three months and nine months ended September 30,
1997 and September 30, 1996 5
Consolidated Condensed Statements of Cash Flows for
the nine months ended September 30, 1997 and
September 30, 1996 6
Notes to Consolidated Condensed Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three months
and nine months ended September 30, 1997 and September 30, 8-16
1996
PART II - OTHER INFORMATION
Items 1 through 6 17
Signature 18
Index to Exhibits 19
2
3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL INFORMATION
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
CURRENT ASSETS
Cash $ 6,266,000 $ 1,820,000
Accounts receivable
Customers 10,034,000 7,901,000
Related party 443,000 376,000
Other 411,000 352,000
----------- -----------
10,888,000 8,629,000
Less allowance for doubtful receivables 175,000 253,000
----------- -----------
10,713,000 8,376,000
Inventories 12,588,000 13,268,000
Deferred income taxes 1,426,000 1,426,000
Prepaid expenses and other 957,000 345,000
----------- -----------
Total current assets 31,950,000 25,235,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 4,649,000 4,628,000
ADVANCES TO RELATED PARTY VENDOR 2,772,000 2,631,000
OTHER ASSETS 68,000 52,000
----------- -----------
TOTAL ASSETS $39,439,000 $32,546,000
=========== ===========
See accompanying notes
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4
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
CURRENT LIABILITIES
Due to bank $ 1,000,000 $ --
Accounts payable
Trade 3,805,000 2,303,000
Related party 1,624,000 2,250,000
Accrued liabilities
Compensation and payroll tax 1,425,000 1,292,000
Other accrued liabilities 1,436,000 810,000
Income taxes payable 1,065,000 223,000
Current portion of long-term debt 1,035,000 954,000
----------- -----------
Total current liabilities 11,390,000 7,832,000
LONG-TERM DEBT, net of current portion 3,504,000 4,288,000
MINORITY INTEREST IN JOINT VENTURE 1,265,000 962,000
STOCKHOLDERS' EQUITY
Class A convertible preferred stock
par value $1.00 per share;
1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock - par value $0.66 2/3 per share;
9,000,000 shares authorized; 5,675,794 and
5,701,019 shares issued and outstanding
at December 31, 1996
and September 30, 1997, respectively 3,801,000 3,784,000
Additional paid-in capital 5,813,000 5,768,000
Retained earnings 15,448,000 11,694,000
----------- -----------
25,062,000 21,246,000
Less:
Treasury stock - 717,115 shares of common stock at cost 1,782,000 1,782,000
----------- -----------
Total stockholders' equity 23,280,000 19,464,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,439,000 $32,546,000
=========== ===========
See accompanying notes
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5
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
NET SALES $ 16,939,000 $ 14,394,000 $ 48,969,000 $ 41,050,000
COST OF GOODS SOLD 12,517,000 10,893,000 35,159,000 30,381,000
------------ ------------ ------------ ------------
Gross profit 4,422,000 3,501,000 13,810,000 10,669,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,569,000 2,388,000 8,647,000 7,397,000
------------ ------------ ------------ ------------
Income from operations 1,853,000 1,113,000 5,163,000 3,272,000
OTHER INCOME (EXPENSE)
Interest income 73,000 55,000 206,000 144,000
Interest expense (98,000) (149,000) (298,000) (421,000)
Minority interest in
joint venture earnings (42,000) 71,000 (290,000) 83,000
Commissions and other 159,000 88,000 361,000 265,000
------------ ------------ ------------ ------------
92,000 65,000 (21,000) 71,000
INCOME BEFORE INCOME TAXES 1,945,000 1,178,000 5,142,000 3,343,000
PROVISION FOR INCOME TAXES 604,000 423,000 1,388,000 1,185,000
------------ ------------ ------------ ------------
NET INCOME $ 1,341,000 $ 755,000 $ 3,754,000 $ 2,158,000
============ ============ ============ ============
EARNINGS PER SHARE
PRIMARY $ 0.24 $ 0.14 $ 0.69 $ 0.40
FULLY-DILUTED $ 0.24 $ 0.14 $ 0.67 $ 0.40
============ ============ ============ ============
Weighted average shares
outstanding
Primary 5,538,282 5,235,179 5,447,608 5,390,866
Fully-diluted 5,582,673 5,293,366 5,580,210 5,390,866
============ ============ ============ ============
See accompanying notes
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6
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,754,000 $ 2,158,000
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 625,000 224,000
Increase (decrease) in allowance for doubtful
accounts (78,000) 61,000
Minority interest in joint venture 303,000 (83,000)
(Increase) decrease in operating assets:
Accounts receivable (2,259,000) (1,740,000)
Inventories 680,000 2,254,000
Prepaid expenses and other (612,000) (702,000)
(Decrease) increase in operating liabilities:
Accounts payable 876,000 (2,797,000)
Accrued liabilities 759,000 1,718,000
Income taxes payable 842,000 (525,000)
----------- -----------
Net cash provided by operating activities 4,890,000 568,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (584,000) (1,454,000)
Acquisition of other assets (16,000) (808,000)
Advances to affiliates (141,000) (2,587,000)
Minority interest contribution to joint venture -- 1,213,000
----------- -----------
Net cash used by investing activities (741,000) (3,636,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on line of credit, net 1,081,000 (917,000)
Proceeds from (repayments of) long-term obligations (784,000) 4,971,000
----------- -----------
Net cash provided by financing activities 297,000 4,054,000
----------- -----------
INCREASE IN CASH $ 4,446,000 $ 986,000
CASH AT BEGINNING OF PERIOD $ 1,820,000 $ 478,000
----------- -----------
CASH AT END OF PERIOD $ 6,266,000 $ 1,464,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-Cash Investing Activities
Conversion of joint venture investment to plant
and equipment $ -- $ 1,878,000
=========== ===========
Cash paid (received) during the year for:
Interest $ 233,000 $ 387,000
=========== ===========
Income taxes $ 1,263,000 $ 2,210,000
=========== ===========
See accompanying notes
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7
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated, condensed financial
statements have been prepared in accordance with the instruction to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position and results of operations have been
included. Operating results for interim periods are not necessarily indicative
of the results that may be expected for the full year. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report in Form 10-K for the calendar year ended December
31, 1996.
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiary, Diodes Taiwan Co., Ltd. (a foreign
subsidiary), and the accounts of the Kai Hong joint venture in which the Company
has a 70% controlling interest. All significant intercompany balances and
transactions have been eliminated.
NOTE B - INCOME TAXES
The Company accounts for the income taxes using an asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for tax effect of differences between the financial statement and tax
basis of assets and liabilities. Accordingly, the Company has recorded a net
deferred tax asset of $1,426,000 resulting from temporary differences in bases
of assets and liabilities. This deferred tax asset results primarily from
inventory reserves and expense accruals which are not currently deductible for
income tax purposes.
The income tax expense as a percentage of pre-tax income differs
from the statutory combined federal and state tax rates. The primary reasons for
this difference are (i) in accordance with Chinese tax policy, earnings of the
Kai Hong joint venture are not subject to tax for the first two years upon
commencement of profitable operations, and (ii) earnings of the Company's
subsidiary in Taiwan are subject to tax at a lower rate than in the U.S.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the
matters addressed in this Item 2 constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are subject to a variety of risks and uncertainties,
including those discussed below under the heading "Factors That May Affect
Future Results" and elsewhere in this Report on Form 10-Q, that could cause
actual results to differ materially from those anticipated by the Company's
management. The Private Securities Litigation Reform Act of 1995 (the "Act")
provides certain "safe harbor" provisions for forward-looking statements. All
forward-looking statements made on this Quarterly Report on Form 10-Q are made
pursuant to the Act.
GENERAL
Diodes Incorporated (the "Company") is a provider of high-quality
discrete semiconductor devices to leading manufacturers in the automotive,
electronics, computing and telecommunications industries. The Company's products
include small signal transistors, medium-power MOSFETs, transient voltage
suppressors (TVSs), zeners, Schottkys, diodes, rectifiers and bridges.
In July 1997, Vishay Intertechnology, Inc. ("Vishay") and The
Lite-On Group, a Taiwanese consortium, announced the formation of a joint
venture -- Vishay/Lite-On Power Semiconductor Pte., LTD. ("Vishay/LPSC") -- to
acquire Lite-On Power Semiconductor Corp. ("LPSC"), a member of The Lite-On
Group and the Company's largest shareholder. Vishay, with worldwide sales
exceeding $1 billion, is the world's largest manufacturer of passive electronic
components. The Lite-On Group, with worldwide sales of almost $2 billion, is a
leading manufacturer of power semiconductors, computer peripherals, and
communication products.
In August 1997, the Company announced that its discrete
semiconductor products will now be marketed under a single brand --
"Vishay/Lite-On Power Semiconductor". The Company will benefit from a uniform
brand identity and will explore marketing methods to use Vishay's resources
combined with planned enhancements to its own engineering and manufacturing
capabilities, to develop ever more advanced products, to enhance product
quality, and further enhance customer service.
In October 1997, the Company announced the appointment of a new
President, Michael A. Rosenberg, to replace David Lin who resigned to pursue
other business interests. Mr. Rosenberg, a director of the Company since 1989
and an independent consultant to Vishay, was from 1970 to 1991 associated with
SFE Technologies, a Southern California based manufacturer of electronic
components, including positions as President and chief executive officer, as
well as a member of the Board of Directors. Both Mr. Rosenberg and Mr. Lin will
remain members of the Board of Directors of the Company.
One of the Company's primary strategic programs was the formation
of the Kai Hong joint venture, formed in the first half of 1996. The Kai Hong
joint venture, in which the Company has invested $2.8 million in a SOT-23
manufacturing facility on mainland China, continues to contribute positively to
the Company's bottom line throughout 1997, as well as provides replacements for
a portion of the parts no longer available due to the sale of one of the
Company's major suppliers. Due to the success of the first phase of Kai Hong as
well as prevailing market conditions, the Company's Board of Directors has
approved funding for further expansion of the joint venture. The capital
required for the second and third phases of Kai Hong is estimated at $14.0
million. The Company will use its existing credit facility to finance the
additional manufacturing capacity.
As of September 30, 1997, the Company had a 70% controlling
interest in the Kai Hong joint venture, but will increase its interest in Kai
Hong to 95% through the purchase of a portion of the interest held by its joint
venture partner in the fourth quarter of 1997. The purchase price, as per the
joint venture agreement, will be approximately $2.1 million and will result in
approximately $1.1 million in goodwill. Since its inception, all of Kai Hong's
sales have been to the Company and, thus, categorized as intercompany sales
which do not contribute to total
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consolidated sales. It is anticipated that with the approved additional
manufacturing capacity, future sales will be made to unaffiliated customers, as
well as to the Company, thus contributing to total consolidated sales.
The Company's Taiwan and Kai Hong manufacturing facilities
receive wafers from FabTech, Inc. ("FabTech") (a wholly-owned subsidiary of
Vishay/LPSC) as well as from other sources. Output from the FabTech facility
includes wafers, which may be used in the production of such products as
Schottky barrier diodes, fast recovery epitaxial diodes (FREDs), and other
widely used value-added products. Schottky barrier diodes are employed in the
manufacture of the power supplies found in personal computers,
telecommunications devices and myriad other applications where high frequency,
low forward voltage and fast recovery are required.
Both the Kai Hong and FabTech alliances are indicative of the
Company's desire to participate in the sourcing of advanced-technology discrete
components, and to enhance its ability to procure products in a timely fashion
and at reasonable costs.
The Company will continue its strategic plan of locating
alternate sources of its products, including those provided by its major
suppliers. Alternate sources include, but are not limited to, the Kai Hong joint
venture and other sourcing agreements in place as well as those in negotiations.
The Company anticipates that the effect of the loss of any one of its major
suppliers will not have a material adverse effect on the Company's operations
provided that alternate sources remain available. The Company continually
evaluates alternative sources of its products to assure its ability to deliver
high quality, cost effective products.
The Company's contracts are primarily in U.S dollars. To a
limited extent, and from time to time, the Company contracts (e.g. a portion of
the equipment purchases for the Kai Hong expansion) in foreign currencies. Due
to the limited number of contracts denominated in foreign currencies and the
complexities of currency hedges, the Company has not engaged in hedging to date.
If the volume of contracts written in foreign currencies increases, and the
Company does not engage in currency hedging, any substantial increase in the
value of such currencies could have a material adverse effect on the Company's
results of operations. Management believes that the contracts written in foreign
currency are not significant enough to justify the costs inherent in currency
hedging.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The following table sets forth, for the periods indicated, the
percentage which certain items in the statement of income bear to net sales and
the percentage dollar increase (decrease) of such items from period to period.
PERCENT OF NET SALES PERCENTAGE DOLLAR
THREE MONTHS ENDED SEPTEMBER 30, INCREASE (DECREASE)
------------------- -----
1997 1996 `96 TO `97
----- ----- -----
Net sales 100.0 % 100.0 % 17.7 %
Cost of goods sold (73.9) (75.7) 14.9
----- ----- -----
Gross profit 26.1 24.3 26.3
SG&A (15.2) (16.6) 7.6
----- ----- -----
Income from operations 10.9 7.7 66.5
Interest expense, net (0.1) (0.6) (73.4)
Other income 0.7 1.1 (26.4)
----- ----- -----
Income before taxes 11.5 8.2 65.1
Income taxes 3.6 3.0 42.8
----- ----- -----
Net income 7.9 5.2 77.6
===== ===== =====
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
three months ended September 1997 compared to the three months ended September
30, 1996. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this quarterly
report.
1997 1996
---- ----
NET SALES $ 16,939,000 $ 14,394,000
Net sales increased approximately $2.5 million, or 17.7%, for the
three months ended September 30, 1997 compared to the same period last year, due
primarily to an increase in customer demand in Asian markets resulting in an
increase in the number of units shipped. Throughout most of 1996, the industry
experienced a substantial decrease in demand, combined with excess inventory
among the Company's customers, which negatively affected the Company's net sales
and gross profit margins in 1996.
1997 1996
---- ----
GROSS PROFIT $ 4,422,000 $ 3,501,000
GROSS PROFIT MARGIN PERCENTAGE 26.1% 24.3%
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Gross profit increased approximately $921,000, or 26.3%, for the
three months ended September 30, 1997 compared to the same period a year ago,
primarily as a result of the 17.7% increase in net sales, and increased gross
profit from sales of product manufactured by the Kai Hong joint venture, as well
as from continued improvements in inventory management. Positive gross profit
from the Kai Hong manufacturing facility began in the first quarter of 1997.
Pricing pressures exist and there can be no assurance that gross margins can be
maintained.
1997 1996
---- ----
SG&A $ 2,569,000 $ 2,388,000
Selling, general and administrative expenses ("SG&A") for the
three months ended September 30, 1997 increased approximately $181,000, or 7.6%,
compared to the same period last year, due primarily to an increase of
approximately $127,000 in sales commissions paid on the 17.7% increase in net
sales and approximately $114,000 associated with new marketing programs and
personnel, partially offset by approximately $136,000 in decreased operating
expenses associated with the Kai Hong manufacturing facility which commenced
operations in the second quarter of 1996.
1997 1996
---- ----
INTEREST INCOME $ 73,000 $ 55,000
INTEREST EXPENSE $ 98,000 $ 149,000
Interest income for the three months ended September 30, 1997
increased $18,000, or 32.7%, compared to the same period last year. Interest
income is primarily the interest charged to FabTech under the Company's loan
agreement, as well as earnings on its cash balances. The Company's interest
expense for 1997 decreased $51,000, or 34.2%, as a result debt reduction.
Interest expense is primarily the result of the term loan by which the Company
financed (i) the $2.8 million investment in the Kai Hong joint venture and (ii)
the $2.5 million advanced to FabTech, a related party.
1997 1996
---- ----
MINORITY INTEREST IN JOINT VENTURE $ (42,000) $ 71,000
Minority interest in joint venture for the three months ended
September 30, 1997 represents the minority investor's share of the Kai Hong
joint venture's net income for the period. The joint venture investment is
eliminated in consolidation of the Company's financial statements and the
activities of Kai Hong are included therein. As of September 30, 1997, the
Company had a 70% controlling interest in the joint venture, but will increase
its interest in Kai Hong to 95% beginning in the fourth quarter of 1997.
1997 1996
---- ----
COMMISSIONS AND OTHER INCOME $ 159,000 $ 88,000
Other income for the three months ended September 30, 1997
increased approximately $71,000, or 80.7%, compared to other income for the same
period in 1996 primarily as a result of increased commissions earned by the
Company's Taiwan subsidiary on drop shipment sales in Asia.
1997 1996
---- ----
INCOME TAXES $ 604,000 $ 423,000
Income tax expense for the three months ended September 30, 1997
increased approximately $181,000, or 42.8%, compared to income taxes for the
same period last year. The Company's effective tax rate in the current quarter
decreased to 31.1% from 35.9% for the same period last year, as a result of the
net income in China from the Kai Hong joint venture, which under Chinese tax law
is exempt from tax for the first two years upon
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commencing profitable operation. Also contributing to the effective tax rate
decrease were increased earnings of the Company's subsidiary in Taiwan, which
are subject to tax at a lower rate than in the U.S.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The following table sets forth, for the periods indicated, the
percentage which certain items in the statement of income bear to net sales and
the percentage dollar increase (decrease) of such items from period to period.
PERCENT OF NET SALES PERCENTAGE DOLLAR
NINE MONTHS ENDED SEPTEMBER 30, INCREASE (DECREASE)
----------------------- -----
1997 1996 `96 TO `97
----- ----- -----
Net sales 100.0 % 100.0 % 19.3 %
Cost of goods sold (71.8) (74.0) 15.7
----- ----- -----
Gross profit 28.2 26.0 29.4
SG&A (17.7) (18.0) 16.9
----- ----- -----
Income from operations 10.5 8.0 57.8
Interest expense, net (0.1) (0.7) (48.0)
Other income 0.1 0.8 (79.6)
----- ----- -----
Income before taxes 10.5 8.1 53.8
Income taxes 2.8 2.8 17.1
----- ----- -----
Net income 7.7 5.3 74.0
===== ===== =====
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
nine months ended September 30, 1997 compared to the nine months ended September
30, 1996. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this quarterly
report.
1997 1996
---- ----
NET SALES $ 48,969,000 $ 41,050,000
Net sales increased approximately $7.9 million, or 19.3%, for the
nine months ended September 30, 1997 compared to the same period last year, due
primarily to an increase in customer demand in Asian markets resulting in an
increase in the number of units shipped. Throughout most of 1996, the industry
experienced a substantial decrease in demand, combined with excess inventory
among the Company's customers which negatively affected the Company's net sales
and gross profit margins in 1996.
1997 1996
---- ----
GROSS PROFIT $ 13,810,000 $ 10,669,000
GROSS PROFIT MARGIN PERCENTAGE 28.2% 26.0%
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Gross profit for the nine months ended September 30, 1997
increased approximately $3.1 million, or 29.4%, compared to the same period last
year, primarily as a result of the 19.3% increase in net sales, and increased
gross profit from sales of product manufactured by the Kai Hong joint venture,
as well as from continued improvements in inventory management Positive gross
profit from the Kai Hong manufacturing facility began in the first quarter of
1997. Pricing pressures exist and there can be no assurance that gross margins
can be maintained.
1997 1996
---- ----
SG&A $ 8,647,000 $ 7,397,000
SG&A for the nine months ended September 30, 1997 increased
approximately $1.3 million, or 16.9%, compared to the same period last year, due
primarily to: (i) an increase of approximately $270,000 in sales commissions
paid on the 19.3% increase in net sales, (ii) approximately $99,000 in operating
expenses associated with the Kai Hong manufacturing facility which commenced
operations in the second quarter of 1996, and (iii) $335,000 associated with new
marketing programs and personnel.
1997 1996
---- ----
INTEREST INCOME $ 206,000 $ 144,000
INTEREST EXPENSE $ 298,000 $ 421,000
Interest income for the nine months ended September 30, 1997
increased approximately $62,000, or 43.1%, compared to the same period last
year. Interest income is primarily the interest charged to FabTech under the
Company's loan agreement as well as earnings on the Company's cash balances. The
Company's interest expense for 1997 decreased $123,000 or 29.2%, as a result of
debt reduction. Interest expense is primarily the result of the term loan by
which the Company financed (i) the $2.8 million investment in the Kai Hong joint
venture and (ii) the $2.5 million advanced to FabTech, a related party.
1997 1996
---- ----
MINORITY INTEREST IN JOINT VENTURE $ (290,000) $ 83,000
Minority interest in joint venture for the three months ended
September 30, 1997 represents the minority investor's share of the Kai Hong
joint venture's net income for the period. The joint venture investment is
eliminated in consolidation of the Company's financial statements and the
activities of Kai Hong are included therein. As of September 30, 1997, the
Company had a 70% controlling interest in the joint venture, but will increase
its interest in Kai Hong to 95% beginning in the fourth quarter of 1997.
1997 1996
---- ----
COMMISSIONS AND OTHER INCOME $ 361,000 $ 265,000
Other income for the nine months ended September 30, 1997
increased approximately $96,000, or 36.2%, compared to other income for the same
period in 1996 primarily as a result of increased commissions earned by the
Company's Taiwan subsidiary on drop shipment sales in Asia.
1997 1996
---- ----
INCOME TAXES $ 1,388,000 $ 1,185,000
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Income tax expense for the nine months ended September 30, 1997
increased approximately $203,000, or 17.1%, compared to income taxes for the
same period last year. The Company's effective tax rate in the current quarter
decreased to 27.0% from 35.4% as a result of the net income in China from the
Kai Hong joint venture, which under Chinese tax law is exempt from tax for the
first two years upon commencing profitable operation. Also contributing to the
effective tax rate decrease were increased earnings of the Company's subsidiary
in Taiwan, which are subject to tax at a lower rate than in the U.S. FINANCIAL
CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended
September 30, 1997 was approximately $4.8 million compared to cash provided by
operating activities of $568,000 for the nine months ended September 30, 1996.
The primary source of cash flows from operating activities for the nine months
ended September 30, 1997 was net income of approximately $3.8 million. The
primary use of cash flows from operating activities was approximately $2.3
million increase in accounts receivable. Gross accounts receivable increased
26.2% on a 19.3% increase in net sales as the Company continues to closely
monitor its credit policy while, at times, providing more flexible terms when
necessary. The ratio of the Company's current assets to current liabilities on
September 30, 1997 was 2.8 to 1 compared to a ratio of 3.2 to 1 as of December
31, 1996.
Cash used by investing activities was $679,000 for the nine
months ended September 30, 1997, compared to $3.6 million for the same period in
1996. The primary investments were approximately $220,000 for computer system
upgrades as well as approximately $300,000 for additional manufacturing
equipment at Kai Hong.
As of September 30, 1997, the Company had a 70% interest in the
Kai Hong joint venture, is responsible for production and management, and
currently receives 100% of the production. The venture parties have made a
significant equity contribution to the joint venture and a portion of the cost
of developing the project is debt financed. Phase one of the Kai Hong operation
is in full production with its existing equipment and, since the first quarter
of 1997, has made a positive contribution to the Company's profitability. The
joint venture agreement allows for additional production expansion in phases
according to market demand. Due to the success of the first phase of Kai Hong as
well as prevailing market conditions, the Company's Board of Directors has
approved funding for further expansion of the joint venture. The capital
required for the second and third phases of Kai Hong is estimated to be $14.0
million. In the fourth quarter of 1997, the Company will also increase its
interest in the Kai Hong joint venture to 95% through the purchase of a portion
of the interest held by its joint venture partner. The purchase price, as per
the joint venture agreement, will be approximately $2.1 million and will result
in approximately $1.1 million in goodwill to be amortized over 25 years. The
Company will use it's existing credit facility to finance both the additional
manufacturing capacity and the increased ownership.
Cash provided by financing activities was approximately $297,000
as of September 30, 1997, compared to cash provided of approximately $4.1
million for the same period in 1996.
In August 1996, the Company obtained a $22.6 million credit
facility with a major bank consisting of: a working capital line of credit up to
$9 million, term commitment notes providing up to $9.5 million for plant
expansion and advances to vendors, and letters of credit of $4.1 million for Kai
Hong. Interest on outstanding borrowings under the credit agreement is payable
monthly at LIBOR plus a negotiated margin. Fixed borrowings require payments of
interest only for six months from the date of distribution and fixed principal
plus interest payments for sixty months thereafter. The agreement has certain
covenants and restrictions which, among other matters requires the maintenance
of certain financial ratios and operating results, as defined in the agreement.
The Company was in compliance as of September 30, 1997. The working capital line
of credit expires August 3, 1998 and contains a sublimit of $2.0 million for
issuance of commercial and stand-by letters of credit. The weighted average
interest rate on outstanding borrowings was 6.9% for the nine months ended
September 30, 1997.
As of September 30, 1997, $4.3 million is outstanding under the
term note commitment. The Company may borrow the remaining $5.2 million
available under the term note commitment through September 30, 1997. The credit
facility extension is currently being negotiated. The Company also has two
guaranty agreements
14
15
which guarantee term loans made by a major bank to Shanghai Kaihong Electronics
Co., Ltd. (Kai Hong) (to assist Kai Hong in establishing a credit record with
the bank) and the minority investor of the Kai Hong joint venture (as per the
Kai Hong joint venture agreement) for $1.0 million and $850,000, respectively.
Upon completion of the Company's increase in joint venture interest to 95%, the
$850,000 guarantee agreement will be terminated. In the event that the Company
shall be required to pay any amount whatsoever to any person pursuant to, in
connection with or as a result of or relating to the guaranty, the Company shall
have the right, in its sole and absolute discretion, to purchase from the
minority investor, and the minority investor hereby sells and assigns to the
Company, that portion of the minority investor's shares of the capital stock of
Shanghai Kaihong Electronics Co., Ltd. obtained by dividing (x) the amount so
paid by the Company by (v) the aggregate amount theretofor required to be paid
by the minority investor to Shanghai Kaihong Electronics Co., Ltd. for the
purchase of such shares, in cancellation of the minority investor's obligations
to reimburse for the Company for such amount so paid by the Company.
The Company uses its credit facility to fund the advances to
FabTech and Kai Hong as well as to support its operations. The Company believes
that the continued availability of this credit facility, together with
internally generated funds, will be sufficient to meet the Company's currently
foreseeable operating cash requirements. The Company's cash balance at September
30, 1997 increased approximately $4.4 million compared to the December 31, 1996
cash balance primarily as a result of cash flow from operating activities.
The Company's total working capital increased 18.4% to $20.6
million as of September 30, 1997 from $17.4 million as of December 31, 1996. The
Company believes that its working capital position will be sufficient for its
capital requirements in the foreseeable future.
As of September 30, 1997, the Company has no material plans or
commitments for capital expenditures other than for the Kai Hong expansion and
the increased ownership in the Kai Hong joint venture previously mentioned.
However, to ensure that the Company can secure reliable and cost effective
sourcing to support and better position itself for growth, the Company is
continuously evaluating additional sources of products. The Company believes its
credit and financial position will provide sufficient access to funds should an
appropriate investment opportunity arise, and, thereby, assist the Company in
improving customer satisfaction and in maintaining or increasing product market
penetration. The Company's debt to equity ratio increased to 0.64 at September
30, 1997 from 0.62 at December 31, 1996. The Company anticipates this ratio may
increase should the Company continue to use its credit facilities to fund
additional sourcing opportunities.
Factors That May Affect Future Results
Except for the historical information contained herein, the
matters addressed in this Item 2 constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are subject to a variety of risks and uncertainties,
including those discussed below under the heading "Factors That May Affect
Future Results" and elsewhere in this Report on Form 10-Q, that could cause
actual results to differ materially from those anticipated by the Company's
management. The Private Securities Litigation Reform Act of 1995 (the "Act")
provides certain "safe harbor" provisions for forward-looking statements. All
forward-looking statements made on this Quarterly Report on Form 10-Q are made
pursuant to the Act.
All forward-looking statements contained in this Form 10-Q are
subject to, in addition to the other matters described in this Report on Form
10-Q, a variety of significant risks and uncertainties. The following discussion
highlights some of these risks and uncertainties. Further, from time to time,
information provided by the Company or statements made by its employees may
contain forward-looking information. There can be no assurance that actual
results or business conditions will not differ materially from those set forth
or suggested in such forward-looking statements as a result of various factors,
including those discussed below.
There are many factors that could cause the events in such
forward looking statements to not occur, including, but not limited to, general
or specific economic conditions, fluctuations in product demand, the
introduction of new products, the Company's ability to maintain customer
relationships, technological advancements,
15
16
impact of competitive products and pricing, growth in targeted markets, risks of
foreign operations, the ability and willingness of the Company's customers to
purchase products provided by the Company, the perceived absolute or relative
overall value of these products by the purchasers, including the features,
quality, and price in comparison to other competitive products, the level of
availability of products and substitutes and the ability and willingness of
purchasers to acquire new or advanced products, and pricing, purchasing,
financing, operating, advertising and promotional decisions by intermediaries in
the distribution channels which could affect the supply of or end-user demands
for the Company's products, the amount and rate of sales growth and the
Company's selling, general and administrative expenses, difficulties in
obtaining materials, supplies and equipment, difficulties of delays in the
development, production, testing and marketing of products including, but not
limited to, failure to ship new products and technologies when anticipated, the
failure of customers to accept these products or technologies when planned,
defects in products, any failure of economies to develop when planned, the
acquisition of fixed assets and other assets, including inventories and
receivables, the making or incurring of any expenditures, the effects of and
changes in trade, monetary and fiscal policies, laws and regulations, other
activities of governments, agencies and similar organizations and social and
economic conditions, such as trade restriction or prohibition, inflation and
monetary fluctuation, import and other charges or taxes, the ability or
inability of the Company to obtain or hedge against foreign currency, foreign
exchange rates and fluctuations in those rates, intergovernmental disputes as
well as actions affecting frequency, use and availability, the costs and other
effects of legal investigations, claims and changes in those items, developments
or assertions by or against the Company relating to intellectual property
rights, adaptations of new, or changes in, accounting policies and practices in
the application of such policies and practices and the effects of changes within
the Company's organization or in compensation benefit plans, and activities of
parties with which the Company has an agreement or understanding, including any
issues affecting any investment or joint venture in which the Company has an
investment, and the amount, and the cost of financing which the Company has, and
any changes to that financing, and any other information detailed from time to
time in the Company's filings with the United States Securities and Exchange
Commission.
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17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no matters to be reported under this heading.
ITEM 2. CHANGES IN SECURITIES
There are no matters to be reported under this heading.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no matters to be reported under this heading.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There are no matters to be reported under this heading.
ITEM 5. OTHER INFORMATION
There are no matters to be reported under this heading.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DIODES INCORPORATED (Registrant)
/s/ Joseph Liu November 11, 1997
JOSEPH LIU
Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
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19
INDEX TO EXHIBITS
EXHIBIT - 11 COMPUTATION OF EARNINGS PER SHARE Page 20
EXHIBIT - 27 FINANCIAL DATA SCHEDULE Page 21
19
1
DIODES INCORPORATED AND SUBSIDIARIES
EXHIBIT - 11
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
PRIMARY
Weighted average number of
common shares outstanding 4,977,033 4,958,679 4,966,256 4,958,652
Assumed exercise of stock options 561,249 276,500 481,352 432,214
---------- ---------- ---------- ----------
5,538,282 5,235,179 5,447,608 5,390,866
Net income $1,341,000 $ 755,000 $3,754,000 $2,158,000
========== ========== ========== ==========
Primary earnings per share $ 0.24 $ 0.14 $ 0.69 $ 0.40
========== ========== ========== ==========
FULLY-DILUTED
Weighted average number of
common shares outstanding 4,977,033 4,958,679 4,966,256 4,958,652
Assumed exercise of stock options 605,640 334,687 613,954 *432,214
---------- ---------- ---------- ----------
5,582,673 5,293,366 5,580,210 5,390,866
Net income $1,341,000 $ 755,000 $3,754,000 $2,158,000
========== ========== ========== ==========
Fully diluted earnings per share $ 0.24 $ 0.14 $ 0.67 $ 0.40
========== ========== ========== ==========
* No further effect given to common stock equivalents as their effect would be
anti-dilutive.
20
5
3-MOS
DEC-31-1997
JUL-01-1997
SEP-30-1997
6,266,000
0
10,888,000
175,000
12,588,000
31,950,000
7,047,000
2,398,000
39,439,000
11,390,000
0
0
0
3,801,000
21,261,000
39,439,000
16,939,000
16,939,000
12,517,000
2,569,000
0
0
25,000
1,945,000
604,000
1,341,000
0
0
0
1,341,000
0.24
0.24
