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 JUNE 30, 1998
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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3050 EAST HILLCREST DRIVE
WESTLAKE VILLAGE, CALIFORNIA 91362
(Address of principal executive offices) (Zip code)
(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 June 30,
1998 was 5,764,352 including 717,115 shares of treasury stock.
THIS REPORT INCLUDES A TOTAL OF 22 PAGES
THE EXHIBIT INDEX IS ON PAGE 18
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL INFORMATION
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
CURRENT ASSETS
Cash $ 2,118,000 $ 2,325,000
Accounts receivable
Customers 9,382,000 10,342,000
Related party 118,000 213,000
Other 429,000 916,000
----------- -----------
9,929,000 11,471,000
Less allowance for doubtful receivables 108,000 74,000
----------- -----------
9,821,000 11,397,000
Inventories 15,865,000 13,525,000
Deferred income taxes 1,096,000 1,096,000
Prepaid expenses and other 387,000 806,000
----------- -----------
Total current assets 29,287,000 29,149,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 9,079,000 5,165,000
ADVANCES TO RELATED PARTY VENDOR 2,924,000 2,821,000
OTHER ASSETS 1,317,000 1,219,000
----------- -----------
TOTAL ASSETS $42,607,000 $38,354,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
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DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
CURRENT LIABILITIES
Due to bank $ 2,643,000 $ 1,000,000
Accounts payable
Trade 2,559,000 4,567,000
Related party 1,274,000 952,000
Accrued liabilities 1,651,000 1,988,000
Income taxes payable 452,000 912,000
Current portion of long-term debt 1,729,000 1,031,000
----------- -----------
Total current liabilities 10,308,000 10,450,000
LONG-TERM DEBT, net of current portion 5,470,000 3,226,000
MINORITY INTEREST IN JOINT VENTURE 413,000 225,000
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; 5,764,352 and 5,701,019
shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively 3,843,000 3,801,000
Additional paid-in capital 6,027,000 5,813,000
Retained earnings 18,328,000 16,621,000
----------- -----------
28,198,000 26,235,000
Less:
Treasury stock - 717,115 shares of common stock at cost 1,782,000 1,782,000
----------- -----------
Total stockholders' equity 26,416,000 24,453,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $42,607,000 $38,354,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
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DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
NET SALES $ 14,333,000 $ 15,541,000 $ 31,137,000 $ 32,031,000
COST OF GOODS SOLD 10,727,000 10,854,000 23,139,000 22,642,000
------------ ------------ ------------ ------------
Gross profit 3,606,000 4,687,000 7,998,000 9,389,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,900,000 3,050,000 5,732,000 6,079,000
------------ ------------ ------------ ------------
Income from operations 706,000 1,637,000 2,266,000 3,310,000
OTHER INCOME (EXPENSE)
Interest income 66,000 88,000 149,000 133,000
Interest expense (161,000) (97,000) (254,000) (200,000)
Minority interest in earnings
of joint venture 2,000 (158,000) (3,000) (248,000)
Commissions and other 116,000 113,000 249,000 202,000
------------ ------------ ------------ ------------
23,000 (54,000) 141,000 (113,000)
INCOME BEFORE INCOME TAXES 729,000 1,583,000 2,407,000 3,197,000
PROVISION FOR INCOME TAXES 208,000 354,000 700,000 784,000
------------ ------------ ------------ ------------
NET INCOME $ 521,000 $ 1,229,000 $ 1,707,000 $ 2,413,000
============ ============ ============ ============
EARNINGS PER SHARE
BASIC $ 0.10 $ 0.25 $ 0.34 $ 0.49
DILUTED $ 0.10 $ 0.23 $ 0.31 $ 0.45
============ ============ ============ ============
Number of shares used in computation
Basic 5,022,621 4,962,855 5,010,589 4,960,779
Diluted 5,391,062 5,435,581 5,424,287 5,391,507
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
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DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,707,000 $ 2,413,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 510,000 446,000
Minority interest earnings 188,000 261,000
Interest income accrued on advances to vendor (103,000) (92,000)
Changes in operating assets:
Accounts receivable 1,576,000 (1,476,000)
Inventories (2,340,000) 214,000
Prepaid expenses and other assets 321,000 (759,000)
Changes in operating liabilities:
Accounts payable (1,686,000) 496,000
Accrued liabilities (337,000) 1,054,000
Income taxes payable (460,000) 239,000
----------- -----------
Net cash provided (used) by operating activities (624,000) 2,796,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (4,424,000) (578,000)
Acquisition of other assets -- (99,000)
----------- -----------
Net cash used by investing activities (4,424,000) (677,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on line of credit, net 1,643,000 1,082,000
Net proceeds from the issuance of capital stock 256,000 --
Proceeds from (repayments of) long-term obligations 2,942,000 (520,000)
----------- -----------
Net cash provided by financing activities 4,841,000 562,000
----------- -----------
INCREASE (DECREASE) IN CASH (207,000) 2,681,000
CASH AT BEGINNING OF PERIOD 2,325,000 1,820,000
----------- -----------
CASH AT END OF PERIOD $ 2,118,000 $ 4,501,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period
for:
Interest $ 138,000 $ 63,000
=========== ===========
Income taxes $ 262,000 $ 661,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
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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 on Form 10-K for the calendar year ended December
31, 1997.
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 KaiHong joint venture in which the Company
has a 95% controlling interest. All significant intercompany balances and
transactions have been eliminated.
NOTE B - INCOME TAXES
The Company accounts for income taxes using an asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the 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 $1,096,000 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 KaiHong 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 and MOSFETs, transient
voltage suppressors (TVSs), zeners, Schottkys, diodes, rectifiers and bridges.
Since the beginning of 1998, the Company's operations have
been adversely affected by a slowdown throughout the electronics industry that
has included the semiconductor segment. Over-capacity, lower average selling
prices, and higher customer inventory levels have contributed to the decreased
demand.
In the first half of 1998, the Company significantly increased
the amount of product shipped to larger distributors. Although these sales are
usually significant in terms of total sales dollars and gross margin dollars,
this shift in sales to larger distributors is under agreements that usually
result in lower gross profit margins for the Company, when compared to smaller
distributors and OEM customers. As the industry trend of consolidation of
electronic component distributors continues, the Company anticipates that a
greater portion of its distributor sales will be to the larger distributors, and
thus may result in lower gross profit margins, primarily at its U.S. operations.
One of the Company's primary strategic programs was the
formation of the KaiHong joint venture. The KaiHong joint venture, in which the
Company has invested in a SOT-23 manufacturing facility on mainland China,
provides replacements for a portion of the parts previously manufactured by ITT.
Due to the success of the first phase of KaiHong, the Company's Board of
Directors has approved funding for further expansion of the joint venture. The
equipment expansion will allow for the manufacturer of additional SOT-23
packaged components as well as other surface-mount packaging. Due to the market
slowdown, management has re-evaluated the KaiHong expansion, and has determined
to continue proceeding with a scaled-down version of the expansion. The capital
required for the additional expansion has been reduced from $14 million to
approximately $9 million. The Company's credit facility will be used to finance
the additional manufacturing capacity. The additional financing remains
available should market demand warrant further expansion.
The Company purchases products from foreign suppliers
primarily in United States dollars. To a limited extent, and from time to time,
the Company contracts (e.g., a portion of the equipment purchases for the
KaiHong expansion) in foreign currencies, and, accordingly, its results of
operations could be materially affected by fluctuations in currency exchange
rates. 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 current contracts written in
foreign currency are not significant enough to justify the costs inherent in
currency hedging.
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The Company's imported products are also subject to United
States customs duties and, in the ordinary course of business, the Company, from
time to time, is subject to claims by the United States Customs Service for
duties and other charges. The Company attempts to reduce the risk of doing
business in foreign countries by, among other things, contracting in U.S.
dollars, and, when possible, maintaining multiple sourcing of product groups
from several countries.
The Company has conducted a comprehensive review of its
computer systems to identify the systems that could be affected by the Year 2000
Issue ("Y2K") and is developing an implementation plan to resolve the issue. Y2K
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. The could result in a major system failure or
miscalculations. The Company is utilizing both internal and external resources
to identify, correct or reprogram, and test the systems for the Y2K compliance.
Confirmation has been requested from the Company's primary processing vendors
that plans are being developed to address processing of transactions in the year
2000. Management estimates the Y2K compliance expense at approximately $250,000
over the next twelve months. The Company presently believes that, with
modifications to existing software and conversions to new software, Y2K will not
pose significant operational problems for the Company's computer systems, as so
modified and converted. However, if such modifications and conversions are not
completed timely, Y2K may have a material impact on the operations of the
Company.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
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.
PERCENTAGE DOLLAR
PERCENT OF NET SALES INCREASE
THREE MONTHS ENDED JUNE 30, (DECREASE)
--------------------------- -----------------
1998 1997 `97 TO `98
----------- ---------- -----------------
Net sales 100.0% 100.0% (7.8)%
Cost of goods sold (74.8) (69.8) (1.2)
----- ----- -----
Gross profit 25.2 30.2 (23.1)
SG&A (20.2) (19.7) (4.9)
----- ----- -----
Income from operations 5.0 10.5 (56.9)
Interest expense, net (0.7) (0.0) 955.6
Other income 0.8 (0.3) 362.2
----- ----- -----
Income before taxes 5.1 10.2 (53.9)
Income taxes 1.5 2.3 (41.2)
----- ----- -----
Net income 3.6 7.9 (57.6)
===== ===== =====
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this quarterly report.
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1998 1997
------------ ------------
NET SALES $ 14,333,000 $ 15,541,000
Net sales decreased approximately $1.2 million, or 7.8%, for
the three months ended June 30, 1998 compared to the same period last year, due
primarily to a decrease in units sold of approximately 6.7%. This decrease in
units sold is comprised of a decrease in units sold in North America of
approximately 10.0%, partly offset by an increase in units sold in the Far East
of 9.9%. Average selling prices in the second quarter of 1998 decreased
approximately 1.4%, which represents decreases in average selling prices in both
North America and the Far East of 0.8% and 8.3%, respectively, compared to the
same period in 1997.
1998 1997
------------ ------------
GROSS PROFIT $ 3,606,000 $ 4,687,000
GROSS MARGIN PERCENTAGE 25.2% 30.2%
Gross profit decreased approximately $1.1 million, or 23.1%,
and gross profit margin decreased to 25.2% from 30.2%, for the three months
ended June 30, 1998 compared to the same period a year ago, due primarily to
market pricing pressures resulting in lower manufacturing profits at the
Company's facilities in Asia, as well as an inventory write-down to reflect
current market value. Gross margins were also affected by an increase in the
Company's sales to larger distributors.
1998 1997
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ("SG&A") $ 2,900,000 $ 3,050,000
SG&A for the three months ended June 30, 1998 decreased
approximately $150,000, or 4.9%, compared to the same period last year, due
primarily to a decrease in operating expenses associated with tightened controls
of the Company's expenses. SG&A as a percentage of net sales increased to 20.2%
for the three months ended June 30, 1998 from 19.6% for the same period last
year.
1998 1997
------------ ------------
INTEREST INCOME $ 66,000 $ 88,000
INTEREST EXPENSE $ 161,000 $ 97,000
Interest income for the three months ended June 30, 1998
decreased approximately $22,000, or 25.0%, compared to the same period last year
as the Company is in a borrowing position and thus strives to minimize its cash
balances. Interest income is primarily the interest charged to FabTech, a
related party, under the Company's loan agreement, as well as earnings on its
cash balances. The Company's interest expense for the three months ended June
30, 1998 increased approximately $64,000, or 66.0%, primarily as a result of
increased borrowing. Interest expense is primarily the result of the term loan
by which the Company financed (i) the investment in the KaiHong joint venture
and (ii) the $2.8 million advanced to FabTech.
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1998 1997
------------ ------------
MINORITY INTEREST IN JOINT VENTURE $ 2,000 $ (158,000)
Minority interest in joint venture represents the minority
investor's share of the KaiHong joint venture's net income for the period. The
joint venture loss for the three months ended June 30, 1998 is primarily the
result of lower unit sales as well as pricing pressures. The joint venture
investment is eliminated in consolidation of the Company's financial statements
and the activities of KaiHong are included therein. As of June 30, 1998, the
Company had a 95% controlling interest in the joint venture compared to 70% in
the same period last year. The Company increased its interest in KaiHong through
an arrangement in accordance with the original joint venture agreement and
through the purchase of a substantial portion of the minority interest in the
fourth quarter of 1997.
1998 1997
------------ ------------
COMMISSIONS AND OTHER INCOME $ 116,000 $ 113,000
Other income for the three months ended June 30, 1998
increased approximately $3,000, or 2.7%, compared to the same period last year,
due primarily to currency exchange gains at the Company's Taiwan subsidiary,
partly offset by decreased commissions earned by the Company's Taiwan subsidiary
on drop shipment sales in Asia.
1998 1997
------------ ------------
INCOME TAX PROVISION $ 208,000 $ 354,000
EFFECTIVE TAX RATE 28.5% 22.4%
Income tax expense for the three months ended June 30, 1998
decreased approximately $146,000, or 41.2%, compared to the same period last
year. The Company's effective tax rate in the current quarter increased to 28.5%
from 22.4% for the same period last year, as a result of the decrease in net
income from the KaiHong joint venture, which under Chinese tax law is exempt
from tax for the first two years upon commencing profitable operation.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997.
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.
PERCENTAGE DOLLAR
PERCENT OF NET SALES INCREASE
SIX MONTHS ENDED JUNE 30, (DECREASE)
----------------------- ------------
1998 1997 `97 TO `98
------ ------ -----------
Net sales 100.0% 100.0% (2.8)%
Cost of goods sold (74.3) (70.7) 2.2
----- ----- -----
Gross profit 25.7 29.3 (14.8)
SG&A (18.4) (19.0) (5.7)
----- ----- -----
Income from operations 7.3 10.3 (31.5)
Interest expense, net (0.4) (0.2) 56.7
Other income 0.8 (0.1) 534.8
----- ----- -----
Income before taxes 7.7 10.0 (24.7)
Income taxes 2.2 2.5 (10.7)
----- ----- -----
Net income 5.5 7.5 (29.3)
===== ===== =====
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this quarterly report.
1998 1997
---- ----
NET SALES $ 31,137,000 $ 32,031,000
Net sales decreased approximately $894,000, or 2.8%, for the
six months ended June 30, 1998 compared to the same period last year, due
primarily to a decrease in average selling prices of approximately 11.3%. Far
East pricing pressures resulted in a decrease in average selling prices of
approximately 18.3%, while in North America, pricing pressures lowered average
selling prices by approximately 10.4% compared to the same period last year.
Decreased average selling prices was partly offset by an increase in units sold
of approximately 9.2%, which represents increases in units sold in North America
and the Far East of approximately 4.7% and 31.8%, respectively, compared to the
same period in 1997. Also contributing to the decrease in sales was a design
change at one of the Company's larger customers, resulting in a decrease in
sales of approximately $2.2 million.
1998 1997
---- ----
GROSS PROFIT $ 7,998,000 $ 9,389,000
GROSS MARGIN PERCENTAGE 25.7% 29.3%
Gross profit decreased approximately $1.4 million, or 14.8%,
and gross profit margin decreased to 25.7% from 29.3%, for the six months ended
June 30, 1998 compared to the same period a year ago, due primarily to market
pricing pressures resulting in lower manufacturing profits at the Company's
facilities in Asia,
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as well as an inventory write-down in the second quarter to reflect current
market value. Gross margins were also affected by an increase in the Company's
sales to larger distributors.
1998 1997
---- ----
SG&A $ 5,732,000 $ 6,079,000
SG&A for the six months ended June 30, 1998 decreased
approximately $347,000, or 5.7%, compared to the same period last year, due
primarily to a decrease in operating expenses associated with tightened controls
of the Company's expenses. SG&A as a percentage of net sales decreased to 18.4%
for the six months ended June 30, 1998 from 19.0% for the same period last year.
1998 1997
---- ----
INTEREST INCOME $ 149,000 $ 133,000
INTEREST EXPENSE $ 254,000 $ 200,000
Interest income for the six months ended June 30, 1998
increased approximately $16,000, or 12.0%, compared to the same period last year
as the Company is in a borrowing position and thus strives to minimize its cash
balances. 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 the six months ended June 30, 1998 increased
approximately $54,000, or 27.0%, primarily as a result of increased borrowing.
Interest expense is primarily the result of the term loan by which the Company
financed (i) the investment in the KaiHong joint venture and (ii) the $2.8
million advanced to FabTech.
1998 1997
---- ----
MINORITY INTEREST IN JOINT VENTURE $ (3,000) $ (248,000)
Minority interest in joint venture represents the minority
investor's share of the KaiHong joint venture's net income for the period. The
earnings of the joint venture for the six months ended June 30, 1998 have been
negatively affected by lower unit sales as well as by pricing pressures.
1998 1997
---- ----
COMMISSIONS AND OTHER INCOME $ 249,000 $ 202,000
Other income for the six months ended June 30, 1998 increased
approximately $47,000, or 23.3%, compared to the same period last year, due
primarily to currency exchange gains at the Company's Taiwan subsidiary, partly
offset by decreased commissions earned by the Company's Taiwan subsidiary on
drop shipment sales in Asia.
1998 1997
---- ----
INCOME TAX PROVISION $ 700,000 $ 784,000
EFFECTIVE TAX RATE 29.1% 24.5%
Income tax expense for the six months ended June 30, 1998
decreased approximately $84,000, or 10.7%, compared to the same period last
year. The Company's effective tax rate in the current quarter increased to 29.1%
from 24.5% for the same period last year, as a result of the decrease in net
income from the KaiHong joint venture, which under Chinese tax law is exempt
from tax for the first two years upon commencing profitable operation.
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FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities for the six months ended
June 30, 1998 was approximately $624,000 compared to cash provided by operating
activities of approximately $2.8 million for the six months ended June 30, 1997.
The primary source of cash flows from operating activities for the six months
ended June 30, 1998 was net income of approximately $1.7 million and a decrease
in accounts receivable of approximately $1.6 million, while the primary use of
cash flows from operating activities was an increase in inventories of
approximately $2.3 million. Due to the slowdown in the semiconductor industry,
the Company is directing its efforts into reducing current inventory levels,
while still providing the service and delivery that customers demand. The
primary sources of cash flows from operating activities for the six months ended
June 30, 1997 was net income of approximately $2.4 million, while the primary
use of cash flows from operating activities was approximately $1.5 million
increase in accounts receivable. The Company continues to closely monitor its
credit policy while, at times, providing more flexible terms primarily to its
Asian customers, when necessary. The ratio of the Company's current assets to
current liabilities on June 30, 1998 was 2.84 to 1 compared to a ratio of 2.79
to 1 as of December 31, 1997.
Cash used by investing activities was approximately $4.4
million for the six months ended June 30, 1998, compared to approximately
$677,000 for the same period in 1997. The primary investments in 1998 was for
additional manufacturing equipment at the KaiHong manufacturing facility.
Cash provided by financing activities was approximately $4.8
million as of June 30, 1998, compared to approximately $562,000 for the same
period in 1997 as the Company continues to use its credit facilities.
In March 1998, the Company amended an August 1996 loan
agreement whereby the Company obtained a $23 million credit facility with a
major bank consisting of: a working capital line of credit up to $9 million and
term commitment notes providing up to $14 million for plant expansion, advances
to vendors, and letters of credit for KaiHong. Interest on outstanding
borrowings under the credit agreement is payable monthly at LIBOR plus a
negotiated margin. 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 June 30, 1998. The working capital line of credit expires June 30, 2000 and
contains a sublimit of $3.0 million for issuance of commercial and stand-by
letters of credit. The weighted average interest rate on outstanding borrowings
was approximately 7.1% for the six months ended June 30, 1998. As of June 30,
1998, approximately $7.1 million is outstanding under the term note commitment.
The Company uses its credit facility primarily to fund the
advances to KaiHong and FabTech 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.
In July 1998, the Company replaced two previously filed
guarantees to Shanghai Kaihong Electronics Co., Ltd. and the minority investor
of the KaiHong joint venture for $1.0 million and $850,000, respectively, as
well as a $1.0 million letter of credit, with a $3.0 million guarantee. The
Company reserves the right, at any time or from time to time, on one month prior
written notice to the bank, to reduce the maximum amount guaranteed hereunder or
to terminate this guaranty; provided, however, that the Company shall in any
event remain liable as guarantor for all obligations of the borrower outstanding
at the effective date of any such notice to the bank pursuant to this paragraph.
The Company's total working capital increased approximately
1.6% to $19.0 million as of June 30, 1998 from $18.7 million as of December 31,
1997. The Company believes that its working capital position will be sufficient
for its capital requirements in the foreseeable future.
13
14
As of June 30, 1998, the Company has no material plans or
commitments for capital expenditures other than for the KaiHong expansion.
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 was 0.60 at June 30, 1998
compared to 0.56 at December 31, 1997. 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, 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
14
15
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.
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.
The Company submitted to a vote of its security holders at an
annual meeting of shareholders on June 5, 1998, the election of members of the
Board of Directors. The directors were each elected to serve until the 1997
annual meeting or until their successors are elected and have qualified. The
results of the tabulation for each nominee for director of the Company is as
follows:
Eugene R. Conahan, Director For: 4,563,158
Withheld: 231,240
Michael R. Giordano, For: 4,578,708
Director Withheld: 215,690
David Lin, For: 4,578,683
Director Withheld: 215,715
M.K. Lu, For: 4,578,608
Director Withheld: 215,790
Shing Mao, For: 4,578,608
Director Withheld: 215,790
Michael A. Rosenberg, For: 4,551,258
Director Withheld: 243,140
Eric Schaedlich, For: 4,563,083
Director Withheld: 231,315
Leonard M. Silverman, For: 4,577,283
Director Withheld: 217,115
15
16
Raymond Soong, For: 4,578,733
Director Withheld: 215,665
William J. Spires, For: 4,563,903
Director Withheld: 230,495
The Company also submitted to a vote of its security holders
at an annual meeting of shareholders on June 5, 1998, the appointment of Moss
Adams LLP as the Company's independent certified public accountants for the
fiscal year ending December 31, 1998. The result of the tabulation was 4,770,258
shares voted in favor of the proposal and 24,140 shares voted against or
abstained from voting on the proposal. No broker non-votes with respect to this
proposal were received.
ITEM 5. OTHER INFORMATION
The proxy materials for the 1998 annual meeting of
stockholders held on June 5, 1998 were mailed to stockholders of the Company on
May 1, 1998. Stockholder proposals to be presented at the 1999 annual meeting of
stockholders must be received at the Company's executive offices at 3050 East
Hillcrest Drive, Westlake Village, California, 91362, addressed to the attention
of the Corporate Secretary by January 1, 1999 in order to be considered for
inclusion in the proxy materials relating to such meeting. Recently, the
Securities and Exchange Commission amended its rule governing a company's
ability to use discretionary proxy authority with respect to stockholder
proposals which were not submitted by the stockholders in time to be included in
the proxy statement. As a result of that rule change, in the event a stockholder
proposal is not submitted to the Company prior to March 15, 1999, the proxies
solicited by the Board of Directors for the 1999 annual meeting of stockholders
will confer authority on the holders of the proxy to vote the shares in
accordance with their best judgment and discretion if the proposal is presented
at the 1999 annual meeting of stockholders without any discussion of the
proposal in the proxy statement for such meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.25 - Bank Guarantee For Shanghai Kaihong
Electronics Co., Ltd.
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
16
17
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/ Carl Wertz August 11, 1998
- -------------------------------------------
CARL WERTZ
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
17
18
INDEX TO EXHIBITS
EXHIBIT - 10.25 BANK GUARANTEE FOR SHANGHAI KAIHONG
ELECTRONICS CO., LTD. Page 19
EXHIBIT - 11 COMPUTATION OF EARNINGS PER SHARE Page 21
EXHIBIT - 27 FINANCIAL DATA SCHEDULE Page 22
18
1
EXHIBIT 10.25
GUARANTY
OF
DIODES INCORPORATED
3050 East Hillcrest Drive, Westlake Village, California 91362
1. FOR GOOD AND VALUABLE CONSIDERATION, the receipt and
sufficiency of which by DIODES INCORPORATED, a Delaware corporation ("DIODES"),
are hereby acknowledged, and to induce THE HONGKONG and SHANGHAI BANKING
CORPORATION LIMITED (the "Bank") at any time or from time to time, to extend
financial accommodation with or without security, to or for the account of:
SHANGHAI KAIHONG ELECTRONICS CO., LTD. (the "Borrower"), or in respect of which
the Borrower may be liable (the term "Financial Accommodations" shall include
the financial accommodations as outlined in the Bank's offer letter of July 10,
1998 duly accepted by the Borrower), DIODES hereby guarantees to the Bank that
the Borrower will promptly perform and observe every agreement to be performed
or observed by the Borrower and that all sums stated to be payable in, or which
become payable under the documents to which such Financial Accommodations are
made ("the Financing Document(s)"), will be promptly paid in full when due
whether at maturity or earlier by reason or acceleration or otherwise, together
with interest due thereunder, or DIODES shall immediately upon receipt of
written demand thereof, fully pay and otherwise discharge all such obligations
of the Borrower. In case of one or more extensions of time of payment or
renewals, in whole or in part, of any of the Financing Document(s), the same
will be promptly paid or performed when due, according to each such extension or
renewal, whether at maturity or earlier by reason of acceleration or otherwise.
2. DIODES hereby consents that from time to time, without
notice to or further consent of DIODES, the performance or observance by the
Borrower of any of the Financing Document(s) may be waived or the time of
performance thereof extended by the Bank, and payment of any obligation hereby
guaranteed may be accelerated in accordance with any agreement between the Bank
and the Borrower, or may be increased, extended, or renewed in whole or in part
without affecting the liability of DIODES hereunder.
3. Notwithstanding the aggregate sums which may be or become
payable by the Borrower to the Bank at any time or from time to time, the
liability of DIODES hereunder shall not exceed THREE MILLION DOLLARS
(U.S.$3,000,000.00) plus any and all interest on that amount, and all costs of
collection including without limitation, reasonable attorney fees. It is
understood that the obligations of the Borrower to the Bank may at any time and
from time to time exceed the liability of DIODES hereunder without impairing
this Guaranty. DIODES agrees that whenever at any time or from time to time it
shall make any payment to the Bank hereunder on account of its liability
hereunder, that it will notify the Bank in writing that such payment is made
under this Guaranty for such purpose. No payment pursuant to any provision
hereof shall entitle DIODES by subrogation to the rights of the Bank, to any
payment by the Borrower or out of the property of the Borrower, except after
payment in full of all sums (including interests, costs and expenses) which may
be or become payable by the Borrower to the Bank at any time or from time to
time.
4. DIODES reserves the right, at any time or from time to
time, on one month prior written notice to the Bank, to reduce the maximum
amount guaranteed hereunder or to terminate this Guaranty; provided, however,
that DIODES shall in any event remain liable as guarantor for all obligations of
the Borrower outstanding at the effective date of any such notice to the Bank
pursuant to this paragraph.
5. DIODES' obligations hereunder shall be unconditional
notwithstanding any lack of enforceability of any Financing Documents pursuant
to which the Financial Accommodations are made or any change in any term
thereof, any exchange, release or nonperfection of any collateral securing
payment of any Financial Accommodation, any law, regulation or order of any
jurisdiction affecting any term of any or the Bank's rights with respect thereto
or any other circumstance which might otherwise constitute a defense available
to or discharge of DIODES. DIODES waives promptness, diligence and notices,
including acceptance hereof, with respect to this Guaranty and the Financial
Accommodations hereby guaranteed and any requirement that the Bank
2
exhaust any right or take any action against the Borrower or any collateral or
disclose to DIODES any information concerning the Borrower.
6. DIODES agrees that, to the extent that the Borrower makes a
payment or payments to the Bank on the Financial Accommodations, or the Bank
receives any proceed of collateral to be applied to the Financial
Accommodations, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set arise or otherwise
are required to be repaid to the Borrower, its estate, trustee, receiver or any
other party, including, without limitation, under any bankruptcy law, state or
federal law, common law, or equitable cause, then to the extent of such
repayment, the obligation or part thereof which has been paid, reduced, or
satisfied by such amount shall be reinstated and continued in full force and
effect as of the date of the initial payments, reduction or satisfaction
occurred, notwithstanding any contrary action which may have been taken by the
Bank in reliance upon such payment or payments. As of the date any payment or
proceeds are returned, the statute of limitations shall start anew with respect
to any action or proceeding by the Bank against DIODES under this document.
DIODES shall defend and indemnify the Bank of and from any claim or loss under
this paragraph including actual attorney's and paralegal's fees and expenses in
the defense of any such action or suit.
7. This Guaranty and all rights, obligations and liabilities
arising hereunder shall be construed according to the laws of the State of
California, United States of America. Unless the context otherwise requires, all
terms used herein which are defined in the Uniform Commercial Code shall have
the meanings therein stated. All notices hereunder shall be given by telex or
telecopier if to the Bank at The Hongkong and Shanghai Banking Corporation
Limited, Shanghai Branch, 5/F Marine Tower, 1 Pudong Ave. Shanghai China 200120,
the People's Republic of China, Attention: Manager, Corporate Banking,
Facsimile: (8621) 5879-2238 or if to Attention: Manager's Office, and shall be
effective when sent.
IN WITNESS WHEREOF, this instrument has been duly executed by
DIODES this 27th day of July 1998.
By: /s/ Michael Rosenberg
------------------------------------
Michael Rosenberg
Title: President & CEO
1
DIODES INCORPORATED AND SUBSIDIARIES
EXHIBIT - 11
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
BASIC
Weighted average number of common
shares outstanding 5,022,621 4,962,855 5,010,589 4,960,779
Net income $ 521,000 $1,229,000 $1,707,000 $2,413,000
========== ========== ========== ==========
Basic earnings per share $ 0.10 $ 0.25 $ 0.34 $ 0.49
========== ========== ========== ==========
DILUTED
Weighted average number of common
shares outstanding 5,022,621 4,962,855 5,010,589 4,960,779
Assumed exercise of stock options 368,441 472,726 413,698 430,728
---------- ---------- ---------- ----------
5,391,062 5,435,581 5,424,287 5,391,507
Net income $ 521,000 $1,229,000 $1,707,000 $2,413,000
========== ========== ========== ==========
Diluted earnings per share $ 0.10 $ 0.23 $ 0.31 $ 0.45
========== ========== ========== ==========
5
3-MOS
DEC-31-1998
APR-01-1998
JUN-30-1998
2,118,000
0
9,929,000
108,000
15,865,000
29,287,000
11,795,000
2,716,000
42,607,000
10,308,000
0
0
0
3,843,000
22,573,000
42,607,000
14,333,000
14,333,000
10,727,000
2,900,000
0
0
95,000
729,000
208,000
521,000
0
0
0
521,000
0.10
0.10
For Purposes of This Exhibit, Primary means Basic.
