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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 March 31, 2002
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)
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, $0.66 2/3 par value,
outstanding as of May 10, 2002 was 9,250,664, including 1,075,672 shares of
treasury stock.
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
December 31, March 31,
2001 2002
------------------- -------------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 8,103,000 $ 6,113,000
Accounts receivable
Customers 16,250,000 16,814,000
Related parties 1,486,000 4,232,000
------------------- -------------------
------------------- -------------------
17,736,000 21,046,000
Less: Allowance for doubtful receivables 343,000 325,000
------------------- -------------------
17,393,000 20,721,000
Inventories 17,813,000 14,557,000
Deferred income taxes, current 4,368,000 4,368,000
Prepaid expenses, income taxes and other current assets 1,266,000 1,843,000
------------------- -------------------
------------------- -------------------
Total current assets 48,943,000 47,602,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 44,925,000 46,430,000
DEFERRED INCOME TAXES, non-current 3,672,000 3,723,000
OTHER ASSETS
Goodwill, net 5,090,000 5,090,000
Other 628,000 937,000
------------------- -------------------
TOTAL ASSETS $ 103,258,000 $ 103,782,000
=================== ===================
The accompanying notes are an integral part of these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
2001 2002
------------------ ------------------
(Unaudited)
CURRENT LIABILITIES
Line of credit $ 6,503,000 $ 3,300,000
Accounts payable
Trade 6,098,000 8,247,000
Related parties 3,149,000 3,309,000
Accrued liabilities 5,062,000 5,456,000
Current portion of long-term debt
Related party 2,500,000 2,500,000
Other 5,833,000 8,608,000
Current portion of capital lease obligations -- 114,000
------------------ ------------------
Total current liabilities 29,145,000 31,534,000
LONG-TERM DEBT, net of current portion
Related party 7,500,000 7,500,000
Other 13,664,000 8,431,000
CAPITAL LEASE OBLIGATIONS, net of current portion -- 2,633,000
MINORITY INTEREST IN JOINT VENTURE 1,825,000 1,864,000
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;
30,000,000 shares authorized; 9,227,664 and 9,242,664
shares issued and outstanding at December 31, 2001
and March 31, 2002, respectively 6,151,000 6,161,000
Additional paid-in capital 7,310,000 7,762,000
Retained earnings 39,882,000 40,090,000
------------------ ------------------
------------------ ------------------
53,343,000 54,013,000
Less:
Treasury stock - 1,075,672 shares of common stock, at cost 1,782,000 1,782,000
Accumulated other comprehensive loss 437,000 411,000
------------------ ------------------
2,219,000 2,193,000
Total stockholders' equity 51,124,000 51,820,000
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 103,258,000 $ 103,782,000
================== ==================
The accompanying notes are an integral part of these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
------------------------------------------
2001 2002
------------------- -------------------
Net sales $ 25,748,000 $ 26,924,000
Cost of goods sold 21,627,000 22,572,000
------------------- -------------------
Gross profit 4,121,000 4,352,000
Research and development expenses 139,000 313,000
Selling, general and administrative expenses 3,045,000 3,765,000
------------------- -------------------
Total operating expenses 3,184,000 4,078,000
Income from operations 937,000 274,000
Other income (expense)
Interest income 66,000 8,000
Interest expense (740,000) (346,000)
Other (96,000) 16,000
------------------- -------------------
(770,000) (322,000)
Income before income taxes and minority interest 167,000 (48,000)
Income tax benefit 429,000 295,000
------------------- -------------------
------------------- -------------------
Income before minority interest 596,000 247,000
Minority interest in joint venture earnings (75,000) (39,000)
------------------- -------------------
Net income $ 521,000 $ 208,000
=================== ===================
Earnings per share
Basic $ 0.06 $ 0.03
=================== ===================
=================== ===================
Diluted $ 0.06 $ 0.02
=================== ===================
Weighted average shares outstanding
Basic 8,132,559 8,165,325
=================== ===================
=================== ===================
Diluted 9,029,628 8,774,016
=================== ===================
The accompanying notes are an integral part of these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------------------------------------
2001 2002
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 521,000 $ 208,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 2,083,000 2,280,000
Minority interest earnings 75,000 39,000
Changes in operating assets:
Accounts receivable (2,430,000) (3,328,000)
Inventories 5,013,000 3,256,000
Prepaid expenses, taxes and other assets (988,000) (937,000)
Changes in operating liabilities:
Accounts payable (2,801,000) 2,309,000
Accrued liabilities (2,517,000) 394,000
Income taxes payable 407,000 --
----------------- ------------------
Net cash provided (used) by operating activities (637,000) 4,221,000
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,801,000) (1,038,000)
----------------- ------------------
Net cash used by investing activities (2,801,000) (1,038,000)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on (repayments of) line of credit, net 2,966,000 (3,203,000)
Proceeds from the issuance of capital stock 58,000 87,000
Repayments of long-term obligations (495,000) (2,458,000)
Proceeds from majority shareholder contract reimbursement -- 375,000
Other 26,000 --
----------------- ------------------
Net cash provided (used) by financing activities 2,555,000 (5,199,000)
----------------- ------------------
EFFECT OF EXCHANGE RATE AND INTEREST RATE CHANGES
ON CASH AND CASH EQUIVALENTS -- 26,000
DECREASE IN CASH (883,000) (1,990,000)
CASH AT BEGINNING OF PERIOD 4,476,000 8,103,000
----------------- ------------------
CASH AT END OF PERIOD $ 3,593,000 $ 6,113,000
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ 674,000 $ 318,000
================= ==================
Income taxes $ 190,000 $ 108,000
================= ==================
Non-cash acquisitions of property, plant and equipment $ -- $ 2,785,000
================= ==================
The accompanying notes are an integral part of these
financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q. They do not
include all information and footnotes necessary for a fair presentation of
financial position and results of operations and cash flows in conformity with
generally accepted accounting principles. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001. In the opinion of management, all
adjustments (consisting of normal recurring adjustments and accruals) considered
necessary for a fair presentation have been included in the interim period.
Operating results for the three months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
The consolidated financial statements include the accounts
of the Company and its wholly-owned foreign subsidiaries, Diodes Taiwan Co.,
Ltd. ("Diodes-Taiwan") and Diodes-Hong Kong Ltd. (Diodes-Hong Kong), the
accounts of Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China") in which the
Company has a 95% interest, and the accounts of FabTech Incorporated ("FabTech"
or "Diodes-FabTech"), which the Company acquired in December 2000. All
significant intercompany balances and transactions have been eliminated.
NOTE B - Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for
fiscal years beginning after December 15, 2001. Under the new rules, goodwill
(and intangible assets deemed to have indefinite lives) will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.
The Company has applied the new rules on accounting for
goodwill beginning in the first quarter of 2002. An independent appraiser hired
by the Company, performed the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002, and has determined
that the goodwill is fully recoverable. Application of the non-amortization
provisions of the Statements is expected to result in an increase in net income,
net of tax, of approximately $165,000 ($0.02 per share) per year.
Three Months Ended
March 31,
------------------------------------------
2001 2002
------------------- -------------------
Reported net income $ 521,000 $ 208,000
Add: Goodwill amortization, net of tax 42,000 --
------------------- -------------------
------------------- -------------------
Adjusted net income $ 563,000 $ 208,000
=================== ===================
=================== ===================
Diluted earnings per common share:
Reported net income $ 0.06 $ 0.02
Add: Goodwill amortization, net of tax $ 0.00 --
------------------- -------------------
------------------- -------------------
Adjusted diluted earnings per common share $ 0.06 $ 0.02
=================== ===================
NOTE C - Functional Currencies, Comprehensive Loss
and Foreign Currency Translation
Until June 30, 2001, the functional currency of
Diodes-Taiwan was the U.S. dollar. Effective July 1, 2001, the Company changed
the functional currency of Diodes-Taiwan to the local currency in Taiwan. As a
result of this change, the translation of the balance sheet and statement of
income of Diodes-Taiwan from the local currency into the reporting currency (US
dollar) results in translation adjustments.
The Company believes this reporting change most
appropriately reflects the current economic facts and circumstances of the
operations of Diodes-Taiwan. The Company continues to use the U.S. dollar as the
functional currency at Diodes-China and Diodes-Hong Kong, as substantially all
monetary transactions are made in that currency, and other significant economic
facts and circumstances currently support that position. As these factors may
change in the future, the Company will periodically assess its position with
respect to the functional currency of Diodes-China and Diodes-Hong Kong.
The Company has entered into an interest rate swap agreement
with a major U.S. bank which expires November 30, 2004, to hedge its exposure to
variability in expected future cash flows resulting from interest rate risk
related to 25%of its long-term debt.
The effect of the translation adjustments and swap agreement
results in a change in accumulated other comprehensive loss of $26,000 for the
three months ended March 31, 2002, and is reflected on the balance sheet as a
separate component of shareholders' equity. There was no other comprehensive
loss for the three months ended March 31, 2001.
NOTE D - Inventories
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the first-in, first-out method.
December 31, March 31,
2001 2002
---------------- ----------------
---------------- ----------------
Finished goods $ 12,030,000 $ 9,364,000
Work-in-progress 1,848,000 1,825,000
Raw materials 6,311,000 5,765,000
---------------- ----------------
---------------- ----------------
20,189,000 16,954,000
Less: Reserves (2,376,000) (2,397,000)
---------------- ----------------
---------------- ----------------
Net inventory $ 17,813,000 $ 14,557,000
================ ================
NOTE E - 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 $8.1 million resulting from temporary differences in bases
of assets and liabilities. This deferred tax asset results primarily from
inventory reserves and certain expense accruals, which are not currently
deductible for income tax purposes.
The reported income tax rate as a percentage of pretax
income differs from the statutory combined federal and state tax rates of
approximately 40%. The primary reasons for this difference are: (i) currently
the effective tax rate of Diodes-China is approximately 12%, and as discussed
below, deferred U.S. federal and state income taxes are currently not provided
on these earnings, and (ii) deferred income tax benefits at a rate of 37.5% have
been recognized on losses incurred at Diodes-FabTech.
In accordance with the current taxation policies of the
People's Republic of China, Diodes-China was granted preferential tax treatment
for the years ended December 31, 1999 through 2003. Earnings were subject to 0%
tax rates in 1999 and 2000, and 12% in 2001. Earnings in 2002 and 2003 will be
taxed at 12% (one half the normal central government tax rate), and at normal
rates thereafter. Earnings of Diodes-China are also subject to tax of 3% by the
local taxing authority in Shanghai. The local taxing authority waived this tax
in 2001 and in the first quarter of 2002, and current indications are that the
local tax will be waived for the remainder of 2002.
Earnings of Diodes-Taiwan are currently subject to a tax
rate of 35%, which is comparable to the U.S. Federal tax rate for C
corporations.
As of March 31, 2002, accumulated and undistributed earnings
of Diodes-China is approximately $22.3 million. The Company has not recorded
deferred Federal or state tax liabilities (estimated to be $8.9 million) on
these cumulative earnings since the Company considers this investment to be
permanent, and has no plans, intentions or obligation to distribute all or part
of that amount from China to the United States. The Company is, however,
evaluating the need to provide deferred taxes for the future earnings of
Diodes-China to the extent such earnings may be appropriated for distribution to
Diodes-North America, and as further investment strategies with respect to
Diodes-China are determined. Should the Company's North American cash
requirements exceed the cash that is provided through the domestic credit
facilities, cash can be obtained from the Company's foreign subsidiaries.
However, the distribution of any unappropriated funds to the U.S. will require
the recording of income tax provisions on the U.S. entity, thus reducing net
income.
NOTE F - Geographic Segments
An operating segment is defined as a component of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief decision-making group consists of the President and Chief Executive
Officer, Chief Financial Officer, Vice President of Sales and Marketing, and
Vice President of Operations. The Company operates in a single segment, discrete
semiconductor devices, through its various manufacturing and distribution
facilities.
The Company's operations include the domestic operations
(Diodes-North America and Diodes-FabTech) located in the United States, and the
Far East operations (Diodes-Taiwan located in Taipei, Taiwan; Diodes-China
located in Shanghai, China; and Diodes-Hong Kong). For reporting purposes,
European operations, which account for approximately 2% of total sales, are
consolidated into the domestic operations.
The accounting policies of the operating entities are the
same as those described in the summary of significant accounting policies.
Revenues are attributed to geographic areas based on the location of the market
producing the revenues.
Consolidated
Three Months Ended Far East North America Segments
March 31, 2002 ---------------- ----------------------- --------------------
---------------- ----------------------- --------------------
Total sales $ 21,195,000 $ 14,824,000 $ 36,019,000
Inter-company sales (8,568,000) (527,000) (9,095,000)
---------------- ----------------------- --------------------
Net sales $ 12,627,000 $ 14,297,000 $ 26,924,000
Assets $ 58,167,000 $ 45,615,000 $ 103,782,000
Deferred tax assets $ 110,000 $ 7,981,000 $ 8,091,000
================ ======================= ====================
Consolidated
Three Months Ended Far East North America Segments
March 31, 2001 ---------------- ----------------------- --------------------
---------------- ----------------------- --------------------
Total sales $ 16,726,000 $ 16,128,000 $ 32,854,000
Inter-company sales (6,773,000) (333,000) (7,106,000)
---------------- ----------------------- --------------------
Net sales $ 9,953,000 $ 15,795,000 $ 25,748,000
Assets $ 63,054,000 $ 48,336,000 $ 111,390,000
Deferred tax assets $ 135,000 $ 5,894,000 $ 6,029,000
================ ======================= ====================
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 Quarterly 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"), a Delaware corporation,
is engaged in the manufacture, sale and distribution of discrete semiconductors
worldwide, primarily to manufacturers in the communications, computing,
industrial, consumer electronics and automotive markets, and to distributors of
electronic components to customers in these markets. The Company's products
include small signal transistors and MOSFETs, transient voltage suppressors
(TVSs), zeners, diodes, rectifiers and bridges, as well as silicon wafers used
in manufacturing these products.
In addition to the Company's corporate headquarters in
Westlake Village, California, which provides sales, marketing, engineering and
warehousing functions, the Company's wholly-owned subsidiary, Diodes Taiwan
Corporation, Ltd. ("Diodes-Taiwan"), maintains a sales, engineering and
purchasing facility in Taipei, Taiwan. The Company also has a 95% interest in
Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China" or "KaiHong"), a
manufacturing facility in Shanghai, China, with sales offices in Shanghai and
Shenzhen, China, and a sales, warehousing and logistics subsidiary in Hong Kong
("Diodes-Hong Kong"). In addition, in December 2000, the Company acquired
FabTech Incorporated ("Diodes-FabTech" or "FabTech"), a silicon wafer
manufacturer located near Kansas City, Missouri. An office in Toulouse, France
supports the Company's European sales expansion.
Sales. The Company's products are sold primarily in North
America and the Far East, both directly to end users and through electronic
component distributors. In the first quarter of 2002, 53% of the Company's
products were sold in North America, while 47% were sold in the Far East. This
compares to 55% and 45% for the year 2001, respectively, and 54% and 46% for the
year 2000, respectively. An increase in the percentage of sales in the Far East
is expected as the Company significantly increases its sales presence there and
believes there is greater potential to increase market share in that region due
to the expanding base of electronics manufacturers.
The Company sells direct to OEM customers as well as to
distributors of electronic components. In the first quarter of 2002, 66% of the
Company's sales were direct, while 34% were to distributors. This compares to
68% and 32%, respectively, for the year 2001, and 52% and 48%, respectively, for
the year 2000.
Beginning in 1998, the Company significantly increased the
amount of product shipped to larger distributors. Although these sales were
significant in terms of total sales dollars and gross margin dollars, they
generally were under agreements that resulted in lower gross profit margins for
the Company when compared to sales to smaller distributors and OEM customers. As
the 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 for this
sales channel.
Reporting Segments. For financial reporting purposes, the
Company is deemed to engage in one industry segment - discrete semiconductors.
The Company has separated its operations into geographical areas: North America
and the Far East. North America includes the corporate offices in Southern
California ("Diodes-North America") as well as FabTech, Inc. ("FabTech" or
"Diodes-FabTech"), the 5-inch wafer foundry located in Missouri. For reporting
purposes, the North American region includes European sales as well, which
account for approximately 2% of total sales. Diodes-North America procures and
distributes products primarily throughout North America and provides management,
warehousing, engineering and logistics functions. Diodes-FabTech manufactures
silicon wafers for sale to its customer base, as well as for use by
Diodes-China. The Far East includes the operations of Diodes-Taiwan,
Diodes-China and Diodes-Hong Kong. Diodes-China manufactures product for, and
distributes product to, Diodes-North America, Diodes-Taiwan and Diodes-Hong
Kong, as well as directly to end customers. Diodes-Taiwan procures product from,
and distributes product primarily to, customers in Taiwan, Korea and Singapore.
Diodes-Hong Kong sells to customers primarily in Hong Kong and China.
LSC. Lite-On Semiconductor Corporation ("LSC"), formerly
Lite-On Power Semiconductor Corporation ("LPSC"), is the Company's largest
stockholder, holding approximately 37.5% of the outstanding shares. LSC is a
member of The Lite-On Group of companies of the Republic of China. The Lite-On
Group, with worldwide sales of approximately $4.5 billion, is a leading
manufacturer of power semiconductors, computer peripherals and communication
products. C.H. Chen, the Company's President and Chief Executive Officer, is
also Vice Chairman of LSC.
For the year 2001, the Company sold silicon wafers to LSC
totaling 7.7% of the Company's sales (15.2% in the first quarter of 2002),
making LSC the Company's largest customer. Also for the year 2001, 15.2% of the
Company's sales were from discrete semiconductor products purchased from LSC
(13.5% in the first quarter of 2002), making LSC the Company's largest outside
vendor. All such transactions are on terms no less favorable to the Company than
could be obtained from unaffiliated third parties.
In addition, in December 2000, the Company acquired FabTech
from LSC. As part of the purchase price, at March 31, 2002, LSC holds a
subordinated, interest-bearing note for approximately $10 million, payable
beginning in July 2002. As per the terms of the acquisition, LSC entered into a
volume purchase agreement to purchase wafers from FabTech. LSC is currently in
compliance with the terms of the wafer purchase agreement.
In June 2001, as per the Company's U.S. bank covenants, the
Company was not permitted to make regularly scheduled principal and interest
payments to LSC on the remaining $10.0 million payable related to the FabTech
acquisition note, but was, however, able to renegotiate with LSC the terms of
the note. Under the terms of the amended and restated subordinated promissory
note, payments of approximately $417,000 plus interest are scheduled to begin
again in July 2002. Provided the Company meets the terms of its U.S. bank's
expected new covenants, these payments will be made to LSC. However, if the new
bank covenants are not met, the Company may be required to re-negotiate its
indebtedness to LSC on such terms, if any, as LSC may find acceptable.
Manufacturing and Significant Vendors. The Company's Far
East manufacturing subsidiary, Diodes-China, manufactures product for sale
primarily to North America and Asia. Diodes-China's manufacturing focuses on
SOT-23 and SOD-123 products, as well as sub-miniature packages such as SOT-363,
SOT-563, and SC-75. These surface-mount devices ("SMD") are much smaller in size
and are used primarily in the computer and communication industries, destined
for cellular phones, notebook computers, pagers, PCMCIA cards and modems, as
well as in garage door transmitters, among others. Diodes-China's
state-of-the-art facilities have been designed to develop even smaller,
higher-density products as electronic industry trends to portable and hand-held
devices continue. Although Diodes-China purchases silicon wafers from
Diodes-FabTech, the majority are currently purchased from other wafer vendors.
Since 1997, the Company's manufacturing focus has primarily
been in the development and expansion of Diodes-China. To date, the Company and
its minority partner have increased property, plant and equipment at the
Mainland China facility to approximately $48.9 million. The equipment expansion
allows for the manufacture of additional SOT-23 packaged components as well as
other surface-mount packaging, including the smaller SOD packages, and even
smaller packaging such as SOT-523 and SC-59.
All of the products sold by the Company, as well as the
materials used by the Company in its manufacturing operations, are available
both domestically and abroad. For 2001, the three largest external suppliers of
products to the Company were LSC and two other vendors. Approximately 15% of the
Company's sales were from product manufactured by LSC in 2001 and approximately
10% of the Company's sales were from products manufactured by the two other
vendors. In addition, sales of products manufactured by Diodes-China and
Diodes-FabTech, the Company's two manufacturing subsidiaries, were approximately
27% and 15% in 2001, respectively. No other manufacturer of discrete
semiconductors accounted for more than 5% of the Company's sales in 2001. For
the first quarter ended March 31, 2002, sales of products manufactured by LSC
and the two other largest vendors were approximately 13% and 12%, respectively,
while 31% and 23% were manufactured by Diodes-China and Diodes-FabTech,
respectively.
The Company will continue its strategic plan of locating
alternate sources of its products and raw materials, including those provided by
its major suppliers. 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.
Diodes-FabTech. Acquired by the Company from LSC on December
1, 2000, FabTech's wafer foundry is located in Lee's Summit, Missouri.
Diodes-FabTech manufactures primarily 5-inch silicon wafers, which are the
building blocks for semiconductors. Diodes-FabTech has full foundry capabilities
including processes such as silicon epitaxy, silicon oxidation, photolithography
and etching, ion implantation and diffusion, low pressure and plasma enhanced
chemical vapor deposition, sputtered and evaporated metal deposition, wafer
backgrinding, and wafer probe and ink.
Diodes-FabTech purchases polished silicon wafers, and then
by using various technologies, in conjunction with many chemicals and gases,
fabricates several layers on the wafers, including epitaxial silicon, ion
implants, dielectrics, and metals, with various patterns. Depending upon these
layers and the die size (which is determined during the photolithography process
and completed at the customer's packaging site where the wafer is sawn into
square or rectangular die), different types of wafers with various currents,
voltages, and switching speeds are produced.
Recent Results. The discrete semiconductor industry has been
subject to severe pricing pressures. Although manufacturing costs have been
falling, excess manufacturing capacity and over-inventory has caused selling
prices to fall to a greater extent than manufacturing costs. To compete in this
highly competitive industry, the Company has committed substantial new resources
to the development and implementation of sales, marketing and manufacturing.
Emphasizing the Company's focus on customer service, additional sales personnel
and programs have been added in Asia, and most recently Europe. In order to meet
customers' needs at the design stage of end-product development, the Company has
also employed additional applications engineers. These applications engineers
work directly with customers to assist them in "designing in" the correct
products to produce optimum results. In addition, the Company has increased its
research and development resources for the purpose of developing new proprietary
products. Regional sales managers, working closely with manufacturers'
representative firms and distributors, have also been added to help satisfy
customers' requirements. In addition, the Company has continued to develop
relationships with major distributors who inventory and sell the Company's
products.
Beginning in the second half of 1999 and continuing through
the first three quarters of 2000, industry demand exceeded industry capacity.
The Company's gross profit margins reached a peak of 34.4% in the third quarter
of 2000 and 31.6% for the year 2000. In addition, OEM customers and distributors
increased their inventory levels to support projected demand. Then, as
semiconductor manufacturers, including the Company, increased manufacturing
capacity, the global economy slowed contributing to a sharp decline in sales in
the fourth quarter of 2000. This downturn continued throughout year 2001
primarily in two key markets, communications and computers.
Due to excess manufacturing capacity and demand-induced
product mix changes, combined with overall decreased product demand and higher
customer inventory levels, the Company's gross profit margins decreased from
31.6% in 2000 to 14.9% in 2001. Although the Company's market share increased in
2001, overall selling prices decreased approximately 22.7% and demand for
silicon wafers used in manufacturing discrete semiconductors deteriorated even
further. In addition, the risks of becoming a fully integrated manufacturer were
amplified in the industry-wide slowdown because of the fixed costs associated
with the Company's manufacturing facilities, including the recent acquisition of
FabTech.
During 2001, the Company responded to this cyclical downturn
by implementing programs to cut operating costs, including reducing its
worldwide workforce by 26%, primarily at the Diodes-FabTech and Diodes-China
manufacturing facilities. The Company continues to actively adjust its cost
structure as dictated by market conditions. Long term, the Company believes that
it will continue to generate value for shareholders and customers, not just from
its expanded Diodes-China manufacturing and Diodes-FabTech's foundry assets, but
also by the addition of an enhanced technology and research and development
component to the Company. This multi-year initiative is aimed at increasing the
Company's ability to serve its customers' needs and establishing itself at the
forefront of the next generation of discrete technologies.
The Company has seen signs of improvement beginning in the
fourth quarter of 2001 when sales increased almost 14% sequentially, and gross
profit margins improved to 13.9%. The improvement trend continued into the first
quarter of 2002 when sales increased sequentially by 4%, gross profit margin
increased to 16.0% and capacity utilization improved. Average capacity
utilization of the Company's manufacturing subsidiaries has increased to 58% and
65% at Diodes-China and Diodes-FabTech, respectively, as compared to 55% and
61%, respectively, in the fourth quarter of 2001, and 52% and 45% in the third
quarter of 2001. In addition to increasing capacity utilization, improving
manufacturing efficiencies, especially at Diodes-FabTech, and reducing unit
costs will continue to be a major operational focus for the balance of 2002. The
Company expects gross margins to continue to improve as capacity utilization
increases and as prices begin to stabilize, demonstrating the operating leverage
inherent in the Company's business.
In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for
fiscal years beginning after December 15, 2001. Under the new rules, goodwill
(and intangible assets deemed to have indefinite lives) will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.
The Company has applied the new rules on accounting for
goodwill beginning in the first quarter of 2002. An independent appraiser hired
by the Company, performed the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002, and has determined
that the goodwill is fully recoverable. Application of the non-amortization
provisions of the Statements is expected to result in an increase in net income,
net of tax, of approximately $165,000 ($0.02 per share) per year.
Income taxes. In accordance with the current taxation
policies of the People's Republic of China, Diodes-China was granted
preferential tax treatment for the years ended December 31, 1999 through 2003.
Earnings were subject to 0% tax rates in 1999 and 2000, and 12% in 2001.
Earnings in 2002 and 2003 will be taxed at 12% (one half the normal central
government tax rate), and at normal rates thereafter. Earnings of Diodes-China
are also subject to tax of 3% by the local taxing authority in Shanghai. The
local taxing authority waived this tax in 2001 and in the first quarter of 2002,
and current indications are that the local tax will be waived for the remainder
of 2002.
Earnings of Diodes-Taiwan are currently subject to a tax
rate of 35%, which is comparable to the U.S. Federal tax rate for C
corporations.
As of March 31, 2002, accumulated and undistributed earnings
of Diodes-China is approximately $22.3 million. The Company has not recorded
deferred Federal or state tax liabilities (estimated to be $8.9 million) on
these cumulative earnings since the Company considers this investment to be
permanent, and has no plans, intentions or obligation to distribute all or part
of that amount from China to the United States. The Company is evaluating the
need to provide deferred taxes for the future earnings of Diodes-China to the
extent such earnings may be appropriated for distribution to Diodes-North
America, and as further investment strategies with respect to Diodes-China are
determined. Should the Company's North American cash requirements exceed the
cash that is provided through the domestic credit facilities, cash can be
obtained from the Company's foreign subsidiaries. However, the distribution of
any unappropriated funds to the U.S. will require the recording of income tax
provisions on the U.S. entity, thus reducing net income.
Results of Operations for the Three Months Ended March 31, 2001 and 2002
The following table sets forth, for the periods indicated,
the percentage that 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 (Decrease)
Three Months Ended March 31,
--------------------------------------- ---------------------
2001 2002 `01 to `02
------------------- ------------------- ---------------------
Net sales 100.0 % 100.0 % 4.6 %
Cost of goods sold (84.0) (83.8) 4.4
------------------- ------------------- ---------------------
Gross profit 16.0 16.2 5.6
Operating expenses (12.4) (15.2) 28.1
------------------- ------------------- ---------------------
Income from operations 3.6 1.0 (70.8)
Interest expense, net (2.6) (1.3) (49.9)
Other income (0.4) 0.1 (116.3)
------------------- ------------------- ---------------------
Income before taxes and minority 0.6 (0.2) (128.8)
Income taxes 1.7 1.1 (31.2)
------------------- ------------------- ---------------------
------------------- ------------------- ---------------------
Income before minority interest 2.3 0.9 (58.4)
Minority interest (0.3) (0.1) (47.1)
------------------- ------------------- ---------------------
Net income 2.0 0.8 (60.1)
=================== =================== =====================
The following discussion explains in greater detail the
consolidated operating results and financial condition of the Company for the
three months ended March 31, 2002 compared to the three months ended March 31,
2001. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this quarterly
report.
2001 2002
---- ----
Net Sales $ 25,748,000 $ 26,924,000
- ---------
Net sales increased approximately $1.2 million, or 4.6%, for
the three months ended March 31, 2002, compared to the same period last year,
due primarily to a 8.6% increase in units sold as a result of increased demand
and lower customer inventories. The Company's average selling prices ("ASP") for
discrete devices decreased approximately 19.7% from the same three-month period
last year, and 6.0% from the fourth quarter of 2001. ASP's for wafer products
decreased 18.2% from the same period last year, but increased 5.0% from the
fourth quarter of 2001.
2001 2002
---- ----
Cost of Goods Sold $ 21,627,000 $ 22,572,000
- ------------------
Gross Profit $ 4,121,000 $ 4,352,000
- ------------
Gross Profit Margin Percentage 16.0% 16.2%
- ------------------------------
Gross profit increased approximately $231,000, or 5.6%, for
the three months ended March 31, 2002 compared to the year ago period. Of the
$231,000 increase, approximately $188,000 was due to the 4.6% increase in sales,
while $43,000 was due to the increase in gross margin percentage from 16.0% to
16.2%. The higher gross margin percentage was primarily due to increased
capacity utilization, cost containment and sales of higher margin products. For
the first quarter of 2002, Diodes-China is running at approximately 58% of total
capacity, up from 55% last quarter, and Diodes-FabTech has improved to 65% from
61% last quarter.
2001 2002
---- ----
Operating Expenses $ 3,184,000 $ 4,078,000
- ------------------
Operating expenses, which include selling, general,
administrative expenses ("SG&A") and research and development expenses ("R&D")
for the three months ended March 31, 2002 increased approximately $894,000, or
28.1%, compared to the same period last year, due primarily to higher sales
commissions associated with the increase in sales, as well as increased general
corporate charges and a $174,000 increase in R&D. SG&A, as a percentage of
sales, increased from 11.8% to 14.0% in the comparable period last year, while
R&D increased from 0.5% to 1.2% of sales.
2001 2002
---- ----
Interest Income $ 66,000 $ 8,000
- ---------------
Interest Expense $ 740,000 $ 346,000
- ----------------
Net Interest Expense $ 674,000 $ 338,000
- --------------------
Net interest expense for the three months ended March 31,
2002 decreased approximately $336,000 versus the same period last year, due
primarily to a reduction in the Company's total debt. The Company's interest
expense is primarily the result of the Company's financing of the FabTech
acquisition, as well as the investment in the Diodes-China manufacturing
facility.
2001 2002
---- ----
Other Income (Expense) $ (96,000) $ 16,000
- ----------------------
Other income for the three months ended March 31, 2002
increased approximately $112,000 compared to the same period last year, due
primarily to rental income generated by Diodes-FabTech for the use of some of
its testing facilities, which began in May 2001.
2001 2002
---- ----
Income Tax Benefit $ 429,000 $ 295,000
- ------------------
The reported income tax rate as a percentage of pretax
income differs from the statutory combined federal and state tax rates of
approximately 40%. The primary reasons for this difference are: (i) currently
the effective tax rate of Diodes-China is approximately 12%, and deferred U.S.
federal and state income taxes are currently not provided on these earnings, and
(ii) deferred income tax benefits at a rate of 37.5% have been recognized on
losses incurred at Diodes-FabTech.
2001 2002
---- ----
Minority Interest in Joint Venture $ 75,000 $ 39,000
- ----------------------------------
Minority interest in joint venture represents the minority
investor's share of the Diodes-China joint venture's income for the period. The
decrease in the joint venture earnings for the three months ended March 31,
2002, is primarily the result of decreased gross margins due to excess capacity
and demand-induced product mix changes, both internally and to external
customers. The joint venture investment is eliminated in consolidation of the
Company's financial statements, and the activities of Diodes-China are included
therein. As of March 31, 2002, the Company had a 95% controlling interest in the
joint venture.
Financial Condition
Liquidity and Capital Resources
At March 31, 2002 the Company had cash and cash equivalents
totaling $6.1 million, a $2.0 million decrease from December 31, 2001 balances
primarily as a result of the Company reducing its bank loan balances. Cash
provided by operating activities for the three months ended March 31, 2002 was
$4.2 million compared to a use of $637,000 for the same period in 2001. The
primary sources of cash flows from operating activities in the first quarter of
2002 were a decrease in inventories of $3.3 million, an increase in accounts
payable of $2.3 million, and depreciation and amortization of $2.3 million. The
primary use of cash flows from operating activities in the first quarter of 2002
was an increase in accounts receivable of $3.3 million. The primary sources of
cash flows from operating activities for the three months ended March 31, 2001
were a $5.0 million decrease in inventories, and depreciation and amortization
of $2.1 million, while the primary uses were a $2.8 million decrease in accounts
payable and a $2.5 million decrease in accrued liabilities. Inventory turns at
March 31, 2002 were 6.2 times compared to 5.1 times at December 31, 2001.
Accounts receivable days at March 31, 2002 were 70 days compared to 61 days at
December 31, 2001. The ratio of the Company's current assets to current
liabilities on March 31, 2002 was 1.5 to 1, compared to 1.7 to 1 at December 31,
2001.
Cash used by investing activities for the three months ended
March 31, 2002 was $1.0 million, compared to $2.8 million during the same period
in 2001. The primary investment in both years was primarily for additional
manufacturing equipment at the Diodes-China manufacturing facility.
On December 1, 2000, the Company purchased all the
outstanding capital stock of FabTech Incorporated, a 5-inch wafer foundry
located in Lee's Summit, Missouri from Lite-On Semiconductor Corporation
("LSC"), the Company's largest stockholder. The acquisition purchase price
consisted of approximately $6.0 million in cash and an earn-out of up to $30.0
million if FabTech meets specified yearly earnings targets over a four-year
period (for the year 2001, these earnings targets were not met, and, therefore,
no earn-out was paid). In addition, FabTech was obligated to repay an aggregate
of approximately $19.2 million in debt, consisting of (i) approximately $13.6
million note payable to LSC, (ii) approximately $2.6 million note payable to the
Company, and (iii) approximately $3.0 million note payable to a financial
institution (this amount was repaid on December 4, 2000 with the proceeds of a
capital contribution by the Company). The acquisition was financed internally
and through bank credit facilities.
In June 2001, as per the Company's U.S. bank covenants, the
Company was not permitted to make regularly scheduled principal and interest
payments to LSC on the remaining $10.0 million payable related to the FabTech
acquisition note, but was, however, able to renegotiate with LSC the terms of
the note. Under the terms of the amended and restated subordinated promissory
note, payments of approximately $417,000 plus interest are scheduled to begin
again in July 2002. Provided the Company meets the terms of its U.S. bank's
expected new covenants, payments will be made to LSC. However, if the bank
covenants are not met, the Company may be required to re-negotiate its
indebtedness to LSC on such terms, if any, as LSC may find acceptable. The
Company is currently in negotiations for new U.S. bank covenants.
Cash used by financing activities was $5.2 million for the
three months ended March 31, 2002, as the Company reduced its overall debt,
compared to cash provided by financing activities of $2.6 million in the same
period of 2001. In 2001, the Company increased its credit facility to $46.3
million, encompassing one major U.S. bank, three banks in Mainland China and two
banks in Taiwan. As of March 31, 2002, the credit facilities were $17.1 million,
$25.0 million, and $3.2 million, for the U.S. facility secured by substantially
all assets, the unsecured Chinese facilities, and the unsecured Taiwanese
facilities, respectively. As of March 31, 2002, the available credit was $5.2
million, $20.0 million, and $1.5 million, for the U.S. facility, the Chinese
facilities, and the Taiwanese facilities, respectively.
The agreements have certain covenants and restrictions,
which, among other matters, require the maintenance of certain financial ratios
and operating results, as defined in the agreements, and prohibit the payment of
dividends. The Company was not in compliance with some of its U.S. bank
covenants but has obtained a waver from the bank.
The Company has used its credit facilities primarily to fund
the expansion at Diodes-China and for the FabTech acquisition, as well as to
support its operations. The Company believes that the continued availability of
these credit facilities, together with internally generated funds, will be
sufficient to meet the Company's current foreseeable operating cash
requirements.
The Company has entered into an interest rate swap agreement
with a major U.S. bank which expires November 30, 2004, to hedge its exposure to
variability in expected future cash flows resulting from interest rate risk
related to 25% of its long-term debt. The interest rate under the swap agreement
is fixed at 6.8% and is based on the notional amount, which was $6.4 million at
March 31, 2002. The swap contract is inversely correlated to the related hedged
long-term debt and is therefore considered an effective cash flow hedge of the
underlying long-term debt. The level of effectiveness of the hedge is measured
by the changes in the market value of the hedged long-term debt resulting from
fluctuation in interest rates. During fiscal 2001, variable interest rates
decreased resulting in an interest rate swap liability of $147,000 as of
December 31, 2001. As of March 31, 2002, the swap liability was $123,000. As a
matter of policy, the Company does not enter into derivative transactions for
trading or speculative purposes.
Total working capital decreased approximately 18.7% to $16.1
million as of March 31, 2002, from $19.8 million as of December 31, 2001. The
Company believes that such working capital position will be sufficient for
foreseeable operations and growth opportunities. The Company's total debt to
equity ratio decreased to 1.01 at March 31, 2002, from 1.02 at December 31,
2001. It is anticipated that this ratio may increase should the Company use its
credit facilities to fund additional inventory sourcing opportunities.
The Company has no material plans or commitments for capital
expenditures other than in connection with manufacturing expansion at
Diodes-China, Diodes-FabTech equipment requirements, and the Company's
implementation of an Enterprise Resource Planning ("ERP") software package.
However, to ensure that the Company can secure reliable and cost effective
inventory sourcing to support and better position itself for growth, the Company
is continuously evaluating additional internal manufacturing expansion, as well
as additional outside sources of products. The Company believes its financial
position will provide sufficient funds should an appropriate investment
opportunity arise and thereby, assist the Company in improving customer
satisfaction and in maintaining or increasing market share. Based upon plans for
new product introductions, product mixes, capacity restraints on certain product
lines and equipment upgrades, the Company expects that year 2002 capital
expenditures for its manufacturing facilities will run approximately $4.0 to
$6.0 million, with an additional approximately $1.0 million for the ERP project.
Cautionary Statement for Purposes of the "Safe Harbor" Provision of the
Private Securities Litigation Reform Act of 1995
Except for the historical information contained herein, the
matters addressed in this Quarterly Report on Form 10-Q 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 under "Risk Factors" and elsewhere
in this Quarterly 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 Quarterly
Report on Form 10-Q are subject to, in addition to the other matters described
in this Quarterly 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.
Risk Factors
Vertical Integration
We are in the process of vertically integrating our
business. Key elements of this strategy include (i) expanding our manufacturing
capacity, (ii) establishing wafer foundry and research and development
capability through the acquisition of FabTech and (iii) establishing sales,
marketing, product development, package development and assembly/testing
operations in company-owned facilities or through the acquisition of established
contractors. We have a limited history upon which an evaluation of the prospects
of our vertical integration strategy can be based. There are certain risks
associated with our vertical integration strategy, including:
o difficulties associated with owning a manufacturing business,
including, but not limited to, the maintenance and management of
manufacturing facilities, equipment, employees and inventories and
limitations on the flexibility of controlling overhead;
o difficulties implementing our Enterprise Resource Planning system;
o difficulties expanding our operations in the Far East and developing new
operations in Europe;
o difficulties developing and implementing a successful
research and development team; and
o difficulties developing proprietary
technology.
The risks of becoming a fully integrated manufacturer are
amplified in an industry-wide slowdown because of the fixed costs associated
with manufacturing facilities.
Economic Conditions
The discrete segment of the semiconductor industry is highly
cyclical, and the value of our business may decline during the "down" portion of
these cycles. During recent years, we, as well as many others in our industry,
experienced significant declines in the pricing of, as well as demand for, our
products and lower facilities utilization. The market for discrete
semiconductors may experience renewed, possibly more severe and prolonged,
downturns in the future. The markets for our products depend on continued demand
in the communications, computer, industrial, consumer electronic and automotive
markets, and these end-markets may experience changes in demand that could
adversely affect our operating results and financial condition.
Competition
The discrete semiconductor industry is highly competitive.
We expect intensified competition from existing competitors and new entrants.
Competition is based on price, product performance, product availability,
quality, and reliability and customer service. We compete in various markets
with companies of various sizes, many of which are larger and have greater
financial, marketing, distribution, brand names and other resources than we have
and, thus, may be better able to pursue acquisition candidates and to withstand
adverse economic or market conditions. In addition, companies not currently in
direct competition with us may introduce competing products in the future. Some
of our current major competitors are On Semiconductor, General Semiconductor,
Inc., Fairchild Semiconductor Corporation, International Rectifier Corporation,
Rohm, and Phillips. We may not be able to compete successfully in the future, or
competitive pressures may harm our financial condition or our operating results.
Foreign Operations
We expect revenues from foreign markets to continue to
represent a significant portion of our total revenues. In addition, we maintain
facilities or contracts with entities in the Philippines, Taiwan, Germany,
Japan, England, India, and China, among others. There are risks inherent in
doing business internationally, including:
o changes in, or impositions of, legislative or regulatory requirements,
including tax laws in the United States and in the countries in which we
manufacture or sell our products;
o trade restrictions, transportation delays, work stoppages, and economic and
political instability;
o changes in import/export regulations, tariffs and freight rates;
o difficulties in collecting receivables and enforcing contracts
generally;
o currency exchange rate fluctuations; and,
o restrictions on the transfer of funds from foreign subsidiaries to
Diodes-North America.
Variability of Quarterly Results
We have experienced, and expect to continue to experience, a
substantial variation in net sales and operating results from quarter to
quarter. We believe that the factors that influence this variability of
quarterly results include:
o general economic conditions in the countries where we sell our products;
o seasonality and variability in the computer and communications market and our
other end markets;
o the timing of our and our competitors' new product introductions;
o product obsolescence;
o the scheduling, rescheduling and cancellation of large orders by our
customers;
o the cyclical nature of demand for our customers' products;
o our ability to develop new process technologies and achieve volume production
at our fabrication facilities;
o changes in manufacturing yields;
o adverse movements in exchange rates, interest rates or tax rates; and
o the availability of adequate supply commitments from our outside suppliers or
subcontractors.
Accordingly, a comparison of the Company's results of
operations from period to period is not necessarily meaningful and the Company's
results of operations for any period are not necessarily indicative of future
performance.
New Technologies
We cannot assure you that we will successfully identify new
product opportunities and develop and bring products to market in a timely and
cost-effective manner, or that products or technologies developed by others will
not render our products or technologies obsolete or noncompetitive. In addition,
to remain competitive, we must continue to reduce package sizes, improve
manufacturing yields and expand our sales. We may not be able to accomplish
these goals.
Production
Our manufacturing efficiency will be an important factor in
our future profitability, and we cannot assure you that we will be able to
maintain or increase our manufacturing efficiency. Our manufacturing processes
require advanced and costly equipment and are continually being modified in an
effort to improve yields and product performance. We may experience
manufacturing problems in achieving acceptable yields or experience product
delivery delays in the future as a result of, among other things, capacity
constraints, construction delays, upgrading or expanding existing facilities or
changing our process technologies, any of which could result in a loss of future
revenues. Our operating results also could be adversely affected by the increase
in fixed costs and operating expenses related to increases in production
capacity if revenues do not increase proportionately.
Future Acquisitions
As part of our business strategy, we expect to review
acquisition prospects that would implement our vertical integration strategy or
offer other growth opportunities. While we have no current agreements and no
active negotiations underway with respect to any acquisitions, we may acquire
businesses, products or technologies in the future. In the event of future
acquisitions, we could:
o use a significant portion of our available cash;
o issue equity securities, which would dilute current stockholders' percentage
ownership;
o incur substantial debt;
o incur or assume contingent liabilities,
known or unknown;
o incur amortization expenses related to goodwill or other
intangibles; and
o incur large, immediate accounting write-offs.
Such actions by us could harm our operating results and/or
adversely influence the price of our Common Stock.
Integration of Acquisitions
During fiscal year 2000, we acquired FabTech. We may
continue to expand and diversify our operations with additional acquisitions. If
we are unsuccessful in integrating these companies or product lines with our
operations, or if integration is more difficult than anticipated, we may
experience disruptions that could have a material adverse effect on our
business, financial condition and results of operations. Some of the risks that
may affect our ability to integrate or realize any anticipated benefits from
companies we acquire include those associated with:
o unexpected losses of key employees or customers of the acquired company;
o conforming the acquired company's standards, processes, procedures and
controls with our operations;
o coordinating our new product and process development;
o hiring additional management and other critical personnel;
o increasing the scope, geographic diversity and complexity of our operations;
o difficulties in consolidating facilities and transferring processes and
know-how;
o diversion of management's attention from other business concerns; and,
o adverse effects on existing business relationships with customers.
Backlog
The amount of backlog to be shipped during any period is
dependent upon various factors and all orders are subject to cancellation or
modification, usually without penalty to the customer. Orders are generally
booked from one to twelve months in advance of delivery. The rate of booking new
orders can vary significantly from month to month. The Company and the industry
as a whole are experiencing a trend towards shorter lead-times (the amount of
time between the date a customer places an order and the date the customer
requires shipment). The amount of backlog at any date depends upon various
factors, including the timing of the receipt of orders, fluctuations in orders
of existing product lines, and the introduction of any new lines. Accordingly,
the Company believes that the amount of backlog at any date is not meaningful
and is not necessarily indicative of actual future shipments. The Company
strives to maintain proper inventory levels to support customers' just-in-time
order expectations.
Product Resources
We sell products primarily pursuant to purchase orders for
current delivery, rather than pursuant to long-term supply contracts. Many of
these purchase orders may be revised or canceled without penalty. As a result,
we must commit resources to the production of products without any advance
purchase commitments from customers. Our inability to sell, or delays in
selling, products after we devote significant resources to them could have a
material adverse effect on our business, financial condition and results of
operations.
Qualified Personnel
Our future success depends, in part, upon our ability to
attract and retain highly qualified technical, sales, marketing and managerial
personnel. Personnel with the necessary expertise are scarce and competition for
personnel with these skills is intense. We may not be able to retain existing
key technical, sales, marketing and managerial employees or be successful in
attracting, assimilating or retaining other highly qualified technical, sales,
marketing and managerial personnel in the future. If we are unable to retain
existing key employees or are unsuccessful in attracting new highly qualified
employees, our business, financial condition and results of operations could be
materially and adversely affected.
Expansion
Our ability to successfully offer our products in the
discrete semiconductor market requires effective planning and management
processes. Our past growth, and our targeted future growth, may place a
significant strain on our management systems and resources, including our
financial and managerial controls, reporting systems and procedures. In
addition, we will need to continue to train and manage our workforce worldwide.
Suppliers
Our manufacturing operations depend upon obtaining adequate
supplies of materials, parts and equipment on a timely basis from third parties.
Our results of operations could be adversely affected if we are unable to obtain
adequate supplies of materials, parts and equipment in a timely manner or if the
costs of materials, parts or equipment increase significantly. In addition, a
significant portion of our total sales is from parts manufactured by outside
vendors. From time to time, suppliers may extend lead times, limit supplies or
increase prices due to capacity constraints or other factors. Although we
generally use products, materials, parts and equipment available from multiple
suppliers, we have a limited number of suppliers for some products, materials,
parts and equipment. While we believe that alternate suppliers for these
products, materials, parts and equipment are available, any interruption could
materially impair our operations.
Environmental Regulations
We are subject to a variety of United States federal,
foreign, state and local governmental laws, rules and regulations related to the
use, storage, handling, discharge or disposal of certain toxic, volatile or
otherwise hazardous chemicals used in our manufacturing process. Any of these
regulations could require us to acquire equipment or to incur substantial other
expenses to comply with environmental regulations. If we were to incur
substantial additional expenses, product costs could significantly increase,
thus materially and adversely affecting our business, financial condition and
results of operations. Any failure to comply with present or future
environmental laws, rules and regulations could result in fines, suspension of
production or cessation of operations, any of which could have a material
adverse effect on our business, financial condition and results of operations.
The Company received a claim from one of its former U.S.
landlords, regarding potential groundwater contamination at a site in which the
Company engaged in manufacturing from 1967 to 1973, alleging that the Company
may have some responsibility for cleanup costs. Although investigations into the
landlord's allegations are ongoing, the Company does not anticipate that the
ultimate outcome of this matter will have a material effect on its financial
condition.
Product Liability
One or more of our products may be found to be defective
after we have already shipped such products in volume, requiring a product
replacement or recall. We may also be subject to product returns, which could
impose substantial costs and have a material and adverse effect on our business,
financial condition and results of operations. Product liability claims may be
asserted with respect to our technology or products. Although we currently have
product liability insurance, there can be no assurance that we have obtained
sufficient insurance coverage, or that we will have sufficient resources, to
satisfy all possible product liability claims.
System Outages
Risks are presented by electrical or telecommunications
outages, computer hacking or other general system failure. To try to manage our
operations efficiently and effectively, we rely heavily on our internal
information and communications systems and on systems or support services from
third parties. Any of these are subject to failure. System-wide or local
failures that affect our information processing could have material adverse
effects on our business, financial condition, results of operations and cash
flows. In addition, insurance coverage for the risks described above may be
unavailable.
Downward Price Trends
Our industry is intensely competitive and prices for
existing products tend to decrease steadily over their life cycle. There is
substantial and continuing pressure from customers to reduce the total cost of
using our parts. To remain competitive, we must achieve continuous cost
reductions through process and product improvements. We must also be in a
position to minimize our customers' shipping and inventory financing costs and
to meet their other goals for rationalization of supply and production. Our
growth and the profit margins of our products will suffer if our competitors are
more successful than we are in reducing the total cost to customers of their
products.
Obsolete Inventories
The life cycles of some of our products depend heavily upon
the life cycles of the end products into which our products are designed.
Products with short life cycles require us to manage closely our production and
inventory levels. Inventory may also become obsolete because of adverse changes
in end market demand. We may in the future be adversely affected by obsolete or
excess inventories which may result from unanticipated changes in the estimated
total demand for our products or the estimated life cycles of the end products
into which our products are designed.
Deferred Taxes
As of March 31, 2001, accumulated and undistributed earnings
of Diodes-China is approximately $22.3 million. The Company has not recorded
deferred Federal or state tax liabilities (estimated to be $8.9 million) on
these cumulative earnings since the Company considers this investment to be
permanent, and has no plans, intentions or obligation to distribute all or part
of that amount from China to the United States. The Company will consider the
need to provide deferred taxes on future earnings of Diodes-China to the extent
such earnings may be appropriated for distribution to Diodes-North America, and
as further investment strategies with respect to Diodes-China are determined.
Should the Company's North American cash requirements exceed the cash that is
provided through the domestic credit facilities, cash can be obtained from the
Company's foreign subsidiaries. However, the distribution of any unappropriated
funds to the U.S. will require the recording of income tax provisions on the
U.S. entity, thus reducing net income.
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 10.46 Sale and Leaseback Agreement between the Company and
Shanghai Ding Hong Company, Ltd.
Exhibit 10.47 Lease Agreement between the Company and
Shanghai Ding Hong Company, Ltd.
Exhibit 11 Computation of Earnings Per Share
Exhibit 99.44 Press release: Diodes Incorporated Announces
Conference Call To Discuss First Quarter FY 2002 Results
Exhibit 99.45 Press release: Diodes, Inc. Reports First Quarter 2002 Results
(b) Reports on Form 8-K
None
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)
By: /s/ Carl Wertz May 10, 2002
- -------------------
CARL WERTZ
Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial
and Chief Accounting Officer)
INDEX TO EXHIBITS
Exhibit 10.46 Sale and Leaseback Agreement between the Company and
Shanghai Ding Hong Company, Ltd. Page 24
Exhibit 10.47 Lease Agreement between the Company and
Shanghai Ding Hong Company, Ltd. Page 31
Exhibit 11 Computation of Earnings Per Share Page 37
Exhibit 99.44 Press release: Diodes Incorporated Announces Conference Call
To Discuss First Quarter FY 2002 Results Page 38
Exhibit 99.45 Press release: Diodes, Inc. Reports First Quarter 2002 Results Page 39
Exhibit 10.46
The Sale and Leasing Agreement
This agreement is concluded between and by Shanghai Kai Hong Electronic Company
Ltd. with its legal residence being: Chenchun Road Xinqiao Town Songjiang County
Shanghai , China ("Party A") and Shanghai Ding Hong Electronic Company Ltd. with
its legal residence being: No 999 Xinqiao Town Songjiang County Shanghai , China
("Party B") on March 30, 2002,in the city of Shanghai.
Whereas,
1. Party A agrees to sell a three story building completed by itself on
(date)(hereinafter referred to as "original factory building"),and one
power distribution building both buildings set forth in Exhibit one and
two, hereinafter refereed to as " Building A") to Party B for the purpose
and on the terms and conditions of this agreement;
2. Party B agrees to let Building A to Party A after Party B purchases
Building A from Party A for the purpose and on the terms and conditions of
this agreement.
3. Party B agrees to let extended part of the original factory building as
well as the affiliated buildings and area (set forth in Exhibit three and
four, hereinafter referred to as " Building B") to Party A.
Now it is hereby agreed as follows,
1. Definitions and interpretation
Unless otherwise defined in this agreement, the terms used in this agreement
shall only have the meanings hereunder.
1.1 "Building A" shall have the following meanings,
a. The original factory building of three stories located in No. 375 land
of Song Jiang District, Shanghai;
b. The power distribution building located in No. 375 land of Song Jiang
District, Shanghai.
1.2 "Building B" shall have the following meanings,
a. The extended part of the original three story factory building and
b. Affiliated buildings and area set forth in Exhibit Four.
(the specific site and area is set forth in the Exhibit Map of the
completed building )
1.3 "Effective Date" shall mean the agreement will take effect after the legal
representatives or authorized representatives of both parties affix their
signatures and company seals on this agreement.
1.4 "Leasing Term" shall mean 15 years since the agreement takes effect.
1.5 "Free of Rental Term" shall mean the period that in accordance with article
3.4 Party A is entitled to use Building A without paying any rent fees since the
16th year after the agreement has taken effect for 15 years as long as Party A
maintains its lawful existence as a business entity.
2. The sale price of Building A and the method of payment
2.1 The sale price
a. Both parties agree to that the net value of the original factory
building is USD$ 242,090, and that the net value of power distribution
building is USD$; 32,916
b. Party B agrees to purchase Building A with the price mentioned above.
2.2 The method of payment
Both parties agree that Party B shall provide Party A with a lawful receipt of
real assets transfer, meanwhile to clarify the real assets value indicated in
Party A's account, the clearance balance shall be transferred into Party A's
long term credit--to collect from Party B. Party B will make 15 annual
installment payments after the agreement takes effect, in other words, to pay
off USD$ 275,006 within 15 years, and that every calendar year Party B shall pay
USD$ 18,334to the account as prescribed by Party A before January 31st.
3. Rent Term, Rent and Method of Payment
3.1 The period of lease
Both parties agree to that Party A is entitled to lease Building A for 15 years
after the agreement takes effect.
3.2 Rental: both parties agree to that the annual rental of Building A
shall be USD$ 19.251.
3.3 Method of payment: every calendar year Party A shall pay rental to the
account as prescribed by Party B before January 31st.
3.4 Term for free of rent
After Party A leases Building A for 15 years, thereby Party A is entitled to
continue to use Building A until 2024 with free of rent. If the operating period
of Party A is extended beyond 2024, and Party A still exists as a business
entity after 2024, thereby Party A is entitled to use Building with free of
rent.
4. Under the circumstances that Party A terminates the lease of Building A
before the lease term expires, then,
4.1 Under the circumstances that Party A terminates the lease relationship
prior to maturity of the lease term and where Party B is unable to let
Building A to a third party, Party A is still borne to pay the rent in
accordance with the agreement. Party B shall also pay installment to Party
A in accordance with the agreement.
4.2 Under the circumstances that Party A terminates the lease relationship
prior to maturity of the lease term and where Party B is able to let
Building A to a third party with the same rent, then Party A is not borne
to pay the rent and any penalties, Party B shall also pay installment to
Party A in accordance with the agreement.
4.3 Under the circumstances that Party B lets Building A or one of Building A
to a third party, however, the rent thereof is less than the installment
that Party B shall pay to Party A, then Party A shall pay the balance
between the annual rental prescribed in Article 3.2 and the actual rental
collected by Party B. Party B shall also pay installment to Party A in
accordance with the agreement.
4.4 Under the circumstances that Party B lets Building A to a third party, and
where the rent thereof is more than the installment Party B shall pay to
Party A, then Party B is entitled to just pay the consideration in
accordance with the amount on terms and conditions of this agreement.
4.5 Party B is not allowed to terminate the lease contract and the leasing
term for free of rental without the consent of Party A. Otherwise Party B
is liable to indemnify Party A all its losses including and without
limitation any and all reasonable profits, out-of-pocket costs, legal
fees, accounting fees and removal or relocation fees.
5. The leasing term, rental and the method of payment as to the leasing
term of Building B.
5.1 Leasing term: both parties agree that, Party A is entitled to lease
Building B for 15 years following the agreement takes effect. After the
expiry of the leasing term, in case Party A still rents Building A or
within the leasing term for free of rental, the leasing term of Building B
shall be extended automatically and accordingly.
5.2 Rental: both parties agree that the monthly rental of Building B shall
be USD $17,541. The rental can be adjusted where meeting mutual
agreement.
5.3 Method of payment: Party A shall pay the rental to the account as
nominated by Party B before 1st monthly.
5.4 Deposit: Party A shall pay Party B a deposit of USD$ 17,030 for leasing
Building B, This deposit should apply against the last month's rent due by
Party A to Party B
6. Termination of the agreement prior to the maturity of the leasing term
of Building B
6.1 Where Party A will terminate the agreement prior to the maturity of the
leasing term, Party A thereby shall compensate all losses, and damages
suffered by Party B. The amount of compensation shall be decided upon
negotiation between two parties.
6.2 Under the circumstances that Party A terminates the agreement prior to the
maturity of the leasing term of building A for free of rental, Party A
shall not be entitled to refund the deposit of USD$17,030.
7. Insurance and repair costs
7.1 During the Leasing Term and Free of rental period, Party A is liable
to purchase insurance for Building A and bear the repair costs as
well, If Party A can not obtain building insurance, then Party B will
be requested to obtain insurance and Party A will reimburse Party B
for the actual insurance cost
7.2 During the Leasing Term, Party B is liable to purchase insurance for
Building B and bear the repair costs as well.
7.3 Party B is entitled to inspect the utilization of buildings rented by
Party A and Party A should provide assistance.
8. Liability for breach of the agreement
Where Party B violates article 2.2 of the agreement for failing to pay
installment punctually, then Party B shall be liable to pay liquidate damages to
Party A at the rate of 0.21/ooof the installment for each day of delay.
8.1 Where Party A violates article 3.3 of the agreement for failing to pay
the rent, then Party A shall pay a penalty at the rate of 0.21/of the
rent for each day of delay.
8.2 Where Party B breach its warranties stipulated in article 6, Party B
shall compensate Party A's lost and damages if any.
8.3 Party A is not allowed to:
(1) sub-lease Building A and Building B or exchange the use of two
buildings with other parties without Party B's consent.
(2) In case Party A alters the structure of two building or damage
two buildings without Party B's consent, Party A is liable to
compensation.
(3) In case Party A changes the lease purpose prescribed in the
agreement and the subject of lease without Party B's consent,
Party A is liable to restoration and compensation.
9. Warranties
Party B hereby warrants that with the period of the lease and term for free of
rent Building A and Building B shall not be sold or mortgaged except for Party
A's prior approval in writing.
10. Force Majeure
10.1 The definition of Force Majeure
Force Majeure shall mean all events which are beyond the control of the Parties
to this agreement, and which are unforeseen, unavoidable and insurmountable, and
which arise after the Effective Date and which prevent total or partial
performance by either party. Such events shall include earthquakes, typhoons,
flood, fire, war, acts of government or public agencies, strikes and any other
event which can not be foreseen, prevented and controlled, including events
which are recognized as Force Majeure in general international commercial
practice.
10.2 Consequences of Force Majeure
a. If an event of Force Majeure occurs, a Party's contractual obligations
affected by such an event shall be suspended during the period of delay
caused by the Force Majeure and the period for performing such obligation
shall be extended, without penalty, for a period equal to such suspension.
b. The party claiming Force Majeure shall promptly inform the other party in
writing and shall furnish with in fifteen (15) days thereafter sufficient
proof of the occurrence and expected duration of such Force Majeure. The
party claiming Force Majeure shall also use all reasonable endeavors to
terminate the Force Majeure.
c. In the event of Force Majeure, the parties shall immediately consult
with each other in order to find an equitable solution and shall use all
reasonable endeavors to minimize the consequences of such Force Majeure
11. The effectiveness of this agreement
This agreement shall become effective after the legal representatives or
authorized representatives of both parties affix their signatures and company
seals on this agreement.
12. Language of the agreement
This agreement is made and executed in Chinese and English, both versions having
equal validity.
13. Settlement of disputes
13.1 Friendly consultations
In the event of any dispute, difference, controversy or claim arising out of or
relating to this agreement, including any regarding the breach, termination or
validity of this agreement, (a "Dispute") then upon one party giving the other
party notice in writing of the Dispute and regarding the commencement of
friendly consultations ("Notice of Dispute") the parties shall attempt to
resolve such Dispute through friendly consultation.
If the Dispute has not been resolved through friendly consultations with thirty
(30) days from the Notice of Dispute was given in respect of it, the Dispute
shall be resolved by arbitration in accordance with Article 10.2 such
arbitration may be initiated by either party.
13.2 Arbitration
The arbitration shall be conducted by Shanghai Arbitration Commission in
Shanghai in accordance with its procedure rules. The arbitration award shall be
final and binding on the parties. The costs of arbitration shall be borne by the
losing party except as may be otherwise determined by the arbitration tribunal.
13.3 Continuance of performance
Except for the specified matters in dispute, which are then currently being
arbitrated, the parties shall continue to perform their respective obligations
under this agreement during any friendly consultations or any arbitration
pursuant to this article 10.
13.4 Separability
The provisions of these articles 10 shall be separable from the other terms of
this agreement. Neither the termination nor the invalidity of this agreement
shall affect the validity of the provisions of this article 10.
14. Applicable law
The validity, interpretation and implementation of this agreement and the
settlement of disputes herein shall be governed by relevant PRC laws and
regulation which are officially promulgated and publicly available.
15. Miscellaneous
15.1 Anything not prescribed by the agreement shall be made as the
supplementary clauses by two parties' mutual agreement. The supplementary
clauses and exhibitions constitute the part of the entire agreement.
15.2 Both parties know their respective right, obligation, liability, very
clearly and will execute the agreement in accordance with the provisions
of the agreement. Where one party violates the agreement, the other party
is entitled to claim damages in accordance with the agreement.
15.3 Any notice or written communication provided for in this Contract from one
Party to the other Party shall be made in writing in Chinese and English
and sent by courier service delivered letter. The date of receipt of a
notice or communication hereunder shall be deemed to be seven (7) days
after the letter is given to the courier service provided it is evidenced
by a confirmation receipt. All notices and communications shall be sent to
the appropriate address set forth below, until the same is changed by
notice given in writing to the other Party.
To: Party A To: Party B
Address: Shanghai KaiHong Electronics, Ltd. Shanghai Ding Hong Electronic Co.,
Ltd.
Attn.: /s/ Joseph Liu, Attn.: /s/ J.Y. Xing
Joseph Liu, President J.Y. Xing, President
Date: March 30, 2002 Date: March 30, 2002
Exhibit 10.47
Lease Agreement
This Lease Agreement (hereinafter referred to as "the Lease") is entered into as
March 30, 2002, in the city of Shanghai, by and between SHANGHAI KAI HONG
ELECTRONIC COMPANY, LIMITED (hereinafter referred to as "Party A") with its
registered office at East of Chen Chun Road, XinQiao Town, SongJiang District,
Shanghai, P.R.C. and SHANGHAI DING HONG ELECTRONIC EQUIPMENT LIMITED
(hereinafter referred to as "Party B") with its registered office at No. 999,
Chen Chun Road, XinQIao Town, SongJiang District, Shanghai, P.R.C.
Party A and Party B are collectively referred to as the Parties and each as a
Party.
WHEREAS,
1. Party B represents that it is the legal owner of the Factory Building and the
Utility Building (hereinafter collectively referred to as "the Buildings") with
full legal power to enter into this Lease.
2. Party A agrees to lease to Party B the partial area of the first floor of the
Factory Building (set forth in Exhibit One, hereinafter referred to as "Rent
Area A") and the Utility Building (set forth in Exhibit Two, hereinafter
referred to as "Rent Area B) in accordance with the terms and conditions of this
Lease. Rent Area A and Rent Area B are collectively referred to as the Rent
Areas as the area for lease in the "Phase I". Party B accepts this Lease.
3. Party B understands that there is no guarantee or obligation on the part of
Party A that it will lease any portion of the Buildings other than the Rent
Areas from Party B including, but not limited to the second floor and the third
floor of the Building.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS,
1. Definitions and Interpretation
Unless otherwise defined in this Lease, the terms used in the
Lease shall only have the meanings hereunder.
1.1 "Factory Building" shall mean the building of three stories
(Construction Number C) located in the lot No. 375 of Song Jiang
District, Shanghai.
1.2 "Rent Area A" shall mean the first floor of the Factory
Building excluding the shade area marked in the Exhibit One ("1st Floor Layout
for Factory Building").
1.3 "Utility Building" shall mean the building of three stories
(Construction Number) located in the lot No. 375-1 of Song Jiang
District, Shanghai.
1.4 "Rent Area B" shall mean the first floor of the Utility Building excluding
the shade area marked in the Exhibit Two ("Utility Building 1st Floor Layout").
1.5 "Effective Date" shall mean the date on which the Lease will take effect
after the legal representatives or authorized representatives of the Parties
affix their signatures and corporate seals on the Lease.
1.6 "Rent Term" shall mean the period of time in which Party A is entitled to
use the Rent Areas and Party B is entitled to receive rent from Party A in
accordance with the terms and conditions of this Lease.
2. Gross Area of the Rent Areas
2.1 The gross area of the Rent Area A is 1233.90 square meters.
2.2 The gross area of the Rent Area B is 478.80 square meters.
3. Rent Term
3.1 The Parties agree that the Lease Term is 5 years commencing from the date of
March 1, 2002.
3.2 The Rent Term shall be automatically renewed for successive 5 year terms
unless Party A gives notice of termination not less than 30 days before the
expiration of any Lease Term. In its operating period, Party A has the priority
to the Rent Areas defined in this Contract and Party B shall not terminate this
Contract without reasonable cause and Party A's approval in written.
3.3 In the period of renewal, the items relating to the rental stipulated in
Article 4 of the Lease shall be adjusted upon consultation on the basis of the
current-then index number of prices.
4. Rental
4.1 The Parties agree that the monthly Rental of the Rent Area A shall be US$4
per square meter and for a total of US$ 4935.60.
4.2 The Parties agree that the monthly Rental of the Rent Area B shall be US$4
per square meter and for a total of US$ 1915.20.
5. Method of Payment
Party A shall pay the Rental in RMB Yuan according to the Medium Rate
of Exchanges published by the Bank of China on the day of payment to the RMB
account as prescribed by Party B before the first day of every month.
6. Deposit
Party A shall pay Party B a deposit amounting to US$ 6850.80 within 10
days of the effective date of the Lease.
7. Right of First Refusal
If, during any term of this Lease, Party B receives from a third party
a bona fide, legally binding offer to rent any portion of the Buildings other
than the Rent Areas, it shall notify Party A of this fact. The notice shall
specify all terms in the bona fide third party offer. Party A shall then have
thirty (30) days to rent that portion of the Buildings referred to in the bona
fide offer on the same terms and conditions. Party B shall not rent the
remaining portion of the Buildings to any third party until the thirty (30) days
has expired, without Party A exercising its right of first refusal.
8. Termination of the Lease
If either Party terminates the Lease prior to the expiration of the Rent
Term without the consent from the other Party, the former thereby shall pay
damages to the latter to compensate its actual loss. The amount of damages shall
include, but not be limited to the reasonable profits, out-of-pocket costs,
legal fees, accounting fees and removal or relocation fees.
9. Insurance and Repair Costs
9.1 During the term of the rental agreement, Party B shall purchase & maintain
insurance coverage to cover any and all casualty damage to the Aent Areas, and
shall be responsible for repairs of all structural damages to the building that
are not the result of improper use by Party A. Party A shall be responsible for
all repair costs arising from improper usage by Party A. If Party B cannot
obtain building insurance, the Party A will be requested to obtain insurance,
and Party B will reimburse Party A for all costs of such insurance coverage".
9.2 Party B shall be entitled to inspect the Rented Areas at reasonable
intervals and upon reasonable notice. Party A shall provide assistance to allow
such inspections.
10. Liability for Breach of the Lease
10.1 If Party A violates Article 5 of the Lease for failing to pay the Rental,
then Party A shall pay a penalty at the rate of 0.21/oo of the Rental for each
day of delay.
10.2 Where Party B breaches its warranties stipulated in Article 11, Party B
shall compensate Party A for all of its losses and damages including
consequential damages.
10.3 Party A shall not:
(4) sub-lease the Rented Areas or exchange the use of the Rented Areas with
other parties without Party B's prior, written consent.
(5) alter the structure of the Rented Areas or damage the Rented Areas
without Party B's prior, written consent.
(6) change the Lease purpose stipulated by the competent authorities
without Party B's consent.
11. Warranties
11.1 Party B hereby warrants that if the Rent Areas are sold to any third party
in the Rent Term or the period of renewal, the third party shall continue to
carry out the Contract. In case the third party fails to carry out the Contract,
Party B shall compensate Party A for all of its losses and damages.
11.2 In case Party B mortgages the Rent Areas to the third party, any loss
suffered by Party A shall be indemnified by Party B.
12. Alteration
12.1 The lease of the area marked as "Phase II" and "Phase III" in the Exhibit
One shall be discussed further to meet Party A's requirements for productivity
improvement.
12.2 If the Parties reach an agreement for the lease of the area set forth in
Section 11.1, the layout of the area shall be signed by the Parties as the
Exhibit Three of the Lease and the Gross Area and the monthly Rental set forth
in Article 2 and Article 4 shall be adjusted accordingly.
13. Force Majeure
13.1 The definition of Force Majeure
Force Majeure shall mean all events which arise after the Effective Date which
are beyond the control of the Parties, are unforeseen, unavoidable and
insurmountable, and which prevent total or partial performance by either Party.
Such events shall include earthquakes, typhoons, flood, fire, war, acts of
government or public agencies, strikes and any other event which cannot be
foreseen, prevented and controlled, including events which are recognized as
Force Majeure in general international commercial practice.
13.2 Consequences of Force Majeure
d. If an event of Force Majeure occurs, the contractual obligation of a Party
affected by such an event shall be suspended during the period of delay
the time for performing such obligation shall be extended, without
penalty, for a period equal to such suspension.
e. The Party claiming Force Majeure shall give prompt notice to the other
Party in writing and shall furnish, with in fifteen (15) days thereafter,
sufficient proof of the occurrence and expected duration of such Force
Majeure. The Party claiming Force Majeure shall also use all reasonable
efforts to mitigate or eliminate the effects of the Force Majeure.
f. In the event of Force Majeure, the Parties shall immediately consult with
each other in order to find an equitable solution and shall use all
reasonable efforts to minimize the consequences of such Force Majeure.
14. The Effectiveness of the Lease
The Lease shall become effective after the legal representatives or authorized
representatives of both Parties affix their signatures and company seals on the
Lease.
15. Language of the Lease
The Lease is made and executed in Chinese and English, both versions having
equal validity.
16. Settlement of Disputes
16.1 Friendly Consultations
a. In the event of any dispute, difference, controversy or claim arising out of
or relating to the Lease, including any regarding the breach, termination or
validity of the Lease, (a "Dispute") then upon one Party giving the other Party
notice in writing of the Dispute ("Notice of Dispute"), the Parties shall
attempt to resolve such Dispute through friendly consultation.
b. If the Dispute has not been resolved through friendly consultations with
thirty (30) days from the Notice of Dispute, the Dispute shall be resolved by
arbitration in accordance with Article 15.2. Such arbitration may be initiated
by either Party.
16.2 Arbitration
The arbitration shall be conducted by Shanghai Arbitration Commission in
Shanghai in accordance with its procedure rules. The arbitration award shall be
final and binding on the Parties. The costs of arbitration shall be borne by the
losing Party except as may be otherwise determined by the arbitration tribunal.
16.3 Continuance of performance
Except for the specified matters in dispute which are then currently being
arbitrated, the Parties shall continue to perform their respective obligations
under the Lease during any friendly consultations or any arbitration pursuant to
this Article 15.
16.4 Separability
The provisions of this Article 15 shall be separable from the other terms of the
Lease. Neither the termination nor the invalidity of the Lease shall affect the
validity of the provisions of this Article 15. 17. Applicable law The validity,
interpretation and implementation of the Lease and the settlement of disputes
herein shall be governed by relevant PRC laws and regulations which are
officially promulgated and publicly available.
18. Miscellaneous
18.1 Any amendment to this Lease shall be in writing and duly signed by both
Parties. Such Amendment shall constitute the part of the entire Lease.
18.2 Both Parties know their respective right, obligation, liability, very
clearly and will execute the Lease in accordance with the provisions of the
Lease. Where one Party violates the agreement, the other Party is entitled to
claim damages in accordance with the Lease.
18.3 Any notice or written communication required or permitted by this Lease
shall be made in writing in Chinese and English and sent by courier service. The
date of receipt of a notice or communication shall be deemed to be seven (7)
days after the letter is deposited with the courier service provided the deposit
is evidenced by a confirmation receipt. All notices and communications shall be
sent to the appropriate address set forth below, until the same is changed by
notice given in writing to the other Party.
To: Party A To: Party B
Address: SHANGHAI KAI HONG Address: SHANGHAI DING HONG ELECTRONIC
COMPANY, LTD. ELECTRONIC EQUIPMENT, LTD.
Attn.: /s/ Joseph Liu Attn.: /s/ Jian Y. Xing
Joseph Liu, President Jian Y. Xing, President
Date: March 30, 2002 Date: March 30, 2002
Exhibit - 11
DIODES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Three Months Ended
March 31,
--------------------------------------
2001 2002
----------------- -----------------
BASIC
Weighted average number of common
shares outstanding used in computing
basic earnings per share 8,132,559 8,165,325
Net income $ 521,000 $ 208,000
================= =================
Basic earnings per share $ 0.06 $ 0.03
================= =================
DILUTED
Weighted average number of common
shares outstanding used in computing
basic earnings per share 8,132,559 8,165,325
Assumed exercise of stock options 897,069 608,691
----------------- -----------------
9,029,628 8,774,016
Net income $ 521,000 $ 208,000
================= =================
Diluted earnings per share $ 0.06 $ 0.02
================= =================
The accompanying notes are an integral part of these financial statements.
Exhibit 99.44
Diodes Incorporated
FOR IMMEDIATE RELEASE
Diodes Incorporated Announces Conference Call To Discuss First Quarter FY 2002
Results
Westlake Village, California - April 26, 2002 - Diodes Incorporated (Nasdaq:
DIOD), a leading manufacturer and supplier of high quality discrete
semiconductors, primarily to the communications, computing, industrial, consumer
electronics and automotive markets, will host a conference call at 9 a.m. PDT
(12 noon EDT) on Wednesday, May 1st to discuss first quarter of FY 2002 results.
Joining C.H. Chen, President and CEO of Diodes, Inc., will be Mark King, Vice
President of Sales and Marketing, and Carl Wertz, Chief Financial Officer. The
Company plans to distribute its earnings announcement on Business Wire that same
day at 6 a.m. PDT (9 a.m. EDT).
This conference call will be broadcast live over the Internet and can be
accessed by all interested parties on the investor section of Diodes' website at
www.diodes.com. To listen to the live call, please go to the Investor section of
Diodes website and click on the Conference Call link at least fifteen minutes
prior to the start of the call to register, download, and install any necessary
audio software. For those unable to participate during the live broadcast, a
replay will be available shortly after the call on Diodes website for 90 days.
About Diodes Incorporated
Diodes Incorporated (Nasdaq: DIOD) is a leading manufacturer and supplier of
high-quality discrete semiconductor products, serving the communications,
computer, industrial, consumer electronics and automotive markets. The Company
operates two Far East subsidiaries, Diodes-China (QS-9000 & ISO-14001 certified)
in Shanghai and Diodes-Taiwan (ISO-9000 certified) in Taipei. Diodes-China's
manufacturing focus is on surface-mount devices destined for wireless devices,
notebook computers, pagers, PCMCIA cards and modems, among others. Diodes-Taiwan
is our Asia-Pacific sales, logistics and distribution center. The Company's 5"
wafer foundry, Diodes-FabTech (QS-9000 certified), specializes in Schottky
products and is located just outside Kansas City, Missouri. The Company's
ISO-9000 corporate sales, marketing, engineering and logistics headquarters is
located in Southern California. For further information, visit the Company's
website at http://www.diodes.com.
Source: Diodes Incorporated CONTACT: Crocker Coulson, Partner, Coffin
Communications Group; (818) 789-0100 e-mail: crocker.coulson@coffincg.com or
Carl Wertz, Chief Financial Officer, Diodes Incorporated; (805) 446-4800
Recent news releases, annual reports, and SEC filings are available at the
Company's website: http://www.diodes.com. Written requests may be sent to
Investor Relations, Diodes Incorporated, 3050 E. Hillcrest Drive, Westlake
Village, CA 91362, or they may be e-mailed to: diodes-fin@diodes.com.
Exhibit 99.45
Diodes Incorporated
FOR IMMEDIATE RELEASE
Diodes, Inc. Reports First Quarter 2002 Results
Sequential revenue growth of 4.4% and return to profitability
Westlake Village, California, May 1, 2002 - Diodes Incorporated (Nasdaq: DIOD),
a leading manufacturer and supplier of high quality discrete semiconductors,
primarily to the communications, computing, industrial, consumer electronics and
automotive markets, today reported financial results for the first quarter of
fiscal year 2002 ended March 31, 2002.
First Quarter Highlights:
Return to profitability, with net income for the first quarter of $208,000 as
compared to a loss of $76,000 for the fourth quarter
Gross margin improves 230 basis points sequentially from the fourth quarter
Manufacturing capacity utilization increases to an average of 60%
Inventory reduced over $3 million from year-end
Opened offices in Hong Kong and Shenzhen, China
Revenues for the first quarter of 2002 were $26.9 million, a
sequential increase of 4.4% from the fourth quarter of 2001, and an increase of
4.6% from the first quarter of 2001.
Net income for the quarter was $208,000, as compared to
$521,000 for the three months ended March 31, 2001 and compared to a net loss of
$76,000 in the fourth quarter ended December 31, 2001. Diluted earnings per
share were $0.02 for the first quarter of 2002, as compared to $0.06 for the
same period last year.
Commenting on the quarter, C.H. Chen, Diodes' President and
CEO, said, "We are encouraged by our progress in the first quarter and we are
especially pleased to report that Diodes has returned to profitability. After
several very challenging quarters in the semiconductor industry, we are starting
to see signs of renewed industry growth with increased capacity utilization
rates and lower customer inventories. A combination of these factors, cost
containment measures, new products and new customers enabled Diodes to achieve
positive net income for the quarter."
Diodes growth in the first quarter continued to be driven by
the Asian market, which accounted for 47% of sales, up from 39% in the same
period last year. During the quarter, the Company opened an office in Hong Kong,
enabling Diodes to better provide service and support to its growing Asian
customer base, and opened an office in Shenzhen, in mainland China. In addition,
European sales are showing positive trends.
While unit demand is up, price competition continues to be
intense, as average selling prices fell. Increased capacity utilization coupled
with manufacturing cost saving measures contributed to an improved gross profit
margin of 16.2% in the first quarter of 2002, compared to 13.9% in the fourth
quarter of 2001.
"For the quarter, capacity utilization increased
sequentially at both our mainland China facility, Diodes-China, and at our wafer
facility, Diodes-FabTech. We have seen indications of renewed distribution
ordering and a slight lengthening in order times from OEMs. However, continuing
to improve the efficiency of our operations and bring down unit costs will
remain a major operational focus for the balance of 2002," stated Mr. Chen.
For the quarter, SG&A expenses were $3.8 million as compared
to $3.7 million in the fourth quarter. As a percentage of sales, SG&A expenses
decreased to 14.0% from 14.3% in the fourth quarter.
"Diodes is gaining significant momentum as a provider of
next-generation surface-mount discrete devices across all market segments. In
2001, we escalated our research & development efforts with the creation of a
cross-functional R&D team to develop new technology and increase our product
range towards higher margin, differentiated products. For the first quarter, we
increased our R&D spending to $313,000 from $142,000 in the prior quarter and we
are just beginning to realize the benefits of this multi-year strategy," said
Mr. Chen.
"Our customer access and market share for targeted products
continue to improve," Mr. Chen continued. "During the quarter, we introduced a
number of new products including our SBM1040, the first in our Powermite(R)3
platform, and designed for applications requiring a compact profile such as
DC-DC converters, switch mode power supplies, notebook PCs, graphics cards, and
handheld and portable electronics. Also introduced was our DLP05LC
low-capacitance data line protection device designed for portable electronics,
including PDAs and laptop computers and other computer peripherals. In addition
we secured several design wins with multiple qualifications in our target end
equipment, such as notebook, flat panel display, digital camera, mobile handset,
set top box, and DC-DC conversion. We will continue to build on this momentum
throughout 2002 and develop proprietary product lines that will enhance the
depth and breadth of our product range."
The Company continued to manage inventories, which decreased
$3 million or 17% to $14.7 million from $17.8 million at the end of 2001. In
addition, Diodes paid down approximately $2.5 million in long-term debt and $3.2
million on its revolving credit line, ending the first quarter with $6.1 million
in cash.
Mr. Chen concluded, "We are encouraged by signs that
industry fundamentals are improving. We believe that both distributor and our
own inventory levels are at a low point and we would anticipate beginning to
rebuild inventories over the balance of the year to support customer needs. As
we continue to improve capacity utilization and introduce new higher margin,
proprietary products, we expect to continue to benefit from the operating
leverage inherent in our business. Nevertheless, we remain cautious about the
timing of improvements in capital spending and PC demand. Therefore, for the
second quarter, we are projecting similar revenue increases, with gross margin
increasing another 200-300 basis points resulting in improved profitability."
About Diodes Incorporated
Diodes Incorporated (Nasdaq: DIOD) is a leading manufacturer and supplier of
high-quality discrete semiconductor products, serving the communications,
computer, industrial, consumer electronics and automotive markets. The Company
operates two Far East subsidiaries, Diodes-China (QS-9000 and ISO-14001
certified) in Shanghai and Diodes-Taiwan (ISO-9000 certified) in Taipei.
Diodes-China's manufacturing focus is on surface-mount devices destined for
wireless devices, notebook computers, pagers, PCMCIA cards and modems, among
others. Diodes-Taiwan is our Asia-Pacific sales, logistics and distribution
center. The Company's 5" wafer foundry, Diodes-FabTech (QS-9000 certified),
specializes in Schottky products and is located just outside Kansas City,
Missouri. The Company's ISO-9000 corporate sales, marketing, engineering and
logistics headquarters is located in Southern California. For further
information, visit the Company's website at http://www.diodes.com.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995: Any statements set forth above that are not historical facts are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Potential risks and uncertainties include, but are not limited to,
such factors as fluctuations in product demand, the introduction of new
products, the Company's ability to maintain customer and vendor relationships,
technological advancements, impact of competitive products and pricing, growth
in targeted markets, risks of foreign operations, and other information detailed
from time to time in the Company's filings with the United States Securities and
Exchange Commission.
Source: Diodes Incorporated CONTACT: Crocker Coulson, Partner, Coffin
Communications Group; (818) 789-0100 e-mail: crocker.coulson@coffincg.com or
Carl Wertz, Chief Financial Officer, Diodes, Inc.; (805) 446-4800
Recent news releases, annual reports, and SEC filings are available at the
Company's website: http://www.diodes.com. Written requests may be sent directly
to the Company, or they may be e-mailed to: diodes-fin@diodes.com.
CONSOLIDATED CONDENSED INCOME STATEMENT and BALANCE SHEET FOLLOWS
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
------------------------------------------
2001 2002
------------------- -------------------
Net sales $ 25,748,000 $ 26,924,000
Cost of goods sold 21,627,000 22,572,000
------------------- -------------------
Gross profit 4,121,000 4,352,000
Research and development expenses 139,000 313,000
Selling, general and administrative expenses 3,045,000 3,765,000
------------------- -------------------
Total operating expenses 3,184,000 4,078,000
Income from operations 937,000 274,000
Other income (expense)
Interest income 66,000 8,000
Interest expense (740,000) (346,000)
Other (96,000) 16,000
------------------- -------------------
(770,000) (322,000)
Income before income taxes and minority interest 167,000 (48,000)
Income tax benefit 429,000 295,000
------------------- -------------------
Income before minority interest 596,000 247,000
Minority interest in joint venture earnings (75,000) (39,000)
------------------- -------------------
Net income $ 521,000 $ 208,000
=================== ===================
Earnings per share
Basic $ 0.06 $ 0.03
=================== ===================
Diluted $ 0.06 $ 0.02
=================== ===================
Weighted average shares outstanding
Basic 8,132,559 8,165,325
=================== ===================
Diluted 9,029,628 8,774,016
=================== ===================
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
December 31, March 31,
2001 2002
------------------- -------------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 8,103,000 $ 6,113,000
Accounts receivable
Customers 16,250,000 16,814,000
Related parties 1,486,000 4,481,000
------------------- -------------------
------------------- -------------------
17,736,000 21,295,000
Less: Allowance for doubtful receivables 343,000 325,000
------------------- -------------------
17,393,000 20,970,000
Inventories 17,813,000 14,677,000
Deferred income taxes, current 4,368,000 4,368,000
Prepaid expenses, income taxes and other current assets 1,266,000 1,844,000
------------------- -------------------
------------------- -------------------
Total current assets 48,943,000 47,972,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 44,925,000 46,430,000
DEFERRED INCOME TAXES, non-current 3,672,000 3,733,000
OTHER ASSETS
Goodwill, net 5,090,000 5,090,000
Other 628,000 687,000
------------------- -------------------
TOTAL ASSETS $ 103,258,000 $ 103,912,000
=================== ===================
The accompanying notes are an integral part of these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
2001 2002
------------------ ------------------
(Unaudited)
CURRENT LIABILITIES
Line of credit $ 6,503,000 $ 3,300,000
Accounts payable
Trade 6,098,000 8,247,000
Related parties 3,149,000 3,309,000
Accrued liabilities 5,062,000 5,600,000
Current portion of long-term debt
Related party 2,500,000 2,500,000
Other 5,833,000 8,608,000
Current portion of capital lease obligations -- 114,000
------------------ ------------------
Total current liabilities 29,145,000 31,678,000
LONG-TERM DEBT, net of current portion
Related party 7,500,000 7,500,000
Other 13,664,000 8,431,000
CAPITAL LEASE OBLIGATIONS, net of current portion -- 2,633,000
MINORITY INTEREST IN JOINT VENTURE 1,825,000 1,864,000
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;
30,000,000 shares authorized; 9,227,664 and 9,242,664
shares issued and outstanding at December 31, 2001
and March 31, 2002, respectively 6,151,000 6,161,000
Additional paid-in capital 7,310,000 7,762,000
Retained earnings 39,882,000 40,090,000
------------------ ------------------
53,343,000 54,013,000
Less:
Treasury stock - 1,075,672 shares of common stock, at cost 1,782,000 1,782,000
Accumulated other comprehensive loss 437,000 425,000
------------------ ------------------
2,219,000 2,207,000
Total stockholders' equity 51,124,000 51,806,000
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 103,258,000 $ 103,912,000
================== ==================
The accompanying notes are an integral part of these financial statements.